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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 31, 1998
or
// TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-21169
Imperial Petroleum Recovery Corporation
(Exact name of registrant as specified in its charter)
Nevada 76-0529110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15311 Vantage Parkway West, Suite 160, Houston, Texas 77032
(Address of principal executive offices) (Zip Code)
(281) 987-2828
(Registrant'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) has filed all reports
Required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
YES X NO
The Number of Shares Of The Registrant's Common Stock, $.001 Par Value Per
Share, Outstanding as of July 31, 1998 was 14,071,300
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheets as of July 31, 1998 and October 31, 1997 1-2
Statements of Operations for the Nine Months Ended July 31, 1998 and 1997 3
Statements of Stockholders' Deficit as of July 31, 1998 4
Statements of Cash Flows for the Nine Months Ended July 31, 1998 and 1997 5
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Exhibit Index 13-14
Financial Data Schedule 15
</TABLE>
<PAGE>
Item 1. Financial Statements
Imperial Petroleum Recovery Corporation
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
July 31, 1998 October 31, 1997
------------- ----------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 44,077 $ 30,498
Note receivable-Maya LLC 295,069 --
Interest receivable-Maya LLC 1,697 --
Inventory, net of allowance of $260,000 as of
July 31, 1998 and October 31, 1997 27,487 --
Prepaid expenses -- 32,266
-------- --------
Total Current Assets 368,330 62,764
Property and equipment, net of accumulated depreciation
of $44,309 and $29,209 as of July 31, 1998 and
October 31, 1997 respectively 124,745 137,614
Other assets 10,032 10,032
-------- --------
$503,107 $210,410
======== ========
</TABLE>
1
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
Balance Sheets--Continued
<TABLE>
<CAPTION>
July 31, 1998 October 31, 1997
------------- ----------------
(Unaudited) (Audited)
<S> <C> <C>
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable $ 434,745 $ 507,744
Accrued expenses 27,825 8,735
Accrued salaries and related expenses -- 71,414
Due to affiliate 4,091 --
Notes payable, stockholders 60,000 77,923
Note payable, other -- 11,748
Note payable, equipment -- 4,811
----------- -----------
Total Current Liabilities 526,661 682,375
Note Payable--FDC, related party 303,775 228,781
Accrued Lease Obligation--non-current 100,000 100,000
Commitments and contingencies -- --
Stockholders' Deficit
Common stock--authorized 100,000,000 shares; $.001 par value; issued and
outstanding 14,071,300 and 12,567,300 shares at July 31, 1998 and
October 31, 1997, respectively 14,071 12,567
Common stock subscribed (6,909) (6,909)
Additional paid-in capital 7,813,447 6,622,614
Deficit accumulated during the development stage (8,247,938) (7,429,018)
----------- -----------
Total Stockholders' Deficit (427,329) (800,746)
----------- -----------
$ 503,107 $ 210,410
=========== ===========
</TABLE>
2
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
Statements of Operations (Unaudited)
Nine Months Ended July 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenue $ 26,289 $ --
Cost of Goods Sold -- --
----------- -----------
Gross Profit 26,289 --
----------- -----------
Operating Expenses
Research and development expenses--prototype 96,844 366,791
General and administrative expenses
Internal administration, selling and marketing
expense 817,715 1,756,555
----------- -----------
Loss from Operations (888,270) (2,123,346)
Other Income (Expense)
Miscellaneous income 18,976 22,620
Interest income 6,629 --
Interest expense (29,739)
Extraordinary gain on debt settlement 73,484 119,900
----------- -----------
Net loss $ (818,920) $(1,980,826)
----------- -----------
Loss per share $ (.07) $ (.25)
Extraordinary gain per share $ .01 $ .01
-----------
Loss per share $ (.06) $ (.24)
----------- -----------
</TABLE>
3
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
Statements of Stockholders' Deficit (Unaudited)
As of July 31, 1998
<TABLE>
<CAPTION>
Common Stock Additional Total
No. of Stock Paid in Retained Stockholders'
Shares Amount Subscriptions Capital Deficit Deficit
------------ ------ ------------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1997 12,567,300 $12,567 $(6,909) $6,622,614 $(7,429,018) $(800,746)
Sale of common stock
& additional paid in capital 1,504,000 1,504 1,190,833 1,192,337
Net loss (818,920) (818,920)
---------- ------- ------- ---------- ----------- ----------
Balance, July 31, 1998 14,071,300 $14,071 $(6,909) $7,813,447 $(8,247,938) $ (427,329)
========== ======= ======= ========== =========== ==========
</TABLE>
4
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
Statements of Cash Flows (Unaudited)
Nine Months Ended July 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net loss $ (818,920) $(1,980,826)
----------- ------------
Adjustments to reconcile net loss to net
cash used in operating activities
Changes in assets and liabilities
Depreciation 15,100
Increase in interest receivable-Maya LLC (1,696)
(Increase) Decrease in inventory (27,487) 132,000
Decrease in officer advances -- 54,747
Decrease in notes receivable -- --
Decrease in prepaid 32,266
Decrease in other assets -- 339,500
Increase (Decrease) in accounts payable (72,999) 386,028
Decrease in salaries and related expenses (71,414)
Increase (Decrease) in accrued liabilities 19,090 (124,542)
----------- ------------
Total Adjustments (107,140) 787,733
----------- ------------
Net Cash Used in Operating Activities (926,060) (1,193,093)
----------- ------------
Cash Flows from Investing Activities
Additions to property and equipment (2,231) (20,010)
----------- ------------
Net Cash Used in Investing Activities (2,231) (20,010)
----------- ------------
Cash Flows from Financing Activities
Proceeds from issuance of common stock and
Additional paid in capital 897,267 1,572,278
Proceeds from loans from affiliated entities 61,162 --
Payments on notes payable (16,559) (244,783)
Payment on bank overdraft -- (51,934)
----------- ------------
Net Cash Provided by Financing Activities 941,870 1,275,561
----------- ------------
Net Increase in Cash 13,579 62,458
Cash and Cash Equivalents, Beginning of Period 30,498 --
----------- ------------
Cash and Cash Equivalents, End of Period $ 44,077 $ 62,458
=========== ============
</TABLE>
5
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
Notes to Financial Statements
JULY 31, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements include the accounts of Imperial
Petroleum Recovery Corporation (the "Company"). Such statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and pursuant to the regulations of the Securities and
Exchange Commission; accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation (consisting of normal recurring accruals) have
been included. The results of operations for the nine month period ended July
31, 1998 are not necessarily indicative of the results for the fiscal year
ending October 31, 1998. The accompanying unaudited financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-KSB for the fiscal year ended October
31, 1997.
NOTE B - ORGANIZATION AND USE OF ESTIMATES
Organization
Imperial Petroleum Recovery Corporation (a development stage company
incorporated in Nevada) has been in the development stage since commencement of
operations in fiscal year 1995. Operations to date have been comprised of
developing and marketing crude oil sludge recovery process technology. Principal
operations are conducted in Texas.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE C - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, the Company has sustained substantial
losses from operations since inception. In addition, the Company has used,
rather than provided, cash in its operations.
6
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
Notes to Financial Statements - Continued
JULY 31, 1998
NOTE C - REALIZATION OF ASSETS - Continued
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to meet its financing requirements on a
continuing basis, to maintain present financing and to succeed in its future
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
The Company has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue in existence.
In December 1996, the Company effected a significant number of cost-cutting
initiatives aimed at continuing to fund its operations from existing resources
and reducing the level of revenue required to achieve a break-even cash flow
position. These initiatives included centralizing operations in Houston, Texas,
re-organizing management and instituting a complete set of internal cost control
policies.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
This information should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and the Company's Annual Report
on Form 10-KSB for the fiscal year ended October 31, 1997.
LIQUIDITY & CAPITAL RESOURCES
During the nine month period ended July 31, 1998, the Company received
net proceeds of approximately $897,267 from the sale of restricted common stock
and additional paid in capital. The Company used approximately ($818,920) in
cash flows in its operations, excluding changes in assets and liabilities,
during the nine month period ended July 31, 1998, compared to approximately
($1,980,826) for the corresponding period of 1997. The total net cash used in
operations was approximately ($926,060) for the nine month period ended July 31,
1998, compared to approximately ($1,193,093) for the corresponding period of
1997.
Cash used in investing activities totaled approximately ($2,231) for
the nine month period ended July 31, 1998 as compared to approximately ($20,010)
for the corresponding period of 1997.
Cash provided by financing activities totaled approximately $941,870
for the nine month period ended July 31, 1998 compared to approximately
$1,275,561 for the corresponding period of 1997. The company successfully
completed a private placement in April 1996, which yielded net proceeds of
approximately $748,505.
The Company expects to continue to make investments in the future to
support its overall growth. Currently, it is anticipated that ongoing operations
will be financed primarily from net proceeds of restricted stock and other
restricted equity sales and additional paid in capital. As indicated in the
Company's most recent Annual Report on Form 10-KSB, while continued sale of
restricted equity may provide sufficient cash in certain periods, to the extent
the Company experiences growth in the near future, the Company anticipates that
its operating and product development activities may use cash and, consequently,
such growth may require the Company to obtain additional sources of financing.
There can be no assurances that unforeseen events may not require more working
capital that the Company currently has at its disposal.
FUTURE OPERATING RESULTS
The following discussion includes forward-looking statements regarding
the Company's future financial position and results of operations. Actual
developments, financial position and results of operations may differ materially
from the statements.
The Company has invested significant amounts in the research and
development and the initial marketing of its MST Sludge Recovery unit. The
emphasis, attention, and dedication of the Company's limited resources for the
MST system have caused and, in management's view, will continue to cause the
negative operating earnings experienced to date. However, the Company believes
that the value and sales potential of the MST system outweigh the risk of
continued operating losses.
The expansion of the Company's introduction of the MST system to major
refineries and petroleum producers has continued with the most recent
performance at Mobil's Torrance Refinery at Torrance, California.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
FUTURE OPERATING RESULTS - Continued
The Company believes that the current, on-going introduction of the MST
system to major refineries and petroleum producers, along with a number of
others that are being scheduled, should lead to the placement of MST systems
under the Company's proposed lease arrangement.
Within the fourth quarter of 1998 the Company expects to complete the
fabrication and assembly of its new SMU-60. This Sludge Melting Unit will be
utilized on oily materials that are high in parrafin or solidified at normal
temperatures. Designed to be either skid or track mounted, this system is
designed to perform prior liquification and pumping of oil waste pit materials,
tank solids and hardened spills. The Company expects that the SMU unit often
will work in conjunction with an MST unit and will serve as another tool to
expand the use and sales of the Company's technologies.
The Company's management is estimating that, during the fourth quarter
of 1998, the first contracts for the fabrication and delivery of MST systems
should take place. Initial agreements on off-shore placements of both the MST
system and the new SMU system may also be completed in the fourth quarter of
1998.
The Company's ability to achieve its revenue and profitability
objectives in fiscal year 1998 will depend on many factors not entirely within
the Company's control. These include the timing and market acceptance of the MST
unit and other new products and features announced and introduced by the Company
and its competitors, and the extent to which the Company is successful in
placing an MST unit in strategic facilities to gain broader acceptance of the
technology. Other factors include rapid changes in technologies and standards
relating to sludge production and remediation of existing sludge in tanks and
ponds.
The foregoing forward-looking statements involve a number of risks and
uncertainties. In addition to the factors discussed above, among the factors
that could cause actual results to differ materially are those listed in the
Company's most recent Annual Report of Form 10-KSB under the headings Item
1-"Description of Business-Forward Looking and Cautionary Statements" and Item
6-"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company cautions that the preceding list of cautionary statements
is not exclusive.
RESULTS OF OPERATIONS
Net Sales
For the nine month period ended July 31, 1998, the Company recorded net
sales of $26,289 from the rental of the MST system to a major refinery compared
to no net sales recorded for the corresponding period of 1997.
Operating Expenses
Selling, general and administrative expenses for the nine month period
ended July 31, 1998, were approximately $817,715, a decrease over the
approximately $1,756,555 recorded for the corresponding period of 1997. This
significant decrease is a result of the cost cutting measures implemented in
December , 1996.
Research and development expenses for the nine month period ended July
31, 1998, were approximately $96,844, a decrease over the approximately $366,791
recorded for the corresponding period of 1997.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
RESULTS OF OPERATIONS - Continued
Interest and Financing Expenses
Total other income (expense) for the nine month period ended July 31,
1998 was approximately $69,350, which included $6,629 of interest income,
($29,739) of interest expense and a one-time charge of $73,484 associated with
gain on debt settlement. For the corresponding period in 1997, the Company
recorded other income (expense) of $142,520, which included a $119,900 one-time
charge associated with gain on debt settlement.
To date, inflation and seasonality has not had a material impact on the
Company's results of operations.
PART II
ITEM 1. LEGAL PROCEEDINGS
During the period covered by this report, no legal proceedings required
to be reported became reportable events, and there were no material developments
in or terminations of any previously reported proceedings.
The Company is subject to routine litigation from time to time arising
from its operations. Management believes that any such pending litigation will
not have a material effect on the Company's financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 11, 1998, the Company sold 500,000 shares of its Common Stock
and a Warrant to purchase 3,500,000 shares of it Common Stock to Maya LLC for
$100,000 in cash and a promissory note for $295,068, bearing interest at 10%,
payable in three installments of $100,000 each, including principal and
interest, on August 11, September 11, and October 11, 1998. The note is
prepayable at any time without penalty. The Warrant is exercisable for $1.00 per
share and expires on July 11, 2002. The shares of Common Stock purchased and the
shares underlying the Warrant enjoy certain registration rights under a
Registration Rights Agreement between the Company and Maya LLC dated as of June
11, 1998.
The Company relied upon the exemption provided in Section 4(2) of the
Securities Act of 1933, which covers "transactions by an issuer not involving
any public offering," to issue the securities discussed in the previous
paragraph without registration under that Act. The Company made a determination
that the investor to whom the securities were issued did not need the
protections that registration would afford. The certificates representing the
shares of Common Stock issued and the Warrant were marked with legends
indicating that transfer of the securities is restricted because they were not
sold in a registered offering.
10
<PAGE>
PART II - Continued
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during the period covered by this report.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits to this report are listed in the Exhibit Index, which is
incorporated herein by reference.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the period
covered by this report.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Imperial Petroleum Recovery Corporation
(Registrant)
Date: September 9, 1998 /s/ C. Brent Karchner
-------------------------------------
C. Brent Karchner
President and Chief Executive Officer
(Duly Authorized Officer and
Principal Financial Officer)
12
<PAGE>
Imperial Petroleum Recovery Corporation
Exhibit Index to Form 10-QSB
Exhibit No. Identification of Exhibit
- ----------- -------------------------
3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibits 2 and 2.1 to the Company's
Registration Statement on Form 10-SB, filed with the
Commission with a filing date of August 8, 1996,
Commission File No. 0-21169)
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended October 31, 1996, filed with the
Commission with a filing date of November 26, 1997,
Commission File No. 0-21169)
10.1 Convertible Promissory Note of the Company, bearing
interest from August 25, 1997, to Food Development
Corporation (incorporated by reference to Exhibit 1 to the
Schedule 13D filed by Henry H. Karchner with the
Commission with a filing date of January 20, 1998,
Commission File No. 0-21169)
10.2 Warrant for the Purchase of Shares of Common Stock dated
as of December 11, 1997 issued by the Company to Maya LLC
(incorporated by reference to Exhibit 1 to the Schedule
13D/A filed by Maya LLC with the Commission with a filing
date of December 22, 1997, Commission File No. 0-21169)
10.3 Warrant for the Purchase of Shares of Common Stock dated
as of March 11, 1998 issued by the Company to Maya LLC
(incorporated by reference to Exhibit 1 to Schedule 13D/A
filed by Maya LLC with the Commission with a filing date
of March 25, 1998, Commission File No. 0-21169)
10.4 Registration Rights Agreement dated as of March 11, 1998
between the Company and Maya LLC (incorporated by
reference to Exhibit 2 to Schedule 13D/A filed by Maya LLC
with the Commission with a filing date of March 25, 1998,
Commission File No. 0-21169)
13
<PAGE>
Imperial Petroleum Recovery Corporation
Exhibit Index to Form 10-QSB
(Continued)
Exhibit No. Identification of Exhibit
- ----------- -------------------------
10.5 Warrant for the Purchase of Shares of Common Stock dated
as of June 11, 1998 10.5 issued by the Company to Maya LLC
(incorporated by reference to Exhibit 1 to Schedule 13 D/A
filed by Maya LLC with the Commission with a filing date
of June 23, 1998, Commission File No. 0-21169)
10.6 Registration Rights Agreement dated as of June 11, 1998
between the Company and Maya LLC (incorporated by
reference to Exhibit 2 to Schedule 13D/A filed by Maya LLC
with the Commission with a filing date of June 23, 1998,
Commission File No. 0-21169)
27* Financial data schedule
* Filed herewith.
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and consolidated statement of operations in the
Company's Quarterly Report on Form 10-QSB as of and for the fiscal quarter ended
July 31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0001020448
<NAME> Imperial Petroleum Recovery Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Oct-31-1998
<PERIOD-START> Nov-1-1997
<PERIOD-END> Jul-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 44,077
<SECURITIES> 0
<RECEIVABLES> 296,766
<ALLOWANCES> 0
<INVENTORY> 27,487
<CURRENT-ASSETS> 368,330
<PP&E> 124,745
<DEPRECIATION> 15,100
<TOTAL-ASSETS> 503,107
<CURRENT-LIABILITIES> 526,661
<BONDS> 0
0
0
<COMMON> 14,071
<OTHER-SE> (441,400)
<TOTAL-LIABILITY-AND-EQUITY> 503,107
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 914,559
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (818,920)
<INCOME-TAX> 0
<INCOME-CONTINUING> (818,920)
<DISCONTINUED> 0
<EXTRAORDINARY> 73,484
<CHANGES> 0
<NET-INCOME> (818,920)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
