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, 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 March 31, 2001
Common Stock, par value 224,005,001
$.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
Consolidated Statements of Cash Flows (unaudited) 7
Notes to Consolidated Financial Statements 8 - 10
Item 2 Management's Discussion and Analysis 11 - 12
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 13
Item 3 Defaults upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5 Other Information 13
Item 6 Exhibits and Reports on form 8-K 13
Signatures 13
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 March 31, 2001 and the related consolidated statements of
operations and consolidated statements of cash flows for the three months ended
March 31, 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 primarily 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
May 4, 2001
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 2001
(Unaudited)
Assets
Current Assets
Cash $ 60,329
Inventory 28,832
Prepaid expenses 15,335
--------
104,496
--------
Investment in Unconsolidated Subsidiary 1,882
Furniture and Equipment - at cost - net of accumulated
depreciation of $48,145 23,828
Deferred Royalties 10,000
License acquisition cost - net of accumulated
amortization of $3,290 25,710
Patents - at cost - net of accumulated amortization
of $19,719 29,716
Deferred Registration and financing costs 25,000
Security Deposits 405
--------
116,541
--------
$221,037
========
4
See accompanying notes and accountants' report.
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 2001
(Unaudited)
Liabilities and Shareholders' (Deficit)
Current Liabilities
1992 convertible debentures - including accrued interest
of $9,150 $ 19,150
Accounts payable 212,617
Due to officers and directors 634,559
Loans from shareholders - including accrued interest
of $1,315 101,315
Accrued expenses 1,523
-----------
969,164
-----------
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 -
224,005,001 shares issued and
outstanding 6,720
Capital in excess of par 5,467,996
Accumulated (deficit) (6,222,843)
-----------
(748,127)
-----------
$ 221,037
===========
5
See accompanying notes and accountants' report.
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended
March 31,
--------------------------------
2001 2000
--------------------------------
Sales - net $ 2,274 $ 882
Cost of Sales 184 148
------------- -------------
2,090 734
------------- -------------
Research and Development Expenses 33,570 15,000
Selling Expenses 10,258 4,522
General and Administrative Expenses 153,152 161,789
------------- -------------
196,980 181,311
------------- -------------
(Loss) Before Other Income (Expenses) (194,890) (180,577)
------------- -------------
Other Income (Expenses)
Write-off of discount on debt (34,000) --
Interest (expense) (1,565) (716)
Loss on investment in unconsolidated subsidiary (41) --
------------- -------------
(35,606) (716)
------------- -------------
Net (Loss) $ (230,496) $ (181,293)
============= =============
Basic and Diluted Net (Loss) Per Share $ NIL $ NIL
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 224,000,000 194,000,000
============= =============
6
See accompanying notes and accountants' report.
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
-------------------------
2001 2000
-------------------------
Cash Flows from Operating Activities
Net (loss) $(230,496) $(181,293)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation 2,648 2,527
Amortization 1,331 1,318
Warrants issued for compensation 22,000 --
Write-off of discount on debt 34,000 --
Accrued interest 1,565 716
Equity in net loss of subsidiary 41 --
(Increase) decrease in:
Inventories 184 148
Increase (decrease) in:
Accounts payable (10,951) 2,552
Accrued officer compensation 86,115 75,000
Accrued expenses -- (1,434)
--------- ---------
(93,563) (100,466)
--------- ---------
Cash Flows from Investing Activities
Acquisition of equipment -- (25,585)
--------- ---------
Cash Flows from Financing Activities
Proceeds from issuance of common stock 15,000 60,000
Proceeds of loans from shareholders 100,000 --
--------- ---------
115,000 60,000
--------- ---------
Net Increase in Cash 21,437 (66,051)
Cash - beginning 38,892 113,338
--------- ---------
Cash - end $ 60,329 $ 47,287
========= =========
Supplemental Disclosures
Non-cash Investing and Financing Transactions:
Stock issued for settlement of debt $ -- $ 334,716
========= =========
7
See accompanying notes and accountants' report.
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 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 will strive to begin
worldwide distribution during 2001.
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 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 formed by the Company, named Wynn Technologies Inc. ("Wynn
Tech"), 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 Technologies Inc. is owned 65% by Quest Products Corporation
and 35% by Mr. Wynn subject to resolution of certain contingencies. Quest
also applied for additional patents to further enhance the BIG1CARD(TM)
technology.
8
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2001
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 calls 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 will be issued at
$.10; 1 million options will be issued at $.15; 1 million options at $.20;
and 1 million options at $.30. The fair value of these warrants is being
amortized over the life of the consulting agreement. Quest, through its
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 March 31, 2001, current liabilities exceed current
assets by $864,668. 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.
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.
9
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2001
Operating results for the three months ended March 31, 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.
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. For the three months
ended March 31, 2001 and 2000, potentially dilutive securities of
approximately 41,000,000 and 54,000,000 shares that related to shares
issuable upon the exercise of warrants 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 three months ended March 31, 2001. The loans are payable on
demand plus accrued interest at 10% per annum. In connection with these
loans, the shareholders were issued warrants 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.
10
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
Three Months Ended March 31, 2001 Compared
to Three Months Ended March 31, 2000
The Company incurred a net loss of $230,496 for the three months ended March 31,
2001 as compared to a loss of $181,293 for the three months ended March 31,
2000.
Sales increased by $1,392 as a result of the Company's initiating sales via
e-commerce beginning in July 1999.
The Company sold 114 units in 2001 and 44 units in 2000 at an average price of
approximately $20 per unit. The cost per unit decreased from $3.36 in 2000 to
$1.61 in 2001 as a result of sales of units in 2001 being purchased at a lower
cost.
The increase in the Company's research and development expenses of $18,570 is
primarily attributable to an approximate $6,000 increase related to the
Company's sunglass project and an approximate $12,000 increase related to the
Company's Smartcard project.
The increase in the Company's selling expenses of $5,736 was attributable to
expenses incurred in connection with travel and entertainment.
General and administrative expenses decreased by $8,637 from $161,789 to
$153,152. This decrease is attributable to a decrease in professional and
consulting fees and other operating expenses.
Interest expense increased by $849 from $716 in 2000 to $1,565 in 2001 due to
interest on loans from shareholders received during the first quarter of 2001.
Liquidity and Capital Resources
The Company has a working capital deficit at March 31, 2001 of $864,668 as
compared to a working capital deficit at December 31, 2000 of $709,192. During
the three months ended March 31, 2001, the Company used $93,563 in operating
activities and generated $115,000 from financing activities from the proceeds
from exercise of stock options in the amount of $15,000 and loans from
shareholders in the amount of $100,000. The Company currently has $60,329 in
cash.
11
QUEST PRODUCTS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis
The Company has historically funded its cash flow needs through the sale of
equity securities in private placements. The Company has raised $1,070,367 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. The funds
obtained by the Company shall be used for the production, marketing and
distribution of the Company's new patented sunglass product--Rainbow Shades(TM).
During 2000, the Company 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 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) SmartCard project.
This will include introducing the Company and assisting in completing agreements
with all such organizations.
12
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
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: May 11, 2001
/s/: Herbert M. Reichlin
----------------------------------------
Herbert M. Reichlin, President
13