<PAGE> 1
US SECURITIES & EXCHANGE COMMISSION
WASHINGTON DC 20549
Form 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 or (15)D OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2000
OR
( ) TRANSITION REPORT UNDER SECTION 13 or 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ________________ To
Commission file number 000-25875
EXHAUST TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Washington 91-1970433
(State or other jurisdiction of (IRS Employer Identification
Incorporation or Organization) No.)
230 North Division St P O Box 2822 Spokane WA 99220-2822
(Address of principal executive office)
(509) 838-4401
(Issuer's telephone number)
Check whether 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 that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. YES (X) NO ( )
As of November 30, 2000 there were 4,692,750 shares of the
Registrant's common stock outstanding.
Transitional Small Business Disclosure Format (check one)
YES ( ) NO (X)
<PAGE> 2
EXHAUST TECHNOLOGIES, INC.
Form 10-QSB
For the Quarter Ended October 31, 2000
INDEX
Page
PART I - Financial Information
Item 1 - Financial Statements (all financial
statements are unaudited except the
January 31, 2000 balance sheet):
- Balance Sheets - October 31, 2000 and
January 31, 2000 3
- Statements of Loss - Three months and
nine months ended October 31, 2000
and 1999 4-5
- Statements of Cash Flows - Nine months
ended October 31, 2000 and 1999 6-7
- Notes To Financial Statements 8-10
Item 2 - Management's Discussion and Analysis
and Plan of Operation 11-13
PART II - Other Information 14
<PAGE> 3
Part I - Financial Information
Item 1 - Financial Statements
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
October 31, January
2000 31,
(Unaudited) 2000
ASSETS (Note 2)
CURRENT:
Cash $ 1,229 $ 352
Accounts receivable 18,780 -
Inventory 199,669 108,545
Prepaid expenses 19,432 -
--------- ---------
TOTAL CURRENT ASSETS 239,110 108,897
--------- ---------
EQUIPMENT, net of accumulated
depreciation of $15,567 and $6,715 109,578 95,186
--------- ---------
OTHER ASSETS:
Licenses, net of accumulated
amortization of $12,391 and $7,871 19,062 23,562
Deferred stock offering costs 79,392 39,300
--------- ---------
TOTAL OTHER ASSETS 98,454 62,862
--------- ---------
$ 447,142 $ 266,945
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT:
Accounts payable $ 228,096 $ 34,955
Accrued interest 46,937 9,503
Line of credit-related party 500,000 345,266
--------- ---------
TOTAL CURRENT LIABILITIES 775,033 389,724
--------- ---------
STOCKHOLDERS' DEFICIT:
Common stock, $.00001 par value,
100,000 shares authorized, 4,692,750
shares outstanding 47 47
Additional paid-in capital 117,088 102,088
Deficit accumulated during the
development stage (445,026) (224,914)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (327,891) (122,779)
--------- ---------
$ 447,142 $ 266,945
--------- ---------
-3-
<PAGE> 4
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF LOSS
(Unaudited)
Three Three Nine Nine Date of
Months Months Months Months Inception
Ended Ended Ended Ended July 21,1998
October 31, October 31, October October 31, Through
2000 1999 2000 1999 10/31/00
SALES $ 63,985 $ - $ 124,026 $ - $ 124,026
COST OF SALES 53,939 - 99,503 - 99,503
--------- --------- --------- --------- ---------
Gross profit 10,046 - 24,523 - 24,523
--------- --------- --------- --------- ---------
OPERATING EXPENSES:
Professional services 9,385 8,002 54,893 49,447 119,523
Research and
development 21,859 25,347 62,467 40,518 106,170
Advertising 11,606 (319) 63,113 1,300 56,779
Office expense 944 1,091 1,883 2,391 5,297
Compensation 5,000 - 15,000 - 45,000
Amortization 1,500 628 4,500 1,902 12,371
Travel 1,022 262 1,688 262 10,894
Director's fees - - - - 30,000
Dues and subscriptions - 275 3,851 275 4,126
Supplies 3,266 2,647 3,888 2,647 6,534
Repairs - - 800 - 800
Depreciation 3,129 - 8,852 - 8,852
Insurance 8,907 - 9,717 - 9,717
Royalties 2,637 - 6,256 - 6,256
--------- --------- --------- --------- --------
Total operating
expenses 69,255 37,933 206,908 98,742 422,319
--------- --------- --------- --------- -------
-4-
<PAGE> 5
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF LOSS
(Unaudited)
Three Three Nine Nine Date of
Months Months Months Months Inception
Ended Ended Ended Ended July 21, 1998
October October October October Through
31, 31, 31, 31, October
2000 1999 2000 1999 31, 2000
Loss from operations (59,209) (37,933) (182,385) (98,742) (397,796)
Interest expense (14,507) (2,517) (37,727) (3,749) (47,230)
---------- --------- ---------- ---------- ---------
Net loss $ (73,716) $ (40,450) $ (220,112) $ (102,491) $(445,026)
========== ========= ========== ========== =========
Net loss per share-
basic and diluted $ (0.02) $ (0.01) $ (0.05) $ (0.02)
========== ======== ========== ==========
Weighted average
number of shares
outstanding-
basic and diluted 4,692,750 4,687,405 4,692,750 4,687,405
========== ========== ========== ==========
-5-
<PAGE> 6
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
Unaudited
Nine Nine Date of
Months Months Inception
Ended Ended (July 21, 1998)
October 31, October 31, Through
2000 1999 October 31, 2000
Cash flows from
operating activities:
Net loss $ (220,112) $ (102,491) $ (445,026)
Adjustments to
reconcile net loss
to net cash used in
operating activities:
Amortization and
depreciation 13,352 1,902 21,223
Contributed services 15,000 - 45,000
Issuance of common
stock for services - - 30,000
Changes in assets and
liabilities:
Accounts receivable (18,780) - (18,780)
Accounts payable 193,141 36,250 228,096
Inventory (91,124) (21,992) (192,458)
Prepaid expenses (19,432) (35,866) (19,432)
Accrued interest 37,434 3,749 46,937
---------- ---------- ------------
Net cash used in
operating activities (90,521) (118,448) (304,440)
---------- ---------- ------------
Cash flows from
investing activities:
Cash paid for licenses - (15,593) (15,592)
Cash paid for property
and equipment (23,244) (57,409) (118,430)
---------- ---------- ------------
Net cash used in
investing activities (23,244) (73,002) (134,022)
---------- ---------- ------------
Cash flows from
financing activities:
Borrowings under line
of credit-related
party 154,734 154,651 492,789
-6-
<PAGE> 7
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
Concluded
Nine Nine Date of
Months Months Inception
Ended Ended (July 21, 1998)
October 31, October 31, Through
2000 1999 October 31, 2000
Net proceeds from
sale of common stock - 10,050 26,294
Deferred stock
offering costs (40,092) - (79,392)
---------- ---------- ------------
Net cash provided by
financing activities 114,642 164,701 439,691
---------- ---------- ------------
Net increase (decrease)
in cash 877 (26,749) 1,229
Cash, beginning of
period 352 27,265 -
---------- ---------- ------------
Cash, end of period $ 1,229 $ 516 $ 1,229
---------- ---------- ------------
Supplemental Disclosures
of Cash Flow Information:
Cash Paid During Period
for:
Interest $ - $ - $ -
========== ========== ============
Taxes $ - $ - $ -
========== ========== ============
Non-Cash Financing
Activities:
Common stock for
licenses $ - $ - $ 15,841
========== ========== ============
Inventory Advanced Under
Line of credit-related
party $ - $ - $ 7,211
========== ========== ============
-7-
<PAGE> 8
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The foregoing unaudited interim financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-QSB and Regulation S-B as promulgated by the Securities and
Exchange Commission. Accordingly, these financial statements do not
include all of the disclosures required by generally accepted
accounting principles for complete financial statements. These
unaudited interim financial statements should be read in conjunction
with the audited financial statements for the period ended January
31, 2000. In the opinion of management, the unaudited interim
financial statements furnished herein include all adjustments, all of
which are of a normal recurring nature, necessary for a fair
statement of the results for the interim period presented.
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities known to
exist as of the date the financial statements are published, and the
reported amounts of revenues and expenses during the reporting
period. Uncertainties with respect to such estimates and assumptions
are inherent in the preparation of the Company's financial
statements; accordingly, it is possible that the actual results could
differ from these estimates and assumptions that could have a
material effect on the reported amounts of the Company's financial
position and results of operations.
Operating results for the three-month and nine-month period ended
October 31, 2000 are not necessarily indicative of the results that
may be expected for the year ending January 31, 2001.
2. DEVELOPMENT STAGE OPERATIONS AND GOING CONCERN
The Company has been in the development stage since its inception.
The Company has incurred losses since inception. While the Company
has commenced selling its product, sales have not been sufficient to
pay expenses. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial
statements do not include any adjustments that may be necessary if
the Company is unable to continue as a going concern.
-8-
<PAGE> 9
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO INTERIM FINANCIAL STATEMENTS
Management of the Company has undertaken certain actions to address
these conditions. Management has commenced operations and has found
companies to manufacture its products. Funds required to carry out
management's plans are expected to be derived from future stock
sales, borrowings from the Company's shareholders or sales of its
products. There can be no assurances that the Company will be
successful in executing its plans.
3. STOCK OFFERING
The Company has entered into a letter of intent with an underwriter
pursuant to which the underwriter has agreed to sell, on a best
efforts basis, up to 550,000 units (each unit consisting of one share
of the Company's common stock and one warrant) at a per unit price of
$5.10 and 550,000 warrants at a per warrant price of $0.10. Each
warrant would grant the holder the right to purchase a share of the
Company's common stock at an initial per share price of $7.00 for a
one year period from the date of the offering, then increasing to
$9.00 through the date of the second anniversary from the offering.
The Company has advanced a fee of $25,000, which is refundable under
certain circumstances, to the underwriter and has agreed to pay the
underwriter commissions and, based on the results of the offering, to
issue the underwriter warrants to purchase up to 55,000 units at
$8.415 per warrant (each unit consisting of one share of the
Company's common stock and one warrant to purchase one share of stock
at $11.55 to $14.55 per share). This nonrefundable fee and certain
other costs incurred in connection with the offering have been
capitalized as deferred offering costs which will be offset against
proceeds received.
In connection with the underwriting, the Company has entered into
employment agreements with its present President and its proposed
Chief Executive Officer and Vice President. The agreement with the
proposed Chief Executive Officer and Vice President of Operations
commence upon receipt of $1,000,000 from the offering. These
employment agreements will be effective for a period of three years
and contain terms, which specify annual compensation of $100,000,
$125,000 and $75,000, respectively. Further, one of the Company
founders will deliver back to the Company at the date of the
Company's registration statement is declared effective a total of
1,692,750 shares of the Company's common stock held by him.
Additionally, this founder will place 550,000 shares of the Company's
common stock held by him into an escrow account. These shares will
be held until the Company achieves annual sales of $19,250,000 and
pretax income of $4,125,000. If these targets are not attained by
January 31, 2004, the shares will be canceled.
-9-
<PAGE> 10
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO INTERIM FINANCIAL STATEMENTS
The 550,000 shares as well as the dollar amount of sales and pretax
income set forth above shall be prorated downward if less than
$2,805,000 is raised in this offering.
4. REVENUE RECOGNITION
In December 1999, the United States Securities and Exchange
Commissions issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in the Financial Statements" ("SAB 101"). SAB 101 refined
the criteria for determining when revenue is considered recognizable
and is effective no later than the first fiscal quarter of the fiscal
year beginning after December 31, 1999. The company adopted the
principles specified in the SAB 101, and accordingly, sales of the
product are recorded and customers are billed when products are
shipped to customers under firm, enforceable commitments and
collectibility is reasonably assured. Estimated amounts for reserves
for sales returns, provision for customer rebates and discounts and a
provision for an allowance for bad debts are recorded at the time of
sale and based on management's estimates using reasonable
assumptions.
-10-
<PAGE> 11
EXHAUST TECHNOLOGIES, INC.
Item 2. Management's Discussion and Analysis or Plan of
Operation
General
This Quarterly Report on Form 10-QSB, including the information
incorporated by reference herein, includes "forward looking
statements" within the meaning of section 27A of the Securities Act
of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
All of the statements contained in this Quarterly Report on Form 10-
QSB, other that statements of historical fact, should be considered
forward looking statements, including, but not limited to, those
concerning the Company's strategies, objectives and plans for
expansion of its operations, products and services and growth in
demand for the Company's services. There can be no assurance that
these expectations will prove to have been correct. Certain
important factors that could cause actual results to differ
materially from the Company's expectations (the "Cautionary
Statements") are disclosed in the annual report filed on Form 10-KSB.
All subsequent written and oral forward looking statements by or
attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by such Cautionary Statements.
Investors are cautioned not to place undue reliance on these forward
looking statements, which speak only as of the date hereof and are
not intended to give any assurance as to future results. The Company
undertakes no obligation to publicly release any revisions to these
forward looking statements to reflect events or reflect the occurence
of unanticipated events.
Plan of Operation
Pending successful completion of the stock offering described in Note
3 of the Financial Statements, we plan to complete the machinery
necessary to allow the manufacturers of our products to manufacture
all our product lines, increase our distribution points, increase our
customer base through advertising and marketing and aggressively
promote all our product lines.
We have inadequate cash to maintain operations during the next twelve
months. In order to meet our cash requirements we have to raise
additional capital through a stock offering as disclosed in Note 3 of
our Financial Statements. If the offering is unsuccessful, we may
have to cease operations. Other than the stock offering, we have no
other plans to raise additional capital. Further, we have not
initiated any negotiations for additional loans, other than a
$500,000 line of credit from our president. At October 31, 2000, we
owed Mr. Sterling $500,000. In addition, for the three months ended
October 31, 2000, Mr. Sterling advanced the Company $118,320. We
believe that we will
-11-
<PAGE> 12
EXHAUST TECHNOLOGIES, INC.
need to raise at least $3,000,000 from the offering in order to
maintain operations during the next twelve months.
The Company anticipates spending monies for capital expenditures only
for molds necessary to manufacture Company product lines to meet
requests by customers for all sizes in product lines currently being
sold in a limited capacity.
The research and development previously expended is expected to be
substantially reduced as the majority of our product lines are ready
for production.
Three and Nine Months Ended October 31, 2000 (Unaudited) compared to
the Three and Nine Months Ended July 31, 1999 (Unaudited)
During the three months and nine months ended October 31, 2000, the
Company sold limited quantities of its products. The Company
recognized total revenue in the third quarter of 2000 of
approximately $64,000 as compared to $-0- for the same period of the
prior year and approximately $124,000 for the nine months ended
October 31, 2000 as compared to $-0- for the same period of the prior
year. The small sales quantities are the result of changes to the
make-up of the product components to increase product efficiency,
causing delays in shipping from the manufacturer. In addition,
anticipated stock sales were not made and their delay has not given
the Company the funds to acquire the inventory necessary to comply
with sales requests on a timely basis.
Operating expenses include those costs incurred to bring the
Company's product to market relative to research and development,
sales, marketing, and general administration. Operating expenses
increased for the three months ended October 31, 2000 to
approximately $69,000 from approximately $38,000 for the same three-
month period in 1999 and increased for the nine months ended October
31, 2000 to approximately $207,000 from approximately $99,000 for the
same nine-month period in 1999. The increases of $31,000 and
$108,000 for the three months and nine months respectively were
primarily due to the Company ramping up operations to begin sales
efforts related to market penetration. Specifically, for the three
months ended October 31, 2000, advertising increased approximately
$11,500, royalties were incurred as a result of sales of
approximately $2,600 and general and administrative expenses
increased approximately $6,600. Additionally, interest increased
approximately $12,000 as a result of borrowings from the Company
president. For the nine months ended October 31, 2000, research and
development increased approximately $22,000 due to finalization of
-12-
<PAGE> 13
EXHAUST TECHNOLOGIES, INC.
readying the products for market, advertising increased approximately
$32,000 due to sales efforts, royalties of approximately $6,300 were
incurred on sales and administrative expenses increased approximately
$47,700. Interest accruing to the President of the Company increased
approximately $34,000 because of increased borrowings by the Company
to complete preparations to bring the products to market.
Net Loss
Primarily as a result of the foregoing factors, the Company's net
loss was approximately $74,000 and $40,000, respectively, for the
three month period ended October 31, 2000 and 1999.
Financial Conditions and Liquidity
At October 31, 2000, the Company had $1,229 of cash. For the nine
months ended October 31, 2000, the Company received approximately
$124,000 from product sales and approximately $273,000 from
borrowings from the Company's President. The Company expended the
majority of funds to bring the Company's products to market. Future
funds required to carry out management's plans are expected to be
derived from future stock sales as explained in Note 3 of the
Financial Statements. If the offering is unsuccessful, we may have
to cease operations. Other than the stock offering, we have no other
plans to raise capital.
-13-
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company knows of no litigation present, threatened or
contemplated or unsatisfied judgment against the Company, its
officers or directors or any proceedings in which the Company, its
officers or directors are a party.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The rights of the holders of the Company's securities have not been
modified nor have the rights evidenced by the securities been limited
or qualified by the issuance or modification of any other class of
securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There are no senior securities issued by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters presented to the shareholders for vote during
the three months ended October 31, 2000.
ITEM 5. OTHER INFORMATION
The Company's auditors have advised the Company that they have not
completed their review of these financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed for the quarter ended October 31,
2000.
-14-
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated this 15th day of December, 2000.
EXHAUST TECHNOLOGIES, INC.
/s/ Robert E. Sterling
Robert E. Sterling
President
-15-
