SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 33-18099-NY and 33-23169-NY
QUEST PRODUCTS CORPORATION
(Exact Name of small business issuer as specified in its charter)
DELAWARE 11-2873662
State or other jurisdiction of (IRS Employer I.D. No.)
Incorporation or organization)
6900 Jericho Turnpike, Syosset, New York 11791
(Address of principal executive offices)
Issuer's telephone number, including area code: (516) 364 - 3500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934, during
the preceding 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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the last practicable date.
Class Outstanding at September 30, 2001
Common Stock, par value 231,205,001
$.00003 per share
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION
Page
Item 1 Consolidated Financial Statements
Report of Independent Accountants 3
Consolidated Balance Sheet (unaudited) 4 - 5
Consolidated Statements of Operations (unaudited) 6 - 7
Consolidated Statements of Cash Flows (unaudited) 8
Notes to Consolidated Financial Statements 9 - 12
Item 2 Management's Discussion and Analysis 12 - 14
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 2 Changes in Securities 14
Item 3 Defaults upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on form 8-K 15
Signatures 15
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Quest Products Corporation and Subsidiaries
We have reviewed the consolidated balance sheet of Quest Products Corporation
and Subsidiaries at September 30, 2001 and the related consolidated statements
of operations for each of the three and nine month periods ended September 30,
2001 and 2000 and consolidated statement of cash flows for the nine months ended
September 30, 2001 and 2000 as set forth in the accompanying unaudited
consolidated financial statements. These consolidated financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1, certain conditions indicate that the Company may be
unable to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern.
RAICH ENDE MALTER & CO. LLP
East Meadow, New York
October 26, 2001
3
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 2001
(Unaudited)
Assets
Current Assets
Cash $ 96,400
Inventory 25,986
Prepaid expenses 10,467
--------
132,853
--------
Investment in Unconsolidated Subsidiary 1,800
Furniture and Equipment - at cost - net of accumulated
depreciation of $53,441 18,532
Deferred Royalties 10,000
License acquisition cost - net of accumulated
amortization of $4,406 24,594
Patents - at cost - net of accumulated amortization
of $21,271 28,164
Security Deposits 405
--------
83,495
--------
$216,348
========
4
See accompanying notes and accountants' report.
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 2001
(Unaudited)
Liabilities and Shareholders' (Deficit)
Current Liabilities
1992 convertible debentures - including accrued interest
of $9,650 $ 19,650
Accounts payable 230,130
Due to officers and directors 750,493
Loans from shareholders - including accrued interest
of $5,972 105,972
Accrued expenses 26,273
-----------
1,132,518
-----------
Shareholders' (Deficit)
Convertible Preferred Stock - par value $.00003 -
authorized 10,000,000 shares - no shares issued and
outstanding --
Common Stock - par value $.00003 - authorized
390,000,000 shares - 231,205,001 shares issued and
outstanding 6,936
Capital in excess of par 5,762,930
Accumulated (deficit) (6,686,036)
-----------
(916,170)
-----------
$ 216,348
===========
5
See accompanying notes and accountants' report.
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the Nine Months Ended
September 30,
------------------------------
2001 2000
------------------------------
Sales - net $ 16,559 $ 4,558
Cost of Sales 6,675 519
------------- -------------
9,884 4,039
------------- -------------
Research and Development Expenses 151,460 65,103
Selling Expenses 25,313 50,885
General and Administrative Expenses 460,955 513,606
------------- -------------
637,728 629,594
------------- -------------
(Loss) Before Other Income (Expenses) (627,844) (625,555)
------------- -------------
Other Income (Expenses)
Write-off of deferred registration costs (25,000) --
Write-off of discount on debt (34,000) --
Interest (expense) (6,722) (1,216)
Loss on investment in unconsolidated subsidiary (123) --
Gain on settlement of debt -- 32,374
Gain on settlement of lawsuit -- 93,411
------------- -------------
(65,845) 124,569
------------- -------------
Net (Loss) $ (693,689) $ (500,986)
============= =============
Basic and Diluted Net (Loss) Per Share $ NIL $ NIL
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 227,000,000 197,000,000
============= =============
6
See accompanying notes and accountants' report.
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the Quarter Ended
September 30,
------------------------------
2001 2000
------------------------------
Sales - net $ 12,329 $ 2,075
Cost of Sales 6,325 116
------------- -------------
6,004 1,959
------------- -------------
Research and Development Expenses 43,807 28,997
Selling Expenses 7,707 44,055
General and Administrative Expenses 152,563 161,622
------------- -------------
204,077 234,674
------------- -------------
(Loss) Before Other Income (Expenses) (198,073) (232,715)
------------- -------------
Other Income (Expenses)
Interest (expense) (2,750) (250)
Loss on investment in unconsolidated subsidiary (41) --
Gain on settlement of debt -- 32,374
Gain on settlement of lawsuit -- 93,411
------------- -------------
(2,791) 125,535
------------- -------------
Net (Loss) $ (200,864) $ (107,180)
============= =============
Basic and Diluted Net (Loss) Per Share $ NIL $ NIL
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 231,000,000 202,000,000
============= =============
7
See accompanying notes and accountants' report.
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
2001 2000
-------------------------
Cash Flows from Operating Activities
Net (loss) $(693,689) $(500,986)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation 7,944 7,501
Amortization 3,999 3,991
Warrants issued for compensation 95,150 15,000
Write-off of deferred registration costs 25,000 --
Gain on settlement of debt -- (32,374)
Write-off of discount on debt 34,000 --
Gain on settlement of lawsuit -- (93,411)
Accrued interest 6,722 966
Proceeds from settlement of lawsuit -- 150,000
Equity in net loss of unconsolidated subsidiary 123 --
(Increase) decrease in:
Inventories 3,030 519
Security Deposits -- (405)
Prepaid Expenses 4,868 1,596
Increase (decrease) in:
Accounts payable 6,562 40,153
Accrued officer compensation 202,049 229,782
Accrued expenses 24,750 (1,434)
--------- ---------
(279,492) (178,853)
--------- ---------
Cash Flows from Investing Activities
Acquisition of equipment -- (25,585)
Refund of acquisitions of equipment -- 2,027
--------- ---------
-- (23,558)
--------- ---------
Cash Flows from Financing Activities
Proceeds from issuance of common stock 237,000 270,000
Proceeds of loans from shareholders 100,000 --
--------- ---------
337,000 270,000
--------- ---------
Net Increase (Decrease) in Cash 57,508 67,589
Cash - beginning 38,892 113,338
--------- ---------
Cash - end $ 96,400 $ 180,927
========= =========
Supplemental Disclosures
Non-cash Investing and Financing Transactions:
Stock issued for settlement of debt $ -- $ 404,958
========= =========
8
See accompanying notes and accountants' report.
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2001
1. BACKGROUND AND STATUS OF THE COMPANY
Quest Products Corporation (the "Company") was organized as a Delaware
Corporation on July 17, 1987 and operated as a development stage company
through 1993. The Company has two wholly-owned subsidiaries, The
ProductIncubator.Com, Inc. and Rainbow Shades, Inc., and a majority-owned
subsidiary, Wynn Technologies, Inc., through which it intends to identify
and bring to the marketplace unique proprietary consumer products. The
Company also intends to continue to market and distribute its patented
"Phase-Out" system smoking cessation device (the "PhaseOut device").
During 1999, the Company entered into a License Agreement with the holders
of a patent for the exclusive worldwide license to make, use and sell
inventions related to an adjustable lens product such as sunglasses, ski
goggles or diving masks. In June 2000, the Company entered into a
comprehensive agreement with Opsales and its President and Vice President,
Sidney and Dean Friedman, to manufacture and distribute the Company's
rotatable variable polarized lenses to be used in the Company's new
sunglass product, Rainbow Shades(TM).
The Company signed an Investment Agreement with Domain Investments Inc. of
New York City, New York, in November 2000, which provides for the Company
to receive up to twenty million dollars of funding for working capital over
a 24-month period in exchange for Common Stock and Warrants. Under the
Agreement dated November 2, 2000, the Company shall sell to Domain
unrestricted shares in the Common Stock of Quest Products Corporation at a
discount from market price of at least 9% plus Warrants equal to 10% of the
number of shares purchased by Domain with an exercise price of 110% of the
purchase price paid for the shares of Domain. Within certain guidelines,
the Company shall determine when and in what amounts it requires capital
from Domain. The Company intends to file an SB2 Registration in order to
generate unrestricted shares required for this Agreement.
During 2000, the Company acquired the rights to and developed a
multi-account card system which will allow a subscribing card holder to
access all of their Credit card, Debit card, frequent flyer, telephone
calling card and other membership accounts by using one plastic "smart"
credit card which will be commercialized and marketed under the name
"BIG1CARD"(TM). The multiple account card system is protected by United
States Patent No. 5,859,419 which was obtained by the system's inventor,
Sol H. Wynn. As part of the BIG1CARD(TM), a new corporation was formed by
the Company in March 2000 named Wynn Technologies Inc. ("Wynn Tech"), which
has now acquired all right, title and interest to the Wynn patent.
Therefore, Wynn Technologies Inc. now has the exclusive rights in the
United States to make, use, offer and sell this new multi-account card
system. Wynn Tech is owned 65% by Quest Products Corporation and 35% by Mr.
Wynn. The Company's 65% interest is subject to the resolution of certain
contingencies. Accordingly, the Company is not currently consolidating this
subsidiary. The Company also applied for additional patent claims to
further enhance the BIG1CARD(TM) technology.
9
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2001
In August 2001, Quest received an official notice from the United States
Patent and Trademark Office that the Company's application to add 25
additional claims to its multi-account credit card system patent will be
allowed. In light of this favorable action of the Patent Office on the
Company's application, the original 7 patent claims will be enlarged to a
total of 32 claims.
On March 1, 2001, the Company signed a five-year Consulting Agreement with
Alex W. Hart to serve as a Special Consultant to the Company on the
development and commercialization of Wynn Technologies, Inc.'s patented
Big1Card(TM) technology. The five-year Consulting Agreement called for Mr.
Hart to receive options to purchase 5 million shares of the Company's
stock, which can be exercised at any time during the five-year Agreement,
either on a cash or cashless basis. Two million options have been issued at
$.10; 1 million options issued at $.15; 1 million options at $.20; and 1
million options at $.30. The fair value of these options is being amortized
over the life of the consulting agreement. Quest, through its
unconsolidated subsidiary, Wynn Technologies, Inc., owns all rights to the
Big1Card(TM) patent, U. S. Patent No. 5,859,419. Mr. Hart's duties will be
to use his best efforts to locate and approach appropriate organizations to
participate in the Company's Big1Card(TM) project. This will include
introducing the Company and assisting in completing agreements with all
such organizations.
The consolidated 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 over a reasonable length of
time. The Company has had recurring net operating losses since its
inception and has made use of privately-placed debt and equity financing to
provide funds for operations. As of September 30, 2001, current liabilities
exceed current assets by $999,665. Those factors, as well as the Company's
inability, thus far, to establish a marketable product, create an
uncertainty about the Company's ability to continue as a going concern. The
Company has intentions of expanding and refining its marketing efforts to
include other products. In addition, the Company is continuing its efforts
to obtain long-term financing through the issuance of long-term debt and
equity securities. The consolidated financial statements do not include any
adjustments that might be necessary should the above or other factors
affect the Company's ability to continue as a going concern.
10
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2001
2. UNAUDITED INTERIM STATEMENTS
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with the instructions to Form 10-QSB and
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (which
consist only of normal recurring adjustments) necessary for a fair
presentation have been included.
Operating results for the three and nine months ended September 30, 2001
are not necessarily indicative of the results to be expected for the year
ending December 31, 2001. These consolidated financial statements and notes
should be read in conjunction with the financial statements and notes
thereto included in the Company's annual report on Form 10-KSB for the year
ended December 31, 2000.
Certain amounts from prior years have been restated to conform to the
current year's presentation. Those reclassifications have no effect on the
previously reported loss.
3. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average numbers of shares of common stock outstanding
during the period. Diluted earnings (loss) per share is computed giving
effect to all dilutive potential common shares that were outstanding during
the period. Dilutive potential common shares consist of the incremental
common shares issuable upon the exercise of warrants and options. For the
nine months ended September 30, 2001 and 2000, potentially dilutive
securities of approximately 25,000,000 and 52,000,000 shares that related
to shares issuable upon the exercise of warrants and options granted by the
Company were excluded, as their effect was antidilutive.
4. RELATED PARTY TRANSACTIONS AND ISSUANCES OF EQUITY SECURITIES
The Company received loans from Shareholders in the amount of $100,000
during the nine months ended September 30, 2001. The loans are payable on
demand plus accrued interest at 10% per annum. In connection with these
loans, the shareholders were issued warrants and options to purchase
500,000 shares at $.05 per share. The portion of the proceeds allocable to
the warrants was accounted for as paid-in capital. The corresponding
discount was written off as these loans are payable on demand.
11
During the nine months ended September 30, 2001, two of the above mentioned
shareholders each exercised warrants and options resulting in the Company's
receiving $50,000. In addition, four other shareholders exercised warrants
and options to purchase 1,000,000 shares at $.015, 5,000,000 shares at
$.03, 1,000,000 shares at $.02 and 200,000 shares at $.01 respectively,
resulting in the Company's receiving $187,000.
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Item 2 - Management's Discussion and Analysis
The Company intends, through its newly incorporated subsidiaries, to identify
and bring to the marketplace, unique proprietary consumer products.
Results of Operations
Nine Months Ended September 30, 2001 Compared
to Nine Months Ended September 30, 2000
The Company incurred a net loss of $693,689 for the nine months ended September
30, 2001 as compared to a loss of $500,986 for the nine months ended September
30, 2000.
Sales increased by $12,001 from $4,558 in 2000 to $16,559 in 2001 as a result of
the Company's increasing sales via e-commerce and international sales.
The Company sold 1,882 PhaseOut units in 2001 at an average price of
approximately $9 per unit and 120 PhaseOut units in 2000 at an average price of
approximately $20 per unit. The cost per unit sold decreased from $3.36 in 2000
to $1.61 in 2001 as a result of sales of units in 2001 being from stock
purchased at a lower cost. In addition, cost of sales for 2001 include storage
cost incurred due to an increase in inventory.
The Company's research and development expenses increased by $86,357 from
$65,103 in 2000 to $151,460 in 2001. The increase is attributable to an
approximate $5,000 increase related to the Company's sunglass project and an
approximate $81,000 increase related to the Company's Smartcard project.
The Company's selling expenses decreased by $25,572 from $50,885 in 2000 to
$25,313 in 2001. The decrease was primarily in travel and entertainment
expenses.
The Company's general and administrative expenses decreased by $52,651 from
$513,606 in 2000 to $460,955 in 2001. This decrease is attributable to a
decrease in professional and consulting fees and other operating expenses.
Interest expense increased by $5,506 from $1,216 in 2000 to $6,772 in 2001 due
to interest on loans from shareholders received during the first quarter of
2001.
12
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis
Liquidity and Capital Resources
The Company has a working capital deficit at September 30, 2001 of $999,665 as
compared to a working capital deficit at December 31, 2000 of $709,192. During
the nine months ended September 30, 2001, the Company used $279,492 in operating
activities and generated $337,000 from financing activities from the exercise of
warrants in the amount of $237,000 and loans from shareholders in the amount of
$100,000. The Company currently has $96,400 in cash.
The Company has historically funded its cash flow needs through the sale of
equity securities in private placements. The Company has raised $1,290,367 since
July of 1997 through such private placements and will attempt to raise
additional cash in a similar manner to fund its ongoing operations.
In October 1999, the Company completed development of adjustable polarized
sunglasses, which allow the wearer to change the color of the sunglass lenses to
a variety of colors without changing the lenses. Management will strive to begin
worldwide distribution of this product in 2001. The Company's plans for the
marketing of this new product in the near future will require additional funding
above and beyond the normal amount of cash required for recurring operations.
There can be no assurance that the Company will be able to obtain the required
additional financing. In January 2001, the Company made its final selection of
frame designs for its Rainbow Shades(TM) sunglasses. The initial line of Rainbow
Shades(TM) sunglasses consists of three separate frames created and designed in
Italy. The Rainbow Shades(TM) sunglasses feature Quest's patented and
revolutionary new lens system which allows the wearer to select up to three
different lens colors by simply moving a slider on the frame. The slider causes
the lens to rotate which, in turn, changes the lens color. With the Rainbow
Shades(TM) sunglasses, there is no need to remove or replace the lens.
During 2000, the Company acquired the rights to and developed a multi-account
card system which will allow a subscribing card holder to access all of their
Credit card, Debit card, frequent flyer, telephone calling card and other
membership accounts by using one plastic "smart" credit card which will be
commercialized and marketed under the name "BIG1CARD"(TM). On March 1, 2001, the
Company signed a five-year Consulting Agreement with Alex W. Hart to serve as a
Special Consultant to the Company on the development and commercialization of
the Company's patented Big1Card(TM) technology. Quest, through its
unconsolidated subsidiary, Wynn Technologies, Inc., subject to the resolution of
certain contingencies, owns all rights to the Big1Card(TM) patent, U. S. Patent
No. 5,859,419. Mr. Hart's duties will be to use his best efforts to locate and
approach appropriate organizations to participate in the Company's Big1Card(TM)
SmartCard project. This will include introducing the Company and assisting in
completing agreements with all such organizations. In January 2001, the Company
filed a reissue application to significantly broaden its patent rights for its
multi-account credit card system. In August 2001, the Company received an
official notice from the United States Patent and Trademark Office that the
Company's application
13
to add 25 additional claims to its multi-account credit card system patent will
be allowed. In light of this favorable action of the Patent Office on the
Company's application, the original 7 patent claims will be enlarged to a total
of 32 claims. The Company's management believes the Patent Office action
allowing these additional 25 claims significantly broadens and strengthens the
Company's patent and materially increases its value in the marketplace. The new
claims allowed by the Patent Office, when combined with the original claims,
make it extremely unlikely that a competitor will be able to design around or
otherwise circumvent the Company's patent in launching a smart card
multi-account credit card system and best insures that no one else in the United
States will be able to commercialize a multi-account credit card system without
obtaining license rights from the Company. The Company's patent, which has a
1995 priority date is, to their knowledge, the only U.S. patent which covers a
multi-account credit card system employing a processing chip and on-board
memory.
In addition, Quest Products Corporation is in the process of contacting
corporations in order to apply the Company's patented multi-account credit card
system to the myriad of security issues facing Government and industry.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
14
Item 6. Exhibits and Reports on Form 8-K
None
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.
QUEST PRODUCTS CORPORATION
Dated: November 5, 2001
/S/:
--------------------------------------
Herbert M. Reichlin, President
15