U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended April 30, 2002.
[ ] Transition report under section 13 or 15(d) of the Exchange Act for the
transition period from _______ to ________
Commission file number 0-29248
SmarTire Systems Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
British Columbia, Canada Not Applicable
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
150-13151 Vanier Place, Richmond, British Columbia, V6V 2J1
(Address of Principal Executive Offices)
(604) 276-9884
(Issuer's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
As of May 31, 2002, the Company had 17,879,369 shares of common stock issued and
outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
SMARTIRE SYSTEMS INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS -
APRIL 30, 2002 (UNAUDITED) AND JULY 31, 2001
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT (UNAUDITED) -
THREE AND NINE MONTHS ENDED APRIL 30, 2002 AND APRIL 30,
2001.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - NINE
MONTHS ENDED APRIL 30, 2002 AND APRIL 30, 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
THIS QUARTERLY REPORT ON FORM 10-QSB, INCLUDING EXHIBITS THERETO, CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THESE FORWARD-LOOKING STATEMENTS ARE TYPICALLY IDENTIFIED BY THE
WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FORECASTS", "PLANS",
"FUTURE", "STRATEGY", OR WORDS OF SIMILAR MEANING. VARIOUS FACTORS COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING
STATEMENTS. THE COMPANY ASSUMES NO OBLIGATIONS TO UPDATE THESE FORWARD-LOOKING
STATEMENTS TO REFLECT ACTUAL RESULTS, CHANGES IN ASSUMPTIONS, OR CHANGES IN
OTHER FACTORS, EXCEPT AS REGULATED BY LAW.
ITEM 1. FINANCIAL STATEMENTS
The unaudited consolidated financial statements of SmarTire Systems Inc. and its
wholly owned subsidiaries, SmarTire USA Inc., SmarTire (Europe) Limited and
SmarTire Technologies Inc. (the "Company" or "SmarTire") as of April 30, 2002
and for the three and nine month periods ended April 30, 2002 and April 30, 2001
are attached hereto.
It is the opinion of management that the interim financial statements for the
three and nine months ended April 30, 2002 include all adjustments necessary in
order to ensure that the financial statements are not misleading.
SMARTIRE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in United States dollars)
================================================================================================
April 30, July 31,
2002 2001
(Unaudited)
- ------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 694,101 $ 2,930,257
Receivables, net of allowance for doubtful accounts
of $nil (July 31, 2001 - $46,232) 221,976 189,472
Inventory 1,425,662 1,477,751
Prepaid expenses 177,262 85,470
----------------------------------------------------------------------------------------
2,519,001 4,682,950
Fixed assets 622,732 706,149
Other assets (note 3) 4,043,731 1,508,740
- ------------------------------------------------------------------------------------------------
$ 7,185,464 $ 6,897,839
================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 921,912 $ 782,690
Promissory note payable (note 3) 1,350,000 --
----------------------------------------------------------------------------------------
2,271,912 782,690
Stockholders' equity:
Share capital (note 4):
Preferred shares, par value $1,000 Cdn per share
20,000 shares authorized
Issued and outstanding; none
Common shares, without par value
200,000,000 shares authorized
17,739,369 shares issued and outstanding at
April 30, 2002 (July 31, 2001 -- 15,159,369) 41,488,871 37,566,083
Additional paid-in capital 889,026 683,462
Deferred stock compensation (24,928) (40,773)
Deficit (36,496,383) (31,287,425)
Accumulated other comprehensive loss (943,034) (806,198)
----------------------------------------------------------------------------------------
4,913,552 6,115,149
- ------------------------------------------------------------------------------------------------
$ 7,185,464 $ 6,897,839
================================================================================================
Contingency (note 6)
See accompanying notes to consolidated financial statements.
On behalf of the Board
/s/ Robert V. Rudman Director /s/ Bernard Pinsky Director
- --------------------- ------------------
SMARTIRE SYSTEMS INC.
Consolidated Statements of Loss and Deficit
(Expressed in United States Dollars)
(Unaudited)
==============================================================================================================
Three Months Ended Nine Months Ended
April 30, April 30, April 30, April 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------
Revenue $ 234,393 $ 171,709 $ 779,687 $ 567,191
Cost of goods sold 143,435 88,145 531,109 233,632
- --------------------------------------------------------------------------------------------------------------
90,958 83,564 248,578 333,559
- --------------------------------------------------------------------------------------------------------------
Expenses
Depreciation and amortization 298,709 155,102 836,907 298,619
Engineering, research and
development 300,547 408,598 1,392,464 1,207,796
General and administrative 638,777 633,334 2,017,246 2,100,760
Marketing 358,333 420,355 1,144,358 1,389,713
- --------------------------------------------------------------------------------------------------------------
1,596,366 1,617,389 5,390,975 4,996,888
- --------------------------------------------------------------------------------------------------------------
Loss from operations 1,505,408 1,533,825 5,142,397 4,663,329
Other expenses (income)
Interest income (3,310) (71,663) (17,084) (316,820)
Interest expense (note 3) 39,038 -- 104,010 --
Foreign exchange gain (33,971) (85,817) (20,365) (116,797)
- --------------------------------------------------------------------------------------------------------------
1,757 (157,480) 66,561 (433,617)
- --------------------------------------------------------------------------------------------------------------
Net loss 1,507,165 1,376,345 5,208,958 4,229,712
Deficit, beginning of period 34,989,218 28,633,773 31,287,425 25,780,406
- --------------------------------------------------------------------------------------------------------------
Deficit, end of period $36,496,383 $30,010,118 $36,496,383 $30,010,118
==============================================================================================================
Basic and diluted loss per share $ 0.09 $ 0.09 $ 0.32 $ 0.28
==============================================================================================================
Weighted average shares used in the
computation of basic and diluted
loss per share 17,326,448 15,117,697 16,319,039 14,849,784
==============================================================================================================
SMARTIRE SYSTEMS INC.
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
(Unaudited)
Nine months ended April 30, 2002 and 2001
==================================================================================================
2002 2001
- --------------------------------------------------------------------------------------------------
Cash provided by (used for):
Operating activities:
Net loss $(5,208,958) $(4,229,712)
Items not affecting cash:
Depreciation and amortization 836,907 298,619
Compensation expense 15,069 102,020
Change in non-cash working capital:
Receivables (36,720) (75,733)
Inventory 17,003 (571,506)
Prepaid expenses (93,137) 2,011
Accounts payable and accrued liabilities 156,601 490,557
------------------------------------------------------------------------------------------
Net cash used in operating activities (4,313,235) (3,983,744)
Investing activities:
Purchase of capital assets (88,287) (297,555)
Purchase of other asset (note 3) (500,000) (500,000)
------------------------------------------------------------------------------------------
Net cash used in investing activities (588,287) (797,555)
Financing activities:
Issuance of common shares (note 4) 4,129,129 259,800
Repayment of promissory note (note 3) (1,450,000) --
------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,679,129 259,800
Effect of exchange rate differences on cash
and cash equivalents (13,763) (260,637)
- --------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,236,156) (4,782,136)
Cash and cash equivalents, beginning of period 2,930,257 9,753,063
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 694,101 $ 4,970,927
==================================================================================================
Supplementary information:
Interest paid $ 77,014 $ --
Non-cash investing and financing activities:
Purchase of other asset through issuance of
Promissory note (note 3) 2,800,000 --
Purchase of other asset through issuance of
Common shares -- 1,237,500
Fair value of agents warrants issued in conjunction
with private placement 206,340 --
==================================================================================================
See accompanying notes to consolidated financial statements.
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
Nine months ended April 30, 2002 and 2001
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION:
These interim consolidated financial statements have been prepared using
United States generally accepted accounting principles. The interim
financial statements include all adjustments, consisting solely of normal
recurring adjustments, which in management's opinion are necessary for a
fair presentation of the financial results for the interim periods
presented.
The disclosures in these statements do not conform in all respects to the
requirements of generally accepted accounting principles for annual
financial statements. These statements follow the same accounting policies
and methods of their application as the most recent annual financial
statements. These statements should be read in conjunction with the
significant accounting policies and other information in the Company's
most recent annual financial statements.
2. OPERATIONS:
The Company and its subsidiaries develop and market products incorporating
wireless data transmission and processing technologies, primarily for the
automotive markets. The Company's primary product is a wireless tire
monitoring system which it currently markets for use on passenger vehicles
and other pneumatic tire applications. All sales of its product are made
in this industry segment.
The Company is continuing to develop its products and markets. The Company
has incurred recurring operating losses and has a deficit of $36,496,383
as at April 30, 2002. Since 1998, the Company has raised approximately
$27,000,000 through nine private placements to fund its operations. The
Company requires immediate additional financing to fund its operations and
meet its maturing debt obligation. The next principal payment of $450,000,
together with accrued interest is due to TRW Inc. by June 28, 2002. The
Company is pursuing various alternatives for private placements and public
financings to meet its immediate and long-term financial requirements.
There can be no assurance that additional financing will be available to
the Company when needed or, if available, that it can be obtained on
commercially reasonable terms. These consolidated financial statements
have been prepared on the going concern basis which assumes that adequate
sources of financing will be obtained as required and that the Company's
assets will be realized and liabilities settled in the ordinary course of
business. Accordingly, these consolidated financial statements do not
include any adjustments related to the recoverability of assets and
classification of assets and liabilities that might be necessary should
the Company be unable to continue as a going concern.
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
Nine months ended April 30, 2002 and 2001
- --------------------------------------------------------------------------------
3. OTHER ASSETS:
On August 31, 2001, the Company and TRW Inc. entered into an agreement to
restructure their strategic alliance. Under the terms of restructuring,
SmarTire and TRW agreed to terminate a number of agreements. The Company
now has the right to manufacture and sell tire monitoring systems to the
original equipment vehicle manufacturers market. Consideration consisted
of a promissory note of $2.8 million, carrying an interest rate of 6% per
annum plus cash of $500,000. The promissory note is secured by personal
property and assets of the Company, including equipment, inventory,
accounts receivable, intangibles and other personal property. The
principal amount of the note is to be paid in installments accompanied by
accrued interest to the date of each payment. The Company made three
principal payments, totaling $1,450,000 in the aggregate, together with
accrued interest, under the promissory note during the nine months ended
April 30, 2002.
The remaining principal payments are repayable as follows:
Fiscal 2002 $450,000
Fiscal 2003 $900,000
The rights are being amortized over five years on a straight line basis.
Accumulated Net book
APRIL 30, 2002 Cost amortization value
- --------------------------------------------------------------------------------
Licenses $5,037,500 $993,769 $4,043,731
================================================================================
Accumulated Net book
JULY 31, 2001 Cost amortization value
- --------------------------------------------------------------------------------
License $1,737,500 $228,760 $1,508,740
================================================================================
4. SHARE CAPITAL:
(a) A summary of fixed stock option transactions and balances during the
period ended April 30, 2002 is as follows:
Weighted
average
Options exercise
Outstanding price
- -------------------------------------------------------------------------------
Balance at July 31, 2001 1,458,750 $ 3.20
Options granted 326,700 3.09
Options forfeited (32,000) (3.04)
- -------------------------------------------------------------------------------
Balance at April 30, 2002 1,753,450 $ 3.20
================================================================================
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
Nine months ended April 30, 2002 and 2001
- --------------------------------------------------------------------------------
4. SHARE CAPITAL (CONTINUED):
(b) For the nine months ended April 30, 2002, the Company realized net
cash proceeds of $4,129,129 from the completion of two separate
private placements, both effected pursuant to Regulation S under the
Securities Act of 1933. In the first private placement, the Company
issued and sold 1,830,000 units for net cash proceeds of $2,955,469.
Each unit was issued at a price of $1.70 and consisted of one common
share and one common share purchase warrant. Each warrant entitles
the holder to purchase one of the Company's common shares and is
exercisable at a price of: (a) $2.30 if exercised on or before June
30, 2002; (b) $2.80 if exercised after June 30, 2002 and on or
before February 28, 2003; and (c) $3.30 if exercised after February
28, 2003 but on or before October 31, 2003, on which date the
warrant will expire. Advisors to the private placement were issued
58,100 share purchase warrants exercisable at a price of $1.70. The
warrants are exercisable over three years from the date of issuance.
In the second private placement, the Company issued and sold 750,000
common shares at a price of $1.75 per share for net cash proceeds of
$1,173,660. Advisors to the private placement were issued 52,500
share purchase warrants exercisable at a price of $1.75. The
warrants are exercisable over three years from the date of issuance.
(c) As at April 30, 2002, warrants outstanding were exercisable for
2,200,317 (July 31, 2001 - 309,717) common shares of the Company.
The warrants entitle the holders to purchase common shares of the
Company at prices ranging from $1.50 to $3.30 per share that expire
on various dates until March 26, 2005.
5. RELATED PARTY TRANSACTIONS:
During the nine months ended April 30, the Company:
(a) Paid $115,900 (2001 - $60,616) for consulting services and financing
fees on the private sales of its common stock and issued 46,900
share purchase warrants at an exercise price of US $1.70, expiring
on January 18, 2005, for financing services to a company in which a
director of the Company has significant influence.
(b) Paid $84,509 (2001 - $66,469) for legal fees to a legal firm in
which a director of the Company is a partner.
SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
(Unaudited)
Nine months ended April 30, 2002 and 2001
- --------------------------------------------------------------------------------
6. CONTINGENT LIABILITY
A former sales representative has advanced a claim against the company
with respect to procuring customer relationships on behalf of the Company.
The Company does not believe that any commissions are owing with respect
to the services provided by this representative and expects to settle the
claim for cash (not exceeding $250,000) and options for the purchase of
the Company's common stock. No accrual has been provided in these
financial statements for this contingent liability.
7. SEGMENTED INFORMATION:
The Company operates in the wireless tire monitoring technology industry.
Management of the Company makes decisions about allocating resources based
on this one operating segment. Substantially all revenue is derived from
sales to North American and European customers. Geographic information is
as follows:
REVENUE FROM EXTERNAL CUSTOMERS
================================================================================
Three months ended Nine months ended
April 30, April 30, April 30, April 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------
North America $191,707 $144,501 $426,194 $440,326
Europe $ 42,686 $ 27,208 $353,493 $126,865
- --------------------------------------------------------------------------------
$234,393 $171,709 $779,687 $567,191
================================================================================
As at April 30, 2002, 72% of the Company's fixed assets were in Canada and
28% were in Europe.
8. COMPARATIVE FIGURES:
Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted for the current year.
- 2 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
The following discussion of the financial condition, changes in financial
condition and results of operations of the Company for the three and nine months
ended April 30, 2002 and 2001 should be read in conjunction with the Company's
most recent audited annual financial statements, the unaudited interim financial
statements attached hereto, and, in each case, the notes thereto.
The Company's consolidated financial statements are stated in United States
Dollars and are prepared in accordance with United States Generally Accepted
Accounting Principles (GAAP).
The Company was formed to develop and market remote data sensing, transmission
and processing products incorporating patented technologies to satisfy emerging
market requirements in the transportation industry. Currently the Company is
focused on developing and marketing technically advanced tire monitoring systems
for the transportation and automotive industries. During the three and nine
months ended April 30, 2002, the Company earned revenues primarily from the sale
of tire monitoring systems for passenger cars.
The Company completed the development and launch of its second-generation tire
monitoring system for the passenger car and light truck market during the fiscal
year ended July 31, 2001. The Company is also continuing the development of
systems for the commercial, industrial, motorcycle and recreational vehicle
markets.
In the year ended July 31, 2001, the United States Government enacted the
Transportation Recall Enhancement Accountability and Documentation ("TREAD") Act
of 2000. The TREAD Act was implemented to address perceived safety concerns
resulting from poor tire maintenance, tread separation and tire blow outs. The
Act, among other things, requires that the National Highway Traffic Safety
Administration ("NHTSA") develop rules and regulations which require all new
passenger cars, light trucks and multipurpose passenger vans sold after November
2003 to have tire monitoring systems that warn drivers if a tire is
significantly under-inflated to be installed as standard equipment. The
regulation was to be finalized in November 2001 for implementation in 2003.
On May 31, 2002, the NHTSA issued part one of a two-part final ruling. Part one
establishes a new Federal Motor Vehicle Safety Standard that requires tire
pressure monitoring systems ("TPMS") be installed in passenger vehicles and
light trucks to warn the driver when a tire is below specified pressure levels.
During the first year of the implementation schedule ending October 31, 2004, at
least 10% of each auto manufacturer's total production must be equipped with
TPMS. This requirement increases to 35% during the second year, 65% by the third
and 100% after October 31, 2006. There are two compliance options that will
apply during the period from November 1, 2003 to October 31, 2006. Under the
first compliance option, a vehicle's TPMS must alert the driver if one or more
tires, up to four tires, is 25% or more under-inflated. Under the second
compliance option, a vehicle's TPMS must alert the driver if any of the
vehicle's tires is 30% or more under-inflated. The second compliance option was
adopted by the NHTSA because indirect TPMS are currently not capable of meeting
the stricter four-tire, 25% requirement under the first compliance option, and
it was deemed appropriate to permit manufacturers to continue to use current
indirect TPMS while they work to improve those systems.
SmarTire's direct measurement TPMS products meet the higher standards of the
first compliance option. The NHTSA will be closely monitoring the performance of
indirect measurement TPMS under the second compliance option, and the NHTSA will
issue the second part of its final ruling on or before March 1, 2005. It is
anticipated that this will establish whether indirect measurement will remain an
option for the long-term.
With TPMS compliance standards and specifications now defined, the auto
manufacturers must proceed with the granting of supply contracts in order to
achieve the NHTSA implementation schedule. SmarTire and its strategic partners
have developed a joint marketing program designed to exploit the significant
product demand that is anticipated to be created by this ruling. Although the
superior performance of direct measurement tire pressure monitoring systems may
give the Company's products certain marketing advantages, indirect measurement
tire pressure monitoring systems will likely benefit from the fact that they are
the least expensive way of complying with the TPMS standard for vehicles already
equipped with anti-lock braking (ABS) systems. Moreover, it is likely that the
performance of indirect measurement tire
- 3 -
pressure monitoring systems will continue to improve, although it remains
unclear whether they will improve to the point where they would be capable of
meeting the standards of the first compliance option specified in part one of
the NHTSA's two-part final ruling.
Following the introduction of the TREAD Act, the Company restructured its
strategic alliance with TRW Inc. ("TRW"), a major automotive parts supplier.
Prior to the restructuring, the strategic alliance included joint engineering
and development activities, and granted TRW exclusive marketing and distribution
rights for some of the Company's products. In addition, TRW had exclusive rights
in the original equipment market to tire monitoring products that it developed
jointly with SmarTire, and SmarTire had exclusive rights in the aftermarket. By
ending collaboration between the two companies in product development, and by
providing that neither company will have exclusive rights to any products, the
restructuring effectively provides SmarTire with immediate access to all levels
of the global automotive and transportation industries.
During May 2002 the Company entered into a non-binding Memorandum of
Understanding with Visteon Corporation to develop and market tire monitoring
solutions for vehicle manufacturers. If the Memorandum of Understanding matures
into a binding agreement, the two companies plan to offer tire monitoring
solutions to global automotive manufacturers for original equipment passenger
car applications. The Company and Visteon are currently negotiating a binding
agreement based on the Memorandum of Understanding.
The Company is shifting its business and operating focus from small specialty
niche markets toward mass-market opportunities in both the passenger car and
commercial vehicle markets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2002 AND APRIL 30, 2001
Gross revenue for the three months ended April 30, 2002 increased to $234,393
from $171,709 for the three months ended April 30, 2001. This increase in
revenue was a result of the following:
Sales of aftermarket passenger car systems increased to $205,235 for the three
months ended April 30, 2002 from $67,978 for the three months ended April 30,
2001. This increase is due to sales of $154,412 of the Company's second
generation product that was launched at the end of the fiscal year ended July
31, 2001. Sales of OEM passenger car systems decreased to $17,876 for the three
months ended April 30, 2002 from $48,203 for the three months ended April 30,
2001 as sales under the Lincoln Continental program of the Company's first
generation product were discontinued at the end of December 31, 2001. Sales of
the motorsport tire monitoring systems decreased to $11,282 for the three months
ended April 30, 2002 from $55,528 for the three months ended April 30, 2001.
Motorsport tire monitoring systems are sold through a distributor and are
difficult to predict.
- 4 -
Despite the increase in sales for the three months ended April 30, 2002, sales
of the Company's second generation products for the three months ended April 30,
2002 are below management's expectations. The primary cause for sales not
meeting expectations relates to the delays by the U.S. Government in finalizing
the regulations under the TREAD Act which were originally due in November 2001.
In particular, the delays in finalizing the regulations have had a significant
negative impact on the Company's aftermarket sales. Now that the NHTSA has
issued part one of its final ruling under the TREAD Act, the Company anticipates
that it's aftermarket segment sales will increase over the course of the next 12
months and beyond. However, it is difficult to predict just how much such sales
will increase, and the exact timing of the increase, if any, since the Company's
products will continue to face competition from other direct measurement tire
pressure monitoring systems manufactured by its competitors. Currently, indirect
measurement tire pressure monitoring systems are being used in some OEM
applications, but the Company is not aware of any indirect measurement tire
pressure monitoring systems which are available as aftermarket products. The
Company doubts that indirect measurement tire pressure monitoring technology
will be adapted to aftermarket applications during the next 12 months, but
technical innovations and developments might make it possible for such products
to compete with the Company's aftermarket products in the future.
While the Company and its strategic partners will continue in their efforts to
aggressively pursue opportunities to market and sell OEM passenger car tire
pressure monitoring systems, the Company anticipates that, until the second
part of the NHTSA's final ruling is issued, it will face significant
competition in this segment from manufacturers of indirect measurement tire
pressure monitoring systems, which are the least expensive way of complying
with the TPMS standard for vehicles already equipped with anti-lock braking
(ABS) systems.
Gross margin on product sales decreased to 39% for the three months ended April
30, 2002 from 49% for the three months ended April 30, 2001. The decrease
occurred as the product mix of systems sold in 2002 had lower gross margins than
the product mix of systems sold in 2001. The gross margins continue to be
affected by the reduction in carrying value of first generation product
inventory in the 1999 fiscal year. If the write down of inventory had not
occurred, gross margins on sales would have been 23% for the three months ended
April 30, 2002 compared to 17% for the three months ended April 30, 2001.
Expenses decreased to $1,596,366 for the three months ended April 30, 2002 from
$1,617,398 for the three months ended April 30, 2001, as decreases in marketing
and engineering, research and development expenses were partially offset by
higher general and administrative expenses and depreciation and amortization
expense.
Engineering, research and development expenses decreased to $300,547 for the
three months ended April 30, 2002 from $408,598 for the three months ended April
30, 2001. The decrease was attributed to lower expenditures on product testing
and prototype development due to completion of the Company's second generation
passenger car products in the year ended July 31, 2001. Engineering expenditures
are expected to increase in the fourth quarter as the Company will initiate
design validation testing of its commercial transmitter and motorcycle
weatherproof receiver.
Marketing expenses decreased to $358,333 for the three months ended April 30,
2002 from $420,355 for the three months ended April 30, 2001. The decrease was a
result of lower advertising and promotion expenditures as well as lower
consulting and travel expenditures.
- 5 -
General and administrative expenses increased to $638,777 for the three months
ended April 30, 2002 from $633,334 for the three months ended April 30, 2001.
The increase was attributed to higher insurance premiums, increased travel and
higher wage expenditures. This increase was partially offset by lower bad debts
and investor relations costs. General and administration expenses are expected
to increase in the fourth quarter due to higher investor relations costs.
Depreciation and amortization expense increased to $298,709 for the three months
ended April 30, 2002 from $155,102 for the three months ended April 30, 2001 due
to the amortization of other assets acquired in December 2000 and August 2001.
Depreciation and amortization expense is expected to remain at its current level
for the foreseeable future.
Interest expense of $39,038 was incurred during the three months ended April 30,
2002 mainly due to interest on a promissory note created as part of the
consideration for restructuring the strategic relationship with TRW Inc. as
described under Liquidity and Capital Resources.
Interest income of $3,310 was earned for the three months ended April 30, 2002
as compared to $71,663 for the three months ended April 30, 2001. This decrease
was due to lower average cash balances maintained and lower interest rates
during the current fiscal period.
NINE MONTHS ENDED APRIL 30, 2002 AND APRIL 30, 2001
Gross revenue for the nine months ended April 30, 2002 increased to $779,687
from $567,191 for the nine months ended April 30, 2001. This increase in revenue
was a result of the following:
Sales of aftermarket passenger car systems increased to $605,371 for the nine
months ended April 30, 2002 from $301,803 for the nine months ended April 30,
2001. This increase is due to sales of $453,258 of the Company's second
generation product that was launched at the end of the fiscal year ended July
31, 2001. Sales of OEM passenger car systems increased to $125,651 for the nine
months ended April 30, 2002 from $119,791 for the nine months ended April 30,
2001 due to sales of $82,258 of the Company's second generation product. Sales
under the Lincoln Continental program of the Company's first generation product
were discontinued at the end of December 31, 2001. Sales of the motorsport tire
monitoring systems decreased to $48,665 for the nine months ended April 30, 2002
from $145,597 for the nine months ended April 30, 2001. Motorsport tire
monitoring systems are sold through a distributor and are difficult to predict.
Despite the increase in sales for the nine months ended April 30, 2002, sales of
the Company's second generation products for fiscal 2002 are below management's
expectations. The primary cause for sales not meeting expectations relates to
the delays by the U.S. Government in finalizing the regulations under the TREAD
Act which were originally due in November 2001. In particular, the delays in
finalizing the
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regulations have had a significant negative impact on the Company's aftermarket
sales. Now that the NHTSA has issued part one of its final ruling under the
TREAD Act, the Company anticipates that its aftermarket segment sales will
increase over the course of the next 12 months and beyond. However, it is
difficult to predict just how much such sales will increase, and the exact
timing of the increase, if any, since the Company's products will continue to
face competition from other direct measurement tire pressure monitoring systems
manufactured by its competitors.
Gross margin on product sales decreased to 32% for the nine months ended April
30, 2002 from 59% for the nine months ended April 30, 2001. The decrease
occurred as the product mix of systems sold in 2002 had lower gross margins than
the product mix of systems sold in 2001. The gross margins continue to be
affected by the reduction in carrying value of first generation product
inventory in the 1999 fiscal year. If the write down of inventory had not
occurred, gross margins on sales would have been 19% for the nine months ended
April 30, 2002 compared to 17% for the nine months ended April 30, 2001.
Expenses increased to $5,390,975 for the nine months ended April 30, 2002 from
$4,996,888 for the nine months ended April 30, 2001, as increases in
engineering, research and development expenses and depreciation and amortization
expense were partially offset by lower marketing and general and administration
expenses.
Engineering, research and development expenses increased to $1,392,464 for the
nine months ended April 30, 2002 from $1,207,796 for the nine months ended April
30, 2001. The increase was attributed primarily to a $500,000 expenditure for
non-recoverable development costs incurred with a key component supplier for
future product development activities. This expenditure was a non-recurring
expense with this key component supplier. While the Company expects its
engineering, research and development expenses for the near future will be more
consistent with the expenses during the nine months ended April 30, 2001, the
nature of the Company's activities could result in future non-recurring
expenditures. The Company also incurred higher wage expenditures. The increase
was partially offset by lower expenditures on consulting fees and on product
testing and prototype development due to completion of the Company's second
generation passenger car products in the year ended July 31, 2001.
Marketing expenses decreased to $1,144,358 for the nine months ended April 30,
2002 from $1,389,713 for the nine months ended April 30, 2001. The decrease was
a result of lower advertising and promotion expenditures as well as lower
travel, consulting, and trade show expenditures. Trade show expenses decreased
as the Company did not attend the SEMA trade show in fiscal 2002 as it did in
fiscal 2001 and the expenses for the nine months ended April 30, 2001, included
costs associated with attending the Automechanika trade show, which is held in
Europe every two years. This decrease is partially offset by the cost of market
research associated with entry into the OEM automotive market.
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General and administrative expenses decreased to $2,017,246 for the nine months
ended April 30, 2002 from $2,100,760 for the nine months ended April 30, 2001.
The decrease was attributed to a recovery of a bad debt and lower travel,
investor relations, computer and office costs. This decrease was partially
offset by higher insurance premiums and wage expenditures.
Depreciation and amortization expense increased to $836,907 for the nine months
ended April 30, 2002 from $298,619 for the nine months ended April 30, 2001 due
to the amortization of other assets acquired in December 2000 and August 2001.
Depreciation and amortization expense is expected to remain at its current level
for the foreseeable future.
Interest expense of $104,010 was incurred during the nine months ended April 30,
2001 mainly due to interest on a promissory note created as part of the
consideration for restructuring the strategic relationship with TRW Inc. as
described under Liquidity and Capital Resources.
The Company earned interest income of $17,084 for the nine months ended April
30, 2001 as compared to $316,820 for the nine months ended April 30, 2001. This
decrease was due to lower average cash balances maintained and lower interest
rates during the current fiscal period.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires immediate additional financing to fund its operations and
meet its maturing debt obligation. The next principal payment of $450,000,
together with accrued interest, under the promissory note is due to TRW Inc. by
June 28, 2002. The Company is pursuing various alternatives for private
placements and public financings to meet its immediate and long-term financial
requirements. There can be no assurance that additional financing will be
available to the Company when needed or, if available, that it can be obtained
on commercially reasonable terms. If the Company is not able to obtain the
additional financing on a timely basis, the Company will be forced to default
on its promissory note due to TRW Inc., and it will not be able to meet its
other obligations as they become due.
The Company has financed its activities primarily through the issuance and sale
of securities. The Company has incurred net operating losses in each year since
inception. Its net loss for the three-month period ended April 30, 2002 was
$1,507,165, compared to $1,376,345 for the three month period ended April 30,
2001; for the nine-month periods ending on these dates, the net losses were,
respectively, $5,208,958 and $4,229,712. As of April 30, 2002, the Company had
an accumulated deficit of $36,496,383, stockholders' equity was $4,913,552 and
the Company had working capital of $247,089.
The Company's cash position at April 30, 2002 was $694,101 as compared to
$2,930,257 at July 31, 2001. This decrease was due to the net of the Company's
operating, financing and investing activities described below.
The Company's net loss of $5,208,958 for the nine-month period ended April 30,
2002 includes non-cash charges of $836,907 for depreciation and amortization,
$15,069 for compensation expense and $43,747 due to changes in non-cash working
capital.
For the nine months ended April 30, 2002, the Company realized net proceeds of
$4,129,129 from the completion of two separate private placements, both effected
pursuant to Regulation S under the Securities Act of 1933. In the first private
placement, the Company issued and sold 1,830,000 units. Each unit was issued at
a price of $1.70 and consisted of one common share and one common share purchase
- 8 -
warrant. Each warrant entitles the holder to purchase one of the Company's
common shares and is exercisable at a price of: (a) $2.30 if exercised on or
before June 30, 2002; (b) $2.80 if exercised after June 30, 2002 and on or
before February 28, 2003; and (c) $3.30 if exercised after February 28, 2003 but
on or before October 31, 2003, on which date the warrant will expire. In the
second private placement, the Company issued and sold 750,000 common shares at a
price of $1.75 per share. Net proceeds were used for debt repayment and working
capital.
On August 31, 2001 the Company and TRW restructured certain agreements entered
into in 1998, and as amended in 2000, between the companies. The Company is
paying consideration of $3.3 million in cash and debt for this transaction. Of
this amount, $500,000 was paid at closing. The balance of $2.8 million is
evidenced by a promissory note dated August 31, 2001, bears interest at the rate
of 6% per annum, and is secured by, substantially all of the Company's personal
property. The principal amount of the note is to be paid in installments
accompanied by accrued interest to the date of each payment. Principal
repayments of $1.9 million are repayable in the 2002 fiscal year and $900,000 is
repayable in the 2003 fiscal year. The Company made three principal payments,
totaling $1,450,000 in the aggregate, together with accrued interest, under the
promissory note during the nine months ended April 30 2002.
During the nine-month period ended April 30, 2002, the Company also purchased
certain capital assets at an aggregate cost of $88,287.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has received a demand letter from one of its former sales
representatives. The representative has asserted a variety of claims against the
Company, including that he was the procuring cause of one or more customer
relationships for which he was not paid a commission. The Company believes that
it has meritorious defenses to each of the claims. Although no complaint has
been filed in any jurisdiction, the Company has been negotiating a settlement
with this former sales representative. There is no guarantee that a final
settlement will be reached. However, at this time, the Company expects to enter
into a settlement and release agreement with this sales representative. The
terms of the agreement remain the subject of negotiations, but without admitting
liability, the Company expects to enter into a settlement that will involve the
cash payment by the Company of less than $250,000 and the issuance of certain
options for the purchase of the Company's common stock.
ITEM 2. CHANGES IN SECURITIES
On February 13, 2002, the Company issued warrants for the purchase of 11,200
common shares to a non-U.S. person in an offshore transaction pursuant to an
exemption from registration as provided by Regulation S under the Securities Act
of 1933 ("Regulation S"). The warrants were issued in payment of a finder's fee
related to the sale of units to non-U.S. persons pursuant to Regulation S
between November 8, 2001 and January 8, 2002. Each warrant entitles the holder
to purchase one common share of the Company at an exercise price of $1.70 until
February 13, 2005, on which date the warrant will expire.
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On March 26, 2002, the Company issued 750,000 common shares at a price of $1.75
to a non-U.S. person in an offshore transaction pursuant to Regulation S. The
Company also issued warrants for the purchase of 52,500 common shares of the
Company to a non-U.S. person in an offshore transaction pursuant to Regulation
S. The warrants were issued in payment of a finder's fee related to the sale of
the common shares. Each warrant entitles the holder to purchase one common share
of the Company at an exercise price of $1.75 until March 26, 2005, on which date
the warrant will expire.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
(10) Material Contracts
10.1 Form of private placement subscription agreement between the
Company and purchasers of securities in the Company's first
private placement completed in January 2002
10.2 Advisory fee payment and subscription agreement between the
Company and West Sussex Trading, Inc. dated January 17, 2002
related to partial consideration paid under the Company's
private placement completed in January 2002
10.3 Advisory fee payment and subscription agreement between the
Company and Seraph Capital AG dated February 12, 2002 related
to partial consideration paid under the Company's private
placement completed in January 2002
10.4 Private Placement subscription agreement between the Company
and West LB Panmure Limited dated March 21, 2002 related to
the Company's March 2002 private placement
10.5 Advisory fee payment and subscription agreement between the
Company and Seraph Capital AG dated March 26, 2002 related to
partial consideration paid under the Company's March 2002
private placement
(b) Reports of Form 8-K - Three months ended April 30, 2002
None
- 10 -
SIGNATURES
In accordance with the requirements for the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SMARTIRE SYSTEMS INC.
--------------------------
(Registrant)
Date June 14, 2002 /s/ ROBERT V. RUDMAN
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Robert V. Rudman
Director, President and
Chief Executive Officer
(Principal Executive Officer)
Date June 14, 2002 /s/ JEFF FINKELSTEIN
-------------------- ---------------------------
Jeff Finkelstein
Controller