================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ---------------- to -------------------.
Commission file number 0-28968
IQ POWER TECHNOLOGY INC.
(Exact name of small business issuer as specified in its charter)
CANADA NOT APPLICABLE
(Jurisdiction of incorporation) (I.R.S. Employer Identification No.)
Suite 708-A, 1111 West Hastings Street
Vancouver, British Columbia V6E 2J3
(Address of principal executive offices)
(604) 669-3132
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 [ ] No [X]
The number of outstanding common shares, without par value, of the
registrant at September 30, 1999 was 24,145,625.
Transitional Small Business Disclosure Format (check one): Yes [ ]; No [X]
<PAGE>
IQ POWER TECHNOLOGY
INDEX TO THE FORM 10-QSB
For the quarterly period ended September 30, 1999
<TABLE>
Page
----
<S> <C> <C>
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
iQ Power Technology Inc.
Consolidated Balance Sheet ............................................................1
Consolidated Statement of Loss and Deficit ............................................2
Consolidated Statement of Cash Flow ...................................................3
Notes to the Consolidated Financial Statements ........................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ..........................................11
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ............................................................15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ....................................15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ..............................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..........................16
ITEM 5. OTHER INFORMATION ............................................................16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .............................................16
SIGNATURES
</TABLE>
-i-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IQ POWER TECHNOLOGY INC.
(a development stage company)
Consolidated Balance Sheet
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
<TABLE>
September 30 December 31
1999 1998
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT
Cash $ 2,734,359 $ 11,073
Receivable from shareholders 120,738 43,237
Accounts receivable 126,746 104,930
Prepaids and deposits 59,305 1,055
------------------ ------------------
Total current assets 3,041,148 160,295
EQUIPMENT, net 292,486 59,583
================== ==================
Total assets $ 3,333,634 $ 219,878
================== ==================
LIABILITIES
CURRENT
Bank indebtedness $ 1,833 $ 108,621
Accounts payable 149,942 472,449
Accrued liabilities 166,097 150,804
Loans from iQ Power - 778,276
Current portion of bank debt - 1,055
Due to shareholders - 68,547
------------------ ------------------
Total current liabilities 317,872 1,579,752
BANK DEBT - non-current 2,037 3,164
NON-CURRENT DUE TO SHAREHOLDERS - 50,092
------------------ ------------------
Total liabilities 319,909 1,633,008
------------------ ------------------
SHAREHOLDERS' EQUITY
Capital stock 5,713,872 52,728
Additional paid-in capital 332,220 -
Cumulative foreign exchange adjustment (81,844) -
Accumulated deficit, during development stage (2,950,523) (1,465,858)
------------------ ------------------
Total shareholders' equity 3,013,725 (1,413,130)
================== ==================
Total liabilities and shareholders' equity $ 3,333,634 $ 219,878
================== ==================
</TABLE>
CONTINUING OPERATIONS (Note 2)
-1-
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Consolidated Statement of Loss and Deficit
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
<TABLE>
-----------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
-------------------------------------- --------------------------------
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
EXPENSES
Research and development
expenses:
Personnel $ 93,148 $ 76,559 $ 328,234 $ 173,481
Laboratory 71,103 46,562 159,996 120,407
Office 52,407 12,278 69,839 46,895
Consulting services 28,408 47,779 63,562 127,902
Professional fees 26,475 80,409 102,011 167,915
-------------- ------------- ------------- -------------
271,541 263,587 723,642 636,600
General and administrative
expenses:
Personnel 18,064 5,613 55,084 5,614
Financing 120,650 629 128,151 1,689
Office 23,524 2,097 33,059 6,220
Consulting services 8,929 - 19,667 39,750
Professional fees (4,374) 14,381 23,881 35,350
Management fees 19,120 - 19,120 -
Investor relations 55,000 - 55,000 -
Research memberships 50,000 - 50,000 -
Travel 46,526 - 46,526 -
Other 17,274 - 34,365 -
-------------- ------------- ------------- -------------
354,713 22,720 464,853 88,623
Interest (867) 11,880 14,495 35,719
Stock based compensation 16,500 - 304,443 -
Professional fees - - - -
-------------- ------------- ------------- -------------
641,887 298,187 1,507,433 760,942
INTEREST INCOME (23,411) (4,769) (22,768) (4,910)
NET LOSS (618,476) (293,418) (1,484,665) (756,032)
Accumulated deficit
during development
stage, beginning of period (2,332,047) (1,047,935) (1,465,858) (824,961)
Adjustment to state temporary
Atypical equity at redemption
amount - - - 239,640
-------------- ------------- ------------- -------------
ACCUMULATED DEFICIT
DURING DEVELOPMENT
STAGE, END OF PERIOD $ (2,950,523) $(1,341,353) $(2,950,523) $ (1,341,353)
Basic and diluted loss per share $ (0.03) $ (0.02) $ (0.09) $ (0.06)
-------------- ------------- ------------- -------------
Weighted average number of
shares outstanding 24,007,429 12,800,000 17,168,734 12,800,000
============== ============= ============= =============
</TABLE>
-2-
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Consolidated Statement of Cash Flow
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
<TABLE>
Nine months Nine months
ended ended
September 30 September 30
1999 1998
--------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,468,165) $ (756,032)
Items not affecting cash
Depreciation and amortization 51,470 15,577
Stock based compensation 287,943 -
Changes in non-cash working capital
Increase in accounts receivable (12,027) (9,586)
Increase in prepaid and deposits (40,015) -
Decrease in accounts payable (621,224) -
(Decrease) increase in accrued liabilities (31,222) 229,456
--------------- --------------
(1,833,240) (520,585)
--------------- --------------
INVESTING ACTIVITY
Additions to property, plant and equipment (284,472) (35,946)
--------------- --------------
FINANCING ACTIVITIES
(Decrease) increase in short-term debt (107,842) 86,270
(Decrease) in due to shareholder (187,176) (19,770)
Advances received from external parties - 337,293
Decrease in other long-term debt (1,126) (1,198)
Cash acquired on business combination 4,717,998 -
Advances from subsidiary 260,099 -
Issuance of shares 166,200 -
Issuance of atypical shares - 239,640
--------------- --------------
4,848,153 642,235
--------------- --------------
INCREASE IN CASH AND
CASH EQUIVALENTS 2,730,441 85,704
FOREIGN EXCHANGE MOVEMENT (7,255) -
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 11,073 17,177
=============== ==============
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 2,734,259 $ 102,881
=============== ==============
</TABLE>
-3-
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Notes to the Consolidated Financial Statements
For the nine months ended September 30, 1999
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
iQ Power Technology Inc. (iQ Power) was incorporated under the Canada
Business Corporations Act on September 20, 1994. Effective June 17, 1999,
iQ Power completed a business combination with iQ Battery Research
Development GmbH (iQ Battery). The business combination has been accounted
for as a reverse acquisition, with iQ Battery being identified as the
acquiror (see Note 5). The comparative financial statements are those of iQ
Battery. Collectively within these financial statements, the term Company
applied to operations subsequent to the business combination.
iQ Battery established in 1991 is developing a chargeable battery which
allows an improved current output at low outside temperatures. The process
engineering for this chargeable battery and the know-how is based on a
patent acquired from the founding shareholders of iQ Battery.
Patents have been granted for Germany, thirteen other European countries
and for the United States of America. International patents applications
have been filed in nine additional countries. iQ Battery's legal domicile
is Floha, Germany, and it maintains a branch near Munich, where management
has its offices.
2. CONTINUING OPERATIONS
These financial statements have been prepared on a going concern basis. The
Company's ability to continue as a going concern is dependent upon the
ability of the Company to attain future profitable operations and/or to
obtain the necessary financing to meet its obligations and repay its
liabilities arising from normal business operations when they come due. The
Company has raised approximately $4,875,000, net of commissions and costs
of issue, through the issuance of 5,500,000 shares of common stock pursuant
to a Registration Statement on Form SB-1. The Company intends to use the
proceeds to fund research and development of iQ Battery, and expansion of
the Company's marketing and sales activities and general working capital.
It is unlikely that current funds on hand will allow the Company to
complete its product development and marketing plan. Additional financing
will be required and there is no assurance that the Company will be able to
secure additional financing or that such financings will be on terms
beneficial to the existing shareholders.
-4-
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Notes to the Consolidated Financial Statements
For the nine months ended September 30, 1999
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for
interim financial reporting and pursuant to the instructions of the
United States Securities and Exchange Commission Form 10-Q and Article
10 of Regulations S-X. While these financial statements reflect all
normal recurring adjustments which are, in the opinion of management,
necessary for fair presentation of the results of the interim period,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report filed on
Form 10-SB for the year ended December 31, 1998.
(b) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(c) Foreign currency translation
The Company's current activities result in transactions denominated in
both US and Canadian dollars. Management considered the following in
the process to determine the Company's functional currency.
(i) All equity financing to this date have been denominated in
US funds. The Company's completed financing as disclosed in
Note 11 is also denominated in US funds.
(ii) In excess of 50% of the Company's operating expenditures are
paid or denominated in US funds.
(iii) 90% of the total assets throughout 1997 and 1998 were
denominated in US funds. Further, the Company maintains its
cash in US dollars, only converting to Canadian dollars to
the extent necessary to pay Canadian denominated
liabilities.
The majority of transactions of the combined enterprise have been
denominated in US dollars and German Deutsche Marks. Based on these
factors the Company has determined that the United States dollar is
the appropriate functional currency for measurement and reporting
purposes.
-5-
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Notes to the Consolidated Financial Statements
For the nine months ended September 30, 1999
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Foreign currency translation (Continued)
Assets and liabilities denominated in Deutsche Marks and Canadian
dollars are translated at the rate of exchange in effect at the
balance sheet date. Transaction gains and losses relating to
conversion of period end balances denominated in Canadian dollars and
revenue and expenses denominated in Canadian dollars are included with
operating results.
(d) Equipment
Equipment is recorded at cost. Depreciation is recorded using the
straight-line method based upon the useful lives of the assets,
generally estimated at 3-5 years. When assets are sold or retired, the
cost and accumulated depreciation are removed from the accounts and
any gain or loss is included in income.
(e) Long-term liabilities to original shareholders
Liabilities due to shareholders including interest only in case the
Company has generated sufficient net assets or liquidation proceeds
are shown under non-current liabilities.
(f) Research and development
Research and development costs are expensed as incurred unless a
project meets the specified criteria for capitalization. Transfer of
intangible assets in the amount of DM400,000 (patent and registered
design) by founding shareholders of the Company and the related
liability are not reflected in the accompanying financial statements.
(g) Recent pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 (SFAS 133), Accounting for Derivative Instruments
and Hedging Activities, which standardizes the accounting for
derivative instruments. SFAS 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. The impact on the
Company's financial statements is not expected to be material.
-6-
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Notes to the Consolidated Financial Statements
For the nine months ended September 30, 1999
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
4. PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma information presents the results of
operations of the Company as if the iQ Power acquisition had occurred at
January 1, 1999.
Nine months ended
September 30
1999
-----------------
Revenue $ -
---------------------------------------------------------------------------
Net loss for the period $ (1,849,281)
---------------------------------------------------------------------------
Loss per share $ (0.10)
---------------------------------------------------------------------------
Weighted average number of shares outstanding 18,479,424
---------------------------------------------------------------------------
5. BUSINESS COMBINATION
On June 17, 1999, iQ Power and iQ Battery completed an agreement pursuant
to which iQ Power issued 12,800,000 common shares in exchange for all the
issued common and atypical shares of iQ Battery.
During the year ended December 31, 1998, iQ Power issued shares pursuant to
a share exchange agreement dated August 25, 1998 with iQ Battery whereby
the shareholders of iQ Battery transferred their iQ Battery shares to the
iQ Power for, in the aggregate, 10,000,000 common shares. The shareholders
of iQ Battery had the option to cancel the share exchange agreement if
after the four month anniversary of the initial filing by iQ Power of a
registration statement on Form SB-1 with the United States Securities and
Exchange Commission (a) iQ Power had failed to complete an equity offering
with gross proceeds of at least $3,000,000 and (b) the shareholders of iQ
Battery had repaid to iQ Power the full amount of all funds advanced to iQ
Battery. The option terminated when iQ Power completed an equity financing
with gross proceeds of more than $3,000,000.
iQ Power also entered into share exchange agreements in September 1998
under which 2,800,000 common shares were issued to the holders of Atypical
Shares of iQ Battery Atypical Shares means certain shares of iQ Battery
which are not part of the ordinary capital of iQ Battery and were issued
pursuant to agreements between iQ Battery and the holders of those shares
under German tax incentives. The iQ Power common shares and the Atypical
Shares were held in escrow until completion of the offering.
The business combination has been accounted for as a reverse acquisition
whereby the purchase method of accounting has been used with iQ Battery
being identified as the accounting parent. These consolidated financial
statements include the operations for iQ Power, the accounting subsidiary,
from the date of acquisition. The fair value of the net assets of iQ Power
at the date of acquisition is as follows:
-7-
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Notes to the Consolidated Financial Statements
For the nine months ended September 30, 1999
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
5. BUSINESS COMBINATION (Continued)
<TABLE>
<S> <C> <C>
Current assets, including cash of $4,717,998 $ 4,754,985
Advances to iQ Battery 1,112,965
-------------------------------------------------------------------------------------
5,867,950
Less: Current liabilities (345,230)
-------------------------------------------------------------------------------------
Purchase price $ 5,522,720
-------------------------------------------------------------------------------------
Purchase price comprised of:
Issuance of common shares $ 5,494,944
Assumption of obligation relating to share purchase warrants 27,776
-------------------------------------------------------------------------------------
$ 5,522,720
-------------------------------------------------------------------------------------
</TABLE>
6. SHARE CAPITAL
Authorized
An unlimited number of common shares
Issued and outstanding
<TABLE>
Number of
Common shares Amount
-------------- ------------
<S> <C> <C>
Balance, January 1, 1998 (iQ Power) 1,969,740 $ 492,435
Private placement, issued for cash 3,709,685 927,421
---------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 5,679,425 1,419,856
Shares issued for cash 5,500,000 5,500,000
Issue costs - (652,576)
---------------------------------------------------------------------------------------------------------
Balance, June 17, 1999 11,179,425 6,267,280
Adjustment for reverse acquisition on June 17, 1999 - (6,214,552)
---------------------------------------------------------------------------------------------------------
11,179,425 52,728
Issued to effect the reverse acquisition 12,800,000 5,494,944
----------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 23,979,425 5,547,672
Warrants exercised 166,200 166,200
----------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 24,145,625 $5,713,872
----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Agent Warrants
As a part of the issuance of 5,500,000 common shares the agent to the
offering was granted 550,000 Agent Warrants entitling the agent to
purchase 550,000 common shares for $1 per share in the first year of
the warrant and for $1.50 per share in the second year of the warrant.
During the period to September 30, 1999, 166,200 Agent Warrants were
exercised for proceeds of $166,200.
-8-
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Notes to the Consolidated Financial Statements
For the nine months ended September 30, 1999
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
6. SHARE CAPITAL (Continued)
(b) Service warrants
The Company has created 500,000 two year Service Warrants, each
warrant entitling the holder to purchase one common share exercisable
as follows:
i) 125,000 warrants vesting on the execution of an Investor
Relations Agreement, exercisable at a price of $1.75 per share;
ii) 125,000 warrants vesting October 1, 1999, exercisable at a price
of $2.50 per share;
iii) 125,000 warrants vesting January 1, 2000, exercisable at a price
of $3.50 per share; and
iv) 125,000 warrants vesting April 1, 2000, exercisable at a price of
$5.00 per share.
The Company will issue the Service Warrants on the execution of an
Investor Relations Agreement.
(c) Stock options
The Company has granted the following stock options:
Of the options outstanding on September 30, 1999, 1,826,666 were
vested.
Number of Exercise
options price Expiry date
------------ ----------- ----------------
2,825,000 $ 1.00 December 1, 2008
345,000 $ 1.00 June 28, 2009
150,000 $ 1.00 June 28, 2001
400,000 $ 1.50 July 7, 2009
(d) Loss per share
The weighted average number of shares used to calculate loss per share
data is based on treating the shares issued in the reverse acquisition
as if they had been outstanding from the period to September 30, 1999
and September 30, 1998.
-9-
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Notes to the Consolidated Financial Statements
For the nine months ended September 30, 1999
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
7. RELATED PARTY TRANSACTIONS
Related party transactions not disclosed elsewhere in the financial
statements comprised:
Management fees for the nine months ended September 30, 1999 of $54,000,
paid to a company with a common director.
The Company has entered into the following contractual arrangements:
(a) a consulting agreement dated August 25, 1998 with a company having a
common director. Under the terms of the agreement the Company is
obligated to pay the consultant $6,000 per month for a term of three
years commencing August 25, 1998;
(b) employment agreement with two directors of the Company to occupy the
position of President and Chief Executive Officer and Vice-President,
Research and Development and Technical Advisor. Under the terms of
these agreements, the Company is obligated to pay these employees
$8,500 and $8,000 per month, respectively, for a term of five years
commencing August 31, 1998;
(c) an employment agreement with the Vice-President, Finance and Chief
Financial Officer. Under the terms of the agreement, the Company is
obligated to pay this employee $7,000 per month for a term of three
years commencing September 1, 1998.
-10-
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements and information contained in this Report constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievement of the Company, or developments in the Company's
industry, to differ materially from the anticipated results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to: the Company's limited operating history
and history of losses, the Company's relative concentration of customers, the
risks related to the Company's ability to commercialize its technology, risks
associated with changes in market demand for the Company's technology, risks
involving the management of growth and integration of acquisitions, competition,
product development risks and risks of technological change, dependence on
third-party marketing relationships and suppliers, the Company's ability to
protect its intellectual property rights and the other risks and uncertainties
detailed in the Company's Securities and Exchange Commission filings.
All financial information contained in this report are in U.S. dollars
unless provided otherwise. Collectively within this report, the term "Company"
refers to the consolidated operations of the Registrant and its subsidiary.
Overview
The Company was organized in 1991 to develop and commercialize batteries
and electric power technology for the automotive industry. Since that date, the
Company has been engaged primarily in research and product development efforts.
Its primary product is a "smart" automotive starter battery which combines
several proprietary features designed to optimize automotive starter battery
efficiency. The process engineering for the Company's smart battery and know-how
is based on a patent acquired from the founding shareholders of iQ Battery.
The Company is an early stage company and its principal activity to date
has been research and development. The Company has not derived revenues from
operations, and does not anticipate having material revenues from operations
until 2000, if at all. The Company has incurred substantial losses to date, and
there can be no assurance that the Company will attain any particular level of
revenues or that the Company will achieve profitability.
The Company believes that its historic spending levels are not indicative
of future spending levels because it is entering a period in which it will
increase spending on product research and development, marketing, staffing and
other general and administrative operating expenses. For these reasons, the
Company believes its expenses, losses, and deficit accumulated during the
development stage will increase significantly before it generates material
revenues. Prior to June 18, 1999, the financial statements of the Company and iQ
Battery Research & Development GmbH ("iQ Battery") were presented as separate
and distinct because the former shareholders of iQ Battery had a put option to
enable them to reverse the August 25, 1998 transaction. That option terminated
on June 18, 1999, when the Company raised in excess of $ 3,000,000 by equity
financing. See "Liquidity and Capital Resources."
After June 17, 1999, all financial information is reported on a
consolidated basis. Any financial information of the Company used for
comparative purposes prior to June 18, 1999, is financial information of iQ
Battery only.
The Company's Results of Operations for the Three Months Ended September 30,
1999 Compared to the Three Months Ended September 30, 1998
No revenues were recorded in either the three month period ended September
30, 1999 or the three month period ended September 30, 1998.
The Company incurred a net loss of $618,476 for the three month period
ended September 30, 1999, compared to a net loss of $293,418 for the comparable
period of the prior year primarily as a result of increased general and
administrative expenses, including increased management fees and employment
expenses related to the hiring of additional employees during 1999 and increased
investor relations expenses. Professional fees over the period in 1999 decreased
by approximately 77%.
-11-
<PAGE>
For the three month period ended September 30, 1999, the Company incurred
research and development expenses of $271,541 compared with $263,587 for the
comparable period of the prior year. The increase in research and development
expenses reflects the cost of supporting a higher level of activity, principally
research, product development, building prototypes and product testing.
The Company incurred general and administrative expenses of $354,713 for
the three month period ended September 30, 1999 compared with $22,720 for the
comparable period of the prior year. For the three month period ended September
30, 1999 compared to September 30, 1998, general and administrative expenses
increased due primarily to increased administrative costs related to the
combined business operations of the Registrant and iQ Battery. During the
comparative three month periods ended September 30, 1999 and 1998, personnel
costs were $18,064 in 1999 compared to $5,613 in 1998; expenses related to
investor relations activities were $175,650 in 1999 compared to $629 in 1998;
consulting and management fees were $28,029 in 1999 compared to nil in 1998;
office expenses were $8,929 in 1999 compared to nil in 1998; travel expenses
were $46,526 in 1999 compared to nil in 1998; and research membership fees were
$50,000 in 1999 compared to nil in 1998.
The Company's Results of Operations for the Nine Months Ended September 30, 1999
Compared to the Nine Months Ended September 30, 1998
No revenues were recorded in either the nine month period ended September
30, 1999 or the nine month period ended September 30, 1998.
As of September 30, 1999, the Company had an accumulated deficit of
$2,950,523. The Company incurred a net loss of $1,484,665 for the nine month
period ended September 30, 1999, compared to a net loss of $756,032 for the
comparable period of the prior year primarily as result of the cost of increased
research and development, expenses attributable to its recent public offering,
increased management fees and employment expenses related to the hiring of
additional employees during 1999 and increased investor relations expenses.
Professional fees for the Company were down 38% from the same period in the
prior year.
For the nine month period ended September 30, 1999, the Company incurred
research and development expenses of $723,642 compared with $636,600 for the
comparable period of the prior year. The increase in research and development
expenses reflects the cost of supporting a higher level of activity, principally
research, product development, building prototypes and product testing.
The Company incurred general and administrative expenses of $464,853 for
the nine month period ended September 30, 1999 compared with $88,623 for the
comparable period of the prior year. For the nine month period ended September
30, 1999 compared to September 30, 1998, general and administrative expenses
increased due primarily to increased costs related to the combined business
operations of the Registrant and iQ Battery. During the comparative nine month
periods ended September 30, 1999 and 1998, personnel costs were $55,084 in 1999
compared to $5,614 in 1998; expenses related to investor relations activities
were $183,151 in 1999 compared to $1,689 in 1998; consulting and management fees
were $38,787 in 1999 compared to $39,750 in 1998; office expenses were $33,059
in 1999 compared to $6,220 in 1998; travel expenses were $46,526 in 1999
compared to nil in 1998; and research membership fees were $50,000 in 1999
compared to nil in 1998.
The Company's expenditures are expected to materially increase as it
pursues research, development, testing and commercialization programs and
expands finance and administrative staff and financial and management system.
Liquidity and Capital Resources
As of September 30, 1999, the Company had cash and cash equivalents of
$2,734,359. Since inception, the Company has financed its operations primarily
through sales of its equity securities. From inception to September 30, 1999,
the Company had raised approximately $6,276,250 (net of issuance costs) from the
sale of such securities, including net proceeds of $4,690,000 from the Company's
initial public offering completed on June 18, 1999 in the
-12-
<PAGE>
United States and excluding the issuance of 10,000,000 common shares for deemed
proceeds of $2,500,000 from the business combination with iQ Battery.
iQ Battery is obligated to pay to Horst Dieter Braun, the Company's Vice
President, Research and Development and Peter Braun, our President, DM400,000 in
connection with iQ Battery's acquisition of the iQ technology and other
intellectual property rights. The amount is payable only out of and only to the
extent of the gross profits of iQ Battery.
The Company plans to finance its capital needs principally from the net
proceeds of its past securities offerings and interest thereon and, to the
extent available, lines of credit. The Company currently has no commitments for
any credit facilities such as revolving credit agreements or lines of credit
that could provide additional working capital. The Company believes that its
existing capital resources, will be sufficient to fund its operations through
1999. The Company's capital requirements depend on several factors, including
the success and progress of its product development programs, the resources the
Company devotes to developing its products, the extent to which its products
achieve market acceptance, and other factors. The Company expects to devote
substantial cash for research and development. The Company cannot adequately
predict the amount and timing of our future cash requirements. The Company will
consider collaborative research and development arrangements with strategic
partners and additional public or private financing (including the issuance of
additional equity securities) to fund all or a part of a particular program in
the future. There can be no assurance that additional funding will be available
or, if available, that it will be available on terms acceptable to the Company.
If adequate funds are not available, the Company may have to reduce
substantially or eliminate expenditures for research and development, testing,
production and marketing of its proposed products, or obtain funds through
arrangements with strategic partners that require it to relinquish rights to
some of its technologies or products. There can be no assurance that the Company
will be able to raise additional cash if its cash resources are exhausted. The
Company's ability to arrange such financing in the future will depend in part
upon the prevailing capital market conditions as well as its business
performance.
The Company anticipates that the level of spending will increase
significantly in future periods as we undertake research and development
activities related to the commercialization of the iQ technology. In addition,
we anticipate that our general and administrative expenses will also
significantly increase as a result of the growth in our research, development,
testing and business development programs. The actual levels of research and
development, administrative and general corporate expenditures are dependent on
the cash resources available to us.
Year 2000 Issue
The Year 2000 issue arises with the change in century and the potential
inability of information systems to correctly "rollover" dates to the new
century. To save on computer storage space, many systems were programmed with a
two-digit century (i.e. December 31, 1999 would appears as 12/31/99) assuming
that all years would be part of the 20th century. On January 1, 2000, systems
with this programming will default to 01/01/1900 instead of 01/01/2000, and
calculations using or reporting the date will not be correct and errors will
arise. To prevent this from occurring, information systems need to be updated to
ensure they recognize the Year 2000.
-13-
<PAGE>
The Company has conducted a review of its computer systems to identify the
systems that could be incompatible with dates beyond December 31, 1999, and is
developing an implementation plan to resolve issues that may arise. The Company
places minimal reliance on data sensitive software and believes that the
expected cost and availability of resources, to recover information not properly
processed after December 31, 1999, would not result in a material effect on its
results of operations.
The Company began its Year 2000 strategy by compiling a list of all
computerized equipment and making a determination of how, if at all, the
software will be affected by Year 2000. Although the effect is so far
unquantified, all of the Company's software is recent, and therefore the Company
anticipates that it will have sufficient time to test any new systems that need
to be installed. All of the Company's financial and business records will be
backed up to ensure that no loss of information can occur. The Company does not
anticipate incurring significant costs in this regard.
The Company has contacted each of its strategic partners, consultants,
contractors and significant suppliers and has obtained assurances from some of
them that their relevant operating software and systems are Year 2000 compliant
or will be by December 31, 1999. The Company plans to continue to make inquiries
of those suppliers and service providers who have not yet provided it with
information regarding their Year 2000 compliance status. The Company anticipates
that it will complete its third-party Year 2000 compliance review by November
1999. The Company is monitoring the status of all of its significant service
providers' and suppliers' Year 2000 compliance efforts to minimize the risk of
any material adverse effect on its operations resulting from compliance
failures. The Company has also, in some cases, identified alternative sources of
supply or service should its present suppliers or service providers encounter
Year 2000 compliance problems.
Foreign Currency Translation Risk
To date, exposure to foreign currency fluctuations has not had a material
effect on our operations. The Company believes its risk of foreign currency
translation is limited, because its operations are based in Germany with
resulting transactions primarily denominated in United States dollars. The
Company does not currently engage in hedging or other activities to control the
risk of foreign currency translation, but may do so in the future, if conditions
warrant.
Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including some types of
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting. SFAS 133 is effective for fiscal years beginning after
June 15, 1999 and must be applied to instruments issued, acquired, or
substantively modified after December 31, 1997. The Company does not expect the
adoption of the accounting pronouncement to have a material effect on our
financial position or results of operations.
-14-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date hereof, there is no material litigation pending against the
Company. On January 3, 1994, a civil lawsuit was filed by Hans Engelhorn against
Peter E. Braun and Horst Dieter Braun in the District Court of Berlin (Case No.
3 O 40/94). Mr. Engelhorn seeks to compel transfer of intellectual property
rights related to the iQ technology or, alternatively, money damages of
approximately DM500,000 ($310,000). The intellectual property rights at issue
are now held by iQ Battery. Mr. Engelhorn alleges that the Brauns had a
contractual obligation to transfer the intellectual property to a partnership
which has since been dissolved. Although the lawsuit is still pending, the
Company has been advised by the Brauns that the prosecution of this lawsuit has
not been pursued. The Company believes that the lawsuit is without merit and
will not materially affect its rights in the intellectual property at issue.
From time to time, the Company may be a party to litigation and claims
incident to the ordinary course of business. While the results of litigation and
claims cannot be predicted with certainty, the Company believe that the final
outcome of such matters will not have a material adverse effect on its business,
financial condition and operating results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a) Sales of Unregistered Securities
During the three month period ended September 30, 1999, the Company issued
166,200 common shares pursuant to the exercise of Agent Warrants for proceeds of
$166,200. The common shares were issued to non-U.S. persons outside the United
States in reliance upon an exemption from registration pursuant to Regulation S
promulgated under the Securities Act.
b) Use of Proceeds from Sales of Registered Securities
On June 18, 1999, the Company completed an initial public offering of its
common shares. The selling agent in the offering was IPO Capital Corp. (the
"Agent"). The common shares sold in the offering were registered under the
Securities Act of 1933, as amended, on a Registration Statement on Form SB-1
(the "Registration Statement") (Reg. No. 333-68649) that was declared effective
by the SEC on May 10, 1999. The offering commenced on May 10, 1999 after which
time, all 5,500,000 common shares registered under the Registration Statement
were sold at a price to the public of $1.00 per common share. The aggregate
offering amount registered was $5,500,000. In connection with the offering, the
Company paid an aggregate of $105,000 in commissions and fees to the Agent and
also issued to the Agent warrants to purchase 550,000 common shares. The Agent
may exercise the warrants for $1.00 per common share during the first year and
for $1.50 per common share during the second year after issuance.
In addition, the following table sets forth an estimate of all expenses
incurred in connection with the offering, other than Agent's fees. All amounts
shown are estimated except for the registration fees of the SEC.
SEC Registration Fee $ 1,390
NASD Filing Fee $ 1,000
Accounting Fees and Expenses $ 50,000
Legal Fees and Expenses $ 75,000
Blue Sky Qualification Fees and Expenses $ 15,000
Transfer and Custody Agent Fees $ 10,000
Printing Expenses $ 4,000
Miscellaneous $ 103,610
-------
Total $ 260,000
-15-
<PAGE>
After deducting the estimated expenses set forth above, the net offering
proceeds to the Company were $5,240,000. Since May 10, 1999, the Company has
used a portion of the net offering proceeds for the purposes described below.
The Company believes that the amounts set forth represent a reasonable estimate
of the amounts actually applied.
Transfer to iQ Battery $ 3,500,000
Payment of payables $ 312,527
Current expenses (working capital) $ 224,470
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IQ POWER TECHNOLOGY INC
Date: November 15, 1999 By: /s/ Peter E. Braun
-------------------------------------
Name: Peter E. Braun
Title: President
Date: November 15, 1999 By: /s/ Gerhard K. Trenz
-------------------------------------
Name: Gerhard K. Trenz
Title: Vice President Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
