SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Pursuant to Section 13 or 15(d) of the
Securities Act of 1934
For the Quarter Ended Commission File Number
March 31, 2001 333-41092
MIRENCO, INC.
(Exact name of registrant as specified in charter)
Iowa 39-1878581
------------------ ---------------------
(State of (IRS Employer
Incorporation) Identification No.)
206 May St. PO Box 343
Radcliffe, IA 50230
(Address of Principle Executive Offices)
800-423-9903
(Registrants telephone number including area code)
Check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 [___] NO [ X ] *
---
* Not applicable since Registrant became subject to Section 15(d) on and
after January 26, 2001.
The Registrant has 13,206,787 shares of common stock, no par value per share
issued and outstanding as of March 31, 2001.
Traditional Small Business Disclosure Format
YES [ X ] NO [___]
---
PART I - Financial Information
Item I. Financial Statements
MIRENCO, Inc.
(a development stage company)
BALANCE SHEETS
(unaudited)
March 31, March 31,
2001 2000
--------------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,018,855 $ 2,223,050
Accounts receivable 15,799 16,403
Inventories 83,373 62,550
Other 167,759 78,997
--------------- ---------------
Total current assets 5,285,786 2,381,000
PROPERTY AND EQUIPMENT, net 883,954 26,912
PATENTS AND TRADEMARKS, net of accumulated amortization
of $2,353 and $451 in 2001 and 2000, respectively 7,447 9,349
OTHER ASSETS 11,538 -
--------------- ---------------
$ 6,188,725 $ 2,417,261
=============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 72,834 $ 11,873
Accrued liabilities 39,556 35,976
--------------- ---------------
Total current liabilities 112,390 47,849
COMMITMENTS AND CONTINGENCIES - -
STOCK SUBJECT TO RESCISSION OFFER
Common stock, no par value; 1,508,908 and 520,996 shares
issued and outstanding at March 31, 2001 and 2000, respectively 7,544,540 2,604,980
STOCKHOLDERS' DEFICIT
Common stock, no par value; 30,000,000 shares authorized,
11,697,779 shares issued and outstanding 731,290 847,322
Additional paid-in capital 1,714,954 1,939,954
Deficit accumulated during development stage (3,914,449) (3,022,844)
--------------- ---------------
(1,468,205) (235,568)
--------------- ---------------
$ 6,188,725 $ 2,417,261
=============== ===============
The accompanying notes are an integral part of these statements.
2
MIRENCO, Inc.
(a development stage company)
STATEMENTS OF OPERATIONS
(unaudited)
Period from
February 21,
Three Months Three Months 1997
Ended Ended (inception) to
March 31, March 31, March 31,
2001 2000 2001
--------------- ---------------- ---------------
Sales $ 20,629 $ 31,864 $ 378,202
Cost of sales 15,264 30,483 402,422
--------------- ---------------- ---------------
Gross profit (loss) 5,365 1,381 (24,220)
Salaries and wages 157,173 118,165 869,900
Stock-based compensation - - 1,933,054
Royalty expenses 619 956 22,452
Marketing and advertising 21,229 9,581 151,107
Other general and administrative expenses 163,616 98,138 1,232,301
--------------- ---------------- ---------------
342,637 226,840 4,208,814
--------------- ---------------- ---------------
Loss from operations (337,272) (225,459) (4,233,034)
Other income (expense)
Interest income 80,769 14,418 333,575
Interest expense - - (14,990)
--------------- ---------------- ---------------
80,769 14,418 318,585
--------------- ---------------- ---------------
NET LOSS $ (256,503) $ (211,041) $ (3,914,449)
=============== ================ ===============
Net loss per share available for common
shareholders - basic and diluted $ (0.02) $ (0.02)
=============== ================
Weighted-average shares outstanding -
basic and diluted 13,232,857 12,100,515
=============== ================
The accompanying notes are an integral part of these statements.
3
MIRENCO, Inc.
(a development stage company)
STATEMENTS OF CASH FLOWS
(unaudited)
Period from
February 21,
Three Months Three Months 1997
Ended Ended (inception) to
March 31, March 31, March 31,
2001 2000 2001
--------------- --------------- ---------------
Cash flows from operating activities
Net loss $ (256,503) $ (211,041) $ (3,914,449)
Adjustments to reconcile net loss to net cash
and cash equivalents used in operating activities:
Stock-based compensation - - 1,933,054
Depreciation and amortization 8,244 1,870 28,256
(Increase) decrease in assets:
Accounts receivable 24,568 92,306 (15,799)
Inventories 9,128 (25,500) (83,373)
Other 821 (1,963) (104,447)
Increase (decrease) in liabilities:
Accounts payable 53,475 (71,185) 72,834
Accrued liabilities (10,995) (7,815) 39,556
--------------- --------------- ---------------
Net cash used in operating activities (171,262) (223,328) (2,044,368)
Cash flows from investing activities
Purchase of property and equipment (240,246) (9,658) (909,857)
Purchase of patents and trademarks - - (9,800)
--------------- --------------- ---------------
Net cash used in investing activities (240,246) (9,658) (919,657)
Cash flows from financing activities
Proceeds from sale of stock, net
of offering costs - 1,744,424 8,484,780
Refund of common stock in rescission offer (261,700) - (261,700)
Distribution to stockholders - - (240,200)
--------------- --------------- ---------------
Net cash provided by financing activities (261,700) 1,744,424 7,982,880
--------------- --------------- ---------------
Change in cash and cash equivalents (673,208) 1,511,438 5,018,855
Cash and cash equivalents, beginning of period 5,692,063 711,612 -
--------------- --------------- ---------------
Cash and cash equivalents, end of period $ 5,018,855 $ 2,223,050 $ 5,018,855
=============== =============== ===============
The accompanying notes are an integral part of these statements.
4
MIRENCO, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying financial statements follows.
1. Nature of Business
MIRENCO, Inc. (the Company) was incorporated as an Iowa corporation in 1997.
The Company is a marketing company that distributes a variety of automotive
and aftermarket products for which they have exclusive licensing rights. The
products primarily reduce emissions and increase vehicle performance. The
Company's products are sold primarily in the domestic market.
2. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Interest income is
generated from cash invested in these short-term financial instruments.
3. Revenue Recognition
Revenue is recognized from sales when a product is shipped and from services
when they are performed.
4. Inventories
Inventories, consisting of purchased finished goods ready for sale, are stated
at the lower of cost (as determined by the first-in, first-out method) or
market.
5. Income Taxes
The Company accounts for income taxes under the asset and liability method
where deferred tax assets 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. Deferred tax assets and liabilities are measured using enacted tax
rates applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. Deferred tax assets are
recognized to the extent management believes that it is more likely than not
that they will be realized.
6. Patents and Trademarks
Patents and trademarks will be amortized on the straight-line method over
their remaining legal lives of 9 years.
5
MIRENCO, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
7. Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation on the straight-line method over the estimated useful lives of
three years for computer equipment, five years for manufacturing and test
equipment and other equipment, and 39 years for building.
8. Impairment of Long-Lived Assets
Impairment losses are recognized for long-lived assets when indicators of
impairment are present and the undiscounted cash flows are not sufficient to
recover their carrying amounts. The impairment loss is measured by comparing
the fair value of the asset to its carrying amount.
9. Stock-Based Compensation
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation," and elected to continue the accounting set forth in Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued
to Employees." This opinion requires that for options granted at less than
fair market value, a compensation charge must be recognized for the difference
between the exercise price and fair market value.
10. Net Loss Per Share
Basic net loss per share is calculated on the basis of the weighted-average
number of common shares outstanding during the periods, which includes the
effects of all stock splits. Net loss per share, assuming dilution, is
calculated on the basis of the weighted-average number of common shares
outstanding and the dilutive effect of all potential common stock equivalents.
Net loss per share assumes dilution for the three months ended March 31, 2001
and 2000 is equal to basic net loss per share, since the effect of common
stock equivalents outstanding during the periods is antidilutive.
11. Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, and accrued expenses. The carrying amounts of financial
instruments approximate fair value due to their short maturities.
12. Royalty Expense
Royalty expense is recorded and paid based upon the sale of products,
services, and rights related to patents according to a contractual agreement.
13. Advertising
Advertising costs are charged to expense as incurred.
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MIRENCO, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
14. Offering Costs
Specific incremental costs directly attributable to the Company's equity
offerings, including advertisements in newspaper, radio and direct mail,
letters, printing costs and certain identifiable legal fees, are charged
against the gross proceeds of the offerings.
15. Software Development Costs
The Company capitalizes software development costs when project technological
feasibility is established and concludes when the product is ready for release.
To date, no amounts have been capitalized. Research and development costs
related to software development are expensed as incurred.
16. Research and Development
The Company expenses research and development costs as incurred. Such costs
include certain prototype products, test parts, consulting fees, and costs
incurred with third parties to determine feasibility of products.
17. Accounts Receivable
The Company considers accounts receivable to be fully collectible; accordingly
no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
18. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
19. Basis of Presentation
The accompanying financial statements of Mirenco, Inc., included herein are
unaudited, but include all adjustments consisting of normal recurring accruals
which the Company deems necessary for a fair presentation of its financial
position, results of operations and cash flows for the interim period. Such
results are not necessarily indicative of results to be expected for the full
year. These financial statements do not include all disclosures provided in the
annual financial statements and should be read in conjunction with the annual
financial statements and notes thereto included in the Company's Form SB-2
filed on May 11, 2001.
[Balance of page left intentionally blank]
7
MIRENCO, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 2001
NOTE B - STOCK SUBJECT TO RESCISSION OFFER
On August 12, 2000, the Company determined that resales of Iowa-Only shares by
Iowa residents to non-Iowa residents violated certain provisions of the
Securities Act of 1933. In response, the Company undertook an offering to
rescind the earlier Iowa-Only Offering in an offering effective January 26,
2001. The Rescission Offer terminated on February 26, 2001 with the result
that the Company refunded 52,340 shares or $261,700, incurring interest
expense of $14,990. As a result, at March 31, 2001, the 1,508,908 Iowa-Only
Offering Shares, in the amount of $7,544,540, are classified as temporary
equity. These shares will remain in temporary equity until such time as the
violations under the securities laws have been cured. Subsequent to the close
of the Rescission Offer, the Company believes that Iowa-Only Offering
Shareholders are estopped from arguing injury. However, the Company will
continue to be contingently liable to such shareholders during the statute of
limitations, a period of one year from the date of the Rescission Offer (or
three years from the date of the original offer). The Company is unable to
quantify the amount of such contingent liability, the claim must be brought
through individual lawsuit, the Company intends to vigorously defend any such
lawsuit believing it has valid defenses, and, finally, management considers
the probability that it will incur any obligation under such contingent
liability as remote. The Company will continue to assess the effect of this
contingent liability on its financial statements during the period of the
contingent liability.
[Balance of page left intentionally blank]
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General and Background
We develop and market technologically advanced products for throttle
control of internal combustion vehicles that improve fuel efficiency, reduce
environmental emissions and reduce vehicle maintenance. Our primary products are
derived from technology patented in the U.S., Mexico and Canada and are:
DriverMax(R), DriverMax(R) Software, HydroFire(R) Injection, HydroFire(R) Fluid
HydroFire(R) Lubricant and EconoCruise(R). Our newest product offering,
EconoCruise(R), is a new and improved version of our product line utilizing
other input sensors including Global Positioning System technology and ambient
sensor features. We believe that we are the first to provide a product that
incorporates Global Positioning System technology into a throttle-control
application using "Satellite-to-Throttle(TM) technology. We intend to market our
products both domestically and internationally and intend to license our
patented technology to automakers for use on their new model vehicles. We expect
our revenues to increase as a result of the broader market penetration, license
revenues and new products scheduled for introduction over the next 6 to 36
months.
We have incurred losses during our fiscal years ended December 31, 2000 and
1999 while developing and introducing our original products and focusing
management and other resources on capitalizing the Company to support future
growth. DriverMax(R) accounts for more than 90% of our product sales during our
development stage, being the most readily marketable of our fully developed
products. HydroFire(R) units account for the remainder. No sales have been
conditioned on other performance or approval. The losses incurred to date are
considered normal for a development stage company. Other costs were incurred
during the past three years to prepare us for commercialization of our products,
including additional management, personnel, consultants and marketing
expenditures. We expect that, as sales increase, there will also be increases in
the total amounts of distribution and selling, general and administrative
expenses. However, as a percentage of sales, these expenses should decline.
From July 30, 1999 through July 30, 2000, we raised $7,806,240 from our
Iowa-Only Offering. On August 12, 2000, we determined that resales of Iowa-Only
shares by Iowa residents to non-Iowa residents violated certain provisions of
the Securities Act of 1933. In response, we undertook an offering to rescind the
earlier Iowa-Only Offering in an offering effective January 26, 2001. The
Rescission Offer terminated on February 26, 2001 with the result that we
refunded $261,700 for 52,340 shares returned and canceled, incurring total
interest expense of $14,990. The net investment of the Iowa-Only Offering was
$7,544,540, having issued 1,508,908 shares. Though the period of the rescission
offer has terminated, we nonetheless may continue to be liable to Iowa-Only
Offering Shareholders under relevant federal laws for a period of up to one year
after discovery of the violation upon which a claim by an Iowa-Only Offering
Shareholder may be based (or three years from the date of the original July 30,
1999 offering). However, since extending this Rescission Offer is believed to
have eliminated any damages element, the potential financial impact of the
Rescission Offer is highly speculative and, in any event, is not expected to
have a material adverse impact on our operations. While unlikely in the opinion
of Mirenco and its securities attorney, in the event claims are brought against
the company and are successful, the post-rescission financial impact could
result in a maximum obligation of $7,544,540, which is the number of outstanding
shares subject to the prior offering that violated Section 5 of the Securities
Act and were not rescinded, multiplied by the offering price.
Results of Operations
Sales decreased $11,235 or 35% for the three months ended March 31, 2001
compared to the same period at 2000. During our development stage, we have
continued to focus management and other resources on raising equity capital and
developing our products. This was again true during the first quarter of 2001 as
we worked toward the effective date of the Resission Offer of January 26, 2001
and the termination of the offer on February 26, 2001. Sales have occurred
sporadically during the development stage creating differences between
comparative periods. No trends or seasonality have yet to be identified. During
the first three months of 2001, we began developing a new sales strategy founded
upon collecting emissions data before and after the use of our products and
providing continuing emission testing services of our installed products.
Cost of sales decreased $15,219 or 50% from 2000 to 2001, costs
representing 96% and 74% of sales, respectively. The decrease in cost of sales,
and resulting increase in gross margin, is related to the change in management
focus during the first quarter to use production personnel to gather data from
existing customers to meet our ongoing research and development and customer
service needs and thus not be charged to production overhead. Production
overhead was further reduced because 2001 sales were made to existing customers
who require no installation assistance from us. Management believes cost of
sales will range between 40% and 60% of sales as increased unit sales levels
cover production overhead and unit costs .
Operating expenses increased $115,798 or 51% from 2000 to 2001. The
increase is primarily attributable to approximately $54,000 additional
accounting services required to complete the Recission Offer prospectus. Another
$40,000 increase in operating expenses occurred as a result of implementing a
medical benefit plan, hiring one new employee and charging former production
9
personnel into R&D and customer service functions. Approximately $12,000 of
increased advertising occurred based on recording shareholder newsletter
mailings as advertising expense instead of a cost of fund raising. Throughout
our self-underwritten, Iowa-Only Offering, we updated shareholders and potential
shareholders regarding company developments as a means to raise awareness and
increase sales of the offer. Such costs were recorded as offering costs, a
decrement to shareholders equity. Upon completion of the Iowa-Only Offering, we
continued to incur similar costs; however, these costs were expensed as
incurred. The remaining approximately $10,000 was from other G&A changes.
Royalty expense for the three months ended March 31, 2001 and 2000 was 3%
of sales calculated per the patent purchase agreement with American
Technologies.
Our net loss increased from $211,041 in 2000 to $256,503 in 2001 primarily
as a result of increased costs to complete the rescission offer, low sales, and
increased research and development and marketing efforts in 2001 to collect
emissions data from existing customers.
Liquidity and Capital Resources
We have not yet commenced generating substantial revenue. We expect to fund
development expenditures and incur losses until we are able to generate
sufficient income and cash flows to meet these expenditures and other
requirements. Having closed our Rescission Offer refunding $261,700 or 3.4% of
the original $7,806,240, we believe we currently have adequate cash reserves to
continue to cover anticipated expenditures and cash requirements. Prior to the
effective date of the Rescission Offer, management believed less than 10% of the
Iowa-Only Offering Shareholders would accept the Rescission Offer.
Since our inception in 1997, we have primarily relied on the sources of
funds discussed in "Cash Flows" below to finance our testing and operations. We
believe that the proceeds raised from the Iowa-Only Offering, net of the
Rescission Offer, will be adequate to continue our operations, including the
marketing launch contemplated in our Iowa-Only Offering and SB-2, and expansion
of sales efforts, inventories, and accounts receivable through the next three
years.
Since acceptance or the affirmative rejection or failure to respond to the
Rescission Offer does not act as a release of claims, eligible Iowa-Only
Offering Shareholders who have accepted, rejected or failed to respond to the
Rescission Offer would retain any rights of claim they may have under federal
securities laws. Any subsequent claims by an Iowa-Only Offering Shareholder
would be subject to any defenses we may have, including the running of the
statute of limitations and/or estoppel. In general, to sustain a claim based on
violations of the registration provisions of federal securities laws, the claim
must be brought within one year after discovery of the violation upon which the
claim is based, in this case, on the date of the prospectus (or three years
from the date of the original offer). Under the principle of estoppel, the
person bringing a claim must carry the burden of proof of why he or she took no
action under the rescission offer and/or how he or she may have been injured.
We have been evaluating financing and capitalization alternatives as part
of our long-term business plans. These alternatives include the sale of
preferred stock and warrants. To preserve operating funds, we have also
developed a strategic plan that provides for reductions of expenditures and a
prioritization of development options. Further, as a result of this
registration, we could receive up to approximately $2.25 million from the
exercise of options and warrants by selling shareholders. However, since many of
the options and warrants bear an exercise price of $5.00 per share, we
anticipate that selling shareholders will only exercise if the eventual market
price of our common stock exceeds $5.00 per share. Otherwise, we have no way to
estimate the dollar amount, if any, that we will receive from the exercise of
options and warrants.
According to the terms of our purchase agreement with American Technologies
to acquire the patents and trademarks, we will pay a 3% royalty of annual gross
sales for a period of 20 years, which began November 1, 1999.
Cash Flows for the Three Months Ended March 31, 2001 and 2000
Since our inception, February 21, 1997, through March 31, 2001, our
activities have been organizational, devoted to developing a business plan and
raising capital. Where these costs are indirect and administrative in nature,
they have been expensed in the accompanying statements of operations. Where
these costs relate to capital raising and are both directly attributable to our
offerings and incremental, they have been treated as offering costs in the
accompanying balance sheets. Therefore, all indirect costs, such as management
salaries, have been expensed in the period in which they were incurred.
Net cash used in operating activities for the three months ended March 31,
2001 and 2000 was $171,262 and $223,328, respectively. The use of cash in
operating activities was primarily related to our net losses and significant
changes in working capital components, including payables and receivables.
10
Net cash used in investing activities for the three months ended March 31,
2001 and 2000 was $240,246 and $9,658, respectively. The use of cash in
investing activities in 2001 was primarily attributed to approximately $230,000
construction costs for our new headquarters facility.
Net cash provided by financing activities during the three months ended
March 31, 2001 and 2000 was $261,700 and $1,744,424, respectively. The source of
the financing was proceeds from the issuance of shares of common stock in our
Iowa-Only Offering and refunds resulting from the Rescission Offer.
Recent Accounting Pronouncements
There are no recently issued accounting standards for which the impact on
our financial statements at March 31, 2001 and 2000 is not known.
Forward-looking Statements
Statements contained in this document which are not historical fact are
forward-looking statements based upon management's current expectations that are
subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements.
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
a. Exhibits
None
b. Reports on Form 8-K
None
11
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.
MIRENCO, INC.
Date: May 18, 2001 By: /s/ Dwayne Fosseen
----------------------
Dwayne Fosseen
Chairman and Chief Executive Officer
Date: May 18, 2001 By: /s/ Darrell R. Jolley
-------------------------
Darrell R. Jolley
Chief Financial Officer
12