===============================================================================
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 April 30, 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 April 30, 1998 was 14,067,300
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
===============================================================================
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheets as of April 30, 1998 and October 31, 1997 1-2
Statements of Operations for the Six Months Ended April 30, 1998 and 1997 3
Statements of Stockholders' Deficit as of April 30, 1998 4
Statements of Cash Flows for the Six Months Ended April 30, 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
Financial Data Schedule 14
</TABLE>
<PAGE>
Item 1. Financial Statements
Imperial Petroleum Recovery Corporation
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
April 30, 1998 October 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 45,764 $ 30,498
Note receivable-Maya LLC 197,494 -
Interest receivable-Maya LLC 1,136
Inventory, net of allowance of $260,000 as of
April 30, 1998 and October 31, 1997 27,487 -
Prepaid expenses 7,967 32,266
---------------------------------------------
Total Current Assets 279,848 62,764
Property and equipment, net of accumulated depreciation
of $39,276 and $29,209 as of April 30, 1998 and
October 31, 1997 respectively 129,778 137,614
Other assets 10,032 10,032
---------------------------------------------
$ 419,658 $ 210,410
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
Balance Sheets--Continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
April 30, 1998 October 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
(Audited) (Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable $ 453,823 $ 507,744
Accrued expenses 29,538 8,735
Accrued salaries and related expenses - 71,414
Accrued lease obligation, current 100,000 -
Due to affiliate 4,091 -
Notes payable, stockholders 77,423 77,923
Note payable, other 4,783 11,748
Note payable, equipment - 4,811
----------------------------------------------
Total Current Liabilities 669,658 682,375
Note Payable--FDC, related party 303,775 228,781
Accrued Lease Obligation--non-current - 100,000
Commitments and contingencies - -
Stockholders' Deficit
Common stock--authorized 100,000,000 shares; $.001 par value; issued and
outstanding 13,567,300 and 12,567,300 shares at April 30, 1998 and
October 31, 1997, respectively 13,567 12,567
Common stock subscribed (6,909) (6,909)
Additional paid-in capital 7,420,436 6,622,614
Deficit accumulated during the development stage (7,980,869) (7,429,018)
----------------------------------------------
Total Stockholders' Deficit (553,775) (800,746)
----------------------------------------------
$ 419,658 $ 210,410
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
Statements of Operations (Unaudited)
Six Months Ended April 30, 1998 and 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ $
Cost of Goods Sold
---------------------------------------------
Gross Profit
Operating Expenses
Research and development expenses--prototype 84,153 352,331
General and administrative expenses
Internal administration, selling and marketing expense 544,744 1,134,667
---------------------------------------------
Loss from Operations (628,897) (1,486,998)
Other Income
Miscellaneous income - 9,154
Interest income 3,562 -
Extraordinary gain on debt settlement 73,484 119,900
---------------------------------------------
Net loss $ (551,851) $ (1,357,944)
- -----------------------------------------------------------------------------------------------------------------------------
Loss per share $ (.05) $ (.19)
Extraordinary gain per share $ .01 $ .01
Loss per share $ (.04) $ (.18)
</TABLE>
3
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
Statements of Stockholders' deficit (Unaudited)
As of April 30, 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 1,000,000 1,000 797,822 798,822
Net loss (551,851) (551,851)
---------- ------- ------- ---------- ----------- -----------
Balance, April 30, 1998 13,567,300 $13,567 $(6,909) $7,420,436 $(7,980,869) $ (553,775)
========== ======= ======= ========== =========== ===========
</TABLE>
4
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
Statements of Cash Flows (Unaudited)
Six Months Ended April 30, 1998 and 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net loss $ (551,851) $ (1,357,944)
---------------------------------------------
Adjustments to reconcile net loss to net
cash used in operating activities
Changes in assets and liabilities
Depreciation 10,067
Increase in interest receivable-Maya LLC (1,136)
Increase in inventory (27,487) -
Decrease in notes receivable - 84,050
Decrease in prepaid 24,299
Increase (Decrease) in accounts payable (53,921) 404,798
Decrease in salaries and related expenses (71,414)
Increase (Decrease) in accrued liabilities 20,803 (124,542)
---------------------------------------------
Total Adjustments (98,789) 364,306
---------------------------------------------
Net Cash Used in Operating Activities (650,640) (993,638)
---------------------------------------------
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 601,328 659,216
Proceeds from loans from affiliated entities 78,585 362,102
Payments on notes payable (11,776) (6,456)
Payment on bank overdraft - (1,214)
---------------------------------------------
Net Cash Provided by Financing Activities 668,137 1,013,648
---------------------------------------------
Net Increase in Cash 15,266 -
Cash and Cash Equivalents, Beginning of Period 30,498 -
---------------------------------------------
Cash and Cash Equivalents, End of Period $ 45,764 $ -
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
Imperial Petroleum Recovery Corporation
(a development stage company)
Notes to Financial Statements
- -------------------------------------------------------------------------------
APRIL 30, 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 six month period ended April
30, 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
- -------------------------------------------------------------------------------
APRIL 30, 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 six month period ended April 30, 1998, the Company received net
proceeds of approximately $601,328 from the sale of restricted common stock and
additional paid in capital. The Company used approximately ($551,851) in cash
flows from operating activities, excluding changes in assets and liabilities,
during the six month period ended April 30, 1998, compared to approximately
($1,357,944) for the corresponding period of 1997. The total net cash used by
operating activities was approximately ($650,640) for the six month period ended
April 30, 1998, compared to approximately ($993,638) for the corresponding
period of 1997.
Cash used by investing activities totaled approximately ($2,231) for the
six month period ended April 30, 1998 as compared to investing activities
totaling approximately ($20,010) for the corresponding period of 1997.
Cash provided by financing activities totaled approximately $668,137 for
the six month period ended April 30, 1998 compared to approximately $1,013,648
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 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 stock may provide
the 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 preceding paragraph and the following discussion include
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 the MST 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 first product of the MST product line became generally available
during the fourth quarter of fiscal year 1997 and the Company believes that
revenues will begin to flow as contracts are finalized in fiscal year 1998.
This is evidenced by the recent contract with the Shell Martinez
Manufacturing Complex in Martinez, California. This initial contract will serve
as an introduction of the MST system into the major refineries. This and the
increasing interest by other U.S. and foreign oil companies may lead to
additional markets for the Company's technology by the forth quarter of fiscal
year 1998. Also, several long-running negotiations relating off-shore
involvement by the Company are expected to conclude by the third quarter of
fiscal year 1998.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
FUTURE OPERATING RESULTS - Continued
For a number of reasons, management has focused on leasing instead of
selling the MST system. This decision has increased the ease of entry by smaller
petroleum processors and service companies into modernizing their current
operations with the MST system.
The above factors may result in the need for the Company to begin
manufacturing additional MST systems by the fourth quarter of 1998. All factors
involved in the manufacturing and delivery of new systems are in place, thus
allowing for timely rollouts in accordance with contract requirements.
The Company does not expect revenue growth to occur evenly over the 1998
fiscal year; instead, the Company expects that the major impact of the MST
product introduction on revenues and earnings will occur during the second half
of the year. Revenue growth in the third quarter of fiscal 1998 will depend to a
large extent on the timing of the Company's rollout of the MST unit.
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."
Because of the uncertainties affecting the Company's future operating
results, past performance is not a reliable indicator of future performance. The
use of historical trends to anticipate results or trends in future periods is
not appropriate. In addition, a number of factors, including the Company's
participation on a highly dynamic industry, may result in significant volatility
in the price of the Company's common stock.
The Company cautions that the preceding list of cautionary statements is
not exclusive.
RESULTS OF OPERATIONS
Net Sales
There were no net sales for the six month period ended April 30, 1998, the
same as recorded for the corresponding period of 1997.
Operating Expenses
Selling, general and administrative expenses for the six month period ended
April 30, 1998, were approximately $544,744 a decrease over the approximately
$1,134,667 recorded for the corresponding period of 1997.
Research and development expenses for the six month period ended April 30,
1998, were approximately $84,153 a decrease over the approximately $352,331
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 six month period ended April 30, 1998,
was approximately $75,909 which included $3,562 of interest income 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
$129,054, 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
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 March 11, 1997.
On March 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, interest at 10%, payable in
three installments of $100,000 each, including principal and interest on April
11, May 11, and June 11, 1998. The note is prepayable at any time without
penalty. The Warrant is exercisable for $1.00 per share and expires on March 11,
2002.
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 the 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: May 12, 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 By laws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Annual Report of 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, CIK No. 0001047620)
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, CIK No. 0001020448)
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, CIK
No. 0001020448)
10.4 Registration Rights Agreement dated as of March 11, 1998
between the Company and Maya LLC (incorporated by reference
to Exhibit 2 to the Schedule 13D/A filed by Maya LLC with the
Commission with a filing date of March 25, 1998, CIK No.
0001020448)
27.* Financial data schedule
- ------------
* Filed herewith.
13
<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
April 30, 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> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 45,764
<SECURITIES> 0
<RECEIVABLES> 198,630
<ALLOWANCES> 0
<INVENTORY> 27,487
<CURRENT-ASSETS> 279,848
<PP&E> 129,778
<DEPRECIATION> 10,067
<TOTAL-ASSETS> 419,658
<CURRENT-LIABILITIES> 669,659
<BONDS> 0
0
0
<COMMON> 13,657
<OTHER-SE> (567,342)
<TOTAL-LIABILITY-AND-EQUITY> 419,658
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 628,897
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (551,851)
<INCOME-TAX> 0
<INCOME-CONTINUING> (551,851)
<DISCONTINUED> 0
<EXTRAORDINARY> 73,484
<CHANGES> 0
<NET-INCOME> (551,851)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
