================================================================================
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 March 31, 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 [X] No [ ]
The number of outstanding common shares, without par value, of the
registrant at March 31, 1999 was 18,479,425.
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 March 31, 1999
<TABLE>
Page
<S> <C>
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
iQ Power Technology Inc.
Balance Sheet 1
Statement of Loss and Deficit 2
Statement of Cash Flow 3
Notes to the Financial Statements 4
iQ Battery Research & Development GmbH
Balance Sheet 9
Statement of Operations 10
Statement of Cash Flows 11
Notes to the Financial Statements 12
Selected Unaudited Pro Forma Consolidated Financial Information 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 28
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS 31
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 31
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 32
ITEM 5. OTHER INFORMATION 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 32
SIGNATURES 33
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IQ POWER TECHNOLOGY INC.
(a development stage company)
Balance Sheet
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
<TABLE>
March 31 March 31
------------------ ------------------
1999 1998
------------------ ------------------
(Unaudited) (Unaudited)
ASSETS
<S> <C> <C>
CURRENT
Cash $ 27,010 $ 22,714
Accounts receivable 13,643 22,976
Prepaids and deposits -- 4,600
Advances to iQ Germany (Note 4) 1,012,965 454,798
- --------------------------------------------------------------------------------------------
$ 1,053,618 $ 505,088
Investment (Note 5) 3,200,000 --
- --------------------------------------------------------------------------------------------
$ 4,253,618 $ 505,088
- --------------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable $ 205,460 $ 57,572
Loans from iQ Germany 169,126 4,626
Accrued liabilities 46,514 5,000
- --------------------------------------------------------------------------------------------
$ 421,100 $ 67,198
- --------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (DEFICIT)
Capital stock (Note 5) $ 4,619,856 $ 619,943
Accumulated deficit, during development stage (787,339) (182,035)
- --------------------------------------------------------------------------------------------
3,832,518 437,890
- --------------------------------------------------------------------------------------------
$ 4,253,618 $ 505,088
- --------------------------------------------------------------------------------------------
</TABLE>
CONTINUANCE OF OPERATIONS (Note 2)
1
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Statement of Loss and Deficit
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
<TABLE>
Cumulative
from date of Three months Three months
inception to ended March ended March
March 31 31 31
------------------- -------------------- --------------------
1999 1999 1998
------------------- -------------------- --------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Expenses
Automobile $ 1,794 $ 222 $ --
Advertising and promotion 7,173 -- 4,463
Loss on foreign exchange 33,256 -- --
Management fees 276,988 88,500 10,476
Office 45,220 8,501 2,494
Professional fees 306,802 73,455 6,233
Technical reports 5,878 -- --
Travel 110,228 -- 12,629
- ------------------------------------------------------------------------------------------------------------------
$ 787,339 $ 170,678 $ 36,295
- ------------------------------------------------------------------------------------------------------------------
Net loss (787,339) (170,678) (36,295)
Accumulated deficit during development stage,
beginning of period (616,660) (145,740)
- ------------------------------------------------------------------------------------------------------------------
Accumulated deficit during development stage,
end of period $ (787,339) $ (787,339) $ (182,035)
- ------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share $ (0.03) $ (0.01)
- ------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 5,679,425 2,479,700
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Statement of Cash Flow
(Expressed in U.S. Dollars)
<TABLE>
Cumulative
from date of Three months Three months
inception to ended March ended March
March 31 31 31
------------------- -------------------- --------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (787,339) $ (170,678) $ (36,295)
Items not affecting cash:
Increase in accounts receivable (13,643) (2,681) (19,916)
(Decrease) increase in prepaid and deposits -- -- --
Increase in accounts payable 205,460 18,409 731
Increase in loans payable 169,126 70,500 4,626
(Decrease) increase in accrued liabilities 46,514 23,257 (10,725)
- ------------------------------------------------------------------------------------------------------------------
(379,882) (61,193) (61,579)
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITY
Increase in advances to iQ Germany (1,012,965) (150,001) (86,722)
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
(Decrease) increase in due to shareholder -- -- --
Increase in share subscriptions
(equity) -- -- 127,490
Increase in share subscriptions -- --
(liability) --
Issuance of common shares -- -- --
- ------------------------------------------------------------------------------------------------------------------
1,419,856 -- 127,490
- ------------------------------------------------------------------------------------------------------------------
DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 27,010 (211,194) (20,811)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -- 238,204 43,525
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 27,010 $ 27,010 $ 22,714
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Note 5 for non-cash investing and financing activity
3
<PAGE>
IQ POWER TECHNOLOGY INC.
Notes to the Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS
iQ Power Technology Inc. (the "Company") was incorporated under the Canada
Business Corporations Act on December 20, 1994. The Company commenced
operations on June 21, 1996. The Company's current business strategy is to
acquire 100% interest in iQ Battery Research & Development GmbH (iQ
Germany) which is legally domiciled in Floha, Germany. The Company's
strategic objectives include the commercial exploitation of a new
generation of computer optimized vehicle batteries researched and developed
by iQ Germany.
2. CONTINUANCE OF 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 plans to raise a maximum of $4,690,000 to a minimum of $2,440,000,
net of commissions and costs of issue, through the issuance of 5,500,000 or
3,000,000 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 Germany, expansion of the Company's marketing and sales
activities and general working capital.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with generally
accepted accounting principles in Canada, which for these financial
statements conform with those in the United States except as outlined in
Note 9.
(a) 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 financings to this date have been denominated in US
funds. The Company's proposed financing as disclosed in Note 10(a) 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.
Management considers that subsequent to the completion of the business
combination with iQ Germany that the majority of transactions of the
combined enterprise will be 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.
Assets and liabilities denominated in 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 and
balances denominated in Canadian dollars and revenue and expenses
denominated in Canadian dollars are included within operating results.
4
<PAGE>
IQ POWER TECHNOLOGY INC.
Notes to the Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(a) Foreign currency translation (continued)
The exchange rates between the Canadian and US dollars were:
Balance Sheet Date Average
------------------ -------
March 31, 1999 1.5092 1.5080-- moving average
March 31, 1998 1.4166 1.4321-- moving average
Bank of Canada
(b) Estimates and assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(c) Investments
Investments in iQ Research & Development GmbH are carried at cost,
less any impairment which is deemed to be other than temporary. On a
quarterly basis, the Company reviews its investment for any
impairment. In the period since the investment was acquired there has
been no indication of a permanent impairment.
(d) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, deposits in banks,
deposits in trust, and highly liquid investments with an original
maturity of three months or less.
(e) Unaudited interim financial statements
The unaudited interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States for interim financial reporting. While these financial
statements reflect all fair presentation of the results for the
interim period, they may not include the footnotes required by
generally accepted accounting principles for complete financial
statements.
4. PROMISSORY NOTES RECEIVABLE
Of the total advances of $1,012,965, the amount of DM 1,489,974
($1,012,965) is supported by promissory notes. Promissory notes receivable
are unsecured, do not bear interest and are payable on demand. The advances
are intended to provide interim financing until all conditions of the
business combination are satisfied.
5
<PAGE>
IQ POWER TECHNOLOGY INC.
Notes to the Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
5. SHARE CAPITAL
Authorized: an unlimited number of common shares
<TABLE>
March 31, 1999
-------------------------------------
Number of
Common shares Amount
----------------- ------------------
<S> <C> <C>
Balance, beginning of period 5,679,425 $ 1,419,856
Shares contingently issued 12,800,000 3,200,000
- ------------------------------------------------------------------------------------
18,479,425 $ 4,619,856
- ------------------------------------------------------------------------------------
</TABLE>
During 1998, the Company issued shares pursuant to a share exchange
agreement dated August 25, 1998 with iQ Germany whereby the shareholders of
iQ Germany sold and transferred their iQ Germany shares to the Company for,
in the aggregate, 10,000,000 common shares of the Company for deemed
proceeds of $2,500,000. The shareholders of iQ Germany have the option to
cancel the share exchange agreement if after the four month anniversary of
the initial filing by IQ Canada of a registration statement on Form SB-1
with the United States Securities and Exchange Commission (a) IQ Canada has
failed to complete an equity offering with gross proceeds of at least
$3,000,000 and (b) the shareholders of iQ Germany have repaid to IQ Canada
the full amount of all funds advanced to iQ Germany (see Note 4). The
option shall terminate and shall not be exercisable as of such date that IQ
Canada shall complete an equity financing with gross proceeds of not less
than $3,000,000;
The Company has also entered into share exchange agreements in 1998 under
which 2,800,000 common shares of the Company were issued to the holders of
the atypical Shares of iQ Germany. Atypical Shares means certain shares of
iQ Germany which are not part of the ordinary capital of iQ Germany and
were issued pursuant to agreements between iQ Germany and the holders of
those shares under German tax incentives. The Company's common shares and
atypical shares will be held in escrow until completion of the offering.
The share exchange will not be completed if the option referred to above is
exercised.
The business combination at the expiration of the put option will be
accounted for as a reverse takeover as iQ Germany is determined to be the
acquirer. Due to the put rights and the reverse takeover accounting the
investment has been recorded at the deemed proceeds of $2,500,000.
6. FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts receivable,
prepaids and deposits, travel advances, accounts payable and accrued
liabilities, due to shareholder and share subscriptions, the fair value of
such financial instruments approximates carrying values due to the
short-term to maturity of the financial instruments and similarity to
market rates. The Company is exposed to currency risk in respect of
financial instruments. Currency risk is the risk that the value of
financial instruments will fluctuate due to changes in foreign exchange
rates. The Company does not attempt to hedge currency risk.
The fair value of the advances to iQ Germany is $937,930, based on a
discount factor of 8% and an anticipated term of 1 year.
6
<PAGE>
IQ POWER TECHNOLOGY INC.
Notes to the Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
7. RELATED PARTY TRANSACTIONS
Related party transactions and balances not disclosed elsewhere in the
financial statements include:
(a) management fees for the three months ended March 31, 1999 of $18,000
paid to a company with a common director;
(b) accounts payable and accrued liabilities include at March 31, 1999 of
$34,892 due to a company with a common director.
In addition, 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 agreements with two directors of the Company to occupy the
positions 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 3 years
commencing September 1, 1998.
8. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Company may experience the effects of the Year 2000 issue before, on,
or after January 1, 2000, and the impact on operations and financial
reporting, if not addressed, may range from minor errors to significant
systems failure which could affect the Company's ability to conduct normal
business operations. It is not possible to be certain that all aspects of
the Year 2000 issue affecting the Company, including those related to the
efforts of customers, suppliers, or other third parties, will be fully
resolved.
9. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
(a) Accounting for income taxes
U.S. GAAP requires, pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 109, that a deferred tax asset amount be
recognized for loss carry-forwards. Although the Company has Canadian
non-capital tax loss carry-forwards, due to uncertainty as to
utilization prior to their expiry, the deferred tax asset amounts
would have been completely offset in these consolidated financial
statements by a valuation provision.
(b) Recent accounting pronouncements
(i) In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which requires that an
enterprise report, by major components and as a single total, the
change in its net assets during the period from non-owner sources; and
SFAS No. 131,
7
<PAGE>
IQ POWER TECHNOLOGY INC.
Notes to the Financial Statements
(Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
"Disclosures About Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its
products, services, geographic areas, and major customers. Adoption of
these statements will not impact the Company's consolidated financial
position, results of operations or cash flows.
(ii) In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
which standardizes the accounting for derivative instruments. SFAS No.
133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. The Company is currently assessing the impact of
SFAS No. 133 on the Company's financial statements and has not yet
determined what if any changes will be necessary.
10. SUBSEQUENT EVENTS
Subsequent to March 31, 1999, the Company entered into the following
transactions that are not disclosed elsewhere in these financial
statements:
(a) issued an aggregate of 5,500,000 common shares at US$1.00 per share on
June 18, 1999 pursuant to a public offering.
(b) granted 495,000 stock options at an exercise price of $1. All shares
vested on the date of grant.
8
<PAGE>
iQ BATTERY Research & Development GmbH
Balance Sheet
(DM in Thousands)
<TABLE>
March 31, March 31,
1999 1998
DM DM
----------------- -----------------
(Unaudited) (Unaudited)
Assets
<S> <C> <C>
Current assets
Cash 78 288
Receivable from original shareholders 68 40
Other receivables, primarily refundable value added taxes 138 280
Prepaid expenses 2 15
----------------- -----------------
Total current assets 286 623
Non-current assets
Equipment-net 275 102
================= =================
Total assets 561 725
================= =================
Liabilities and Shareholders' Deficit
Current liabilities
Short-term bank debt 548 221
Trade accounts payable 858 419
Due to original shareholders 202 66
Accrued payroll 195 124
Due to Parent Company 818 --
Advances 913 812
Other accrued liabilities 101 170
----------------- -----------------
Total current liabilities 3,635 1,812
Long-term bank debt 8 8
Non-Current liabilities due to original shareholders 0 155
----------------- -----------------
Total liabilities 3,643 1,975
----------------- -----------------
Commitments and Contingencies
Temporary atypical equity -- --
Shareholders' deficit
Registered capital 100 100
Accumulated deficit
Attributable to voting shareholders (3,182) (1,350)
----------------- -----------------
Total shareholders' deficit (3,082) (1,250)
----------------- -----------------
Total liabilities, temporary equity and
shareholders' deficit 561 725
================= =================
</TABLE>
See Notes to Financial Statements
9
<PAGE>
iQ BATTERY Research & Development GmbH
Statement of Operations
(DM in Thousands)
<TABLE>
Three months
ended March 31,
1999 1998
DM DM
------------------- -------------------
<S> <C> <C>
Revenues (Unaudited)
Sales -- --
Other revenues -- --
------------------- -------------------
-- --
------------------- -------------------
Operating Expenses
Research and development expenses 350 287
General administrative and other expenses 52 68
------------------- -------------------
Operating loss (402) (355)
Interest income -- --
Interest and other finance expense -- 17
------------------- -------------------
Loss before taxes (402) (372)
Income taxes -- --
------------------- -------------------
Net loss (402) (372)
Accumulated deficit beginning of period -- (372)
Adjustment to state temporary atypical
equity at redemption amount -- 400
------------------- -------------------
Accumulated deficit end of period (402) 28
=================== ===================
</TABLE>
See Notes to Financial Statements
10
<PAGE>
iQ BATTERY Research & Development GmbH
Statement of Cash Flows
(DM in Thousands)
<TABLE>
Three months ended
March 31,
1999 1998
DM DM
-------------------- -------------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net loss (income) (402) 28
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 15 --
Loss on disposal of equipment -- --
Changes in assets and liabilities:
Other receivables and prepaid expenses (18) (55)
Accounts payable and other current
liabilities (28) 29
-------------------- -------------------
Net cash used in operating activities (433) 2
-------------------- -------------------
Investing Activities:
Proceeds from sales of equipment -- --
Additions to property, plant and equipment (162) (27)
-------------------- -------------------
Net cash used in investing activities (162) (27)
-------------------- -------------------
Financing Activities:
Increase (decrease) in short-term debt 340 133
Increase (decrease) in debt due to shareholders (23) --
Received from Parent Company 255 --
Advances received from external parties -- 149
Increase in other long-term debt 2 --
-------------------- -------------------
Net cash used in financing activities 574 282
-------------------- -------------------
Increase (decrease) in cash (21) 257
Cash, beginning of period 78 31
==================== ===================
Cash, end of period 57 288
==================== ===================
</TABLE>
11
<PAGE>
IQ BATTERY Research & Development GmbH
Notes to the Financial Statements
(DM in Thousands)
1 Description of Business
iQ BATTERY Research & Development GmbH ("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 Research & Development GmbH.
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.
The Company's legal domicile is Floha, Germany, and it maintains a branch near
Munich, where management has its offices.
The Company intends to grant licenses for this process to the automotive and
related industries in the future.
2 Summary of Significant Accounting Policies
a) Basis of accounting
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements during the three months ended March 31, 1999 and March 31, 1998, the
Company incurred net losses of DM 402 and DM 372 and had operating cash flows of
DM (21) and DM 257, respectively. The shareholders capital deficit of March 31,
1999 was DM 3,082. These factors among others may indicate that the Company will
be unable to continue as a going concern for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to obtain additional financing.
Management believes that iQ BATTERY will obtain sufficient funds from financing
activities during the next twelve months to continue its operations.
b) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from these estimates.
c) 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.
12
<PAGE>
IQ BATTERY Research & Development GmbH
Notes to the Financial Statements
(DM in Thousands)
d) 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.
e) Research and Development
Research and development costs are expensed as incurred. DM 400 for the transfer
of intangible assets (patent and registered design) by founding shareholders of
the Company and the related liability are not reflected in the accompanying
financial statements (see also note 11).
f) Earnings per share
Earnings per share are not presented because the Company is privately held.
g) Income taxes
Income taxes have been provided for in accordance with the asset and liability
method. Deferred tax assets, net of valuations allowances, and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss carryforwards.
h) Supplemental cash flow information
Cash paid for interest and income taxes for the periods ended was as
follows:
March 31
--------------------------------------
1999 1998
------------------ ------------------
Interest -- 17
Income taxes -- --
3 Equipment
Equipment was as follows:
<TABLE>
March 31 March 31
------------------ ----------------
1999 1998
------------------ ----------------
<S> <C> <C>
Equipment - at cost 359 165
Less accumulated depreciation (84) (63)
--------------------------------------------------------------------------------------
Equipment - net 275 102
--------------------------------------------------------------------------------------
</TABLE>
Depreciation expense is calculated on an annual basis therefore
depreciation expense was DM Nil for the three months ended March 31, 1999
and DM Nil for the three months ended March 31, 1998.
13
<PAGE>
IQ BATTERY Research & Development GmbH
Notes to the Financial Statements
(DM in Thousands)
4 Shareholders' Equity and Temporary Atypical Equity
The registered capital of the Company is DM 100, which has been fully paid
in by the Company's shareholders. Such ownership shares are not negotiable.
In addition, the Company has also received a total of DM 1,842 of capital
from the issue of atypical shares. The atypical shareholders have certain
information rights, but no voting powers. Losses and profits are allocated
to the atypical shareholders' capital account as stipulated in the
individual atypical shareholders'
14
<PAGE>
IQ BATTERY Research & Development GmbH
Notes to the Financial Statements
(DM in Thousands)
4 Shareholders' Equity and Temporary Atypical Equity (Continued)
agreements. The atypical shareholders are entitled to terminate the
agreements at the end of 1999 or 2002 depending on their entrance dates; iQ
BATTERY can terminate in 2001, 2002 or 2003. Generally the compensation to
be paid to the atypical shareholders upon their termination is based on the
applicable fair value of the company under exclusion of created goodwill.
The following table presents the movements on temporary atypical equity
(amount in DM):
<TABLE>
March 31
----------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Opening balance -- --
Capital contributions -- 400
Adjustments to state equity at redemption amount
-- (400)
--------------------------------------------------------------------------------------------
Redemption amount -- --
--------------------------------------------------------------------------------------------
</TABLE>
The Company has received a total of DM 1,842 with respect to atypical
equity with the redemption amount at March 31, 1999 being Nil.
On August 25, 1998, IQ Power Technology, Inc. (IQ Canada) acquired all the
issued and outstanding stock of iQ Battery in exchange for 10,000,000
common shares of iQ Canada. Pursuant to the terms of the Share Exchange
Agreement, the former shareholders of iQ Battery, as a group, have a
limited right to require IQ Canada to repurchase all of the IQ Canada
common shares received by such shareholders (the "Put Option"). The Put
Option is exercisable at and after the four month anniversary of the
initial filing of a prospectus with the Securities and Exchange Commission
if (i) IQ Canada has failed to complete an equity offering with gross
proceeds of at least US$3 Million and (ii) such shareholders have repaid to
IQ Canada the full amount of all funds IQ Canada has advanced or invested
in iQ Battery. As a result of the business combination, the shareholders of
iQ Battery will acquire control of the combined entity. Due to this
acquisition of control, iQ Battery is identified as the acquiror (reverse
acquisition) and the business combination will be accounted for under the
purchase method.
Pursuant to the terms of the Atypical Share Exchange Agreements, IQ Canada
has also issued into escrow an additional 2,800,000 common shares against
the deposit into escrow of the atypical shares of iQ Battery held by
twenty-one atypical shareholders. The common shares and the atypical shares
will be released from escrow to the atypical shareholders and IQ Canada,
respectively, on the completion of a minimum equity financing of US$3
million. In the event the Put Option is exercised, the common shares and
the atypical shares will be released from escrow and returned to IQ Canada
and the atypical shareholders, respectively.
15
<PAGE>
IQ BATTERY Research & Development GmbH
Notes to the Financial Statements
(DM in Thousands)
4 Shareholders' Equity and Temporary Atypical Equity (Continued)
The following table presents the changes in shareholders deficit for the
period from January 1, 1995 to March 31, 1999 (amounts in DM).
<TABLE>
Registered Accumulated
capital Deficit Total
-------------- ----------------- --------------
<S> <C> <C> <C>
January 1, 1995 100 (374) (274)
Adjustments to redemption value of atypical equity 601 601
Net loss (541) (541)
- ----------------------------------------------------------------------------------------------------------
December 31, 1995 100 (314) (214)
Adjustments to redemption value of atypical equity 221 221
Net loss (791) (791)
- ----------------------------------------------------------------------------------------------------------
December 31, 1996 100 (884) (784)
Adjustments to redemption value of atypical equity 540 540
Net loss (1,034) (1,034)
- ----------------------------------------------------------------------------------------------------------
December 31, 1997 100 (1,378) (1,278)
Adjustments to redemption value of atypical equity 400 400
Net loss (1,803) (1,803)
- ----------------------------------------------------------------------------------------------------------
December 31, 1998 100 (2,787) (2,687)
Adjustments to redemption value of atypical equity
Net loss (402) (402)
- ----------------------------------------------------------------------------------------------------------
March 31, 1999 (3,183) (3,083)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
5 Short-term Bank Debt
Short-term bank debt is summarized as follows (amounts in DM):
<TABLE>
March 31
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Commerzbank AG, Ottobrunn 331 200
Dresdner Bank AG, Dresden 201 19
Current portion of Behncke 14 --
Bank GmbH, Hamburg 2 2
------------------------------------------------------------------------------------------
Total short-term bank debt 548 221
------------------------------------------------------------------------------------------
</TABLE>
The Commerzbank debt is personally guaranteed by four original shareholders
up to a maximum total of DM 320; any cash and deposits maintained with
Commerzbank have been pledged. The Dresdner Bank debt is personally
guaranteed by a founding shareholder up to a maximum total of DM 50.
Interest expense for the short-term bank debt amounts to DM 0 for the three
months ended March 31, 1999 and to DM 17 for the three months ended March
31, 1998. The weighted average interest rates were 11%.
16
<PAGE>
IQ BATTERY Research & Development GmbH
Notes to the Financial Statements
(DM in Thousands)
6 Long-term bank debt
Long-term bank debt is determined as follows (amounts in DM):
<TABLE>
March 31
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Behncke Bank GmbH, Hamburg 8 10
Less current portion (2) (2)
------------------------------------------------------------------------------------------
Long-term debt, excluding current portion 6 8
------------------------------------------------------------------------------------------
</TABLE>
The Behncke Bank debt is a financing loan for the telephone equipment in
the Munich office. The loan was contracted in 1997 and the term is over
five years. Current portion of the long term debt is DM 2.
Payments to be made for the years ending December 31 (amounts in DM):
1999 2
2000 2
2001 2
2002 2
7 Non-Current Liabilities Due to Original Shareholders
Non-current liabilities due to shareholders are summarized as follows
(amounts in DM):
March 31
------------------------------
1999 1998
-------------- --------------
Due to shareholders -- 155
-------------------------------------------------------------------------
Interest, which has to be repaid only in case the company has generated
sufficient net assets or liquidation proceeds, has been accrued for the
three months ended March 31, 1999.
Payments are expected for the years ending December 31 (amounts in DM):
1999 95
2000 0
2001 0
2002 0
2003 0
8 Leases
The Company has operating leases for certain equipment and facilities.
Rental expense was DM 4 for the three months ended March 31, 1999. As of
December 31, 1997 obligations to make future minimum lease payments were as
follows:
17
<PAGE>
IQ BATTERY Research & Development GmbH
Notes to the Financial Statements
(DM in Thousands)
8 Leases
Payments to be made in the years ending December 31 (amounts in DM):
1998 50
1999 43
2000 30
2001 4
2002 3
Thereafter 0
9 Income Taxes
The components of the provision for income taxes are as follows for the
years ended December 31:
<TABLE>
1998 1997 1996
---------------- ------------- -------------
<S> <C> <C> <C>
German
Current 0 0 0
Deferred 0 0 0
Change in valuation allowance 0 0 0
- -----------------------------------------------------------------------------------------------------------
0 0 0
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes differed from the federal corporation income
tax rate of 45% because no benefit was realized for the operating losses
incurred in 1995, 1996, 1997 and 1998. The tax rate has been reduced to 40%
for income taxes in 1999.
As of March 31, 1999 and March 31, 1998, the Company had total deferred tax
assets relating to loss carryforwards of DM 2,133 and DM 1,108,
respectively, which were reduced to zero by valuation allowances. The
valuation allowance represents the amount of deferred tax assets that may
not be realized based upon expectations of taxable income that are
consistent with the Company's operating history.
As of March 31, 1999, the Company had net operating loss carryforwards of
approximately DM 3,119 for corporation income taxes and DM 4,981 for
municipal trade taxes. Such loss carryforwards have no set expiry dates.
10 Fair Value of Financial Instruments
Management has determined that the carrying values of cash, accounts
receivable, accounts payable and short-term bank debt approximate fair
value at December 31, 1998 and 1997 because of immediate or short-term
maturities. The carrying amount reported for non-current liabilities due to
shareholders approximates fair value because the interest rate of 5.5%
provided for the accrued interest in 1998 approximates the market rate.
18
<PAGE>
IQ BATTERY Research & Development GmbH
Notes to the Financial Statements
(DM in Thousands)
11 Related Party Transactions
The Company paid management fees of DM 78 for the three month period ended
March 31, 1999 to the company's two founding shareholders based on
contracts dated October 11, 1991, March 28, 1992 and August 28, 1994.
19
<PAGE>
IQ BATTERY Research & Development GmbH
Notes to the Financial Statements
(DM in Thousands)
11 Related Party Transactions (Continued)
iQ BATTERY acquired patents and know-how improving the current output of a
chargeable battery at low outside temperatures and the registered design
"iQ" based on a contract dated March 15, 1995 from two shareholders and
managing directors of iQ BATTERY. The intangibles purchased relate to a
German patent, an international patent application as well as the
registered design "iQ".
The Company and the shareholders agreed that the shareholders would receive
DM 400 from future income. Any amounts paid will be charged to operations
as a current expense. No other amounts are due as the Company has not
realized any applicable revenues or royalties.
12 Commitments and Contingencies
The Company is not currently involved in any legal proceedings in the
ordinary course of business.
20
<PAGE>
Selected Unaudited Pro forma
Consolidated Financial Information
The selected unaudited pro forma consolidated financial information for the
Company set forth below gives effect to the acquisition of the shares of IQ
Power Technology Inc. (IQ Canada) and IQ Battery Research and Development GmbH
(IQ Germany). The historical financial information set forth below has been
derived from, and is qualified by reference to, the financial statements of the
Company and IQ Germany and should be read in conjunction with those financial
statements and the notes thereto included elsewhere herein.
The March 31, 1999 pro forma balance sheet has been prepared as if the
transactions described in Notes 1 and 2 had occurred on March 31, 1999, and
represents the consolidation of the March 31, 1999 balance sheet of IQ Germany
with the March 31, 1999 balance sheet of the Company.
The pro forma statements of net loss for the three month period ended March 31,
1999 and the three months ended March 31, 1998 have been prepared as if the
transactions described in Notes 1 and 2 had occurred at the commencement of the
relevant period. They represent the consolidation of the IQ Germany statements
of loss for the three months ended March 31, 1999 and the three months ended
March 31, 1998 with the statement of loss of the Company for the three months
ended March 31, 1999 and the three months ended March 31, 1998.
The pro forma consolidated financial statements are not intended to reflect the
results of operations or the financial position of the Company which would have
actually resulted had the proposed transactions described in Notes 1 and 2 been
effected on the dates indicated. Further, the pro forma financial information is
not necessarily indicative of the results of operations or the financial
position that may be obtained in the future.
21
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Unaudited Pro Forma Consolidated Balance Sheet
As at March 31, 1999
(Expressed in Thousands of United States Dollars)
- --------------------------------------------------------------------------------
<TABLE>
Pro forma
after
business Minimum Pro forma
IQ Canada iQ Germany Acquisition combination Offering Consolidated
----------- ---------- ------------ -------------- ---------- -------------
(Note 1) (Note 3)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT
Cash $ 27 $ 43 $ 70 $ 3,000 $ 2,510
(560)
Prepaid Expenses 1 1 1
Accounts receivable 13 76 89 89
Receivable from
Shareholders 37 37 37
Advances to IQ Germany 1,013 (103) (910)
- -----------------------------------------------------------------------------------------------------------
1,053 54 (910) 197 2,440 2,637
INVESTMENT
EQUIPMENT, net 3,200 152 (3,200) 152 152
- -----------------------------------------------------------------------------------------------------------
$ 4,253 $ 206 $(4,110) $ 349 $ 2,440 $ 2,789
- -----------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable $ 205 $ 474 $ $ 679 $ $ 679
Accrued liabilities 47 56 103 103
Share subscriptions
Current portion of bank
debt 303 303 303
Due to shareholders 112 112 112
Advances from IQ Canada 169 957 (1,126)
- -----------------------------------------------------------------------------------------------------------
421 1,902 (1,126) 1,197 1,197
BANK DEBT 4 4 4
NON-CURRENT
LIABILITIES DUE TO
SHAREHOLDERS
- -----------------------------------------------------------------------------------------------------------
Temporary equity 421 1,906 (1,126) 1,201 1,201
- -----------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 4,619 55 (3,987) 687 3,000 3,687
Share subscriptions
Cumulative foreign
exchange adjustment 3 216 219 219
Deficit (787) (1,758) 787 (1,758) (560) (2,318)
- -----------------------------------------------------------------------------------------------------------
3,833 (1,700) (2,984) (852) 2,440 1,588
- -----------------------------------------------------------------------------------------------------------
$ 4,253 $ 206 $(4,110) $ 349 $ 2,440 $ 2,789
- -----------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Unaudited Pro Forma Statement of Loss
For the three months ended March 31, 1999
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
<TABLE>
Business Combination
of iQ Germany
-------------------------------
March 31 Adjustments Pro forma
IQ Canada 1999 Acquisition Consolidated
------------- ---------------- -------------- ----------------
(Note 2)
<S> <C> <C> <C> <C>
OPERATING EXPENSES
Research and development expenses $ $ 193 $ 193
General administrative and other expenses 171 29 200
- --------------------------------------------------------------------------------------------------------------
(171) (222) (393)
INTEREST INCOME
INTEREST AND OTHER
FINANCE EXPENSE
- --------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (171) $ (222) $ (393)
- --------------------------------------------------------------------------------------------------------------
Loss per share $ (0.03) $ N/A
- --------------------------------------------------------------------------------------------------------------
Weighted average
common shares outstanding 5,679,425 18,479,425
- --------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
IQ POWER TECHNOLOGY INC.
(a development stage company)
Unaudited Pro Forma Statement of Loss
For the three months ended March 31, 1998
(Expressed in United States Dollars)
- --------------------------------------------------------------------------------
<TABLE>
Acquisition of iQ Germany
--------------------------------
March 31 Adjustments Pro forma
IQ Canada 1998 Acquisition Consolidated
-------------- ----------------- -------------- ----------------
(Note 2)
<S> <C> <C> <C> <C>
REVENUE $ $ $
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Research and development expenses 155 155
General administrative 36 37 73
- ----------------------------------------------------------------------------------------------------------------
(36) (192) (228)
INTEREST AND OTHER
FINANCE EXPENSE 9 9
- ----------------------------------------------------------------------------------------------------------------
(36) (201) (237)
- ----------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (36) $ (201) $ (237)
- ----------------------------------------------------------------------------------------------------------------
Loss per share $ (0.01) $ N/A
- ----------------------------------------------------------------------------------------------------------------
Weighted average
common shares outstanding 2,479,700 18,479,425
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
Notes to the Unaudited Pro Forma Consolidated Financial Information
1. BUSINESS COMBINATION
On August 25, 1998, the Company exchanged 10,000,000 common shares for 100%
of the issued and outstanding equity stock of IQ Germany and has the right
to exchange 2,800,000 common shares for 100% of the Atypical shares of IQ
Germany.
The acquisition has been accounted for using the purchase method. The
acquiror in the business combination has been identified as IQ Germany, as
it is the shareholders of IQ Germany who, as a group, has the ability to
control the combined enterprise. The shares of the Company's common stock
that were issued have been recorded at a fair value of $632,000 based on
the fair market value of the Company's net assets acquired.
Intercompany advances have been eliminated.
The effect of the business combination on the unaudited pro forma
consolidated balance sheet at March 31, 1999 is summarized below:
<TABLE>
<S> <C>
Common stock held by IQ Power Technology Inc. shareholders $ 632
------------------------------------------------------------------------------------------------------------
Allocation of purchase price
Current assets $ 1,053
Current liabilities 421
------------------------------------------------------------------------------------------------------------
$ 632
------------------------------------------------------------------------------------------------------------
Elimination of IQ Power Technology Inc.
Capital stock $ 3,987
Deficit (787)
Investment in IQ Germany (3,200)
Advances to IQ Germany 1,126
Advances to IQ Canada (910)
Cumulative foreign exchange adjustment (216)
</TABLE>
The effect of the business combination on the unaudited pro forma
consolidated statements of loss is summarized below:
Historical results of IQ Germany are summarized as follows:
Period Ended
----------------------------------
March 31, 1999 March 31, 1998
---------------- ---------------
Revenue $ $
Operating expenses (222) (192)
Interest income
Interest expense (9)
---------------------------------------------------------------------------
$ (222) $ (201)
---------------------------------------------------------------------------
25
<PAGE>
3. MINIMUM OFFERING OF SHARES OF COMMON STOCK
The pro forma balance sheet reflects the public offering of 3,000,000
shares of common stock for net proceeds, estimated at a minimum of
$2,440,000. The offering agreement entered into with IPO Capital Corp.
contemplates the issuance of a minimum of 3,000,000 shares and a maximum of
5,500,000 shares. The pro forma balance sheet reflects completion of the
minimum offering (see Note 5 for the effect of completing the maximum
offering).
The pro forma financial statements reflect the following adjustments
related to the public offering and related transactions:
<TABLE>
<S> <C>
Balance Sheet
Cash
Gross proceeds from offering $ 3,000,000
10% Agents' financing fee (300,000)
Expenses of offering (260,000)
---------------------------------------------------------------------------------------------------------
Increase in cash $ 2,440,000
---------------------------------------------------------------------------------------------------------
Increase in stockholders' equity
Share capital $ 3,000,000
Deficit (560,000)
---------------------------------------------------------------------------------------------------------
Increase in stockholders' equity $ 2,440,000
---------------------------------------------------------------------------------------------------------
</TABLE>
4. CAPITAL STOCK
Capital stock subsequent to the reverse takeover and the pro forma effect
of share issuances can be summarized as follows:
<TABLE>
Number Amount
----------------- ----------------
<S> <C> <C>
Share capital of IQ Germany 100 $ 62
Effect of reverse takeover 9,999,900 -
Issued to acquire IQ Canada 2,843,225 349
-----------------------------------------------------------------------------------------------------------
12,843,225 411
Exchange of shares for Atypical shares 2,800,000 -
Issued on public placement 436,000 108
-----------------------------------------------------------------------------------------------------------
16,079,225 519
Minimum public offering 3,000,000 3,000
-----------------------------------------------------------------------------------------------------------
19,079,225 $ 3,519
-----------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
5. SUPPLEMENTARY INFORMATION
As disclosed in Note 1, the Company has entered into an offering agreement
providing for the issuance of a minimum of 3,000,000 common shares or a
maximum of 5,500,000 common shares. The following analysis provides the
effect on the pro forma balance sheet (prepared based on the minimum
offering) of the completion of the maximum offering:
<TABLE>
Pro forma Maximum Adjusted
Balance sheet offering Balance Sheet
------------------ ----------------- ------------------
<S> <C> <C> <C>
Assets
Cash $ 2,510 $ 2,250 $ 4,760
Other current assets 127 - 127
Equipment (net) 152 - 152
----------------------------------------------------------------------------------------------------------------
$ 2,789 $ 2,250 $ 5,039
----------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities $ 1,197 $ - $ 1,197
Non-current liabilities 4 - 4
Temporary Atypical equity -
Capital stock 3,687 2,500 6,187
Cumulative foreign exchange adjustment 219 - 219
Deficit (2,318) (250) (2,568)
----------------------------------------------------------------------------------------------------------------
$ 2,789 $ 2,250 $ 5,039
----------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements and information contained in this Form 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.
Overview
iQ Power Technology Inc. (the "Company") was organized in December 1994 and
commenced operations in June 1996. The Company develops and commercializes
batteries and electric power technology for the automotive industry. Its primary
product is a "smart" automotive starter battery which combines several
proprietary features designed to optimize automotive starter battery efficiency.
The Company is an early stage company and its principal activity to date
has been the acquisition of all the issued and outstanding shares of iQ Battery
Research & Development GmbH ("iQ Germany"). Neither the Company nor iQ Germany
have derived revenues from operations, and the Company does not anticipate
having material revenues from operations until 2000, if at all. The Company and
iQ Germany have 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 and the historic
spending levels of iQ Germany 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 operating
expenses. For these reasons, the Company believes its expenses, losses, and
deficit accumulated during the development state will increase significantly
before it generates material revenues.
Acquisition of iQ Germany
On August 25, 1998, the Company acquired all the issued and outstanding
common stock of iQ Germany in exchange for 10,000,000 of the Company's common
shares at a deemed price of US$0.25 per common share for a total purchase price
of US$2,500,000. As a result of the business combination, the shareholders of iQ
Germany have control of the Company. Due to this acquisition of control, iQ
Germany was identified as the acquiror (reverse acquisition), and the business
combination was accounted under the purchase method.
The Company's Results of Operations for the Three Months Ended March 31, 1999
Compared to the Three Months Ended March 31, 1998
The Company was organized in December 1994 and commenced operations in June
1996. Its principal activity to date has been the acquisition of all the issued
and outstanding shares of iQ Germany.
No revenues were recorded in either the three month period ended March 31,
1999 or the three month period ended March 31, 1998.
As of March 31, 1999, the Company had an accumulated deficit of US$787,339.
The Company incurred a net loss of US$170,678 for the three month period ended
March 31, 1999, compared to a net loss of US$36,295
28
<PAGE>
for the comparable period of the prior year primarily as result of increased
management and professional fees and increased employment expenses related to
the hiring of additional employees during 1998.
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,
the Company anticipates that its 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 the Company.
iQ Germany's Results of Operations for the Three Months Ended March 31, 1999
Compared to the Three Months Ended March 31, 1998
iQ Germany was organized in 1991 to develop and commercialize batteries and
electric power technology for the automotive industry. Since that date, iQ
Germany has been engaged primarily in research and product development efforts.
As of March 31, 1999, iQ Germany had an accumulated deficit of DM3,182,000
(US$1,758,532). iQ Germany incurred a net loss of DM402,000 (US$222,165) for the
three month period ending March 31, 1999 compared with a net loss of DM372,000
(US$201,066) for the comparable period of the prior year.
iQ Germany had no revenues for the three month period ending March 31, 1999
and the three month period ending March 31, 1999.
For the three month period ended March 31, 1999, iQ Germany incurred
research and development expenses of DM350,000 (US$193,427) compared with
DM287,000 (US$155,123) 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.
iQ Germany incurred general and administrative expenses of DM52,000
(US$28,738) for the three month period ended March 31, 1999 compared with
DM68,000 (US$36,754) for the comparable period of the prior year. The decrease
in administrative and general corporate expenses was due primarily to reduced
consulting fees.
iQ Germany's expenditures are expected to materially increase as iQ Germany
pursues research, development, testing and commercialization programs and
expands iQ Germany's finance and administrative staff and financial and
management system.
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily through
sales of its equity securities. As of March 31, 1999, the Company had cash and
cash equivalents of US$1,053,618. As of March 31, 1999, the Company had raised
approximately $1,420,050 (net of issuance costs) from the sale of such
securities, excluding the issuance of 10,000,000 common shares for deemed
proceeds of $2,500,000 on the business combination with iQ Germany. On June 18,
1999, the Company completed its initial public offering pursuant to which it
received net proceeds of 4,690,000.
iQ Germany is obligated to pay to Horst Dieter Braun, the Company's Vice
President, Research and Development and Peter Braun, the Company's President,
DM400,000 in connection with iQ Germany'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 Germany.
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
29
<PAGE>
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.
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.
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 have obtained assurances from some of
them that their relevant operating software and systems are Year 2000 compliant
or would 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
mid-summer 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, as 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.
30
<PAGE>
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
must 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.
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 (US$310,000). The intellectual property rights at issue
are now held by iQ Germany. 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
None
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 55,000 common shares. The Agent
may exercise the warrants for US$1.00 per common share during the first year and
for US$1.50 per common share during the second year after issuance.
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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
After deducting the estimated expenses set forth above, the net offering
proceeds to the Company were US$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 Germany $ 3,500,000
Payment of payables $ 287,850
Current expenses
(working capital) $ 68,340
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
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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: July 5, 1999 By: /s/ Peter E. Braun
-----------------------------------
Name: Peter E. Braun
Title: President
Date: July 6, 1999 By: /s/ Gerhard K. Trenz
-----------------------------------
Name: Gerhard K. Trenz
Title: Vice President Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
