Tirex Files Form 10-K at last!
Form 10-K for TIREX CORP
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1-Mar-2011
Annual Report
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements for the fiscal year ended June 30, 2009, including the notes thereto, appearing elsewhere in this Annual Report. The discussion of results, causes and trends should not be construed to imply any conclusion that these results or trends will necessarily continue into the future.
Overview and Business Events
F-7
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Tirex's primary objective is to sell its patented and proprietary tire recycling process, called the TCS System, to tire recyclers throughout the world (www.tirex-tcs.com). In March 2000, we announced that our TCS technology prototype was ready for replication and commercialization. The intellectual property owned by Tirex comprises both the patented "Fracturing Mill" (both US and Canadian patents) plus the proprietary freezing process of using super-cooled air (rather than the competitions' liquid nitrogen process-- which we believe employs expensive "overkill" in terms of what is required to freeze tire chips) to freeze the tire chips to the "glass point," which permits the effective separation and disintegration of the tire components by our patented "fracturing mill", producing a semi-cryogenic crumb rubber at a significant cost savings. The intellectual property of our TCS System process is recognized in the Manufacturing License Agreement (2003) that we are currently renegotiating with Simpro S.p.A. (Simpro), headquartered in Torino, Italy http://www.simpro.it/home.php?argid=49&pagid=18&lang=en. Simpro had a semi-exclusive manufacturing license to manufacture the TCS System to the extent that they have a right of first refusal for the fabrication, installation and commissioning of any TCS system anywhere in the world, with the exclusivity lost on a case-by-case basis in those circumstances where they would elect to not accept an order, under which circumstances Tirex has the right to contract the same services to other companies. Our patent renewals and continuation for both the USA and Canada were documented in 2005 and renewed again in March 2010 for the *US patent.
In 2001 Tirex's TCS System tire recycling prototype was accredited by Recyc-Qu?bec, the provincial recycling agency in Montreal, Quebec, Canada, as an economically viable and environmentally-friendly process that produced quality recycled rubber. While numerous Letters of Intent were signed during this early stage, none materialized into firm purchase contracts. Management attributed these failures to acquire sales contracts to the lack of a commercial history for the TCS technology, or alternatively, to the Company's inability at the time to provide performance guarantees. With the signing of the License Agreement with Simpro we engaged a reputable, highly accredited manufacturer which created the potential to offer performance guarantees. The TCS System prototype was disassembled and the Fracturing Mill was sent to Simpro's facility in Italy. Simpro is prepared to build the first commercial TCS System. However, as of February 2011, no purchase/sale contracts have been written.
Tirex has continued with its marketing structure consisting primarily of Tirex's President, John L. Threshie Jr., assisted by the Company's Chief Financial Officer, Michael Ash, combined with Simpro's significant marketing and sales efforts, as well as independent representatives. We are also renegotiating Simpro's non-exclusive marketing agreement applicable on a worldwide basis. Tirex continues to entertain requests for marketing agreements on several continents, but adheres to its policy of offering commissions out of sales proceeds only, and not providing exclusivities in the absence of prior-established results.
The lack of a commercial track record relative to the operation and output of the TCS System has proven to be a difficult hurdle to overcome in realizing TCS System sales. The installed cost of a TCS-2 System to a recycler, depending on the system configuration, the condition of the feedstock and the output requirements and excluding building and infrastructure costs, is in the vicinity of Euros 5,500,000 (approximately US$7.89 million at prevailing exchange rates), depending on the extent of automation requested by the customer. When one adds infrastructure costs, pre-production expenses and a reasonable provision for working capital after system commissioning, we are of the opinion that the entrepreneur has to consider his gross investment cost (prior to debt financing possibilities) to be in the vicinity of US$9 million to $10 million, depending on the customs duties which could be imposed on US and Canadian customers respecting the importing of products from non-NAFTA countries. US$9,000,000 or more represents a substantial investment for a start-up company. Simpro has been able to obtain insurance backing to support their offer of limited performance guarantees, and such potential is expected to assist the marketing effort. Simpro is now offering limited feedstock throughput guarantees on a case by case basis.
Market and sales efforts of the TCS System continues to evolve and has attracted the interests of qualified and capable companies over the past year. During Fiscal years 2009 and 2010, the Company and Simpro have entertained numerous potential TCS System customers. Out of these developments, several opportunities have presented themselves that have merited and continue to merit the expenditure of considerable time and effort to attempt close on a Purchase and Sales Agreement. Tirex and Simpro continue to pursue sales efforts in Europe, the US and Canada.
The 2009 New York negotiations ended due to terms and conditions that Tirex's management concluded were not satisfactory to Tirex and its shareholders.
Simpro's signing of a Memorandum of Understanding in 2009 for a US$20.8 million TCS Facility with Exchangtech in Malaysia continues to experience delays in reaching a definitive agreement due to financing facilities involved in the entire industrial project as reported by Simpro management.
Simpro's management also reported in 2009 that the patented 'fracturing mill' parts of the TCS technology is 75% complete but remains on hold in the Brazilian factory until further developments. Simpro and Tirex also pursued opportunities in Brazil where the production of crumb rubber would be linked to products for the railroad and synthetic turf industries. Management has since learned that the use of ambient crumb, as opposed to Tirex's semi-cryogenic crumb, was chosen for the synthetic fields because it was less expensive.
F-8
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Our listing on the Internet Recycling Exchange will be renewed when our crumb becomes available. Our web site www.tirex-tcs.com continues to generate inquiries from all over the world. We believe that these enquiries confirm the interest for our new technology in the industry. These opportunities may not conclude, however, until there is a commercial system in operation and regardless of Management's optimism there can be no assurance that these opportunities will actually result in unconditional sales contracts.
The finalizing and potential renewal of the License Agreement with Simpro requires that the gross revenues from sales will be recorded on Simpro's books, not in the books of Tirex, unless Simpro would refuse the proposed contract. The revenue remitted back to Tirex will take the form of royalty payments and will be accounted for as such. Regardless of the contract structure and the accounting effects which result, generally accepted accounting principles in effect in the USA have the effect that the revenues to Tirex resulting from such transactions will not be recognizable until the systems will have been accepted by the customers. Given the time line required to manufacture, install and have accepted these systems, it is unlikely that any revenues would become recognizable during the fiscal year ending June 30, 2010. While the Company will benefit from the periodic cash inflows resulting from progress payments during the next approximately ten months, the royalty will, in fact, not have been earned until the systems are accepted by the customers.
In the third and fourth quarters of fiscal 2008 and continuing into fiscal 2009, management undertook a restructuring of the corporation. This was engaged because management believed (and still does) that the structure of the Tirex was creating an impediment to marketing efforts. We engaged the services of the Otto Law Group (Seattle WA) to assist us in the restructuring of our position. Their services are being remunerated in shares of the corporation. We also engaged the services of Legacy Trading and their affiliate company, Southern Capital Consulting, based in Oklahoma, to consult us in getting our shares listed first back onto the Pink Sheets with the goal of being re-listed onto the Bulletin Board. These services are also being remunerated by means of a share issuance. In order to be eligible for re-listing on the Bulletin Board, the Corporation is required to file audited financial statements and remain current in all of its required public filings for 12 months, and thereafter to maintain eligibility. The statements of the Corporation had not been audited since the fiscal year ended June 30, 2004. We engaged the services of Moore & Associates (Las Vegas) to undertake the audit of our accounts for the years 2004 through 2007 with a continuation for the fiscal year 2008. These audits were completed and amended filings were made. We also filed amended 10-Q reports for the periods ended December 31, 2008 and March 31, 2009, with the result that we are now fully-reporting.
In the course of this restructuring, debts to officers, directors and consultants were converted in whole or in part to equity through the issuance of shares. Part of this was accomplished through the auspices of Sequoia International which accepted assignment of $100,000 of executive accrued salaries in exchange for 100 million shares, a transaction approved by a Florida court. This transaction also provided for the creation of funding for Tirex in its restructuring efforts. Third party liabilities were examined and deleted as permitted by US and Canadian law (the term in Canada is "prescription", in the USA "Statute of Limitations"). Management is of the opinion that the measures undertaken in the last half of fiscal 2008 and continuing into fiscal 2009 will be beneficial to the development of the Corporation.
In August 2009 we were advised that Moore & Associates' registration with the PCAOB had been revoked and that they were thus abandoning audit services of public companies. We were advise that they had transferred it audit clients and staff to Seale & Beers. We immediately attempted to engage this firm, given a long-standing ongoing relationship with the audit technician from Moore, who was engaged by Seale & Beers, to continue with our independent accounting services. Seale & Beers thence declined to perform the audit, citing a lack of international resources to verify our assets currently located in Italy. On September 16, 2009, the Board of Directors approved the appointment of M&K, CPA's. located in Houston, Texas, to undertake the audit of our accounts. An 8-K was filed noting this change in certifying accountant. Management asserts that there were no disagreements respecting accounting principles, auditing standards, auditing practices or any other professional issue with Moore & Associates. Management further asserts this it had had no contact with M&K, CPA's in the two years prior to their engagement, other than the most recent discussions and negotiations in September 2009 to engage their services. The revocation of the registration of Moore with the PCAOB meant that fiscal 2008 had to be re-audited such that M&K could provide standard format audited financial statements for fiscal 2009 with comparative data for fiscal 2008.
In December 2009 Tirex engaged Capital Business Brokers ("CBB") with an exclusive 3 month financing agreement to raise capital for TCS facilities and $50,000 working capital. CBB's contract subsequently expired with no results.
F-9
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In June 2010 the Board of Directors approved the engagement of Boysen Consulting ("Boysen"), a North American tire recycling expert, to augment TCS marketing efforts.
Previous and Current Financings
In February of 2001, we concluded a private financing with an investor group. Under the terms of the Agreement, we had the contractual right to require the Investor to purchase up to US$5,000,000 of put notes. We drew down US$750,000 of this amount and used the proceeds of this financing toward legal and consulting fees due, normal operating expenses such as payroll, rent and taxes and the acquisition of equipment for our prototype TCS-1 Plant. In July of 2001, the Company entered into a technical default with respect to the Agreement by not having an SB-2 Registration Statement declared effective by the SEC. After several months of negotiations, the Company entered into a Settlement Agreement with the Investor Group which provided for a cash pay down of the amount owed, including interest and penalties over a period of approximately two years starting with the date the Settlement Agreement was signed, the right of the Investor Group to continue to be able to sell up to 600,000 collateral and Rule 144 shares per month and the issuance of three series of warrants, 500,000 each, exercisable at prices of one cent, five cents and ten cents over a three year period. This Settlement Agreement was announced in April of 2002, and details of the terms of the Agreement are filed on Edgar. The Company, in the absence of having completed its first sales of TCS Systems according to our expectations, was unable to generate the cash flow necessary to pay down the Convertible Note in accordance with the terms of the Settlement Agreement. Thus, the Company once again found itself in a position of default. Numerous recourses are available to the holders of the Convertible Notes, but to date, these recourses have not been exercised. Such recourses can be exercised at any time and the fact that they have not been exercised so far does not preclude their being exercised now or in the future. The Company has kept the Convertible Note holders apprised of its efforts to sell TCS Systems and thus restart the repayments on the Convertible Notes.
Since Fiscal year 2006, the expenses of the Company have been funded by a series of non-interest bearing convertible loans with no specific terms of repayment made by a significant number of individuals investing modest amounts for a grand total of U.S.$264,400. These investors, fully cognizant of the Company's situation and so documented in writing, accepted that their investments were being made and represented by a convertible debt, the conversion of which could occur only once the Company would have shares available for issuance. These debts are convertible at fixed prices rather than as a discount to market.
Fiscal years Fiscal Fiscal Fiscal Fiscal
2006 & 2007 year 2008 year 2008 year 2008 year 2008
Q-2 Q-3 Q-4
Dollars received $ 114,700 $ 10,700 $ 19,400 $ 22,000 $ 25,000
Shares 26,040,000 3,840,000 5,460,000 5,400,000 7,000,000
Fiscal year Fiscal year Fiscal Fiscal
2009 2009 Year 2009 Year
Q-1 Q-3 Q-4 2010&2011
Q-1 &Q-2
Dollars Received $ 19,000 $ 2,500 $ 25,800 $ 116,285
Shares 9,400,000 3,571,429 25,400,000 71,405,000
The shares referred to in the above table were mostly issued, unrestricted, during the Fiscal years 2009 and 2010.
We expect that some portion of our future overhead costs, which may be significant, will continue to be covered from sources other than commercial revenues. Since March of 2003, our monthly our-of-pocket cash costs were reduced to minimal amounts.
Our greatest expense, from an accounting standpoint, is for salaries. These salaries have not been paid for over seven years, but rather set up as payables. A portion of these payables has been converted to equity through the issuance of common stock. The company intends to continue this process to convert recorded liabilities into equity. Our cash flow deficit condition will continue until such time as the Company will start generating revenues from the sale of TCS Systems. Until we can succeed in securing an unconditional sales contract for the sale of one or more systems employing our technology, the company will not be engaging any significant financial commitments and will not be engaging in any significant research and development activities nor increasing employment.
While we continue to market TCS Systems and have in place the Simpro License Agreement, as of June 30, 2009, no unconditional sales orders for TCS Systems had been received and manufacturing of TCS Systems has not been initiated. We anticipate that we will begin selling or licensing out the sale of TCS Systems and thus initiating the manufacturing of these systems on a commercial basis inevitably as long as there is a demand for new recycling technology. Until we successfully develop and commence TCS System manufacturing and sales operations on a full-scale commercial level, however, we will not generate significant revenues from operations. Accordingly, we would be obligated to attempt to seek non-commercial sources of revenues to support operations until TCS Systems sales and manufacturing operations would become a reality. In the event of such a circumstance, there can further be no assurance that such non-commercial revenue funding would be available at all or on terms acceptable to management. Except for research, development and sales and marketing activities related to the recycled crumb rubber industry, as noted above and in previous filings, we have never engaged in any other significant business activities.
F-10
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During the first quarter of Fiscal 2007, Tirex completed the negotiation of the employment agreements with respect to Tirex CEO and President, John L. Threshie Jr., Tirex Vice President Engineering and Research and Development, Louis V. Muro and Tirex Secretary-Treasurer and Chief Financial Officer, Michael Ash. These versions were ratified by all respective parties. Under the terms of these agreements, Mr. Threshie's salary was augmented to US$150,000 retroactive to July 1, 2002 while Mr. Muro's salary was reduced retroactively to July 1, 2002 to US$75,000. The salary of Mr. Muro was subsequently reinstated at $150,000, effective July 1, 2008, on a retroactive basis. The salary of Mr. Ash remained unchanged at US$100,000. Also under the terms of the agreements, Mr. Threshie received an option to acquire 3,000,000 shares of the corporation at the beginning of each year of his three-year agreement, the effective inception date being July 1 2007. Similarly, Mr. Muro received options to purchase 1,000,000 shares per year. Mr. Muro's employment was also effective July 1, 2007. Other than for the number of shares involved, Mr. Muro's options proposed agreement are identical to that of Mr. Threshie. As for Mr. Ash, his three-year employment agreement was be effective January 1, 2007 and provided for him to acquire 2,000,000 shares of Tirex in each of the three years of his contract. In all cases, the exercise window is three years. These options could be exercised on a cashless basis and are described in more detail elsewhere in this report.
Liquidity and Capital Resources
As of June 30, 2009, the Company had total assets of $1 as compared to $1 at June 30, 2008 reflecting a change of $0. There was no change in the value of Patents from June 30, 2008 to June 30, 2009. There were no other changes in the value of individual assets from June 30, 2008 to June 30, 2009.
As of June 30, 2009, the Company had total liabilities of $4,981,442 as compared to $7,507,611 at June 30, 2008, reflecting a decrease in liabilities of $2,526,169. The decrease in total liabilities from June 30, 2008 to June 30, 2009 is primarily attributable to: (i) a decrease in Accounts Payable and Accrued Liabilities in the amount of $201,845 from $1,742,273 as of June 30, 2008 to $1,540,428 as of June 30, 2009, (ii) a decrease in Accrued Liabilities-Related Parties in the amount of $822,373 from $2,357,021 as of June 30, 2008 to $1,534,648 as of June 30, 2009, (iii) a decrease in Notes Payable-Related Party in the amount of $162,500 from $162,500 as of June 30, 2008 to $0 as of June 30, 2009, (iv) a decrease in Convertible Notes-Non-Related Parties in the amount of $244,500 from $920,245 as of June 30, 2008 to $675,745 as of June 30, 2009, and (v) a decrease in Derivative Liability in the amount of $1,094,951 from $2,325,572 as of June 30, 2008 to $1,230,621 as of June 30, 2009.
Reflecting the foregoing, the financial statements indicate that as at June 30, 2009, the Company had a working capital deficit (current assets minus current liabilities) of $4,981,442 and that as at June 30, 2008, the Company had a working capital deficit of $7,507,611, a working capital deficit decrease of $2,526,169. There were no changes in current assets, as noted above, while there were reductions to current liabilities.
The financial statements, which are included in this report, reflect total operations and other expenses of $636,938 and a gain on change in the value of the derivative liability of $1,094,951 for the year ended June 30, 2009, which reflects a decrease in total operations and other expenses of $386,790 and a decrease in the gain from the change in the value of the derivative liability of $2,811,115 over the year ended June 30, 2008. The Company has ceased Research and Development activities thereby resulting in a significant decrease in personnel expenses and other Research and Development expenses compared with prior periods.
The success of the tire recycling manufacturing business and the ability to continue as a going concern will be dependent upon the ability of the Company to obtain adequate financing to commence profitable, commercial manufacturing and sales activities and the TCS Systems' ability to meet anticipated performance specifications on a continuous, long term commercial basis.
The Company believes that the amounts accrued to date in respect of the shares issued to compensate the executive officers and consultants reflect the fair value of the services rendered, and that the recipients of such shares received such shares at an appropriate and reasonable discount from the then current public market price. The Company believes that the discount is warranted due to the fact that there are often restrictions on the transfer of said shares arising out of the absence of registration, and the uncertainty respecting our ability to continue as a going concern.
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From inception (July 15, 1987) through June 30, 2009, the Company has incurred a cumulative net loss of $32,557,086. 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 the proposed health care operations and therefore, generated no revenues there from.
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