U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31. 1997
Commission file number 0-24520
IMSCO TECHNOLOGIES. INC.
(Exact name of small business issuer as
specified in its charter)
Delaware 04-3021770
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
40 Bayfield Drive, North Andover. Massachusetts 01845
(Address of principal executive offices)
(508) 689-2080
Issuer's telephone number)
IMSCO, INC.
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No .
---- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 6,192,425.
<PAGE>
PART I - Financial Information
Item 1. Financial Statements.
See pages FS-1 to FS-21.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
The Company is in the development stage and its operations are subject to
all the problems, expenses, delays and other risks inherent in the establishment
of a new business enterprise, as well as the problems inherent in developing and
marketing a new product/service and in establishing a name and business
reputation. The likelihood of the success of the Company must also be considered
in connection with the rapidly and continually changing technology and the
competitive environment in which the Company will operate. There can be no
assurance that the Company's operations will result in its becoming or remaining
economically viable. Potential investors should be aware of the problems,
delays, expenses and difficulties encountered by any company in a developmental
stage, many of which may be beyond the Company's control. These include, but are
not limited to, unanticipated regulatory compliance, marketing problems and
intense competition that may exceed current estimates. The Company has had no
revenues from operations to date and, because it is just beginning to enter the
commercial stage, it will likely sustain operating losses for an indeterminate
time period. Since entering the development phase in July, 1992, the Company has
devoted substantially all of its resources to the research and development of
its products and technology and general and administrative expenses. Since
entering the development stage in July, 1992, the Company has generated an
accumulated deficit of $2,466,916 at March 31, 1997 and has a total accumulated
deficit of $3,087,824.
The Company had no revenues from continuing operations in years ending
December 31, 1993, December 31, 1994, December 31, 1995 or December 31, 1996.
The Company has incurred net losses in each year since its inception in 1986.
Given the dormant level of business activity from 1988 through 1991, the Company
realized that it could not continue with its luminator technology product,
discontinue operations and was reactivated and entered into a new development
stage in July 1992.
The Company's losses incurred since inception have resulted principally
from expenditures under its research and development programs, and the Company
expects to incur significant operating costs and possible losses therefrom over
the next several years due primarily to expanded research and development
efforts in the PLASMA PURE area and related medical products, preclinical and
clinical testing of its product candidates and the performance of
commercialization activities. There can be no assurance of
2
<PAGE>
when and whether the Company will generate revenues or become profitable on a
sustained basis, if at all. Although the Company believes it has substantially
completed the research and development of its decaffeination technology which is
called the DECAFFOMATIC and is anticipating sales thereof to commence in 1997,
the Company's results of operations may vary significantly from quarter to
quarter due to timing of payments and other factors. The timing of the Company's
revenues, if any, may not match the timing of associated product development of
other expenses.
The Company's ability to achieve sales and increase its levels of revenue
will depend upon its ability to secure additional financing and future
licensees, if any, and successfully develop, test and sell the Company's
products. The Company's ability to generate significant revenue and become
profitable is dependent in large part on its commercializing the Company's lead
product, the DECAFFOMATIC, expanding its manufacturing contracts with third
party manufacturers, entering into additional marketing agreements and the
ability of its marketing contractors to commercialize successfully products
incorporating the Company's technologies. There can be no assurance that the
operations of the Company will generate significant revenue or will ever be
profitable.
Statements included in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" Section, and in other sections of
this Report and in prior and future filings by the Company with the Securities
and Exchange Commission, in the Company's prior and future press releases and in
oral statements made with the approval of an authorized executive which are not
historical or current facts are "forward-looking statements" made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 and are subject to certain risks and uncertainties that could cause actual
results to differ materially from those presently anticipated or projected. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. There are
important risk factors that in some cases have affected and in the future could
affect the Company's actual results and could cause the Company's actual
financial and operating performance to differ materially from that expressed in
any expressed in any forward-looking statement. The following discussion and
analysis should be read in conjunction with the Financial Statements and notes
thereto appearing elsewhere in this report.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDING MARCH 31, 1997; COMPARED WITH
MARCH 31,1996.
Net losses increased from $23,599 for the three months ending March 31,
1996 to $477,704 for the three months ending March 31, 1997. The Company had no
revenue or operating income for the quarters ended March 31,1996 and March 31,
1997 from continuing operations. The Company has interest income of $3,245 for
the three months ended March 31, 1997 and none in the comparable prior period.
Total general, administrative and development
3
<PAGE>
expenses were $480,949 for 1997 in comparison to $23,599 for 1996, an increase
of 1,938%. The increase in these costs from 1996 to 1997 was in most expense
categories, including larger development expenses which increased from $9,566 in
the first quarter of 1996 to $37,320 in the first quarter of 1997, an 369%
increase. Additional increased expenses were incurred in professional services,
which increased from $2,500 in the first quarter of 1996 to $235,364 in the
first quarter of 1997, which increases were primarily from consulting fees paid
in the form of 100,000 shares of the Company's common stock, having a value of
approximately $150,000, issued to Waldman Biomedical, a biotechnology and
biomedical consulting firm for services rendered by Dr. Alan Waldman, a Vice
President and Director of the Company, over the prior year and additional legal
costs and filing fees incurred in connection with the Company's patent
applications for its technology. Salaries and wages, officers salaries and
related payroll taxes were $55,250, $31,250 and $12,083, respectively, for the
first quarter of 1997 in comparison to $0 in total for the first quarter of
1996. Rent increased from $3,613 for the three months ended March 31, 1996 to
$15,178 for the three months ended March 31, 1997, an increase of $11,565 which
was primarily due to the additional office lease and costs related thereto by
the Company of space at 950 Third Avenue, New York, New York entered into in
October 1996. Most of the additional costs in the first quarter of 1997 in
comparison to the first quarter of 1996 were related to further development,
refinement and early stage marketing efforts of the Company's Decaffamatic
separation technology. All research and development costs were expensed
currently in the year incurred, rather than capitalized.
At March 31, 1996, the Company had total assets of $7,336, and at March 31,
1997, the Company had total assets of $1,917,022, an increase of $1,909,686. At
March 31, 1996, the Company had total liabilities of $61,297, and at March 31,
1997 the Company had total liabilities of $65,385. At March 31, 1997 the Company
had an total stock holders' equity of $1,851,637 in comparison to a total
stockholders' deficit of $53,961 at the comparable date in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital as of March 31, 1997 of 1,751,074 in
comparison to a deficit position of $58,307 as of March 31, 1996. The Company
had an accumulated deficit of $1,870,960 for the period ended March 31, 1996 in
comparison to an accumulated deficit of $3,087,824. The increase in the
accumulated deficit is primarily related to continuing operating costs without
any operating income. For the three months ended March 31, 1997 the Company's
cash requirements were satisfied from the cash reserves in its operating and
investment accounts.
4
<PAGE>
The Company does not currently possess a bank source of financing and has
not had any revenues. The Company cannot be certain that its existing sources of
cash will be adequate to meet its liquidity requirements. Therefore, the Company
is considering the following options to meet its liquidity requirements:
(a) attempting to raise additional funds through the sale of equity
securities to persons or entities who are not presently stockholders of the
Company;
(b) attempting to obtain a bank line of credit; and
(c) should insufficient funds be available from the foregoing sources,
reducing the Company's present rate of expenditures which might materially
adversely affect the ability of the Company to produce competitive products
and services and to market them effectively.
The Company believes that its existing cash and cash equivalents together
with the $1.5 million of prepaid media credits which the Company intends to use
to advertise and market its decaffeination technology and products, excluding
any potential cash flow from operating revenues, will be sufficient to meet its
operating expenses and capital expenditures requirements for at least the next 6
months. The Company's future capital requirements, however, will depend on
numerous factors, including (i) the progress of its research and product
development programs, including clinical studies, (ii) the effectiveness of
product commercialization activities and marketing agreements, including the
development and progress of sales and marketing efforts and manufacturing
operations, (iii) the ability of the Company to maintain existing marketing
agreements and establish and maintain new marketing agreements, (iv) the costs
involved in preparing, filing, prosecuting, defending and enforcing intellectual
property rights and complying with regulatory requirements, and (v) the effect
of competing technological and market developments. However, if operating
expenses are higher than expected or if cash flow from operations is lower than
anticipated, there can be no assurance that the Company will have sufficient
capital resources to be able to continue as a going concern.
Unless the Company is able to generate revenues or obtain additional
financing in the future, the continuing losses incurred by the Company in its
development phase raise substantial doubt about the Company's ability to
continue as a going concern. Therefore, the Company's ability to continue in
business as a going concern depends upon its ability to sell products, to
generate licensing fees and royalties from the sale of its technology and
products, to conserve liquidity by setting marketing and other priorities and
reducing expenditures, to obtain bank financing and to obtain additional funds
through offering of its securities. The Company's ability to obtain bank
financing will require significantly improved operating results over the
Company's results for its past twelve months, the likelihood of which the
Company presently
5
<PAGE>
cannot assure. Similarly, the Company's ability to obtain funds through an
offering of its debt securities is limited by its lack of revenue. In any event,
there is no assurance that any expenditure reductions, financings or other
measures that the Company may be able to effect will enable it to meet its
working capital requirements.
PART II - Other Information
Not Applicable.
6
<PAGE>
INDEX TO FINANCIAL STATEMENTS
IMSCO TECHNOLOGIES, INC.
Balance Sheet at March 31, 1996
(unaudited) and March 31, 1997 (unaudited) .......................... FS-1
Statement of Income (Loss) for the three
months ended March 31, 1996 and 1997 (unaudited) .................... FS-2
Statement of Cash Flows for the three
months ended March 31, 1996 and 1997 (unaudited) .................... FS-3
Statement of Stockholders' Equity (Deficit) for the three
months ended March 31, 1996 and 1997 (unaudited) .................... FS-4
7
<PAGE>
IMSCO TECHNOLOGIES, INC.
a development stage enterprise
BALANCE SHEET
AT MARCH 31, 1996 and MARCH 31, 1997
March 31, March 31,
1997 1996
----------- -----------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 287,228 $ 2,990
Prepaid advertising 1,464,500 0
TOTAL CURRENT ASSETS 1,751,728 2,990
FIXED ASSETS - Note 1
Property and equipment 190,945 76,672
Leasehold Improvements 5,845 4,900
Accumulated Depreciation (78,246) (78,246)
----------- -----------
NET FIXED ASSETS 118,544 3,326
ORGANIZATION COSTS net of amortization 0 100
DEPOSITS 21,650 390
DUE FROM OFFICERS 25,000 530
OTHER ASSETS 100 0
----------- -----------
TOTAL ASSETS $ 1,917,022 $ 7,336
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 27,377 $ 51,427
Accrued Expenses 38,000 8,372
Accrued Payroll Taxes 8 1,498
----------- -----------
TOTAL CURRENT LIABILITIES 65,385 61,297
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock-authorized 15,000,000
shares at $.001 Par value;
2,994,839 and 6,192,425 shares issued
and outstanding at March 31, 1996
and 1997, respectively 6,192 2,995
Additional paid-in capital 4,933,269 1,814,004
Deficit Accumulated:
Development Stage (2,466,916) (1,250,052)
Discontinued Operations (620,908) (620,908)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 1,851,637 53,961
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 1,917,022 $ 7,336
=========== ===========
The following notes are an integral part of these statements.
FS-1
<PAGE>
IMSCO TECHNOLOGIES, INC.
a development stage enterprise
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 AND CUMULATIVE
AMOUNTS FROM JULY 9, 1992 (inception of the current development stage)
TO MARCH 31, 1997
Cumulative
amounts
from
current
development
1997 1996 stage
----------- ----------- -----------
DEVELOPMENT EXPENSES $ 37,320 $ 9,566 $ 234,183
SALARIES AND WAGES 55,250 0 301,099
OFFICER SALARIES 31,250 0 364,319
PAYROLL TAXES 12,083 0 67,353
OUTSIDE LABOR 0 0 120,350
PROFESSIONAL SERVICES 235,364 2,500 918,909
RENT 15,178 3,613 95,176
INSURANCE 7,481 3,267 62,319
TRAVEL AND BUSINESS MEETINGS 16,110 928 82,652
AUTO EXPENSES 441 448 24,733
TELEPHONE AND UTILITIES 6,163 1,482 39,860
OFFICE EXPENSES 7,662 619 47,909
EQUIPMENT RENTAL 7,949 0 16,294
CONTRIBUTIONS 0 375 410
CORPORATE FEES 9,648 802 50,253
ADVERTISING 39,050 0 40,475
----------- ----------- -----------
TOTAL GENERAL, ADMINISTRATIVE AND
DEVELOPMENT EXPENSE 480,949 23,599 2,466,294
----------- ----------- -----------
OTHER INCOME (EXPENSE):
DIVIDEND AND INTEREST INCOME 3,245 0 9,337
INTEREST EXPENSE 0 0 (9,047)
LOSS BEFORE INCOME TAXES (477,704) (23,599) (2,466,044)
PROVISION FOR INCOME TAX 0 0 (912)
NET LOSS FROM DEVELOPMENT (477,704) (23,599) (2,466,916)
----------- ----------- -----------
LOSS FROM DISCONTINUED OPERATIONS
(Note 1)
NET LOSS $ (477,704) $ (23,599) $(2,466,916)
=========== =========== ===========
LOSS PER SHARE (Note 1) $ (.08) $ (.01)
=========== =========== ===========
The accompanying notes are an integral part of these statements.
FS-2
<PAGE>
IMSCO TECHNOLOGIES, INC.
a development stage enterprise
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
AND CUMULATIVE AMOUNTS FROM JULY 9, 1992
(inception of the current development stage)
<TABLE>
<CAPTION>
Cumulative
Amounts
from current
development
1997 1996 state
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from dividends and interest $ 3,245 $ 9,337
Cash received from customers 57,004
Cash received from research and testing 8,187
Cash received from unemployment taxes 170
Cash received from travel reimbursements and other rebates 938
Cash paid to suppliers and employees (327,667) ($ 25,645) (2,130,175)
----------- ----------- -----------
Net cash provided by operating activities (324,422) (25,645) (2,054,539)
Cash flows from investing activities:
Prepaid research testing (7,734)
Purchase of Fixed Assets (39,229) (117,767)
----------- -----------
Net cash provided by investing activities (39,229) (125,501)
Cash flows from financing activities:
Cash flow for non-deductible expenses
Interim loan financing 385,000
Proceeds from issuance of common stock 20,000 1,896,376
----------- -----------
Net cash provided by financing activities 0 20,000 2,281,376
Net Increase in cash and cash equivalents (363,651) (5,645) 101,336
Cash and cash equivalents at beginning of period 450,879 8,634 (436,772)
----------- ----------- -----------
Cash and cash equivalents at end of period $ 87,228 $ 2,990 $ 538,108
=========== =========== ===========
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Loss ($ 506,601) ($ 23,599) ($2,466,916)
----------- -----------
Increase (Decrease) in Prepaid Advertising 35,500 (1,464,500)
Increase in miscellaneous receivable (200,000)
Decrease in Due from Officers (25,000) (25,120)
Depreciation and Amortization 2,613
Stock issued to retire debt/services 155,280 2,092,325
Increase (Decrease) in Accounts Payable (1,500) (1,500) (37,074)
Increase (Decrease) in Accrued Payroll Taxes 17,899 (546) 8
Increase (Decrease) in Accrued Expenses 38,000
Decrease (increase) in Deposits (16,973)
Decrease (increase) in Accounts Receivable 2,998
Decrease in Inventory and Assets 20,100
----------- ----------- -----------
Total adjustments 182,179 (2,046) 412,377
----------- ----------- -----------
Net cash provided by operating activities ($ 324,422) ($ 25,645) ($2,054,539)
=========== =========== ===========
</TABLE>
The following notes are an integral part of these statements.
FS-3
<PAGE>
IMSCO, INC.
a development stage enterprise
STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Additional Paid-in Accumulated Deficit Total Stockholders'
Common Stock Capital Equity (Deficit)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 2,995 $ 1,794,004 $(1,847,362) $ (50,363)
Issuance of DPI Additional Paid in
Capital for $2.00 per share 10 19,990 20,000
Issuance of subsidiary stock 10,000 10,000
Issuance of shares of $.001 par value 197 (197)
Issuance of shares of $.001 par
value for contract services 284 213,278 213,562
Issuance of shares of $.001 par
value in payment of loan 227 299,773 300,000
Issuance of shares of $.001 par value
for prepaid advertising 1,136 1,498,864 1,500,000
Issuance of shares of $.001 par value
at $1.32 per share 775 942,845 943,620
Issuance of shares of $.001 par value
for subsidiary stock 468 (468)
Loss from development for the
year ended December 31, 1996 (762,758) (762,758)
----------- ----------- ----------- -----------
Balance at December 31, 1996 $ 6,092 $ 4,778,089 $(2,610,120) $ 2,174,061
----------- ----------- ----------- -----------
Issuance of shares of $.001 par value
in consulting service 100 149,900 150,000
Stock subscription receivable 5,280 5,280
Loss from development for the
three months ended March 31, 1997 (371,601) (371,601)
----------- ----------- ----------- -----------
Balance at March 31, 1997 $ 6,192 $ 4,933,269 $(2,981,721) $ 1,957,740
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
FS-4
<PAGE>
UNAUDITED INTERIM FINANCIAL INFORMATION
IMSCO TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1997 awl 1996
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. The
financial statement information was derived from unaudited financial statements
unless indicated otherwise. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
The accompanying unaudited financial statements should be read in conjunction
with the Company's audited financial statements included in the Company's 10-KSB
dated December 31, 1996.
ORGANIZATION
In July 1996, IMSCO, Inc. was reincorporated in Delaware as IMSCO Technologies,
Inc. The Company filed a Certificate of Incorporation in Delaware incorporating
a new wholly-owned subsidiary, IMSCO Technologies, Inc. The Board of Directors
of the Company at a meeting held in May 1996 voted, subject to the adoption by
the stockholders, to merge into its wholly-owned subsidiary, IMSCO Technologies,
Inc., a Delaware corporation. On July 9, 1996, the stockholders of IMSCO, Inc.,
voted to approve the change of corporate domicile from Massachusetts to
Delaware. Therefore, on July 18, 1996, there remained one surviving corporation
and the name surviving corporation become IMSCO Technologies, Inc. As of the
effective date of the merger, each stockholder of the Company held one share of
common stock, par value $.001 per share,
12
<PAGE>
UNAUDITED INTERIM FINANCIAL INFORMATION
of IMSCO Technologies, Inc. for each one share of common stock, par value $.001
per share, of IMSCO, Inc. previously held by him. IMSCO Technologies, Inc., a
Delaware corporation, is currently a development stage enterprise which has
developed a core technology that achieves molecular separation with innovative
applications of electrostatics. Until July 7, 1992, the Company was engaged in
the sale of an automated luminometer and an accompanying reagent system that
measures raw material for microbiological contamination. The Company
discontinued operations and liquidated the remaining inventory of reagents on
April 16, 1993. Due to a lack of demand for the technology developed, the
Company changed its focus and began applying its engineering and medical talents
to the development of a separation system. No revenue has been received from
current products to date. There are 15,000,000 shares of common stock and
1,000,000 shares of preferred stock authorized, of which 6,192,425 and 0,
respectively are issued and outstanding at March 31, 1997. The Company's
subsidiaries, Decaf Products, Inc. (DPI) and BioElectric Separation and Testing,
Inc. (BEST) (the subsidiaries) were formed in 1995. DPI was formed to market a
unique proprietary technologies to decaffeinate coffee. BEST was founded to
create systems to improve human therapy, by developing new diagnostics and
improved methods for production and use of drugs, biologics, and extracorporeal
devices. As of March 31, 1997 and March 31, 1996 the subsidiaries had minimal
activity, did not own any assets and are not liable for any liabilities.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its subsidiaries Decaf Products/ Inc. (DPI) an BioElectric Separation and
Testing, Inc. (BEST). All significant intercompany accounts and transactions
have been eliminated in consolidation.
13
<PAGE>
UNAUDITED INTERIM FINANCIAL INFORMATION
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Significant additions or improvements
extending asset lives are capitalized; normal maintenance and repair costs are
expended as incurred. Depreciation is provided on the straight-line method over
the estimated useful lives of the assets ranging from five to ten years.
CASH EQUIVALENTS:
The Company considers all highly liquid investments with an original maturity of
less than three months to be cash equivalents.
ACCOUNTING METHOD:
The Company's financial statements are prepared using the accrual method of
accounting.
EARNINGS (LOSS) PER SHARE:
The computations of earnings (loss) per share of common stock is based on the
number of shares outstanding at the date of the financial statements.
ESTIMATES:
Management uses estimates and assumptions in preparing financial statements in
accordance with general accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were assumed in
preparing the financial statements.
14
<PAGE>
UNAUDITED INTERIM FINANCIAL INFORMATION
NOTE 2 LEASES:
In 1993, the Company entered into an operating lease for office space which
expired in August, 1996. The Company is currently leasing the premises as a
tenant-at-will. Rental expense for the operating lease was $3,612 and $3,613 for
the three months ended March 1997 and 1996, respectively. Under the terms of the
lease the Company is responsible for all utilities.
In September 1996, the Company established an office at 950 Third Avenue, New
York, New York, consisting of approximately 2,500 square feet of space, with the
intention of conducting its sales, marketing and finance related activities. The
Company has decided that it will be more efficient and cost effective to run all
of its activities from the North Andover office for the near future and is
negotiating to sub-lease or assign the lease at 950 Third Avenue to an unrelated
party. The lease at 950 Third Avenue, New York, is for a term of five years at
an annual base rental of $32 per square foot. The lease contains standard
pass-throughs by the unaffiliated landlord of increase in real estate taxes and
operating expenses after the first year of occupancy. The 950 Third Avenue lease
expires on January 31, 2002. Rental expense for the above lease was $11,566 for
the three months ended March 31, 1997.
Minimum future lease payments under noncancelable operating leases as of
December 31,1996 are as follows:
Year ending December 31:
1997 $ 78,757
1998 78,757
1999 78,757
2000 78,757
2001 78,757
2002 6,548
15
<PAGE>
UNAUDITED INTERIM FINANCIAL INFORMATION
The Company entered into various leases for equipment during the year ended
December 31, 1996. Minimum future lease payments under these noncancelable
operating leases as of December 31, 1996 are as follows:
1997 $ 14,676
1998 14,676
1999 11,045
Rental expense for the above leases was $7,949 and $0 for the three months ended
March 31, 1997 and 1996, respectively.
NOTE 3 FEDERAL AND STATE INCOME TAXES:
As of December 31, 1996, the Company had net operating loss carryfowards for
federal income tax purposes which expire as follows:
2000 $ 4,180
2001 181,180
2002 233,280
2003 88,125
2004 70,850
Thereafter 2,609,755
$ 2,609,755
The deferred tax asset from the benefit of the losses is $391,460 and $277,050
for the year ending December 31, 1996 and 1995, respectively which is offset by
an equivalent reserve account each year.
16
<PAGE>
UNAUDITED INTERIM FINANCIAL INFORMATION
As of December 31, 1996, the Company had net operating loss carryforwards for
state income tax purposes which expire as follows:
1997 $ 259,185
1998 40,825
1999 513,690
2000 405,630
2001 762,390
-----------
$ 1,981,630
===========
The deferred tax asset from the benefit of the losses is $188,250 and $115,800
for the year ending December 31, 1996 and 1995, respectively which is offset by
an equivalent reserve account each year.
State excise tax expense amounted to $456 and $0 for the three months ended
March 31, 1997 and 1996, respectively.
NOTE 4 RELATED PARTY TRANSACTIONS:
In August 1996, Hampton Tech Partners, LLC acquired $300,000 in promissory notes
from the Company and 150,000 shares of Common Stock for the total consideration
of $300,000. On September 20, 1996, the Company entered into a Purchase
Agreement with Hampton Tech Partners II, LLC wherein Hampton Tech Partners II,
LLC acquired 761,000 shares of Common Stock for $1,004,520 in cash or $1.32 per
share. Private placement expenses of $77,400 were incurred during this
transaction, reducing net cash proceeds to $927,120. Hampton Tech Partners II
received 227,273 shares in repayment of the $300,000 promissory notes with
Hampton Tech Partners, LLC and 129,151 shares in payment of private placement
fees. Mr. Scott Robinson, a recently elected director of the Company, is a
member of Hampton Tech Partners and Hampton Tech Partners II, LLC. Mr.
Robinson's brother, Mr. Jeffrey
17
<PAGE>
UNAUDITED INTERIM FINANCIAL INFORMATION
Robinson is the sole shareholder of Hampton Partners Investments, Inc., the
Managing Member of Hampton Tech Partners and Hampton Tech Partners II, LLC.
On September 20, 1996, the Company entered into the Media Purchase Agreement
with Proxhill Marketing Ltd., wherein Proxhill Marketing Ltd. agreed to sell
$1,500,000 of media credits to the Company in consideration for the Company
issuing $1,136,364 shares of Common Stock, representing a price of $1.32 per
share. In connection with the private placement of the Shares of Hampton Tech
Partners II, LLC, Hampton Tech Partners and Proxhill Marketing Ltd., First
Capital Investments, Inc. a broker-dealer which is a member of the National
Association of Securities Dealers, Inc. ("NASD"), received 242,272 Class A
Warrants entitling it to acquire Common Stock for the price of $1.45 per share
exercisable over a period ending July 31, 2001. For advertising and marketing
services rendered to the Company in 1996 and 1997, Proxhill marketing Ltd. Also
received 127,262 Class D Warrants, entitling it to acquire Common Stock for the
price of $1.32 per share for a period ending July 31, 2001. As of December 31,
1996, the registration statement for the Class A Warrant Common Stock and Class
D Warrant Common Stock had not been declared effective.
In 1996, Mr. Sol L. Berg, a Director and President of the Company, received
150,000 shares of Common Stock in exchange for shares of common stock in Decaf
Products, Inc. (DPI) based on a conversion of .60 IMSCO Technologies, Inc.
shares for 1.00 Decaf products, Inc. shares. In 1996, Mr. James G. Yurak, a
Director and President of the DPI subsidiary, received 75,000 shares of Common
Stock in exchange for shares of common stock in Decaf Products, Inc. (DPI) based
on a conversion of .60 IMSCO Technologies, Inc. share for 1.00 Decaf Products,
Inc. share. Mr. Yurak received another 75,000 shares of Common Stock in February
1997 upon the one year anniversary of his employment agreement with DPI. In
1996, Dr. Alan Waldman entered into an understanding that he shall receive
100,000 shares of Common Stock representing payment for services due him under
his consulting agreement through December 31,1996, with the shares vesting and
being issued on January 1, 1997. In
18
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UNAUDITED INTERIM FINANCIAL INFORMATION
1996, David E. Fleming, a member of Epstein, Becker & Green, P.C., counsel to
the Company, was granted 90,000 shares of the Company's Common Stock in exchange
for shares of Common Stock in Decaf Products, Inc. (DPI) based on a conversion
of .60 IMSCO Technologies, Inc. shares for 1.00 Decaf Products, Inc. shares,
which shares vested on January 1, 1997. In 1996, Mr. Vernon Oberholtzer, a
former Director of the Company who resigned in February 1997, received stock
options to acquire 10,000 shares for a price of $1.32, exercisable over a period
ending December 31,1999. In 1996, Universal Sales, Inc. ("Universal"), a sales
and marketing company of which Mr. Victor Bauer, a director of the Company, is
President and a 50% shareholder, received cash compensation in the amount of
$31,500 and 75,000 shares of Common Stock for services rendered to the Company,
including the recruitment of the services of Mr. Edmond Abramson as a consultant
for the Company.
NOTE 5 RESEARCH AND DEVELOPMENT COSTS:
During the three months ended March 31, 1997 and 1996, the Company charged
$37,320 and $9,556, respectively to research and development expense.
NOTE 6 NONMONETARY TRANSACTION:
During the three months ended March 31, 1997, the Company issued 100,000 shares
of common stock for consulting service received, valued at $150,000.
NOTE 7 COMMITMENTS:
In 1996, the Company entered into a collaborative Research Agreement with the
Polymer Sciences Division of the University of Akron, for further development
for the electrostatic decaffeination
19
<PAGE>
UNAUDITED INTERIM FINANCIAL INFORMATION
technology. The Company pays $10,000 per month for the use of the University of
Akron's facilities and the dedication of certain professors to the Company's
project.
On September 20, 1996 the Company entered into a Marketing Agreement with Hughes
Edwards & Price, Inc. ("Hughes") for certain large institutional marketing of
the Company's decaffeination system. Hughes is a privately held corporation,
based in Traverse City, Michigan. The Company agreed that Hughes will have the
exclusive right to sell the DECAFFOMATIC to so-called "large institution"
coffeemaker market in North American for a period of three years. The "large
institutional" marketplace is dominated by major hotel chains and major
restaurant and fast food chains. In exchange for these exclusive rights, Hughes
agreed to sell or purchase from the Company a minimum $3 million worth of units
for the first year, $5 million worth of units for the second year and $7 million
worth of units the third year.
Under the Hughes Agreement, the Company sells units of the decaffeination system
to Hughes' customers for a stated price of up to $199 per unit for the
institutional coffeemakers. If Hughes fails to sell the minimum amount it must
purchase the difference for its own account to maintain the agreement in force.
All servicing and customer calls will be performed by Hughes.
Under a Media Purchase Agreement dated September 20, 1996 with Proxhill
Marketing Ltd. ("Proxhill"), it contractually agreed to finance $1.5 million of
media for the Company's public relations and advertising campaign through Grow
Marketing Services ("GROW.), an independent marketing company, in exchange for
the Company issuing 1,136,363 shares of its common stock, representing a price
of $1.5 million of prepaid, dedicated media credits (the "Media Credits") and
certain media services. The Media Purchase Agreement expires at the end of sixty
(60) months or upon the depletion of the prepaid media credits.
20
<PAGE>
UNAUDITED INTERIM FINANCIAL INFORMATION
On September 20, 1996, the Company entered into an agreement with NEWCO
Enterprises, Inc. ("NEWCO") for certain institutional manufacturing and
marketing of the Company's decaffeination system. NEWCO is a privately held
corporation based in St. Charles, Missouri, and is one of the larger
manufacturers and distributors of institutional coffee making equipment in North
America. The Company agreed that NEWCO will have the exclusive right to sell the
DECAFFOMATIC to so-called "Office Coffee Supply" ("OCS") subsection of the
institutional coffeemaker market and will be the manufacturer of the
DEFAFFOMATIC for the institutional marketplace in North American for a period of
three years. NEWCO further agreed to sell or purchase from the Company for the
OCS market a minimum of 25,000 units or the product for the first year, 50,000
units for the second year and 100,000 units the third year. Under the NEWCO
Agreement, NEWCO has also agreed to pay the costs of making final commercial
model designs of the Decaffeination System which will be the property of the
Company.
Under the NEWCO Agreement, the Company sells units of the Decaffeination System
to NEWCO for a net price to the Company. The Company anticipates that the price
to be paid NEWCO, which is still being finalized until the final working and
commercial ready components are established, will be in the range of
approximately $20 per unit for small OCS type users, ranging to $200 for large,
high volume institutional coffee brewers. NEWCO will take the Decaffeination
System and in turn incorporates it into its coffeemakers and re-sells it to a
variety of end users in the OCS marketplace. The terms of the minimum purchase
by NEWCO are mandatory and are not subject to, or conditioned upon, NEWCO's
ability to sell the units acquired. All servicing and customer calls will be
performed by NEWCO. The parties can terminate the NEWCO Agreement if NEWCO fails
to make the specified minimum number of Decaffeination System purchases.
21
<PAGE>
UNAUDITED INTERIM FINANCIAL INFORMATION
NOTE 8 GOING CONCERN:
As shown in the accompanying financial statements, the Company incurred a net
loss of $506,601 during the three month period ended March 31, 1997. The
operating loss as well as the uncertain conditions that the Company faces
regarding sources of financing, create an uncertainty about the Company's
ability to continue as a going concern. Although there can be no assurances,
management of the Company has developed a business plan to finance the Company
through sales of its products to such companies as NEWCO and Hughes, licensing
of its technology and individual patent rights to its subsidiaries. The
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
NOTE 9 DEVELOPMENT STAGE ENTERPRISE:
On July 7, 1992, the Company discontinued regular operations relating to the
sale of an automated luminometer. On July 22, 1992, the Company and The General
Hospital Corporation, doing business as Massachusetts General Hospital, entered
a research agreement for $45,100, to perform the research and evaluation using
the Company's electrostatic filter. As defined by the Financial Accounting
Standards Board Statement No. 7, the Company is now a development stage
enterprise and it has been devoting substantially all of its efforts to
developing, engineering and obtaining patents for new technologies relating to
separation technologies for the medical and consumer product sectors. The
cumulative deficit during the development stage is $2,495,813 for the period
July 7, 1992 through March 31, 1997.
NOTE 10 Advertising:
The costs of advertising are expensed the first time the advertising takes
place. For the three months ended March 31, 1997 and 1996, the advertising
expense was $39,050 and $0, respectively.
22
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UNAUDITED INTERIM FINANCIAL INFORMATION
NOTE 11 EMPLOYEE INCENTIVE STOCK OPTIONS:
On May 21, 1996, the Board of Directors adopted the Employee Incentive Stock
Option Program (the "Option Program"), which provides for the issuance of up to
the lesser of 24% of the issued and outstanding Common Stock or 1,500,000 shares
of Common Stock through the grant of incentive and non-qualified stock options.
Stock options will be issued by action of the Board of Directors or its
Compensation Committee (the "Administrator") to key employees of the Company as
a long-term incentive. Key employees will be designated by the Administrator in
its sole discretion. There are currently three employees so designated.
Stock Options under the Option Program will provide for an exercise price per
share determined by the Administrator (but not less than the par value of
$.001), subject to tax requirements in connection with incentive stock options.
No payment will be required from participants in connection with grants. The
options will be exercisable as specified by the Administrator at the time of
grant, although the tax benefits of incentive stock options described below will
be unavailable if the options is exercised less than one year after grant.
Options will be exercisable for a period determined by the Administrator but not
in excess of 10 years after grant. As of March 31, 1997, an option to purchase
100,000 shares of common stock at $1.5 per share was issued and outstanding.
23
<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.
Dated: May 14,1997
IMSCO TECHNOLOGIES, INC.
By: /s/ Sol L. Berg
-------------------------------
Sol L. Berg, President and
Principal Accounting Officer
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