<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Quarterly Period Ended July 31, 1999
Commission File Number: 0-21169
IMPERIAL PETROLEUM RECOVERY CORPORATION
--------------------------------------------------
(Exact Name of Issuer as Specified in its Charter)
NEVADA 76-0529110
- ------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
2325-A Renaissance Drive, Las Vegas, Nevada 89119
--------------------------------------------------
(Address of Principal Executive Offices)
(702) 798-6800
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
There were 15,716,781 shares of the Registrant's $.001 par value common stock
outstanding as of August 27, 1999.
<PAGE>
INDEX
PAGE
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 31, 1999
and October 31, 1998 ................................... 3
Consolidated Statements of Operations for the Three
and Nine Months Ended July 31, 1999 and 1998 ........... 4
Consolidated Statements of Cash Flows for the
Nine Months Ended July 31, 1999 and 1998 ............... 5-6
Notes to Consolidated Financial Statements ............. 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 9-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................. 12
Item 2. Changes in Securities and Use of Proceeds ......... 12
Item 3. Defaults Upon Senior Securities ................... 12
Item 4. Submission of Matters to a Vote of Security
Holders ........................................... 12
Item 5. Other Information ................................. 12
Item 6. Exhibits and Reports on Form 8-K .................. 12
Signatures ................................................. 13
2
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMPERIAL PETROLEUM RECOVERY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
July 31, October 31,
1999 1998
----------- -----------
(Unaudited) (Audited)
Assets
Current Assets
Cash and cash equivalents $ 413,628 $ 49,342
Inventories - net of reserve of $260,000
as of July 31, 1999 and October 31, 1998 107,773 -
Prepaid expenses - 7,221
----------- -----------
Total Current Assets 521,401 56,563
Property and equipment - net of accumulated
depreciation of $65,985 and $49,342 as of
July 31, 1999 and October 31, 1998,
respectively 129,790 144,712
----------- -----------
Other assets 47,121 15,413
----------- -----------
$ 698,312 $ 216,688
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable $ 55,469 $ 175,471
Customer deposits 75,000 -
Payables to related parties - 252,605
Accrued liabilities 77,958 94,990
Current maturities of long-term obligations 244,207 363,775
----------- -----------
Total Current Liabilities 452,634 886,841
Long-term Obligation - less current
maturities 221,500 221,500
Commitments and contingencies - -
Stockholders' Equity (Deficit)
Common stock par value $0.001: authorized
100,000,000 shares; reserved 11,575,000;
issued and outstanding 15,505,886 and
13,731,421 shares at July 31, 1999 and
October 31, 1998, respectively 15,503 13,732
Additional paid-in capital 9,312,064 7,855,470
Common stock subscribed (6,509) (6,509)
Deficit accumulated during the development
stage (9,296,880) (8,754,346)
----------- -----------
Total Stockholders' Equity (Deficit) 24,178 (891,653)
----------- -----------
$ 698,312 $ 216,688
=========== ===========
See notes to consolidated financial statements.
3
<PAGE>
IMPERIAL PETROLEUM RECOVERY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND NINE MONTHS ENDED JULY 31, 1999 AND 1998
<TABLE>
<CAPTION>
For the three For the nine
months ended July 31, months ended July 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 14,000 $ 26,289 $ 50,512 $ 26,289
Cost of goods sold - - - -
----------- ----------- ----------- -----------
Gross profit 14,000 26,289 $ 50,512 $ 26,289
Operating expenses
Research and development 36,076 38,971 157,932 180,274
General and administrative 145,863 237,811 496,032 734,285
----------- ----------- ----------- -----------
181,939 276,782 653,964 914,559
----------- ----------- ----------- -----------
Loss from operations (167,939) (250,493) (603,452) (888,270)
Other income (expense),
including interest, net (2,542) 13,691 (12,852) (4,134)
----------- ----------- ----------- -----------
Loss before extraordinary item (170,481) (236,802) (616,304) (892,404)
Extraordinary item - gain on
debt settlement 71,703 - 73,770 73,484
----------- ----------- ----------- -----------
Net loss $ (98,778) $ (236,802) $ (542,534) $ (818,920)
=========== =========== =========== ===========
Net loss per common share -
basic
Loss before extraordinary
item $ (.01) $ (.02) $ (.04) $ (.07)
Extraordinary item - - - .01
Net loss $ (.01) $ (.02) $ (.04) $ (.06)
=========== =========== =========== ===========
Weighted average common
shares outstanding -
Basic and diluted 15,358,766 13,821,300 14,972,269 13,321,078
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
IMPERIAL PETROLEUM RECOVERY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JULY 31, 1999 AND 1998
1999 1998
----------- -----------
Increase (Decrease) in Cash and Cash
Equivalents
Cash Flows from Operating Activities
Net loss $ (542,534) $ (818,920)
----------- -----------
Adjustments to reconcile net loss to net
cash used in operating activities
Changes in assets and liabilities
Depreciation and amortization 16,558 15,100
Increase in interest receivable-Maya LLC - (1,696)
Increase in inventories (107,773) (27,487)
Decrease in prepaid expenses 7,221 32,266
Increase in other assets (31,708) -
Decrease in accounts payable (9,454) (72,999)
Decrease in salaries and related expenses - (71,414)
Increase in customer deposits 75,000 -
Decrease in current portion of long-term
debt (67,015) -
Increase in accrued liabilities 10,338 19,090
----------- -----------
Total Adjustments (106,833) (107,140)
----------- -----------
Net Cash Used in Operating Activities (649,367) (926,060)
----------- -----------
Cash Flows from Investing Activities
Additions to property and equipment (1,636) (2,231)
----------- -----------
Net Cash Used in Investing Activities (1,636) (2,231)
----------- -----------
Cash Flows from Financing Activities
Proceeds from issuance of common stock 924,999 897,267
Proceeds from loans from affiliated
entities 100,000 61,162
Payments on notes payable to related parties (9,710) -
Payments on notes payable - (16,559)
----------- -----------
Net Cash Provided by Financing Activities 1,015,289 941,870
----------- -----------
Net Increase in Cash 364,286 13,579
Cash and Cash Equivalents, Beginning of
Period 49,342 30,498
----------- -----------
Cash and Cash Equivalents, End of Period $ 413,628 $ 44,077
=========== ===========
(Continued)
See notes to consolidated financial statements
5
<PAGE>
IMPERIAL PETROLEUM RECOVERY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
NINE MONTHS ENDED JULY 31, 1999 AND 1998
Noncash activities:
In December, 1998 the Company issued 614,021 shares of Common Stock to an
officer of the Company in exchange for relief of an outstanding debt in the
amount of $268,327.
In December, 1998 the Company issued 485,790 shares of Common Stock to an
officer of the Company in exchange for relief of an outstanding debt in the
amount of $242,895.
In January, 1999 the Company issued 32,923 shares of its Common Stock to an
officer and various employees as bonuses for the fiscal year 1999. The fair
value of the bonuses was approximately $21,900.
In January, 1999 the Company issued 2,490 shares of its Common Stock to a
vendor for satisfaction of an account payable in the amount of $1,494.
Extraordinary gains were realized on the forgiveness of various accounts
payable to vendors totaling approximately $6,754.
On behalf of the Company, a related party paid approximately $84,206 to
various vendors for satisfaction of accounts payable. As such, a liability in
the amount of $84,206 has been recorded in long term debt.
See notes to consolidated financial statements
6
<PAGE>
IMPERIAL PETROLEUM RECOVERY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 1999 AND 1998
NOTE A - SUMMARY OF SIGNIFCANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Imperial Petroleum Recovery Corporation (a development stage company
incorporated in Nevada) ("the Company") has been in the development stage
since commencement of operations in fiscal year 1995. The Company is committed
to developing and marketing a proprietary oil sludge remediation process and
equipment that uses high energy microwaves to separate water, oil and solids.
Principal operations are conducted in Texas. The Company's corporate offices
are in Nevada.
Effective May 1, 1999 the Company transferred the equipment manufacturing
function to its newly created, wholly-owned subsidiary, Petrowave Corporation
("Petrowave"). Certain assets were transferred to Petrowave using the
Company's net book value at the time of transfer.
PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts and operations of the Company for all periods and its wholly-owned
subsidiary, Petrowave since its organization on May 1, 1999. Intercompany
transactions and balances have been eliminated in consolidation.
BASIS OF PRESENTATION
The consolidated financial 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, 1999 are
not necessarily indicative of the results for the fiscal year ending October
31, 1999. The accompanying unaudited consolidated 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, 1998.
NOTE B - REALIZATION OF ASSETS
The accompanying consolidated 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.
7
<PAGE>
IMPERIAL PETROLEUM RECOVERY CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 1999 AND 1998
(CONTINUED)
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
consolidated balance sheets 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 consolidated 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.
During December 1998, the Company reached agreements with certain related
party creditors to settle debt in exchange for common stock.
During the third quarter 1999, management executed a long-term lease with a
large petroleum company for the use of the Company's technology.
During the fourth quarter 1999, a promissory note held by a vendor was
partially converted to shares of common stock. In addition, the vendor
forgave the interest of approximately $11,800 that had accrued on the note.
NOTE D - INVENTORY
Inventory consists of work in process inventory and components to be
integrated into the Company's products to be sold to customers. Inventory is
valued at lower of cost or market. Cost is determined using the first-in,
first-out method. Since the recoverability of inventory is dependent upon the
Company's ability to generate sales of such products, management has recorded
a reserve of $260,000 against the value of the inventory on hand.
NOTE E - NET LOSS PER COMMON SHARE
In February, 1997 the Financial Accounting Standards Board issued SFAS No. 128
"Earnings Per Share" which simplifies the accounting for earnings per share by
requiring presentation of basic earnings per share including only outstanding
common stock and diluted earnings per share including the effect of dilutive
common stock equivalents. Shares of stock having an antidilutive effect on
periods presented are not included in the computation of diluted earnings per
share.
The Company's basic and diluted net loss per share are the same since the
Company's stock warrants granted and potentially convertible debt instruments
are anti-dilutive.
8
<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, 1998.
This portion of the Form 10-QSB contains "forward-looking statements"
within the meaning of the federal securities laws, including statements
concerning anticipated revenues, the installation plans for the MST-1000 at
Mobile Oil Company's Torrance, California facility, and similar statements
concerning anticipated future events and expectations that are not historical
facts. The forward-looking statements in this portion of the Form 10-QSB are
subject to numerous risks and uncertainties, including the effects of economic
conditions; the availability of capital; the dependence on key customers;
competitive conditions; and the various risks associated with developing and
marketing a new process/technology which could cause actual results to differ
materially from those expressed in or implied by the statements herein.
Readers should also refer to the Company's most recent Form 10-KSB.
RESULTS OF OPERATIONS
Net Sales
For the nine month period ended July 31, 1999 the Company recorded net
sales of $50,512 from the rental of the MST system compared to net sales of
$26,289 recorded for the corresponding period of 1998. For the three month
period ended July 31, 1999, the Company recorded net sales of $14,000 compared
to $26,289 for the corresponding period of 1998.
Operating Expenses
Selling, general and administrative expenses for the nine month period
ended July 31, 1999, were approximately $496,032 compared to approximately
$734,285 for the corresponding period of 1998. Selling, general and
administrative expenses for the three month period ended July 31, 1999, were
approximately $145,863 compared to approximately $237,811 for the
corresponding period of 1998. This decrease is a result of continued cost
cutting measures.
Research and Development Expenses
Research and development expenses for the nine month period ended July
31, 1999 were approximately $157,932 compared to approximately $180,274 for
the corresponding period of 1998. For the three month period ended July 31,
1999, research and development expenses were $36,076 compared to $38,971 for
same period in 1998. The decrease reflects continued cost cutting measures in
addition to a decrease in research and development activities.
Other Income and Extraordinary Items
Total other income (expense) for the nine month period ended July 31,
1999 was approximately ($12,852), which was comprised primarily of interest
expense of ($17,129)and miscellaneous income of $4,277. For the corresponding
period in 1998, the Company recorded other (expense) of approximately
($4,134). For the nine month period ended July 31, 1999, the Company recorded
an extraordinary gain on debt settlement of $73,770 compared to $73,484 for
the corresponding period in 1998. For the three month period ended July 31,
1999 other income (expense) was ($2,542) compared to $13,691 for the
9
<PAGE>
corresponding period in 1998. During the three month period ended July 31,
1999 the Company recorded an extraordinary gain on debt settlement of $71,703.
During the three month period ended July 31, 1998 the Company recorded no
extraordinary items.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1999, the Company had a working capital of $68,767 as
compared to a working capital deficit of $830,278 at October 31, 1998.
During the nine month period ended July 31, 1999, the Company received
net proceeds of approximately $924,999 from the sale of restricted common
stock and additional paid in capital. The Company used approximately
($542,534) in cash flows in its operations, excluding changes in assets and
liabilities, during the nine month period ended July 31, 1999, compared to
approximately ($818,920) for the corresponding period of 1998. The total net
cash used in operations was approximately ($649,367) for the nine month period
ended July 31, 1999, compared to approximately ($926,060) for the
corresponding period of 1998.
Cash provided by financing activities totaled approximately $1,015,289
for the nine month period July 31, 1999 compared to approximately $941,870
for the corresponding period of 1998 due to an increase in the sale of common
stock during the nine month period ended July 31, 1999.
During the third quarter of 1999, the Company signed a long-term lease
for its MST System with a major oil refinery. The income stream from these
funds is expected to satisfy immediate and near-term cash flow requirements.
Additional funding and/or cash flow from the sale of the Company's products
will be needed in 1999, however, to sustain the operations of the Company.
Management feels that it has identified sufficient funds to manufacture
the required MST Systems and has devised arrangements to introduce new,
related products that are expected to increase revenues.
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 expansion of the Company's introduction of the MST System to major
refineries and petroleum producers has continued with the most recent
performance at Paramount Petroleum Company's refinery at Paramount,
California. During its performance there, the MST-1000 established new
production levels for total volume produced over extended 24 hour/7 days per
week operation periods, thereby supporting the Company's premise that the
MST-1000 can promote increased production at reduced costs.
Requests for demonstrations of the MST-1000 System are being submitted
by prospective customers in ever-increasing numbers. Potential customers
submit oil samples to the Company's test laboratory. Test results are then
discussed with each prospective customer and an appropriate course of action
is determined for each situation. In addition to the test results being used
as a planning tool to determine potential customers' needs, the Company is
archiving these test results to create a comprehensive database that will
ultimately be used to enable Management to project the performance of the
Company's technology on various types of emulsions and in various oil regions
and fields of production.
10
<PAGE>
During the third quarter, the Company executed a three-year lease
agreement with Mobil Oil Company for the use of the MST-1000 at its Torrance,
California facility. The MST-1000 is currently being manufactured in Houston,
Texas and is expected to be installed and operational at the Mobil facility by
September, 1999.
The worldwide energy sector, which has been through a difficult period
recently, is beginning to show some improvement. The price of crude oil, which
recently reached a twenty-year low, is on the rise. However, due to an
emphasis to cut costs, major energy companies continue to consolidate. This
desire to cut costs of production and recover marketable products from waste
streams has prompted the numerous inquiries into the MST System and ultimately
resulted in the contract with Mobil.
Industry experts are stating that the glut of oil will not continue. The
recent trend of reduced production and the rapid decline of U. S. supplies of
crude has resulted in crude prices that have surged in recent months. Experts
now estimate that during the fall of 1999 demand for fuel will be the highest
in history. As a result of this high demand, the price of crude oil has been
driven to the $20 per barrel range. The Company's management believes that the
improved oil prices will result in continued interest among the major users of
the MST type equipment.
On July 27, 1999 the Company was granted Patent # 99303579.9-2113 by the
European Patent Office. This European patent is registered in 19 countries. In
addition, on June 22, 1999 the U.S. Patent Office granted Patent # 5,914,014
to the Company. These patents represent a major step toward protecting the
proprietary technological process and the equipment design inherent in the MST
System. The Company also has patents pending in numerous other foreign
regions.
11
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During June, 1999, the Company sold 291,667 shares of its Common Stock
to an investor for $625,000 in cash.
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 were marked with legends
indicating that transfer of the securities is restricted because they were not
sold in a registered offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description Location
27 Financial Data Schedule Filed herewith electronically
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the period
covered by this report.
12
<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)
By:/s/ C. Brent Kartchner
Date: September 20, 1999 C. Brent Kartchner
President and Chief Executive Officer
(Duly Authorized Officer and Principal
Financial Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and consolidated statements of operations found on
pages 3 and 4 of the Company's Form 10-QSB for the year to date, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JUL-31-1999
<CASH> 413,628
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 107,773
<CURRENT-ASSETS> 521,401
<PP&E> 129,790
<DEPRECIATION> 16,558
<TOTAL-ASSETS> 698,312
<CURRENT-LIABILITIES> 452,634
<BONDS> 0
<COMMON> 15,503
0
0
<OTHER-SE> 8,675
<TOTAL-LIABILITY-AND-EQUITY> 698,312
<SALES> 50,512
<TOTAL-REVENUES> 50,512
<CGS> 0
<TOTAL-COSTS> 653,964
<OTHER-EXPENSES> 12,852
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,129
<INCOME-PRETAX> (616,304)
<INCOME-TAX> 0
<INCOME-CONTINUING> (616,304)
<DISCONTINUED> 0
<EXTRAORDINARY> 73,770
<CHANGES> 0
<NET-INCOME> (542,534)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
</TABLE>
