NEWS OUT!12-Nov-2008
Quarterly Report
ITEM 2. Management's Discussion and Analysis of Financial Condition and Resultsof Operations
The following is management's discussion and analysis of significant factorswhich have affected the Company's financial position and operations during thethree and six month periods ended September 30, 2008. This discussion alsoincludes events which occurred subsequent to the end of the last quarter andcontains both historical and forward-looking statements. When used in thisdiscussion, the words "expect(s)", "feel(s)","believe(s)", "will", "may","anticipate(s)" "intend(s)" and similar expressions are intended to identifyforward-looking statements. Such statements are subject to certain risks anduncertainties, which could cause actual results to differ materially from thoseprojected.
In March 2000, we announced that our tire recycling technology prototype wasready for replication and commercialization. Our technology has been upgradedand refined since that year 2000 date. The intellectual property owned by Tirexcomprises the patented fracturing mill (both US and Canadian patents) whichpermits the effective separation of the materials components of the tires, andthis at a significant cost saving. The intellectual property of our process,including the integration of the Tirex designed freezing process with thefracturing mill, is recognized in the Manufacturing License Agreement we havewith Simpro www.simpro.it. Our patent renewals for both the USA and Canada haveboth been completed.
Since the March 2000 announcement respecting the commercial availability of itsTCS-1 model, Tirex worked to complete the design of the TCS-2, the version ofthe technology which processes two million tires per year, and has worked withits manufacturing partner, Simpro S.p.A. of Turin, Italy, to refine thetechnology and to create the possibility of auxiliary crumb rubber processing topermit the production of much finer mesh crumb rubber than the initialtechnology delivers. These refinements, at no significant additional cost tocustomers, allow for access to higher-value crumb rubber markets which somecustomers desire. The TCS-2 is now the primary model being offered to customersfor reasons of capital and operating cost efficiencies per unit volume of outputof finished product although inquiries for TCS-3 and TCS-4 models have beenentertained.
Concurrent with the continued technological refinement of our technology, ourprimary objective has been to conclude a first purchase and sales agreement of aTCS System. In this regard, Tirex has responded to requests for information andhas engaged in negotiations with potential customers throughout the world.Simultaneously, our manufacturing partner, Simpro, which also has anon-exclusive marketing agreement, has been actively negotiating with numerouspotential customers with customers based in the Middle East, the Far East, andwith British interests who would install one or more systems in the Middle East.With respect to this latter contact, the process has been slower than whatManagement would have preferred, but Management recognizes that the TCS elementof this industrial development initiative represents but a fraction of the totaland thus the timing of the conclusion of the agreement is constrained by othernegotiations where in which we have no interest. Furthermore, we have beeninformed that negotiations are also continuing between the Middle Easternpartners and the British partners as to the proportional ownership of thisventure. The Far Eastern customer continues to represent to us that the projectfinancing is in place and that they are waiting for a funds transfer to completethe purchase and sales agreement. With the recent upheavals in world financialmarkets and appreciable credit squeezing, it is clear that we cannot assure thatthis project will be consummated quickly, if at all. Insofar as none of theabove opportunities have reached the point of being actual agreements, we cannotoffer any guarantees that any of the above will actually result in formalcontracts.
Over the last fifteen months we have developed a relationship with New Yorkbased individuals who have expressed their belief in our technology and haverepresented to us that they would be able to put together US-based TCS projects.These individuals have devoted substantial time to the understanding of ourtechnology and to the structure and key successful factors of the tire recyclingindustry. While Tirex has no reason to doubt the abilities of these individuals,neither can we assure that they will, in fact, be successful with their effortsto sell TCS systems. During the first quarter of Fiscal 2009 and continuing intoOctober, these individuals have identified an investor group with actualexperience in the recycling industry who have expressed substantial interest inthe possibility of establishing a TCS facility in Upstate New York.
In the context of the information being provided to potential customers, wepoint out to these persons or entities that the original TCS-1 prototype locatedin Montreal has been disassembled and that the patented fracturing mill iscurrently physically located in Italy for reference in research and developmentpurposes. These customers are also provided copies of videotapes which include,among other things, a visual demonstration of the prototype actually in use. Inaddition, these customers are provided with documentation as to the variousaccreditations and attestations as to the effectiveness of the TCS technology,this documentation coming entirely from independent sources, including privatesector engineering firms, public sector government agencies andinternationally-accredited technical universities. Customers are also offeredthe free-of-charge possibility to obtain tailor-made pro-forma financialforecasts for their specific region, based on an adjustable financial modelcreated by our Chief Financial Officer, which allows for the input of localeconomic costing of goods and services, local taxation conditions, and variousloan and depreciation scenarios.
Despite this important quantity of substantiation of the effectiveness of theTCS technology and the substantial offers of assistance in the development ofthe business plans for these customers, the conclusion of the first purchase andsales agreement has proven elusive. Our manufacturing partner, Simpro, hassucceeded in putting into place a limited performance guarantee with respect tothe installations which it would accomplish, and this performance guarantee,backed by a major international insurance company, is offered to potentialcustomers. Even with performance guarantees, conclusion of an agreement has beendifficult. At issue is that Tirex is not in a position to simply sell newtechnology systems into an established industry. Also with Simpro selling itssystems in Euros, and considering the appreciation of the Euro versus US Dollar,North American sales have proven very difficult. Most potential customers areconfronted with the reality of becoming involved in a recycling industry whichhas complexities not found in other industrial sectors. To screen inquiries frompotential customers and to assist them in their own decision-making process asto whether or not they want to really participate in this industrial sector,Tirex routinely sends out a questionnaire to such persons pertaining to the keysuccess factors of their proposed initiative to ascertain their readiness andcapability to become involved in such activities. While negotiations on severalfronts have progressed to an advanced stage, as of September 30, 2008, nounconditional contracts had been concluded.
Management attributes the difficulty in concluding a sale primarily to the lackof a long-term track record of the system and to the lack of a demonstrationunit to establish the visual confirmation for customers that the technologyactually works as represented. While the video of the prototype createsinterest, it would appear that, by itself, it cannot replace the visual impactof a functioning fracturing mill. The approximate installed cost of a TCS-2 is5,500,000 Euros (currently, approximately US$7.07 million using the exchangerate of October 24, 2008?1 Euro = US$1.2656, which is a lot of money for mostentrepreneurs or their financial backers for unproven long-term technology, andparticularly in the context of global financial and credit difficulties. Theproject cost is not limited to the acquisition cost of the TCS. Dependingsomewhat on the location, we consider that the entrepreneur is facing a totalinvestment cost of approximately US$8 million to US$9 million, taking intoaccount pre-production and early production losses, local infrastructure costs,freight an in-transit insurance, local labor, permits, and a reasonableallocation for working capital to support early operations. There could also beimport duties on equipment imported from Europe.
During the second quarter of Fiscal 2007, the Tirex head office and morespecifically Mr. Threshie, relocated to Connecticut. Tirex engaged several newcommissioned representatives from New York and Connecticut, each with extensivemarketing and business development backgrounds. The most active opportunities onwhich Tirex and Simpro have worked since the first nine months of Fiscal 2007,and on which efforts continue, include projects for the Middle East, the UnitedKingdom, Malaysia, South Carolina, and New York State. It has been representedto either Tirex or Simpro that these projects have done their due diligence andeither all or a major part of their funding requirement is feasible. Management,however, is not in a position to assert that TCS System sales contracts will beconcluded.
As noted, these opportunities may not conclude in definitive agreements. Untilthere is a commercial system in operation, and regardless of Management'soptimism, there can be no assurance that these opportunities will actuallyresult in unconditional sales contracts. Tirex continues to be listed on theInternet Recycling Exchange, combined with our web site, www.tirex-tcs.com, andMr. Threshie's network, it continues to generate interest on a global basis.What appears to be quite clear is the desire to acquire new technologies toreplace existing technologies which are either being phased out by evolvinggovernment regulations or which are not economically viable in the absence oftire recycling subsidies. Furthermore, government subsidies and focus, as is thecase in New York, are towards technologies that can produce higher value addedrecycled products.
The Agreement with Simpro means that the gross revenues from sales will berecorded on Simpro's books, not in the books of Tirex, unless Simpro refuses thecontract at which time the gross revenues would be recorded by Tirex. The amountremitted back to Tirex will take the form of a royalty and will be accounted foras such. Regardless of the contract structure and the accounting effects whichresult, generally accepted accounting principles in effect in the USA have theeffect that the revenues to Tirex resulting from such transactions will not berecognizable until the systems will have been accepted by the customers. Giventhe time line required to manufacture, install and have accepted these systems,it is unlikely that any revenues would become recognizable, from the point ofview of US Generally Accepted Accounting Principles, during our fiscal yearwhich will end June 30, 2009. While the Company will benefit from the periodiccash inflows resulting from progress payments during the next approximately tenmonths, the royalty will, in fact, not have been earned until the systems areaccepted by the customers.
As a result of this period preceding the commencement of commercial operations,we have had to cover our overhead costs from sources other than from commercialrevenues. We expect that some portion of our future overhead costs, which may besignificant, will continue to be covered from sources other than commercialrevenues. Since March of 2003, our monthly our-of-pocket cash costs have beenreduced to inconsequential amounts, and thus our requirement to find financialresources to fund operations is minimal. Our greatest expense, from anaccounting standpoint, is for salaries. These salaries have not been paid forover five years, but rather set up as payables and represent by far the greatestproportion of our current liabilities. Our cash flow deficit condition willcontinue until such time as the Company will start generating revenues from thesale of TCS Systems. Until we can succeed in securing an unconditional salescontract for the sale of one or more systems employing our technology, thecompany will not be engaging any significant financial commitments and will notbe engaging in any significant research and development activities norincreasing employment.
Since Fiscal 2006, the expenses of our company were funded by a series of loansmade by a significant number of individuals investing modest amounts totalingapproximately US$198,000 to September 30, 2008. Each investment was made throughTirex President, John L. Threshie Jr., and insofar as Tirex did not have sharesto issue at that time, these investors, fully cognizant of our situation, and sodocumented in writing, accepted that their investment was being made via Mr.Threshie and represented a convertible debt, the conversion of which could occuronce Tirex would have shares available for issuance. To September 30, 2008,approximately 48,940,000 shares were involved, this number being before anyadjustments to our share authorization structure which would cause aproportional adjustment to the number of shares actually issuable. Thisconvertible debt was priced at fixed prices rather than as a discount to market.During the first quarter of Fiscal 2009 and in the month of October (secondquarter of Fiscal 2009) shares were issued to many of these investors, leaving19,560,000 shares remaining to be issued. The reason why these remaining shareswere not already issued revolves around the Rule 144 restriction period. Theseinvestors preferred to wait until Rule 144 would permit the issuance offree-trading stock rather than receive stock with restrictive legends. Theseremaining shares will be issued periodically during Fiscal 2009. The funds werelent directly to Mr. Threshie rather than to Tirex directly, with Mr. Threshiethen paying personally the expenses of Tirex, which expenses were duly recordedin our accounts, offset by a liability to him. As these private placement shareshave been and continue to be issued, the liability on our books toward Mr.Threshie is being extinguished.
In addition to the above liability for shares, Tirex has been liable for thereplacement of 11,986,315 shares which were delivered as collateral by TirexDirectors, Threshie, Muro and Sanzaro (now deceased, and thus the shares due tohis estate) for the $750,000 of convertible debt contracted for in 2001, whichshares were sold by the debt holders. On October 2, 2008, just following theperiod covered by this report, the collateral shares of Louis V. Muro (1,723,514shares) Louis A. Sanzaro (estate) (8,371,597 shares) were replaced. Thecollateral shares of Mr. Threshie, (1,891,204 shares) are in process of beingreplaced.
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 theInvestor to purchase up to US$5,000,000 of put notes. We drew down US$750,000 ofthis amount and used the proceeds of this financing toward legal and consultingfees due, normal operating expenses such as payroll, rent and taxes and theacquisition of equipment for our prototype TCS-1 Plant. In July of 2001, theCompany entered into a technical default with respect to the Agreement by nothaving an SB-2 Registration Statement declared effective by the SEC. Afterseveral months of negotiations, the Company entered into a Settlement Agreementwith the Investor Group which provided for a cash pay down of the amount owed,including interest and penalties over a period of approximately two yearsstarting with the date the Settlement Agreement was signed, the right of theInvestor Group to continue to be able to sell up to 600,000 collateral and Rule144 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 yearperiod. This Settlement Agreement was announced in April of 2002, and details ofthe terms of the Agreement are filed as an Exhibit to this Report. The Company,in the absence of having completed its first sales of TCS Systems according toour expectations, was unable to generate the cash flow necessary to pay down theConvertible Note in accordance with the terms of the Settlement Agreement. Thus,the Company once again finds itself in a position of default. Numerous recoursesare available to the holders of the Convertible Notes, but to date, theserecourses have not been exercised. Such recourses can be exercised at any timeand the fact that they have not been exercised so far does not preclude theirbeing exercised now or in the future. The Company has kept the Convertible Noteholders apprised of its efforts to sell TCS Systems and thus restart therepayments on the Convertible Notes. The collateral shares provided by thedirectors, totaling approximately 11,986,000 shares, have been sold by theinvestors.
Because of the lengthy delay preceding the commencement of commercialoperations, we have historically had to cover our overhead costs from sourcesother than from commercial revenues. We expect that some portion of our futureoverhead costs, which may be significant, will continue to be covered fromsources other than commercial revenues. Since March of 2003, our monthlyour-of-pocket cash costs have been reduced to relatively inconsequentialamounts, and thus our requirement to find financial resources to fund operationshas been minimal. Our greatest expense, from an accounting standpoint, is forsalaries. These salaries have not actually been paid for several years, butrather set up as payables. Some of these accrued salaries were translated intoconvertible promissory notes. Our cash flow deficit condition will continueuntil such time as the Company will start generating revenues from the sale ofTCS Systems. Until we can succeed in securing an unconditional sales contractfor the sale of one or more systems employing our technology, the company willnot be engaging any significant financial commitments and will not be engagingin any significant research and development activities nor increasingemployment.
Since the third quarter of Fiscal 2008, Management has devoted substantial timeand efforts to re-structure the Balance Sheet of the Corporation and to positionthe company for release from the Gray sheets and elevation to the Pink Sheets,with an ultimate goal of seeing its securities listed once again on the OTCBulletin Board. During the fourth quarter of Fiscal 2008 and during the firstquarter of Fiscal 2009, booked liabilities in excess of one million dollars werewritten off as a function of the Statute of Limitations and other liabilitieswere converted to equity through the issuance of stock. During the fourthquarter of Fiscal 2008, Tirex engaged the services of Moore & Associates toundertake the audit of our annual accounts for the years ended June 30, 2004through 2007 inclusive and to continue with an additional mandate for the auditof our Fiscal 2008 accounts and to undertake the required Review Engagements forour Fiscal 2009 quarterly reports. This new certifying accountant released itsaudit opinions for the fiscal years 2004 through 2007 inclusive in October 2007.We prepared and filed amended 10-KSB Reports for these fiscal years. Moore &Associates is currently completing the audit of our financial statements for ourfiscal year ended June 30, 2008, and an amended 10-KSB will be filed once theaudit report is released.
Concurrently, the company engaged the services of consultants to assist us ingetting our stock listed on the Pink Sheets. The efforts of this consultant andthe market maker engaged by him were successful in that our stock was officiallyre-listed on the Pink Sheets on October 24, 2008. We intend that, once the 2008financial statements are audited and an amended 10-KSB filed, we will apply fora further elevation of our listing to the OTC Bulletin Board. We can offer noguarantees that such an application will be accepted.
Liquidity and Capital Resources
As of September 30, 2008, the Company had total assets of $25,001 as compared to$25,001 at June 30, 2008 reflecting a change of Nil. There were no changes inthe value of individual assets, representing Property and Equipment and Patentsfrom June 30, 2008 to September 30, 2008.
As of September 30, 2008, the Company had total liabilities of $4,594,677 ascompared to $5,126,083 at June 30, 2008, reflecting a decrease in liabilities of$531,406. Total liabilities at June 30, 2008 had reflected a previous increaseof $413,985 over $4,712,098 in total liabilities at June 30, 2007. The decreasein total liabilities from June 30, 2008 to September 30, 2008 is primarilyattributable to: (i) a decrease in Long-Term Deposits and Convertible Notes inthe amount of $148,500 from $306,000 as of June 30, 2008 to $157,500 as ofSeptember 30, 2008, and (ii) a decrease in Convertible Loans in the amount of$314,930 from $2,756,216 as of June 30, 2008 to $2,441,286 as of September 30,2008.
Reflecting the foregoing, the financial statements indicate that as at September30, 2008, the Company had a working capital deficit (current assets minuscurrent liabilities) of $1,421,041 and that as at June 30, 2008, the Company hada working capital deficit of $1,478,922, a working capital deficit decrease of$57,881. There were no changes in current assets, as noted above, while therewere reductions to current liabilities due to third parties represented byAccounts Payable and Accrued Liabilities.
The financial statements, which are included in this report, reflect totaloperations and other expenses of $161,969 for the three month period endedSeptember 30, 2008, which reflects an increase of $53,321 over the three monthperiod ended September 30, 2007 when total operations and other expenses were$108,648. The Company has ceased Research and Development activities therebyresulting in a significant decrease in personnel expenses and other Research andDevelopment expenses compared with prior periods.
The success of the tire recycling manufacturing business and the ability tocontinue as a going concern will be dependent upon the ability of the Company toobtain adequate financing to commence profitable, commercial manufacturing andsales activities and the TCS Systems' ability to meet anticipated performancespecifications on a continuous, long term commercial basis.
The Company believes that the amounts accrued to date in respect of the sharesissued to compensate the executive officers and consultants reflect the fairvalue of the services rendered, and that the recipients of such shares receivedsuch shares at an appropriate and reasonable discount from the then currentpublic market price. The Company believes that the discount is warranted due tothe fact that there are often restrictions on the transfer of said sharesarising out of the absence of registration, and the uncertainty respecting ourability to continue as a going concern.
From inception (July 15, 1987) through June 30, 2007, the Company has incurred acumulative net loss of $30,566,310. Approximately $1,057,356 of such cumulativenet loss was incurred prior to the inception of the Company's present businessplan, in connection with the Company's discontinued proposed health carebusiness and was due primarily to the expending of costs associated with theunsuccessful attempt to establish such health care business. The Company nevercommenced the proposed health care operations and therefore, generated norevenues therefrom.