<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1999
Commission File No. 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.)
2325-A Renaissance Drive
Las Vegas, Nevada 89119
----------------------------------------
(Address of Principal Executive Offices)
(702) 798-6800
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities Registered under Section 12(b) of the Exchange Act: None
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.001 per share
(Title of Class)
Check if the issuer (1) 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 as the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [_] Yes [X] No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this report and no such disclosure will be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were approximately
$109,748.
Based on the January 27, 2000 last sale price of $1.875, the aggregate market
value of shares of Common Stock held by non-affiliates was approximately
$16,087,989.
As of January 27, 2000, 15,987,961 shares of the issuer's Common Stock were
outstanding.
Transitional small business disclosure format: [_] Yes [X] No
<PAGE>
INDEX
PART I PAGE
Item 1. Description of Business 1-6
Item 2. Description of Property 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 7-11
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
Item 7. Financial Statements 15
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act 16
Item 10. Executive Compensation 17
Item 11. Security Ownership of Certain Beneficial Owners and
Management 17-18
Item 12. Certain Relationships and Related Transactions 18
Item 13. Exhibits and Reports on Form 8-K 19
Signatures 20
ii
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Imperial Petroleum Recovery Corporation and its wholly-owned subsidiary,
Petrowave (the "Company" or "IPRC") is a high tech company committed to
developing and marketing a proprietary oil sludge remediation process and
manufacturing the related equipment that uses high energy microwaves to
separate slop oil emulsions. The Company calls the process "Microwave
Separation Technology" ("MST"), and has proven that it can provide an
effective, ecologically sound and economical method of processing crude oil
sludge and emulsions. The use of microwave energy for sludge remediation and
oil recovery reduces usage of energy, chemical pollutants, reagents and
solvents, and minimizes the generation of by-products or waste streams.
Processing time normally is reduced. Laboratory work has shown that the
microwave system is 30 times faster and takes up 90% less space than
conventional emulsion cracking systems. The MST System offers one of the
first truly effective, economical, and safe methods to address the global
waste problem. The MST process recovers usable hydrocarbon compounds from
material that otherwise would be of little value or require disposal. Based
on prototype testing and demonstrations, management has shown that
approximately 50% to 90% of the crude oil recovered through the MST process
can be reclaimed as usable products.
Because of the increased industry interest in the MST technology during
fiscal year 1999, the Company felt it would be advantageous to its operations
to spin-off the equipment manufacturing function. The spin-off was finalized
by approval of the Board of Directors on May 1, 1999 and resulted in the
creation of its wholly owned subsidiary, Petrowave.
Current Product Offerings
The Company currently offers three product lines, each meeting a specific
need within the hydrocarbon reclamation process:
* Microwave Separation Technology System (MST-4000, MST-2000,
MST-1000)
* Sludge Tank/Pit Heating Unit (SMU-60)
* Truck Melting System (TMS-60)
The Microwave Separation Technology System is the Company's principal
product line. An MST unit includes a computer-controlled microwave sludge
remediation system consisting of all the elements needed to reclaim oil from
oil sludge and "rag layer" water located in tank storage and waste pits. In
addition, the MST System has been used to improve the efficiency of the
desalter units required by refineries. MST Systems are modular and can be
conjoined to handle larger capacity requirements as required by the customer.
The core of an MST unit consists of a microwave generator, a series of
waveguides, tuners, a computer and computer control instrumentation plus the
actual applicator, where the sludge/emulsion is subjected to microwave energy.
The Company introduced its first MST System in 1996 for remediating oil sludge
to water, marketable oil and solids and is now marketing a much-improved unit.
1
<PAGE>
The Sludge Tank/Pit Heating Unit (SMU-60) is a low-cost sludge
liquefaction and pumping platform. It is mobile, either trailer or track
mounted, and provides an extended reach capability of up to 60 feet.
Requiring no open flame, this unit employs the Company's MST technology and
can turn sludge into a soluble product for ease of removal.
The Truck Melting System (TMS-60) is the third line of products currently
offered by IPRC. This unit complements the Company's other product lines by
providing the customer with the means to preheat oil sludge within a tanker
truck to facilitate unloading into an MST System unit or an SMU-60.
All products currently are available for order and have a delivery
schedule of approximately 120 days. Complete parts support and training
programs are available for all products.
The Company assembles its products in its Houston, Texas facility, using
components procured primarily from outside subcontractors and vendors. The
Company manufactures certain proprietary items and can build product units to
individual customer's specifications. Each unit using the MST process can
vary in size and sophistication as a result of modifications to the software.
The Company offers its products for lease directly to end-users. In
certain overseas markets, the Company offers its products to existing oil
sludge processors through geographically specific marketing partnerships. As
part of the lease agreements, lessee personnel receive technical training from
the Company thus enabling them to operate the equipment. In the future, IPRC
will have technicians available worldwide to service the Company's products
and to monitor and periodically check products in the field. In addition, the
Company plans to protect each MST System with a security device thus assuring
that the Company and its customers maintain control of the System and
facilitating accurate calculation of usage payments.
Research and Development
Principals of the Company began developing the MST process in 1995.
Serious testing of a prototype unit began in September 1996. Testing and
development continued for approximately two years. During that time, IPRC
created and perfected a commercially viable computer-driven system that
applied microwave energy to crude oil sludge for remediation and oil recovery.
In order to create a system that would operate at lower costs than
existing methods and use a continuous flow system for the required quantity,
it was necessary to design, engineer and manufacture a revolutionary
applicator. IPRC realized that the new design would have to be unlike any
other and must meet the "tough" required petroleum specifications. In
addition, the Company knew the design would have to function under the most
primitive conditions with minimal maintenance. Therefore, IPRC was
determined to develop a low cost system that could perform at high efficiency
using little or no labor. The Company accomplished this in record time with
very satisfactory results.
The MST System separates the oil sludge using the following action. The
increased energy imparted differentially to water molecules with the emulsion
allows them to move freely in the matrix and eventually to coalesce with other
water molecules; thus, effectively, "breaking" the oil-water emulsion. In a
like manner, disruption of the "sticky" hydrogen bonding allows heavier
inorganic sediment to settle out. After energy is applied, the material is
pumped into a separation tank. If immediate separation is required, a polisher
or centrifuge can be utilized.
2
<PAGE>
The separated oil is then pumped into holding tanks for shipment to
customers. Water and sediments can be delivered to an evaporation pond or
handled in accordance with the customer's wishes. Water recovered from this
procedure is of process quality and can be further cleansed by filtration.
During this same period of time, IPRC designed and established a new, one
of a kind, Emulsion Testing Facility to test the MST's capabilities for field
application. This facility serves as a bench scale testing unit, capable of
testing up to eight samples of oil and emulsions per day, while duplicating
the commercial MST System's process. The Facility is also used for the
development of new processes and specialized equipment.
The Emulsion Testing Facility is adjacent to the manufacturing plant in
Houston Texas. This facility receives oil sludge samples from production
facilities worldwide.
IPRC is continuing its research and development efforts to develop better
methods of using microwave technology in the future. The Company feels it must
aggressively pursue new applications of the technology in order to maintain
its role as a leader in the field.
Marketing
The Company markets its products primarily for the purpose of remediation
of crude oil sludge and emulsions produced in connection with oil production
and refining. There are approximately 700 oil refineries worldwide with 111
of these located in the United States. Each is a potential customer of the
Company.
At this time, the Company is concentrating its marketing efforts on North
America with emphasis in the United States and Canada. Currently, several
potential domestic customers are reviewing the results of IPRC's field test
trials.
In addition to its North American marketing efforts, the Company has been
in serious discussions with entities in several countries, including Kuwait,
the Netherlands and Venezuela. To date, the Company has formed a strategic
alliance with Golden Shahin for General Trading and Contracting Co., a Kuwaiti
company that provides logistical support for the successful completion of the
Kuwait Oil Lakes Remediation Project. The Company plans to pursue additional
alliances with foreign partners to penetrate the international market.
In addition to being used for the remediation of crude oil sludge and
emulsions, Management feels the Company's technology can be utilized in two
other potential markets. First, the Company sees uses in oil field waste
management. Second, the Company believes that the MST process can be deployed
in shipping lanes and ports to treat sludge from crude oil tankers as they
off-load crude and clean their tanks before loading ballast.
While the Company intends to develop and/or refine marketing plans to
penetrate these sectors, no assurances can be given that any of these
activities will result in sales revenues for the Company.
Competition
The Company's competitors are firms that use a variety of processes to
dispose of solid and oily non-hazardous oil field wastes. The following table
provides information on these processes:
3
<PAGE>
Estimated costs
(provided by disposal
companies between
Processes June 1996 and March 1997)
- ----------------------------------------------------------------------------
* Recycling $40-$45 / hour (tank bottoms)
* Chemical treatment/reuse $12-$25 / ton
* Biological treatment/reuse $12-$28 / cubic yard
* Landfill $30-$60/ ton (liquids may be solidified
@ $150/ton and landfilled)
* Landspread $95 /ton; $38 / barrel
* Thermal treatment $40-$50 / ton; $10.50 / barrel
* Reuse $52-$77 / barrel (tank bottoms)
* Incinerator $26-$30 / ton (tank bottoms)
* Treat / injection $8.50-$11 / barrel (depends on oil & gas
content)
* Cavern $1.95-$2.85 / barrel (discounts for high
oil content)
* Chemical treat / pit $9-$12 / barrel
Management believes that the MST process offers significant competitive
advantages over competing oil sludge remediation processes, because it feels
that the MST process is more effective and more economical than competing
systems. In addition, fewer environmental problems appear to be associated
with the MST process. Heat, pressure, chemical, and centrifuge processes can
achieve partial remediation, but these methods have drawbacks. They are
expensive, pose additional environmental risks of their own, often leave
volumes of untreated hydrocarbons, and usually require the transportation of
sludge to special remediation sites. Use of a centrifuge/chemical recovery
system requires high heat and creates vapor problems. Fires and explosions
are possible, posing a danger to personnel as well as to the environment.
Complete recovery of oil seldom is achieved and requires the use of chemicals,
at additional cost. Moreover, the chemicals are difficult to eliminate from
the sludge, and eventually travel back to the refinery or into the wastewater
system. Incineration, which is still prevalent in developing nations, is
easy, low in cost and does not require sophisticated technology so long as the
process is not subject to environmental rules and procedures. If done under
environmental rules and regulations, however, incineration is costly. In
addition, most incineration systems destroy the sludge in a way that does not
produce usable hydrocarbon byproducts.
Oil sludge remediation services are being provided at over 80 sites
within the 10-state area encompassed by Arizona, California, Colorado,
Louisiana, Mississippi, New Mexico, Nevada, Texas, Utah, and Wyoming. Each
company providing these services is using a technology which has been
effective. Management believes, however, that each of these technologies can
be greatly enhanced by the introduction of IPRC's remediation Systems. The
Railroad Commission of Texas has identified 38 permitted reclamation plants
within the state of Texas. Each of these locations represents both a
competitor and a potential customer for IPRC.
4
<PAGE>
The Company's largest competitors are:
* Waste Management, Inc., which handles bio-remediation, liquid
solidification, and waste transportation, is a nationwide company with
25 operating units in the Texas, Oklahoma, and Louisiana regions.
* DuraTherm, Inc., which is one of the nation's leaders in hazardous
solid waste handling, processing and recovery, has a $20 million
facility in Houston, Texas that receives products from all over North
America.
* Alfa Laval, a manufacturer of remediation equipment, has a worldwide
coverage of centrifuges and other separation equipment, plus a service
company in most oil producing regions.
Many of the Company's competitors are substantially larger and have
greater resources, market recognition and broader capabilities. It is also
likely that other competitors will emerge in the future. As a consequence,
there is no assurance that the Company will be able to successfully compete in
the marketplace.
Protection of Intellectual Property
The technology used in the MST process is proprietary. The Company owns
patents to protect its design and may seek additional patents in the future.
The Company has also received patent protection from several foreign
countries. There can be no assurance that any future patent applications will
result in patents being issued. Likewise, there can be no assurance that the
Company's patents will afford protection against competitors with similar
technology. In addition, there can be no guarantee that the patents will not
be infringed upon, designed around by others, or challenged and held to be
invalid or unenforceable. Proprietary rights relating to the Company's
products and processes generally will be protected from unauthorized use by
third parties only to the extent that they are covered by valid and
enforceable patents or are maintained in confidence as trade secrets. In the
absence of patent protection, the business of the Company may be adversely
affected by competitors who independently develop substantially equivalent
technology.
Third-party patents relating to technology utilized by the Company may
now exist or may be issued in the future. The Company may need to acquire
licenses or to contest the validity of any such patents. Significant funds
may be required to defend against third party claims of patent infringement.
Any such claim could adversely affect the Company until the claim is resolved.
Furthermore, any such dispute could result in a rejection of any patent
applications or the invalidation of any patents the Company owns. There can
be no assurance that any license required under any such patent would be
available to the Company or, if available, on acceptable terms. In addition,
there is no guarantee that the Company would prevail in any litigation
involving such patent. Any of the foregoing could have a material adverse
effect on the Company and its results of operations.
The Company seeks to protect the technology used in the MST process in
part by confidentiality agreements with its advisors, employees, consultants,
suppliers and vendors. The Company also protects its technology by building
interlocking security measures into its products. There can be no assurance,
however, that these agreements and security measures will not be breached or
5
<PAGE>
that the Company's trade secrets will not be discovered by competitors. In
addition, there can be no assurance that persons or institutions providing
research to the Company will not assert rights to intellectual property
arising out of such research.
Suppliers
The Company primarily uses standard parts and components from a variety
of suppliers to produce the hardware for its products. Certain components are
currently available only from a few limited sources. To date, the Company has
not had difficulty obtaining parts and components in sufficient quantity in a
timely manner. The Company does not expect to have such difficulty if and
when sales of MST Systems accelerate.
Government Regulation
The Company's products are subject to government regulation by the United
States Environmental Protection Agency, local and state environmental
agencies, and local health departments. The Company believes that its
products meet or exceed all applicable safety and environmental regulations.
Employees
As of December 31, 1999 the Company had eight full-time employees, four
engaged in testing and manufacturing and four involved in sales and
administration.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 4,519 square feet of office space and 7,500 square
feet of manufacturing and laboratory space in Houston, Texas under leases that
expire through the year 2000. The total lease payment for the leased space is
approximately $6,400 per month.
ITEM 3. LEGAL PROCEEDINGS
A lawsuit involving the Company was filed on February 9, 1995. The
plaintiff, Thermal Wave International Inc. (TWI), filed third-party claims
against third-party defendants, including the Company, on August 20, 1996.
This lawsuit was dismissed on August 17, 1999 with both parties accepting a no
contest settlement.
The Company is subject to litigation from time to time arising from its
normal course of operations. Management does not believe that any such
litigation and claims that have arisen have merit or that they will have a
material effect on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fiscal year covered by this report.
6
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the OTC Bulletin Board market
under the symbol "IREC."
The following table sets forth the range of high and low bid quotations
for the Company's Common Stock for each of the quarters within the last two
fiscal years:
High and Low Bid Prices
Fiscal Year 1998 Low Bid High Bid
First Quarter (11/1/97-1/31/98) $ 0.500 $ 0.938
Second Quarter (2/1/98-4/30/98) $ 0.562 $ 0.875
Third Quarter (5/1/98-7/31/98) $ 0.343 $ 0.718
Fourth Quarter (8/1/98-10/31/98) $ 0.343 $ 0.969
Fiscal Year 1999 Low Bid High Bid
First Quarter (11/1/98-1/31/99) $ 0.500 $ 2.250
Second Quarter (2/1/99-4/30/99) $ 2.000 $ 3.281
Third Quarter (5/1/99-7/31/99) $ 1.375 $ 3.062
Fourth Quarter (8/1/99-10/31/99) $ 1.250 $ 2.562
The quotations in the table above reflect inter-dealer prices, without
retail mark-up, mark-down or commissions, and may not represent actual
transactions.
Holders
As of January 27, 2000 there were 679 registered holders of the Company's
Common Stock.
Dividends
The Company has not paid cash dividends to date, and does not expect to
pay any cash dividends in the foreseeable future. The Company intends to
retain any earnings to finance its future growth.
Recent Sales of Unregistered Securities
In fiscal year 1999, the Company issued securities without registration
under the Securities Act of 1933, as follows:
On December 8, 1998 Maya LLC acquired beneficial ownership from the
Company of 125,000 shares of the Company's Common Stock, and a Warrant to
purchase an additional 875,000 shares of its Common Stock in exchange for
$100,000 cash. The Warrant is exercisable for $1.00 per share and expires
December 8, 2002.
On December 11, 1998 the Company issued 614,021 shares of its Common
Stock to Food Development Corporation, a related party, in exchange for relief
of outstanding debt in the amount of $268,327.
On December 16, 1998 the Company issued 485,790 shares of its Common
Stock to an officer of the Company in exchange for relief of an outstanding
liability in the amount of $242,895.
7
<PAGE>
During fiscal year 1999, the Company issued the following shares of its
Common Stock without registration under the Securities Act of 1933:
Person to
Issuance Date No. of Shares Whom Issued Purpose of Issuance
Jan. 4, 1999 10,000 Employee 1 Bonus of $6,250 for fiscal
year 1999
Jan. 4, 1999 10,000 Employee 2 Bonus of $6,250 for fiscal
year 1999
Jan. 4, 1999 10,000 Employee 3 Bonus of $6,250 for fiscal
year 1999
Jan. 4, 1999 2,490 Consultant Discharge account payable
of $1,494
Jan. 4, 1999 2,474 Various Bonuses totaling $1,608 for
Employees fiscal year 1999
Jan. 4, 1999 449 Vendor Discharge account payable
of $292
Jan. 25, 1999 100,000 Investor Cash investment of $50,000
Feb. 1, 1999 20,000 Investor Cash investment of $15,000
Feb. 24, 1999 100,000 Investor Cash investment of $135,000
June 4, 1999 2,574 Investor Cash investment of $4,505
Aug. 17, 1999 139,973 Vendor Consulting services
valued at $233,755
Aug. 3,1999 70,922 Investor Discharge of debt of
$21,986
On June 25, 1999 the Company issued 292,276 shares of its Common Stock
and on October 6, 1999 the Company issued a Warrant to purchase an additional
1,116,071 shares of its Common Stock to an Investor in exchange for $625,000.
The Warrant is exercisable for $3.00 per share and expires on October 6, 2003.
On September 16, 1999 the Company issued 184,207 shares of its Common
Stock to Food Development Corporation, a related party, in exchange for relief
of outstanding debt in the amount of $184,207.
On November 12, 1999 the Company issued 14,394 shares of its Common Stock
and 6,250 Warrants based on a price of $0.20 per Warrant to an Investor in
exchange for $25,000. The Warrants are exercisable for $3.00 per share and
expire on November 12, 2002.
On November 12, 1999 the Company issued 28,788 shares of its Common Stock
and 12,500 Warrants based on a price of $0.20 per Warrant to an Investor in
exchange for $50,000. The Warrants are exercisable for $3.00 per share and
expire on November 12, 2002.
8
<PAGE>
In addition, on November 12, 1999 the Company issued 28,788 shares of its
Common Stock and 12,500 Warrants based on a price of $0.20 per Warrant to an
Investor in exchange for $50,000. The Warrants are exercisable for $3.00 per
share and expire on November 12, 2002
On November 30, 1999 the Company issued 14,394 shares of its Common Stock
and 6,250 Warrants based on a price of $0.20 per Warrant to an Investor in
exchange for $25,000. The Warrants are exercisable for $3.00 per share and
expire on November 30, 2002.
During fiscal year 1998, the Company issued the following shares of its
Common Stock without registration under the Securities Act of 1933:
On December 11, 1997 Maya LLC acquired beneficial ownership from the
Company of 500,000 shares of the Company's Common Stock, and a Warrant to
purchase an additional 3,500,000 shares of its Common Stock in exchange for
$400,000 cash. The Warrant is exercisable for $1.00 per share and expires
December 11, 2001.
On March 11, 1998 Maya LLC acquired beneficial ownership from the Company
of 500,000 shares of the Company's Common Stock, and a Warrant to purchase an
additional 3,500,000 shares of its Common Stock in exchange for $100,000 cash
and a 90-day promissory note of $295,068. The Warrant is exercisable for
$1.00 per share and expires March 11, 2002.
On June 11, 1998 Maya LLC acquired beneficial ownership from the Company
of 500,000 shares of the Company's Common Stock, to be issued on July 11,
1998, and a Warrant to purchase an additional 3,500,000 shares of its Common
Stock, which bears an effective date of July 11, 1998, in exchange of $100,000
cash and a 90-day promissory note of $295,069. The Warrant is exercisable
for $1.00 per share and expires July 11, 2002.
In addition during the fiscal year 1998, the Company issued the number of
shares of its Common Stock indicated in the table below without registration
under the Securities Act of 1933:
Person to
Issuance Date No. of Shares Whom Issued Purpose of Issuance
Nov. 19, 1997 4,000 Investor Cash investment of $2,200
June 3, 1998 17,000 Investor Discharge debt of $7,500
Sept. 24, 1998 43,000 Vendor Satisfy Account Payable of
$33,583
During fiscal year 1997, the Company issued shares of its Common Stock
without registration under the Securities Act of 1933 as follows.
On April 1, 1997, the Company issued a stock certificate evidencing
50,000 shares sold for $40,000 cash to an individual investor at $0.80 per
share.
On July 3, 1997, August 26, 1997 and September 12, 1997, the Company
sold 300,000 shares, 350,000 shares and 1,350,000 shares, respectively, for
cash to an individual investor at an average price of $0.38 per share, with
total gross proceeds of $760,000.
9
<PAGE>
On September 15, 1997, the Company issued 5,000 shares at $.50 per share
to a vendor in satisfaction of an outstanding account payable.
During fiscal year 1997, the Company also issued shares to various
consultants for services performed for the Company, as shown in the following
table:
Date of No. of Co. Debt Price
Stock Certificate Identifier Shares Issued Forgiven Per Share
5/15/97 Consultant 1 200,000 $130,000 $0.65
7/1/97 Consultant 2 5,400 2,700 0.50
7/8/97 Consultant 3 10,000 5,000 0.50
7/14/97 Consultant 2 5,400 2,700 0.50
8/11/97 Consultant 2 5,400 2,700 0.50
8/11/97 Consultant 4 10,000 5,000 0.50
8/11/97 Consultant 5 10,000 5,000 0.50
8/26/97 Consultant 2 3,600 1,800 0.50
9/12/97 Consultant 2 5,400 2,700 0.50
10/28/97 Consultant 6 200,088 62,027 0.31
In addition during 1997, the Company issued shares of its Common Stock to
certain employees in lieu of cash, as shown in the following table:
Date of No. of Co. Debt Price
Stock Certificate Identifier Shares Issued Forgiven Per Share
6/18/97 Employee 1 34,000 $17,000.00 $0.50
6/18/97 Employee 2 5,000 2,500.00 0.50
6/18/97 Employee 3 8,700 4,350.00 0.50
6/18/97 Employee 4 5,833 2,916.50 0.50
6/18/97 Employee 5 500 300.00 0.50
8/11/97 Employee 1 11,667 5,833.50 0.50
8/11/97 Employee 3 8,700 4,350.00 0.50
8/11/97 Employee 4 5,833 2,916.50 0.50
8/11/97 Employee 2 5,000 2,500.00 0.50
8/11/97 Employee 1 22,366 11,183.00 0.50
In all instances except the 22,366 shares issued to an employee, the debt
forgiven was a debt for salary or wages. In the case of the 22,366 shares,
the debt represented reimbursement for relocation expenses.
Also in fiscal year 1997, the Company issued shares of its Common Stock
without registration under the Securities Act of 1933 to certain parties for
the purposes shown in the following table:
Date of No. of
Stock Certificate Shares Issued Purpose of Issuance Financial Terms
12/9/96 450,139 Loan repayment Debt of $1,884,004
canceled ($4.185
per share)
4/9/97 109,939 Loan repayment Debt of $450,000
canceled ($4.09
per share)
10
<PAGE>
6/3/97 10,000 Loan repayment Debt of $10,000
canceled ($0.30
per share)
6/18/97 3,000 Loan repayment Debt of $1,000
canceled ($0.30
per share)
7/21/97 147,200 Reimbursement for Debt of $73,600
expenses advanced canceled ($0.50
per share)
7/24/97 100,000 Settlement of claim Settlement amount
for abandonment of of $63,500 ($0.635
leased premises per share)
7/24/97 3,000 Loan repayment Debt of $1,000
canceled ($0.30
per share)
7/29/97 326,425 Reimbursement for Debt of
expenses advanced $163,212.33
canceled ($0.50
per share)
8/11/97 56,070 Debt settlement Settlement amount
of $28,035 ($0.50
per share)
9/25/97 100,000 Settlement of Settlement amount
claims of Phonon of $28,035 ($0.625
Technologies per share)
The Company relied upon the exemption provided in Section 4(2) of the
Securities Act, which covers "transactions by an issuer not involving any
public offering," to issue the securities discussed above without registration
under the Securities Act of 1933. The Company made a determination in each
case that the person to whom the securities were issued did not need the
protections that registration would afford. The certificates representing the
securities issued were marked with a legend indicating that transfer of the
securities was restricted because they had not been sold in a registered
offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This portion of the Form 10-KSB contains "forward-looking statements"
within the meaning of the federal securities laws, including statements
concerning anticipated revenues, future marketing plans for the MST-1000, 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-KSB 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. Due to such uncertainties and risks, readers are cautioned
not to place undue reliance on such forward looking statements, which speak
only as of the date hereof.
11
<PAGE>
Overview
The worldwide energy industry rebounded during the last half of 1999. As
a result of oil prices staying in the $20 range, interest has remained high
for the MST System because it provides a low cost method to increase refinery
production and free up storage tank capacity. Major energy companies have
consolidated operations and continue to emphasize cost cutting measures.
This trend has had a positive effect for IPRC since the Company has
proven the performance of its technology on the waste streams of numerous
refineries and continues to demonstrate its capabilities to recover
considerably more oil at lower costs than other technologies.
Throughout 1999, IPRC continued to expand the Company's marketing of the
Microwave Separation Technology to major refineries and petroleum producers.
In fiscal year 1999, the MST-1000 was demonstrated at four domestic
refineries. The Company was encouraged by the new production and
dependability levels established by the MST during those field trials. The
performance results supported the Company's premise that the MST System can
promote increased refining production at reduced costs on many different types
of emulsions found in various regions of the country. In addition, the MST
has proven its efficiency by operating 24 hours a day, 7 days a week with very
small maintenance costs. During the field trials the MST also demonstrated
that it could be placed with ease into a test site with minimal modifications
to that site. This resulted in significant savings of time and costs to
customers who implemented the System.
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.
Now that the Company has the protection of these patents, Management
hopes to accelerate the joint development, commercialization, marketing and
licensing of its microwave technology throughout the worldwide petroleum
industry. The Company's immediate goal is to place as many machines as
possible in U.S. refineries. In addition, the Company plans to be more
aggressive in its marketing efforts to overseas refineries.
Throughout 1999, IPRC made positive improvements to both the Emulsion
Testing Facility and its website, www.iprc.com as described below:
The Emulsion Testing Facility now has the capability to quickly process
numerous oil and emulsion samples from refineries located all over the world.
IPRC lab technicians have developed a bench scale model of the MST System to
analyze the samples from prospective customers. Test results are then
discussed with each customer and an appropriate course of action is determined
for the various applications. In addition to the test results being used as a
planning tool to determine potential customers' needs, the Company now has the
ability to archive these test results in a comprehensive database. This
database allows the Company to project the performance of the MST on the
different types of emulsions found in various oil regions and specific fields
of production.
12
<PAGE>
During the last quarter of fiscal year 1999, the Company worked
diligently on the redesign of its website. In November 1999 the Company
launched its new, updated www.iprc.com. The more sophisticated format of the
website represents an innovative, powerful marketing tool to respond to
potential customer requests for information about the Company's products. The
new site offers a more scientific, informative format, a customer friendly
navigation system within the site, and a better method for capturing a
database of site visitors. Through a special arrangement with the web host,
the Company can directly update the site. This ability will allow the Company
to keep the site current on a weekly basis, thus creating a more interactive
and timely marketing tool. The new website is linked to over 300 related
search engines resulting in more extensive exposure. In addition, an
exclusive agreement has been signed with Business Wire, the global leader in
news distribution. Under the terms of this agreement, Business Wire will
provide a link to its website's, "Today's News on the Net" and "Real Time
Traders". The former provides news stories on current events; the later
provides real time quotes on the Company's stock.
In May 1999 the Company executed a three-year lease of an MST-1000 with
the Torrance, California facility of Mobil Oil Corporation. Prior to signing
the lease, extended testing demonstrated that Mobil could gain an important
financial advantage by using the MST. The fully automated, commercial unit
was manufactured in Houston, Texas and delivered to the Torrance site in
September 1999. In addition to processing waste streams, Mobil is exploring
other uses for the MST that include API sludge, tank cleaning, and other types
of emulsions from the refinery.
The single most important event during 1999 occurred when Imperial
Petroleum Recovery Corporation signed a worldwide marketing agreement with
Mobil Technology Company (MTC)---the technology arm of the giant Mobil Oil
Corporation. According to Mobil's website, it is one of the major producers,
refiners and marketers of petroleum, and has revenues of nearly $54 billion,
assets of almost $43 billion, and capital employed of over $26 billion. Its
business interests extend into approximately 140 countries. The MTC division
is the major technology center of Mobil Oil and its mission is to create value
for Mobil's businesses and business partners. MTC provides research,
development, engineering, technical services and management of capital
projects. MTC's role is to utilize its expertise and extensive experience to
publicize and market IPRC's Microwave Separation Technology (MST) globally to
the oil industry. Since signing the agreement in October 1999, the marketing
team has advanced the position of the MST by helping it to gain acceptance
within the petroleum industry.
The agreement is, by nature, very detailed and covers aspects of
marketing, revenue sharing, and ownership of intellectual property. The most
important feature, however, is the establishment of the future relationship
between MTC and IPRC and the many prospects this opportunity offers IPRC and
its shareholders. Management within both companies is strategically
developing and implementing detailed plans for this joint effort. In the
future, more information on this arrangement will be made available on IPRC's
website.
During this period of consolidations, mergers, and financial
restructuring within the petroleum industry, refiners and processors are
looking for methods of reducing costs and increasing efficiencies.
Management feels that the various agreements and contracts signed during
fiscal 1999 as well as the many tests, demonstrations and negotiations
presently underway will place the Company in a position to increase revenues
13
<PAGE>
and move toward profitability. In the past, the Company cautiously advanced
its technology to insure that the technology was in place and proven. At this
juncture, Management feels it is time to move forward at a faster, more
aggressive pace and intends to capitalize on established business
relationships and involve entities in Europe, the Middle East and Africa. To
facilitate its expansion, IPRC plans to use various business arrangements that
include joint ventures, regional franchises and direct leases. The Company
acknowledges that it must implement more aggressive manufacturing plans to
accommodate this expansion. Management feels it has identified sufficient
funds to manufacture the necessary MST Systems and has devised arrangements to
introduce new, related products that will have a positive impact on the
Company's revenues in the future.
FISCAL YEAR ENDED OCTOBER 31, 1999 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1998
Revenue
During fiscal year 1999, the Company recognized $109,748 in revenue
compared to $26,289 in prior fiscal year. The current year revenue is
primarily comprised of lease revenue earned from the Mobil lease at Torrance
California. In addition, the Company recognized income from fees charged to
reimburse set-up costs incurred by the Company to demonstrate the MST-1000 at
various locations.
Cost of Goods Sold and Gross Profit
During fiscal year 1999, the Company identified $111,923 in costs that
were specifically identified to contracts completed during the year. Of the
$111,923 recorded, the Company took a charge of $5,031 for depreciation of
leased equipment. The remaining $106,892 represents costs incurred to
transport and set-up the MST Demonstration Unit at prospective customers'
locations. The Company underestimated its demonstration costs, which resulted
in a negative gross profit for fiscal year 1999. With this in mind, the
Company has revised its fee schedule for future demonstrations.
General and Administrative & Research and Development Expenses
General and administrative expenses for fiscal year 1999 totaled
$1,118,523 compared to $972,532 for fiscal year 1998 an increase of 15%.
Research and development expenses totaled $74,964 for the fiscal year 1999
compared to $499,655 for fiscal year 1998 a decrease of 85%. These changes are
a result of a shift in the Company's focus from a research and development
company to a marketing and manufacturing entity.
In the prior fiscal year, research and development activities on the MST
System began to draw to a close. During 1999, the Company made only minor
design modifications to the MST before it began to manufacture equipment to be
leased. As a result, salaries attributed to research and development totaled
approximately $61,000, a decrease of 81% from approximately $318,200 in 1998.
In addition, as a result of the ability to manufacture a marketable machine,
costs of approximately $420,000 associated with the MST equipment were
capitalized rather than expensed as research and development costs.
The change in general and administrative cost during 1999 was caused by
several factors. First, administrative salaries totaled approximately
$272,000 an increase of 432% from approximately $51,100 in the prior year.
This was a result of the Company's emphasis in marketing a viable machine. In
14
<PAGE>
addition to the increased salaries, the Company recorded a one time charge of
approximately $233,000 in consulting fees as a result of a vendor executing a
cashless exercise of a warrant that was issued in a prior year. During 1999,
legal and professional fees decreased approximately $116,000, the result of
the Company settling an on-going lawsuit on August 17, 1999, and resolving
various patent issues.
Extraordinary Item
During fiscal year 1999, extraordinary items decreased to $1,253 from
$123,778 in fiscal year 1998. In the past fiscal years, the Company recorded
extraordinary items as a result of vendors and note holders forgiving amounts
owed. The decrease during 1999 is a result of the Company becoming current on
its payables and notes.
Liquidity and Capital Resources
IPRC's operations have been capital intensive. The Company has funded
operations principally from the private placement of equity securities,
primarily common stock, and warrants exercisable for common stock. On October
31, 1999, IPRC's aggregate current liabilities were approximately $458,330
compared to $886,841 in the prior year. At fiscal year end, the Company had
reduced its negative working capital to $433,050, compared to $830,278 at
October 31, 1998.
Management feels that it has identified sufficient funds to manufacture
the required MST Systems and has devised arrangements to introduce new,
related products which it expects will increase revenues. The Company
anticipates steady growth in fiscal year 2000 as a result of an aggressive
marketing strategy and its continuing business relationships.
Year 2000 Compliance
The Company has undertaken a program to address the Year 2000 issue with
respect to the Company's information, technology and operating systems,
including billing, accounting and financial reporting systems. Since the
Company is relatively new and small its only computer-related functions are
office functions which have been tested and found to be in compliance.
The Company has developed contingency plans to handle the most likely
worst case Year 2000 scenario. The Company currently estimates that it will
incur costs no greater than $5,000 to complete its Year 2000 compliance work.
Although the Company's efforts are intended to minimize the adverse effects of
the Year 2000 issue, the actual effects and the success the Company's efforts
described above cannot be known until the Year 2000 or later. Failure by the
Company and its major suppliers, other material service providers and major
distributors to address adequately their respective Year 2000 issues in a
timely manner (insofar as such issues relate to the Company's business) could
have a material adverse effect on the Company's business, results of
operations and financial condition.
ITEM 7. FINANCIAL STATEMENTS
See attached beginning at F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
15
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The current directors and executive officers of the Company are Henry H.
Kartchner, 75, C. Brent Kartchner, 53 and Scott Jensen, 28.
Henry H. Kartchner has served as a director and Chairman of the Board of
the Company since December 1995 and as Chief Executive Officer since December
1996. Mr. Kartchner also is Chief Executive Officer of Food Development
Corporation, an international agribusiness, which he founded in 1975. Under
his leadership, FDC grew to annual revenues of $75 million. In 1970, he
founded Desert Magic, Inc., an agribusiness that included 10,000 acres of
irrigated land, processing plants and a nationwide marketing system. During
the 1960's, Mr. Kartchner was an executive with the H.J. Heinz company and was
responsible for the fastest growing food sector of Heinz. Henry H. Kartchner
is the father of C. Brent Kartchner.
C. Brent Kartchner has been President of the Company since January 1998,
Vice President of Operations since September 1995, and a director of the
Company since September 1995. From 1992 to 1994, Mr. Kartchner was General
Manager and co-owner of Pacific Northwest Farming--Oregon Potato Processing
Center, a 12,000 acre agribusiness that included production, marketing, and
transportation divisions. In addition, that company operated the nation's
largest potato dehydrating factories. From 1987 to 1992, Mr. Kartchner was
Vice President of Marketing of Sunkyong Limited, one of the largest
grain/foodstuff importers into South Korea. Mr. Kartchner received a Bachelor
of Science degree in agronomy and business management from Brigham Young
University in 1971. C. Brent Kartchner is the son of Henry H. Kartchner.
Scott Jensen, 28, was elected Secretary and Treasurer of the Company in
January 1998. He had served as Controller of the Company since December 1996,
and had worked for the Company since 1995. Mr. Jensen has been involved in
many aspects of the Company's business, including manufacturing, accounting,
finance, and operations. He aided in the manufacture of the Company's first
MST unit. Mr. Jensen received a bachelor's degree in business management from
Brigham Young University, Hawaii, in 1995. Mr. Jensen is the son-in-law of C.
Brent Kartcher.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Act") requires
the Company's executive officers and directors and any persons who own
beneficially more than 10% of the Company's Common Stock to file initial
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC") as well as to furnish the Company with a copy of each such
report. Additionally, SEC regulations require the Company to identify in its
proxy statement and Annual Report on Form 10-KSB those individuals for whom
one or more of these reports required under Section 16 was not filed on a
timely basis during the most recent fiscal year or prior fiscal years. To
management's knowledge, all executive officers, directors and 10% stockholders
met the requirements of Section 16(a) during the 1999 fiscal year.
16
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning the
compensation paid or accrued by IPRC to or on behalf of the Company's Chief
Executive Officer and other executive officers for services provided in the
fiscal years indicated.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Rest- Secur-
Name Annual ricted ities All other
and Compen- Stock Underlying LTIP Compensa-
Principal Salary Bonus sation Award(s) Options/ Payouts tion
Position Year ($) ($) ($) ($) SARs(#) ($) ($)
- -------- ---- ------- ----- ------- -------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Henry H. Kartchner 1999 0 0 0 0 0 0 0
Chairman & CEO 1998 0 0 0 0 0 0 0
1997 0 0 0 0 0 0 0
1996 12,000 0 0 0 0 0 0
C. Brent Kartchner 1999 120,000 6,250 0 0 0 0 0
President 1998 120,000 0 0 0 0 0 0
1997 120,000 0 0 0 0 0 0
1996 17,500 0 0 0 0 0 0
</TABLE>
Compensation of Directors
Directors receive no compensation or fees for their services rendered in
such capacity.
Employment Contracts
There were no written employment contracts for any IPRC executive
officers in the fiscal year ended October 31, 1999. No employment contracts
have been signed subsequent to year end.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management
As of January 27, 2000 the persons (including any "group") named in the
table below were believed by the management of the Company to be beneficial
owners of more than five percent of the Common Stock of the Company under SEC
Rule 13d-3. Under that Rule, beneficial ownership of a security consists of
sole or shared voting power (including the power to vote or direct the voting)
and/or sole or shared investment power (including the power to dispose or
direct the disposition) with respect to a security whether through a contract,
arrangement, understanding, relationship or otherwise. Unless otherwise
indicated, management believes that each person named in the table below has
sole power to vote, or dispose or direct the disposition of, all shares
beneficially owned, subject to applicable community property laws.
17
<PAGE>
Five-Percent Owners and Management Holdings (1)
Name and Amount and
Title Address of Nature of
Of Beneficial Beneficial Percent of
Class Owner Ownership (2) Class (5)
------- ----------------------- ------------- ----------
Common C. Brent Kartchner 1,068,041 7.1%
Stock 57 Quail Run Rd.
Henderson, NV 89014
Common Henry H. Kartchner 2,714,659 16.9%
Stock 3216 S. Everett Place
Kennewick, WA 99336
Common Rex H. Lewis 15,000,000 56.9%
Stock 2325-A Renaissance Dr.
Las Vegas, NV 89119
Common All Executive Officers 3,782,700 24.0% (4)
Stock & Directors as a Group (3)
_________________
(1) Company's Common Stock without management's having sufficient evidence to
conclude that such an ownership position currently exists.
(2) All shares are held directly except that (i) Mr. Henry H. Kartchner's
beneficial holdings include 1,087,646 shares held directly by Food Development
Corporation, which he controls, and (ii) Mr. Lewis' beneficial holdings are
held by Maya LLC, an entity he controls, and includes warrants to acquire
11,375,000 shares of the Company's Common Stock for $1.00 per share until
December 8, 2002.
(3) Includes two individuals, Mr. Henry H. Kartchner and Mr. C. Brent
Kartchner.
(4) May not equal the sum of individual holdings percentages because, under
SEC rules, different denominators may be used to calculate certain individual
percentages.
(5) The percentage ownership for the warrants held by the indicated
individuals is based on an adjusted total of issued and outstanding shares
giving effect only to the exercise of each individual's warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 1, 1998, the Company entered into a Management Agreement with
Maya LLC for a period of five years. Maya LLC is controlled by Rex H. Lewis,
who is named as a major shareholder of the Company under Item 11. Under the
Management Agreement, Maya LLC agreed to give consultation and advice on
selection and retention of management employees, planning and development,
budgeting, accounting, and general business in exchange for a management fee
equal to five percent of the gross revenue of the Company. At fiscal year
ended October 31, 1999 four years remain on this Agreement.
18
<PAGE>
During fiscal year 1999, the Company engaged in transactions with Food
Development Corporation ("FDC"), an entity controlled by Henry H. Kartchner,
the Company's Chairman of the Board. During fiscal year 1999, FDC advanced
the Company a total of $184,207. Of this amount, $84,207 was used to settle
outstanding accounts payable, and $100,000 was advanced to fund operations.
Throughout the year, the Company issued 184,207 shares of stock to satisfy
this debt. In addition, on December 11, 1998, the Company issued 614,021
shares of Common Stock to FDC in exchange for relief of outstanding debt in
the amount of $268,327.
On December 16, the Company issued 485,790 shares of its Common Stock to
Henry H. Kartchner, Chairman of the Board, to satisfy an outstanding debt of
$242,895.
Between November 12, 1999 and January 6, 2000, FDC advanced the Company a
total of $60,000 to fund operations. FDC accepted a $60,000 note bearing an
interest rate of 12% per annum to be repaid at an unspecified date.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Financial Statements
The following are included in this report:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of October 31, 1999 and 1998
Consolidated Statements of Operations for the years ended October 31,
1999 and 1998 and cumulative amounts since inception
Consolidated Statements of Stockholders' Deficit for the years ended
October 31, 1999 and 1998 and cumulative amounts since inception
Consolidated Statements of Cash Flows for the years ended October 31,
1999 and 1998 and cumulative amounts since inception
Notes to Consolidated Financial Statements
Exhibits
The exhibits to this report are identified in the Exhibit Index, which
appears immediately after the signature page and is incorporated in this Item
13 by this reference.
Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter
of the fiscal year ended October 31, 1999.
19
<PAGE>
IMPERIAL PETROLEUM RECOVERY CORPORATION AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets as of October 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the Years Ended
October 31, 1999 and 1998 and cumulative amounts since
inception F-4
Consolidated Statements of Stockholders' Deficit for the
Years Ended October 31, 1999 and 1998 and cumulative amounts
since inception F-5
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1999 and 1998 and cumulative amounts since
inception F-8
Notes to Consolidated Financial Statements F-11
F-1
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Imperial Petroleum Recovery Corporation
We have audited the accompanying consolidated balance sheets of Imperial
Petroleum Recovery Corporation and Subsidiary (a development stage company;
the "Company") as of October 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the years
then ended and cumulative amounts since inception. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Imperial Petroleum Recovery Corporation and Subsidiary (a development stage
company) as of October 31, 1999 and 1998, and the consolidated results of
their operations and their consolidated cash flows for the years then ended
and cumulative amounts since inception, in conformity with generally accepted
accounting principles.
The Company is in the development stage as of October 31, 1999. Recovery of
the Company's assets is dependent on future events, the outcome of which is
indeterminable. In addition, successful completion of the Company's
development plan and its transition, ultimately, to attaining profitable
operations, is dependent upon obtaining adequate financing to fulfil its
development activities and achieving a level of sales adequate to support the
Company's cost structure.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the financial statements, the
Company has incurred consolidated cumulative net losses of $10,006,565 since
inception of operations and as of October 31, 1999, the Company's current
liabilities exceeded its current assets by $433,050 and its total liabilities
exceeded its total assets by $86,189. These factors, among others, as
discussed in Note B to the financial statements, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note B. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/Grant Thornton LLP
Salt Lake City, Utah
December 10, 1999
F-2
<PAGE>
IMPERIAL PETROLEUM RECOVERY CORPORATION AND SUBSIDIARY
(a development stage company)
CONSOLIDATED BALANCE SHEETS
October 31,
ASSETS
1999 1998
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 17,774 $ 49,342
Inventory, net of reserve - -
Prepaid expenses 7,506 7,221
---------- ----------
Total current assets 25,280 56,563
PROPERTY AND EQUIPMENT, net (Notes C and E) 527,099 144,712
OTHER ASSETS 41,262 15,413
---------- ----------
$ 593,641 $ 216,688
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Trade accounts payable $ 270,745 $ 175,471
Payables to related parties (Note I) 5,829 252,605
Accrued liabilities 115,959 94,990
Deferred revenue 15,764 -
Current maturities of long-term obligations
(Note D) 50,033 363,775
---------- ----------
Total current liabilities 458,330 886,841
LONG-TERM OBLIGATIONS, less current maturities
(Note D) 221,500 221,500
COMMITMENTS AND CONTINGENCIES (Notes E and L) - -
STOCKHOLDERS' DEFICIT (Notes F, H and I)
Common stock, par value $0.001; authorized
100,000,000 shares; reserved 12,491,071; issued
and outstanding 15,901,597 in 1999 and
13,731,421 in 1998, respectively 15,902 13,732
Additional paid-in capital 9,910,983 7,855,470
Common stock subscriptions receivable (6,509) (6,509)
Deficit accumulated during the development
stage (10,006,565) (8,754,346)
----------- ----------
Total stockholders' deficit (86,189) (891,653)
----------- ----------
$ 593,641 $ 216,688
=========== ==========
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
IMPERIAL PETROLEUM RECOVERY CORPORATION AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
Amounts
Since Year ended October 31,
Inception 1999 1998
------------ ----------- -----------
Revenues (Notes E and M) $ 136,037 $ 109,748 $ 26,289
Cost of goods sold 111,923 111,923 -
------------ ----------- -----------
Gross profit (loss) 24,114 (2,175) 26,289
Operating expenses
General and administrative
expenses 6,407,946 1,118,523 972,532
Research and development
expenses - prototype 3,371,341 74,964 499,655
Acquired research and development
expenses - prototype (Note G) 349,500 - -
Loss on abandonment of leased
facility 161,918 - -
------------ ----------- -----------
10,290,705 1,193,487 1,472,187
------------ ----------- -----------
Loss from operations (10,266,591) (1,195,662) (1,445,898)
Other expense including interest,
net (72,091) (57,810) (3,208)
------------ ----------- -----------
Loss before extraordinary
item (10,338,682) (1,253,472) (1,449,106)
Extraordinary item - gain on
extinguishment of debt (Note K) 332,117 1,253 123,778
------------ ----------- -----------
NET LOSS $(10,006,565) $(1,252,219) $(1,325,328)
============ =========== ===========
Net loss per common share -
basic and diluted (Note J)
Loss before extraordinary item $ (0.94) $ (0.08) $ (0.10)
Extraordinary item 0.03 - 0.01
------------ ----------- -----------
Net loss $ (0.91) $ (0.08) $ (0.09)
============ =========== ===========
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
IMPERIAL PETROLEUM RECOVERY CORPORATION AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Years ended October 31, 1999, 1998, 1997,
1996 and 1995 and period from inception to October 31, 1995
<TABLE>
<CAPTION>
Deficit
accumulated
Price Common stock Additional during the
Per ------------------ Subscriptions paid-in development
Date Share Shares Amount receivable capital stage
------------------- ----- --------- ------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of
November 1, 1994 Sept - Oct 1995 $ - 7,729,702 $7,730 $(7,730) $ - $ -
Issuance of common
stock for cash Sept - Oct 1995 1.94 89,812 90 - 174,310 -
Sept - Oct 1995 3.85 62,858 62 - 242,038 -
Net loss - - - - - (700,240)
----- ---------- ------ ------- ---------- -----------
Balances as of
October 31, 1995 - 7,882,372 7,882 (7,730) 416,348 (700,240)
Issuance of common
stock for cash Nov 1995 - Apr 1996 1.94 158,734 159 - 308,067 -
Nov 1995 - Apr 1996 2.41 13,794 14 - 33,351 -
Nov 1995 - Apr 1996 3.17 21,626 22 - 68,478 -
Nov 1995 - Apr 1996 3.88 60,044 60 - 233,120 -
Nov 1995 - Apr 1996 4.86 11,890 12 - 57,822 -
Nov 1995 - Apr 1996 5.07 7,366 7 - 37,393 -
July 1996 3.00 83,333 83 - 249,917 -
Sept 1996 4.34 11,513 12 - 49,989 -
Issuance of common
stock to vendors
for services
rendered Aug 1996 5.94 25,750 26 - 152,974 -
Issuance of common
stock to employees
for services
rendered Oct 1996 4.84 38,658 38 - 187,167 -
Net loss - - - - (4,104,506)
----- ---------- ------ ------- ---------- -----------
Balances as of
October 31, 1996 8,315,080 8,315 (7,730) 1,794,626 (4,804,746)
Issuance of common
stock for cash Apr 1997 0.80 50,000 50 - 39,950 -
July 1997 0.40 300,000 300 - 119,700 -
Aug 1997 0.34 350,000 350 - 119,650 -
Sept 1997 0.40 1,000,000 1,000 - 399,000 -
Sept 1997 0.34 350,000 350 - 119,650 -
Contribution of
capital by
stockholders - - - 821 678,738 -
Issuance of common
stock to affiliated
entities in satis-
faction of loans and
accounts payable Dec 1996 3.19 766,659 767 - 2,448,544 -
Apr 1997 2.26 100,000 100 - 225,962 -
July 1997 0.50 473,625 474 - 236,338 -
(Continued)
F-5
<PAGE>
Deficit
accumulated
Price Common stock Additional during the
Per ------------------ Subscriptions paid-in development
Date Share Shares Amount receivable capital stage
------------------- ----- --------- ------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock to employees
in satisfaction of
loans payable June 1997 0.30 33,000 33 - 10,967 -
July 1997 0.30 3,000 3 - 997 -
Aug 1997 0.50 22,366 22 - 11,161 -
Issuance of common
stock to vendor in
satisfaction of
accounts payable Aug 1997 0.50 58,070 58 - 28,978 -
Sept 1997 0.50 5,000 5 - 4,995 -
Issuance of common
stock in satisfac-
tion of lease
obligation July 1997 0.59 100,000 100 - 59,200 -
Issuance of common
stock in satisfac-
tion of acquisition
liability Sept 1997 0.63 100,000 100 - 62,400 -
Issuance of common
stock to vendors
for services
rendered Apr 1997 0.65 200,000 200 - 129,800 -
July 1997 0.50 20,800 21 - 10,379 -
Aug 1997 0.50 29,000 29 - 14,471 -
Sept 1997 0.50 5,400 5 - 2,695 -
Oct 1997 0.31 200,088 200 - 61,827 -
Issuance of common
stock to employees
for services
rendered June 1997 0.50 54,133 55 - 27,018 -
Aug 1997 0.50 31,200 31 - 15,568 -
Net loss - - - - (2,624,272)
---------- ------ ------- ---------- -----------
Balances as of
October 31, 1997 12,567,421 12,568 (6,909) 6,622,614 (7,429,018)
Issuance of common
stock for cash Nov 1997 0.55 4,000 4 - 2,196 -
Dec 1997 0.68 500,000 500 - 339,500 -
Mar 1998 0.66 500,000 500 - 324,568 -
June 1998 0.66 500,000 500 - 324,569 -
Issuance of warrants
for cash Dec 1997 0.12 - - - 60,000 -
Mar 1998 0.14 - - - 70,000 -
June 1998 0.14 - - - 70,000 -
Issuance of common
stock to vendor
in satisfaction of
accounts payable Sept 1998 0.78 43,000 43 - 33,540 -
Issuance of common
stock to employees
for services
rendered June 1998 0.50 17,000 17 - 8,483 -
(Continued)
F-6
<PAGE>
Deficit
accumulated
Price Common stock Additional during the
Per ------------------ Subscriptions paid-in development
Date Share Shares Amount receivable capital stage
------------------- ----- --------- ------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cancellation of
stock subscrip-
tions Oct 1998 0.78 (400,000) (400) 400 - -
Net loss - - - - (1,325,328)
---------- ------ ------- ---------- -----------
Balances as of
October 31, 1998 13,731,421 13,732 (6,509) 7,855,470 (8,754,346)
Issuance of common
stock for cash
(Note F) Dec 1998 0.58 125,000 125 - 72,375 -
Jan 1999 0.59 100,000 100 - 58,910 -
Feb 1999 0.75 20,000 20 - 14,980 -
Feb 1999 1.40 100,000 100 - 139,900 -
June 1999 1.75 2,574 3 - 4,502 -
June 1999 1.89 292,276 292 - 551,640 -
Issuance of warrants
for cash (Note G) Dec 1998 0.22 - - - 27,500 -
June 1999 0.25 - - - 73,068 -
Issuance of common
stock to related
parties in satis-
faction of obliga-
tions (Notes F and
I) Dec 1998 0.44 614,021 614 - 267,713 -
Dec 1998 0.50 485,790 486 - 242,409 -
Sept 1999 1.00 184,207 184 - 184,023 -
Issuance of common
stock in satisfac-
tion of debt (Note
F) Aug 1999 0.98 70,922 71 - 69,731 -
Issuance of common
stock to employees
for services ren-
dered (Note F) Jan 1999 0.65 2,474 2 - 1,606 -
Jan 1999 0.63 30,000 30 - 18,720 -
Issuance of common
stock for services
rendered (Note F) Jan 1999 0.65 449 1 - 291 -
Jan 1999 0.60 2,490 2 - 1,492 -
Aug 1999 1.44 139,973 140 - 233,615 -
Contribution of
capital by related
party (Notes F and
I) Various - - - - 26,023 -
Note payable to a
principal shareholder
contributed as capital
(Notes F and I) Sept 1999 - - - - 67,015 -
Net loss - - - - (1,252,219)
---------- ------- ------- ---------- ------------
Balances as of
October 31, 1999 15,901,597 $15,902 $(6,509) $9,910,983 $(10,006,565)
========== ======= ======= ========== ============
The accompanying notes are an integral part of these statements.
</TABLE>
F-7
<PAGE>
IMPERIAL PETROLEUM RECOVERY CORPORATION AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
amounts
since Year ended October 31,
inception 1999 1998
------------ ------------ -----------
Increase (decrease) in cash and
cash equivalents
Cash flows from operating
activities
Net loss $(10,006,565) $(1,252,219) $(1,325,328)
Adjustments to reconcile
net loss to net cash used
in operating activities -
Contributed capital for
services rendered and
liabilities paid 26,023 26,023 -
Gain on extinguishment of
debt (332,117) (1,253) (123,778)
Depreciation and amortization 95,834 44,621 20,133
Noncash charge associated with
acquisition 349,500 - -
Accrued loss on abandonment
of leased facility 161,918 - -
Charges associated with stock
issuances to employees,
vendors and related parties 775,107 317,725 42,083
Noncash expenses incurred by
affiliate 661,677 - -
Loss on disposal of property
and equipment 13,177 - -
Changes in assets and
liabilities -
Other assets (48,768) (26,134) 19,664
Payables 1,161,003 93,072 206,234
Accrued liabilities 244,301 148,336 14,841
Deferred revenue 15,764 15,764 -
Accrued lease obligations (2,618) - -
------------ ------------ -----------
Total adjustments 3,120,801 618,154 179,177
============ ============ ===========
Net cash used in
operating activities (6,885,764) (634,065) (1,146,151)
------------ ------------ -----------
Cash flows from investing
activities
Cash paid for acquisition (94,000) - -
Purchases of property and
equipment (636,112) (427,008) (27,231)
------------ ------------ -----------
Net cash used in
investing activities (730,112) (427,008) (27,231)
------------ ------------ -----------
(Continued)
F-8
<PAGE>
Cumulative
amounts
since Year ended October 31,
inception 1999 1998
------------ ------------ -----------
Cash flows from financing
activities
Proceeds from issuance
of common stock and warrants 5,603,000 929,505 1,192,337
Proceeds from issuance of
long-term obligations 2,621,569 100,000 5,000
Principal payments on long-
term obligations (590,919) - (5,111)
------------ ------------ -----------
Net cash provided by
financing activities 7,633,650 1,029,505 1,192,226
============ ============ ===========
Net increase (decrease)
in cash and cash
equivalents 17,774 (31,568) 18,844
Cash and cash equivalents at
beginning of period - 49,342 30,498
------------ ------------ -----------
Cash and cash equivalents at
end of period $ 17,774 $ 17,774 $ 49,342
============ ============ ===========
Supplemental disclosure of
cash flow information
Cash paid during the period
for Interest $ 104,139 $ 39,287 $ 39,287
Noncash investing and financing activities
The following noncash activities occurred in 1999 and 1998:
1999
As a result of the issuance of stock in satisfaction of certain
obligations described in Notes F and I, accounts payable was decreased by
$241,214, accrued liabilities were decreased by $126,114 and notes payable was
decreased by $415,422.
Extraordinary gains were realized on the forgiveness of obligations to
vendors in the amount of approximately $1,253.
1998
The Company cancelled a stock subscription receivable for 400,000 shares
of common stock in the amount of $400.
Accounts payables were restructured to notes payable in the amount of
approximately $196,500. An extraordinary gain of approximately $43,800 was
realized on the restructuring.
The Company issued 60,000 shares of common stock to an employee and a
vendor for services received. The fair value of the services was
approximately $42,100.
F-9
<PAGE>
An extraordinary gain was realized on the forgiveness of accounts payable
to vendors in the amount of approximately $63,500.
An extraordinary gain was realized on the forgiveness of a note payable
to a financing company in the amount of approximately $16,400.
The accompanying notes are an integral part of these statements.
F-10
<PAGE>
IMPERIAL PETROLEUM RECOVERY CORPORATION AND SUBSIDIARY
(a development stage company)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Organization and business activity
Imperial Petroleum Recovery Corporation and Subsidiary (a development stage
company incorporated in Nevada) (the "Company") has been in the development
stage since commencement of operations in fiscal year 1995 and is committed to
developing and marketing a proprietary oil sludge remediation process and
equipment (MST units) that uses high energy microwaves to separate water, oil
and solids. Company operations take place in Texas. The Company's corporate
offices are in Nevada.
2. Principles of consolidation and financial statement presentation
During 1999, the Company created a wholly-owned subsidiary, Petrowave
Corporation, into which it transferred certain assets.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. Significant intercompany transactions and
balances have been eliminated in the consolidation.
3. 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.
4. Cash and cash equivalents
The Company considers all highly liquid investments, with original maturity
dates of three months or less when purchased, to be cash equivalents.
5. Inventories
Inventory consists of components to be manufactured into the Company's
products. Inventory is valued at lower of cost or market. Cost is determined
using the first-in, first-out method. Management has recorded a reserve of
$260,000 against the value of inventory on hand. The recoverability of
inventory is dependent upon the Company entering into agreements to lease the
completed units.
6. Other assets
Included in other assets are long-term deposits and patents. The cost of
patents is capitalized and amortized to operations over their estimated useful
lives or statutory lives whichever is shorter. Amortization is computed on
the straight-line method.
7. Property and equipment
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated useful lives. The
straight-line method of depreciation is followed for furniture and fixtures,
machinery and equipment, and automobiles for financial reporting purposes.
Rental equipment is depreciated over ten years using a straight-line method.
F-11
<PAGE>
8. Research and development expenses
Costs incurred in connection with developing a prototype and a demonstration
model of a crude oil sludge, recovery system have been expensed as incurred.
9. Advertising costs
Advertising costs are expensed in the period incurred.
10. Revenue recognition
Revenue on contracts from crude oil sludge recovery services is accounted for
principally by the percentage-of-completion method whereby revenue is
recognized based on the estimated stage of completion of individual contracts.
Revenues on contracts from leased equipment is recognized according to
contract terms.
11. Fair value of financial instruments
Cash and cash equivalents, accounts payable and accrued liabilities are
reflected in the financial statements at fair value because of the short-term
maturity of these instruments. Notes payable to third parties and related
parties as reflected in the financial statements approximate their fair value.
12. Income taxes
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect during the years in
which the differences are expected to reverse. An allowance against deferred
tax assets is recorded in whole or in part when it is more likely than not
that such tax benefits will not be realized.
13. Warrants
In accordance with Statement of Financial Accounting Standards No. 123 (SFAS
No. 123) "Accounting for Stock-Based Compensation", expense is recognized in
connection with the grant of warrants when issued using the fair-market-value
method. Pro forma adjusted net income calculated by applying the fair value
requirement for warrants issued for recognition of expense is not included
because there is no significant impact in application of the standard.
14. Loss per common share
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128). SFAS 128 requires the disclosure of Basic
and Diluted Earnings per Share (EPS). Basic EPS is calculated using income
available to common stockholders divided by the weighted-average number of
common shares outstanding during the year. Diluted EPS is similar to Basic
EPS except that the weighted-average of common shares outstanding is increased
to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued. Such
potentially dilutive common shares include stock warrants granted or sold and
convertible debt. Shares having an antidilutive effect on periods presented
are not included in the computation of dilutive EPS (Note J).
F-12
<PAGE>
15. Segment reporting
Statement of Financial Accounting Standards No. 131 (SFAS 131) "Disclosures
about Segments of an Enterprise and Related Information", requires that a
public business enterprise report a measure of segment profit or loss, certain
specific revenue and expense items, and segment assets. Since the Company is
still considered a development stage company, no segments have been identified
by management.
16. Certain reclassifications
Certain reclassifications have been made to the 1998 financial statements to
conform with the 1999 presentation.
NOTE B - GOING CONCERN
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 is a development stage
company, has generated limited revenue through October 31, 1999, and has
sustained substantial losses from operations since inception. In addition, as
of October 31, 1999, its current liabilities exceeded its current assets by
$433,050 and it has a stockholders' deficit of $86,189. Also, the Company has
used cash in, rather than provided cash from, its operations.
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:
* As of October 31, 1999, the Company had leased certain equipment expiring
through 2002.
* During fiscal year 1999, the Company entered into a 24-month Worldwide
Marketing Agreement with an oil company to provide the Company with
marketing and sales assistance. The two companies have agreed to share
certain of the revenue related to this agreement.
* Also during December 1999, the Company reached agreements with certain
related party creditors to settle debt in exchange for common stock (Note
I).
F-13
<PAGE>
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment and estimated useful lives consist of the following:
Years 1999 1998
----- -------- --------
Furniture and fixtures 5-7 $ 25,649 $ 43,644
Machinery and equipment 10 77,227 54,174
Rental equipment, net of
accumulated depreciation of $5,031 10 420,471 -
Automobiles 7 97,715 96,236
-------- --------
621,062 194,054
Less accumulated depreciation (93,963) (49,342)
-------- --------
$527,099 $144,712
======== ========
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
1999 1998
-------- --------
10% note payable to a corporation, due
September 2003, interest paid in full at
date incurred, principal due in full at
maturity, not collateralized. $121,500 $121,500
10% note payable to a limited partnership,
due June 2001, interest due semi-annually,
principal due in full at maturity, not
collateralized. 100,000 100,000
10% note payable to a related party and
stockholder, due in full in 1999, con-
vertible at anytime into shares of the
Company's common stock at $0.31 per share,
not collateralized. 50,033 60,000
10% note payable to a corporation con-
trolled by a stockholder and director of
the Company, interest and principal due
in November 1998, convertible at anytime
into 541,783 shares of the Company's common
stock at $0.44 per share, not collateralized,
satisfied in full in 1999. - 303,775
-------- --------
271,533 585,275
Less current maturities 50,033 363,775
-------- --------
$221,500 $221,500
======== ========
F-14
<PAGE>
Scheduled maturities of long-term obligations as of October 31, 1999 are as
follows:
Year ending October 31,
- -----------------------
2000 $ 50,033
2001 100,000
2002 -
2003 121,500
Thereafter -
--------
$271,533
========
NOTE E - COMMITMENTS AND CONTINGENCIES
1. Lessee leasing
The Company leases office space, a production and lab facility, office
equipment and automobiles under operating leases which expire through the year
2004. Under these operating lease agreements the Company is liable to carry
property insurance and assume the responsibility for maintaining the property.
The Company's future rental commitments under these operating leases are as
follows:
Year ending October 31,
- -----------------------
2000 $ 46,908
2001 4,506
2002 4,506
2003 4,506
2004 1,502
Thereafter -
--------
$ 61,928
========
Total rent expense for the years ended October 31, 1999 and 1998, was
approximately $93,000 and $84,900, respectively and cumulative since inception
of approximately $688,000.
2. Lessor leasing
As of October 31, 1999, the Company had leased certain equipment expiring
through 2002. Future minimum rental receipts are as follows:
Year ending October 31,
- -----------------------
2000 $325,000
2001 325,000
2002 297,917
Thereafter -
--------
$947,917
========
Total rental income for the year ended October 31, 1999 was approximately
$59,000.
F-15
<PAGE>
NOTE E - COMMITMENTS AND CONTINGENCIES - CONTINUED
3. Worldwide Marketing Agreement
During 1999, the Company entered into a 24-month Worldwide Marketing Agreement
(the Agreement) with an oil company to provide the Company with marketing and
sales assistance. For such assistance, the Company has agreed to share certain
of the revenues related to this Agreement with the oil company. After the
24-month period, the oil company can, at its option, extend the Agreement for
an additional eight years.
NOTE F - STOCKHOLDERS' DEFICIT
1. Common stock
During fiscal 1999 and 1998, the Company issued 2,939 and 43,000 shares of
common stock, respectively, to an attorney, consultants, and vendors for
services on behalf of the Company. Expenses associated with these issuances
were $1,786 and $33,583, respectively, and represent the fair value of the
shares issued.
Also during fiscal 1999 and 1998, the Company issued 32,474 and 17,000 shares,
respectively, of common stock to certain employees of the Company for services
received. Compensation expense recorded as a result of these stock issuances
during fiscal 1999 and 1998 was $20,358 and $8,500, respectively.
During fiscal 1999, 200,000 warrants issued to a consultant were exercised
under a cashless exercise option of the warrant agreement. As a result,
139,973 shares of common stock were issued. Consulting expense associated
with these issues totaled $233,755.
During fiscal 1999, the convertible option on a $60,000 note payable was
exercised on a portion of the outstanding debt. Under an agreed upon
conversion rate of $0.31 per share, 70,922 shares were issued. As a result,
long-term obligations decreased by $9,967 and accrued liabilities decreased by
$12,019. Interest expense associated with these issues was $47,816.
During fiscal 1999, the convertible option on a $303,775 note payable was
exercised on a portion of the outstanding debt to a related party (Note I).
Under an agreed upon conversion rate of $0.44 per share, 798,228 shares were
issued. As a result, long-term obligations were decreased by $420,966 and
accrued liabilities were decreased by $31,568.
In December 1998, the Company settled payables to related parties by issuing
485,790 shares of common stock valued at the trading price of the shares (Note
I). As a result, payables to related parties was decreased by $242,895.
2. Stock subscription receivable
During fiscal 1998, the Company canceled a stock subscription receivable for
400,000 shares in the amount of $400.
3. Additional paid-in capital
During 1999, obligations to a related party were relieved (Note I). As a
result, additional paid-in capital was increased by $26,023.
During fiscal 1999, obligations to a related party (FDC) totaling $67,015 were
relieved (Note I) and have been recorded as additional paid-in capital.
F-16
<PAGE>
NOTE G - ASSET PURCHASE SETTLEMENT
In August 1996, the Company acquired certain assets consisting of technology,
patents and furniture and laboratory equipment from Phonon Technologies, Inc.
(PTI), a Houston, Texas, based research and development company, engaged in
the development of microwave chemistry technologies. The purchase price for
the assets was $689,000, of which $94,000 was paid at closing and the
remainder financed by a nonrecourse note payable collateralized only by the
technology and assets acquired. The Company allocated $349,500 of the
purchase price to acquired research and development costs which were expensed
in the statement of operations. The remaining $339,500 related to other
technology was capitalized. The Company paid an additional amount of $193,000
during 1997. The Company reached an agreement in July 1997 to restructure the
remaining balance due on the note payable ($402,000). The settlement included
reassigning the capitalized technology to the seller in satisfaction of the
remaining balance on the note of $339,500 and issuance of 100,000 shares of
common stock (approximating $62,500).
NOTE H - WARRANTS
The Company's board of directors has the authority to grant stock warrants to
employees and certain non-employees. These warrants are considered
nonqualified for income tax purposes. As of October 31, 1999, the Company has
granted or sold warrants to purchase 12,491,071 shares of the Company's common
stock. The Company has reserved this amount of its authorized shares. The
warrants vest immediately upon grant and have a weighted-average remaining
contractual life of 2.66 years.
Changes in the Company's warrants are as follows:
Exercise Weighted-average
Warrants price exercise price
---------- --------- ----------------
Outstanding at November 1, 1996 - $ - $ -
Granted 200,000 0.50 0.50
Outstanding at October 31, 1997 200,000 0.50 0.50
Granted 10,500,000 1.00 1.00
Outstanding at October 31, 1998 10,700,000 0.50-1.00 0.99
Granted 1,991,071 1.00-3.00 2.12
Exercised (200,000) 0.50 0.50
Outstanding at October 31, 1999 12,491,071 1.00-3.00 1.18
Exercisable at October 31, 1999 12,491,071 1.00-3.00 1.18
NOTE I - RELATED PARTY TRANSACTIONS
In addition to matters in Notes D and F the Company had related party
transactions relating to the following:
1. National Security Analysts, Inc.
In fiscal 1996 and through December 1996, the Company was provided with
administrative support services and office space by National Security
Analysts, Inc. (NSA), an entity controlled by a stockholder and former
director of the Company. Such amounts totaled $236,986 and $338,451 for the
F-17
<PAGE>
years ended October 31, 1997 and 1996, respectively. In addition, the Company
received noninterest-bearing loans in fiscal 1997 totaling approximately
$335,000 and noninterest-bearing advances to fund working capital needs
totaling $257,023 in fiscal 1996.
The Company's liability to NSA at October 31, 1996 was $138,637. During
fiscal 1997, the Company entered into a settlement agreement wherein NSA
agreed to contribute approximately $600,000 of amounts due to the capital of
the Company as consideration for amounts due from NSA's principal shareholder
for common stock issued in 1995. In addition, the remaining balance due was
exchanged for 100,000 shares of common stock. The reduction in the amount due
to NSA resulting from the settlement of approximately $600,000 has been
credited to additional paid-in capital.
2. Food Development Corporation
During fiscal 1996 and early fiscal 1997, Food Development Corporation (FDC),
an entity controlled by a stockholder and officer of the Company, incurred
expenses on behalf of the Company amounting to $76,261 and $469,770,
respectively. In addition, included in research and development expense in
fiscal year 1995 is $275,000 associated with prototype development costs
funded by FDC.
In fiscal 1997, the Company issued 473,625 shares of common stock valued at
$236,812 to FDC in partial satisfaction of the balance due. In addition, the
Company and FDC agreed to reduce the amount due to FDC by approximately
$132,000. This reduction has been reflected as an extraordinary gain in the
accompanying financial statements. In January 1998, the amount due was
recorded as a note payable to FDC which bears interest at 10 percent and is
due no earlier than November 2, 1998 (Note D). During 1999, the Company
borrowed $100,000 in additional funds and incurred $1,680 of other accounts
payable and $82,527 of accrued liabilities to vendors all of which were
consolidated with the debt. During September 1999 and December 1998, a
portion of the debt was settled with issuances of shares of common stock.
During fiscal 1999, the remaining balance and accrued interest totaling
$67,016 were forgiven by FDC and has been recorded as additional paid-in
capital (Note F).
During fiscal 1999, FDC paid $26,023 to an officer and vendors on behalf of
the Company for salary expenses and accounts payable, respectively. These
transactions have been recorded as capital contributions to the Company (Note
F).
3. Affiliates of Stockholder
From March through October 1997, the Company was loaned $1,884,004 from two
entities affiliated with a stockholder of the Company. The loans bore no
interest. In fiscal 1997, the Company issued 766,659 shares of common stock,
to repay the loans in full. The Company received approximately $450,000 from
the same entities as additional loans in early 1998.
4. Payables to Officers and Employees
During 1998, the Company agreed to pay an officer of the Company $217,895 for
services rendered in the Company's behalf. The Company also agreed to pay
$25,000 for furniture received from the officer. In December 1998, the
Company issued 485,790 shares of common stock in full satisfaction of these
obligations (Note F).
F-18
<PAGE>
5. Management Agreement
During November 1998, the Company entered into a five year management
agreement with a company, controlled by a major stockholder. The agreement
calls for general business and financial consultation and certain management
services to be provided to the Company by the related party in exchange for an
annual management fee equal to five percent of the Company's gross revenues.
During 1999, the Company paid approximately $5,500 in management fees.
NOTE J - LOSS PER COMMON SHARE
Cumulative
amounts
since Year ended December 31,
inception 1999 1998
----------- ---------- ----------
Common shares outstanding during
the entire period - 13,731,421 12,567,421
Weighted average common shares
issued during the period 10,960,808 1,403,760 877,253
========== ========== ==========
Weighted average number of common
shares used in basic EPS 10,960,808 15,135,181 13,444,674
Dilutive effect of stock options
and warrants - - -
---------- ---------- ----------
Weighted average number of common
shares and dilutive potential
common stock used in diluted EPS 10,960,808 15,135,181 13,444,674
========== ========== ==========
The average shares relating to warrants granted and potentially convertible
debt instruments were not included in the computation of diluted loss per
share because their inclusion would have been antidilutive for all periods
(Notes D and H).
NOTE K - INCOME TAXES
The (provision for) benefit from income taxes for the years ended October 31,
1999 and 1998, consisted of the following:
1999 1998
----------- -----------
Current
Federal $ - $ -
State - -
Deferred - -
----------- -----------
Total $ - $ -
=========== ===========
F-19
<PAGE>
The reported (provision for) benefit from income taxes is different than the
amount computed by applying the statutory Federal income tax rate of 34
percent to the loss before income taxes is as follows:
1999 1998
----------- -----------
Benefit at statutory rates $ (425,754) $ (450,612)
Increase in valuation allowance 418,165 451,064
State income tax benefit - (786)
Nondeductible items - other
adjustments 7,589 334
----------- -----------
Total $ - $ -
=========== ===========
In accordance with SFAS No. 109, the deferred tax assets and liabilities as of
October 31, 1999 and 1998, are comprised of the estimated future tax benefit
(provision) due to different financial reporting and income tax basis related
to:
1999 1998
----------- -----------
Deferred tax assets
Net operating loss carryforward $ 3,388,998 $ 2,910,492
Asset reserves and accrued
liabilities - 14,135
Start-up expenditures 45,608 69,495
Depreciation (42,111) (19,792)
----------- -----------
Total deferred tax assets 3,392,495 2,974,330
Valuation allowance (3,392,495) (2,974,330)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
The Company has sustained net operating losses in each of the periods
presented. There were no deferred tax assets or income tax benefits recorded
in the financial statements for net deductible temporary differences or net
operating loss carryforwards because the likelihood of realization of the
related tax benefits cannot be established. Accordingly, a valuation allowance
has been recorded to reduce the net deferred tax asset to zero and
consequently, there is no income tax provision or benefit for any of the
periods presented. The increase in the valuation allowance was $418,165 and
$451,064, for the years ended October 31, 1999 and 1998, respectively.
As of October 31, 1999, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $9,965,754 expiring in various years
through 2018.
NOTE L - EMPLOYEE BENEFIT PLANS
In 1997, the Company adopted a Savings Incentive Match Plan (Simple IRA) under
Section 408(p) of the Internal Revenue Code. All employees are eligible for
participation in the plan. The Company contributes a matching contribution
equal to the employee's salary reduction contributions up to three percent of
the employee's compensation. All contributions made under this plan are fully
vested and nonforfeitable.
F-20
<PAGE>
NOTE M - CONCENTRATION
In 1999, revenue totaling $109,748 is the result of the Company leasing its
crude oil sludge recovery equipment under four separate contracts. Each
contract generated revenue of 10 percent or more of total revenues.
NOTE N - SUBSEQUENT EVENTS
Sale of Common Stock and Warrants
During November 1999, the Company issued 86,364 shares of restricted common
stock at $1.65 per share and 37,500 warrants at $0.20 per warrant, exercisable
for 36 months at $3.00 per warrant in exchange for $150,000.
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, on
February 11, 2000.
IMPERIAL PETROLEUM RECOVERY CORPORATION
By:/s/ Henry H. Kartchner
Date: February 11, 2000 Henry H. Kartchner
Chairman and Chief Executive Officer
(Duly Authorized Officer and Principal
Executive Officer)
By:/s/ C. Brent Kartchner
Date: February 11, 2000 C. Brent Kartchner
President and Director
(Duly Authorized Officer and Principal
Financial Officer)
20
<PAGE>
IMPERIAL PETROLEUM RECOVERY CORPORATION
Exhibit Index to Form 10-KSB
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-KSB 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).
27* Financial data schedule (filed herewith electronically)
<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 Annual Report on Form 10-KSB as of and for the fiscal year ended
October 31, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 17,774
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,280
<PP&E> 527,099
<DEPRECIATION> 44,621
<TOTAL-ASSETS> 593,641
<CURRENT-LIABILITIES> 458,330
<BONDS> 0
0
0
<COMMON> 15,902
<OTHER-SE> (102,091)
<TOTAL-LIABILITY-AND-EQUITY> 593,641
<SALES> 109,748
<TOTAL-REVENUES> 109,748
<CGS> 111,923
<TOTAL-COSTS> 1,193,487
<OTHER-EXPENSES> 57,810
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,578
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,252,219)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,253
<CHANGES> 0
<NET-INCOME> (1,252,219)
<EPS-BASIC> (.08)
<EPS-DILUTED> 0
</TABLE>
