10-Q 1 final_10q.txt IQ POWER ================================================================================ UNITED STATES 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 For the transition period from ___________________ to ______________________. Commission file number 000-26165 IQ POWER TECHNOLOGY INC. (Exact name of small business issuer as specified in its charter) CANADA NOT APPLICABLE (Jurisdiction of incorporation) (I.R.S. Employer Identification No.) Suite 708-A, 1111 West Hastings Street Vancouver, British Columbia V6E 2J3 (604) 669-3132 (Address and telephone number of principal executive offices) Erlenhof Park Inselkammer Strasse 4 D-82008 Unterhaching, Germany (Address of principal place of business or intended principal place of business) (604) 669-3132 (Issuer's telephone number) Not Applicable (Former name,former address and former fiscal year,if changed since last report) Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes_X_ No___ The number of outstanding common shares, without par value, of the registrant at September 30, 2001 was 14,494,186. Transitional Small Business Disclosure Format (check one): Yes ____ ; No _X_ IQ POWER TECHNOLOGY INDEX TO THE FORM 10-QSB For the quarterly period ended September 30, 2001 Page Part I - Financial Information ITEM 1. Financial Statements iQ Power Technology Inc. Unaudited Consolidated Balance Sheet............................................1 Unaudited Consolidated Statement of Loss and Comprehensive Loss.................2 Unaudited Consolidated Statement of Shareholders' Equity (Deficit)..............3 Unaudited Consolidated Statement of Cash Flow...................................4 Notes to the Unaudited Consolidated Financial Statements........................5 Item 2. Management's Discussion..................................................12 Part II - Other Information Item 1. Legal Proceedings........................................................19 Item 2. Changes in Securities and use of Proceeds................................19 Item 3. Defaults Upon Senior Securities..........................................19 Item 4. Submission of Matters to a Vote of Security Holders......................19 Item 5. Other Information........................................................20 Item 6. Exhibits and Reports on Form 8-K.........................................21 Signatures..........................................................................25

i Part I - Financial Information Item 1. Financial Statements iQ POWER TECHNOLOGY INC. (a development stage company) Consolidated Balance Sheets (Expressed in United States dollars; all amounts in thousands, except per share data) (Unaudited) ================================================================================================ September 30, December 31, 2001 2000 ------------------------------------------------------------------------------------------------ ASSETS Current Assets Cash and cash equivalents 362 183 Receivable from original shareholders 70 54 Other receivables 122 138 Prepaids and deposits 50 76 Other current assets 85 - -------------------------------------------------------------------------------------------- Total current assets 689 451 Non-current Assets Equipment, net 344 374 -------------------------------------------------------------------------------------------- Total non-current assets 344 374 TOTAL ASSETS 1,033 825 ------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Current liabilities Accounts payable 341 191 Loans payable due to shareholder 120 66 Accrued payroll and employees benefits 32 66 Accrued liabilities 204 263 ------------------------------------------------------------------------------------------ Total current liabilities 697 586 -------------------------------------------------------------------------------------------- TOTAL LIABILITIES 697 586 SHAREHOLDERS' EQUITY Authorized: An unlimited number of common shares of no par value Issued and outstanding: 9,746,620 common shares at December 31, 2000 14,494,186 common shares at September 30, 2001 7,646 5,941 Capital surplus/Additional paid-in 2,033 406 Accumulated other comprehensive (loss) income (21) (16) Accumulated deficit, during development stage (after loss allocation to silent partners) (9,322) (6,092) -------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 336 239 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,033 825 ------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements. 1 iQ POWER TECHNOLOGY INC. (a development stage company) Consolidated Statements of Income/(Loss) and Comprehensive Income/ (Loss) (Expressed in United States dollars; all amounts in thousands, except per share data) (Unaudited) =================================================================================================================================== Cumulative from date of inception Three months ended Nine months ended to September 30, September 30, September 30, 2001 2001 2000 2001 2000 ------------------------------------------------------------------- ----------------------------- ---------------------------- Sales and other revenue 182 - - - - ------------------------------------------------------------------- ----------------------------- ---------------------------- EXPENSES Research and development expenses Personnel 2,334 115 163 442 443 Laboratory 1,178 80 61 215 229 Office 512 14 43 46 158 Consulting services 600 0 10 1 31 Professional fees 800 11 12 37 59 -------------------------------------------------------------- ----------------------------- ---------------------------- Total Research & Development expenses 5,424 220 289 741 920 Marketing and general & administrative expenses Personnel 556 40 63 123 132 Financing 279 5 12 6 18 Office 208 30 30 67 61 Consulting services 396 16 72 71 119 Professional fees 492 64 22 186 97 Management fees 162 18 18 54 54 Marketing activities 175 48 67 59 109 Investor relations 464 113 32 230 99 Research memberships 100 - 50 - 50 Travel 256 37 10 46 30 Other 177 11 23 16 53 -------------------------------------------------------------- ----------------------------- ---------------------------- Total Marketing and G&A expenses 3,265 382 399 858 822 Total operating expenses 8,689 602 688 1,599 1,742 Interest expense 165 8 - 32 - Stock based compensation 2,005 (702) - 1,627 10 -------------------------------------------------------------- ----------------------------- ---------------------------- TOTAL EXPENSES 10,860 (92) 688 3,258 1,752 Interest and other income (138) (1) (13) (2) (70) (Gain)/loss on foreign exchange (193) (115) (40) (25) (112) INCOME/(LOSS) BEFORE INCOME TAX (10,347) 208 (635) (3,231) (1,570) Income tax - - - - - NET INCOME/(LOSS) (10,347) 208 (635) (3,231) (1,570) ------------------------------------------------------------------- ----------------------------- ---------------------------- Other comprehensive income (loss) Accumulated other comprehensive income (loss) (21) (95) (74) (5) (171) COMPREHENSIVE INCOME/(LOSS) (10,368) 113 (709) (3,236) (1,741) ------------------------------------------------------------------- ----------------------------- ---------------------------- Basic and diluted earnings/(loss) per share (1.55) 0.01 (0.07) (0.28) (0.16) Basic and diluted weighted average number of shares outstanding 6,659,439 14,062,329 9,746,620 11,573,402 9,746,620 ------------------------------------------------------------------- ----------------------------- ----------------------------

See accompanying notes to consolidated financial statements. 2 iQ POWER TECHNOLOGY INC. (a development stage company) Consolidated Statements Shareholders' Equity (Deficit) (Expressed in United States dollars; all amounts in thousands, except per share data) (Unaudited) ================================================================================================================== Accumulated Total Common shares Additional Other Shareholders' ------------------- Paid-In Comprehensive Accumulated Equity Shares Amount Capital Income (Loss) Deficit (Deficit) ---------- -------- --------------------- ---------- ----------- --------------- Balance at December 31, 1991 40 $ 60 $ - $ - $ (1) $ 59 Issue of shares - Net loss (9) (9) ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1992 40 60 - - (10) 50 Issue of shares - Net loss (7) (7) ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 40 60 - - (17) 43 Issue of shares - Net loss (193) (193) Allocation of loss to atypical shares 37 37 ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 40 60 - - (173) (113) Issue of shares - Net loss (341) (341) Allocation of loss to atypical shares 379 379 ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 40 60 - - (135) (75) Issue of shares - Net loss (496) (496) Allocation of loss to atypical shares 139 139 ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 40 60 - - (492) (432) Issue of shares - Net loss (597) (597) Allocation of loss to atypical shares 312 312 ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 40 60 - - (777) (717) Issue of shares - Net loss (1,027) (1,027) Allocation of loss to atypical shares 228 228 Other comprehensive (loss) - - foreign currency translation adjustments (94) (94) ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 40 60 - (94) (1,576) (1,610) Reorganization of capital on reverse acquisition 5,119,960 Deemed issuance of shares on acquisition of iQ Power Technology Inc. 4,471,770 5,495 5,495 Stock based compensation 396 396 Exercise of warrants 139,850 349 349 Net loss (2,157) (2,157) Other comprehensive (loss) - foreign currency translation adjustments 176 176 ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 19,731,620 5,904 396 82 (3,733) 2,649 Net loss - - - - (2,359) (2,359) Other comprehensive (loss) - foreign currency translation adjustments - - - (98) - (98) Exercise of options 15,000 37 - - - 37 Stock based compensation - - 10 - - 10 ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 29,746,620 5,941 406 (16) (6,092) 239 Net loss - - - - (3,231) (3,231) Other comprehensive (loss) - foreign currency translation adjustments - - - (5) - (5) Issue of shares 3,770,066 1,216 - - - 1,216 Stock based compensation 1,627 1,627 Exercise of options 977,500 489 - - - 489 ------------------------------------------------------------------------------------------------------------------- Balance at September 30, 14,494,186 $7,646 $ 2,033 $ (21) $ (9,323) $ 336 -------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements. 3 iQ POWER TECHNOLOGY INC. (a development stage company) Consolidated Statements of Cash Flows (Expressed in United States dollars; all amounts in thousands data) (Unaudited) =========================================================================================================== Cumulative from date of Nine months Nine months inception to ended ended to September 30, September 30, September 30, 2001 2001 2000 ----------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net loss (10,347) (3,231) (1,570) Items not affecting cash Depreciation and amortization 274 68 63 Stock based compensation 2,005 1,627 10 Changes in non-cash working capital (Increase) decrease in other receivable (132) (3) 85 (Increase) decrease in prepaids and deposits (50) 26 (34) Increase (decrease) in accounts payable 342 152 (26) Increase (decrease) in accrued liabilities 243 (85) 86 (Increase) decrease in other assets (84) (83) - ------------------------------------------------------------------------------------------------------- (7,749) (1,529) (1,386) INVESTING ACTIVITY Additions to property, plant and equipment (627) (47) (124) ------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Increase (decrease) in long-term debt - - (1) Increase (decrease) in due to shareholder 58 54 - Advances received from external parties 296 (0) (2) Cash acquired on business combination 4,718 0 - Advances from subsidiary 581 - - Issue of capital stock 2,151 1,705 37 Issuance of atypical shares 1,025 - - ------------------------------------------------------------------------------------------------------- 8,829 1,759 34 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 453 183 (1,476) EFFECT OF FOREIGN EXCHANGE MOVEMENT (91) (4) (171) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 183 2,283 ----------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD 362 362 636 -----------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements. 4 iQ POWER TECHNOLOGY INC. (a development stage company) Notes to the Consolidated Financial Statements (Expressed in United States dollars) -------------------------------------------------------------------------------- 1. NATURE OF OPERATIONS iQ Power Technology Inc. ("iQ Power") was incorporated under the Canada Business Corporations Act on September 20, 1994. Effective June 17, 1999, iQ Power completed a business combination with iQ Battery Research & Development GmbH ("iQ Battery"). The business combination has been accounted for as a reverse acquisition with iQ Battery being identified as the acquiror. The comparative financial statements for 1998 are those of iQ Battery. Collectively within these financial statements the term Company applied to operations subsequent to the business combination. iQ Battery, established in 1991, is conducting research and product development in the area of intelligent performance-improved battery systems. The Company's first product is an intelligent car battery, in which, for the first time, electronics, microprocessors and software manage the energy. The know-how is based on a patent acquired from the founding shareholders of iQ Battery. Patents have been granted for Germany, thirteen other European countries, and for the United States of America. International patents applications have been filed in nine additional countries. iQ Battery's legal domicile is Chemnitz, Germany, and it maintains a branch near Munich, where management has its offices. The Company intends to grant licenses for its technologies to the automotive and related industries in the future. 2. CONTINUING OPERATIONS These 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. The Company has incurred cumulative losses since inception and as of September 30, 2001, the Company has a negative working capital position (see Note 8. Subsequent Event for further information). The Company's ability to continue as a going concern is dependent upon the ability of the Company to attain future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. In 1999, the Company raised approximately $4,875,000, net of commissions and costs of issue, through the issuance of 2,200,000 shares of common stock pursuant to a Registration Statement on Form SB-1. In May 2001, the Company completed a private placement of 3,000,000 common shares at $0.25 per share for proceeds $750,000. In September 2001, an additional private placement of 333,333 common shares at $0.75 per share for proceeds of $250,000 was also completed. The subscribers to the private placements were non-U.S. persons outside the United States of America. The Company has used the proceeds to fund research and development of iQ Battery's technology, expansion of the Company's marketing and sales activities and general working capital. Additional funds are necessary to allow the Company to complete its product development and marketing plan. 5 iQ POWER TECHNOLOGY INC. (a development stage company) Notes to the Consolidated Financial Statements (Expressed in United States dollars) -------------------------------------------------------------------------------- 2. CONTINUING OPERATIONS (Continued) In the year 2000, the Company has signed agreements to jointly develop its applications with large corporations such as DaimlerChrysler. Such alliances involve the utilisation of certain aspects of the Company's technology. The ability of the Company to succeed in these alliances is also dependent upon the Company's ability to obtain additional financing. Management believes that the Company will be able to obtain the necessary financing. As of September 30, 2001, the Company's current financial condition requires the infusion of additional capital in order to continue its current operations. If the Company is unable to obtain the additional financing, the Company will be unable to meet all its financial obligations. There is no assurance that the Company will be able to secure additional financing or that such financing will be on terms beneficial to the existing shareholders. 3. RECENT PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued two new statements, SFAS No.141, Business Combinations and SFAS No.142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method be used for all business combinations initiated after June 30, 2001. Using the pooling of interest method will be prohibited. SFAS No.142 changes the accounting for goodwill and intangibles assets with indefinite lives from an amortization method to an impairment approach. Other intangible assets will continue to be amortized over their estimated useful lives. Amortization of goodwill, including goodwill recorded in prior business combinations, will cease prospectively upon the adoption of the standard. The Company currently does not have any goodwill or other intangible assets on its books as of September 30, 2001 and will adopt SFAS No. 142 as of January 1, 2002. Management believes that the adoption of this Statement will have no effect on its financial statements. 4. BASIS OF PRESENTATION The unaudited financial statements included herein have been prepared pursuant to the rules aud regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The statements should be read in conjunction with the accounting policies and notes to consolidated financial statements included in the Company's 2000 Annual Report on Form 10-K. In the opinion of management, the financial statements reflect all adjustments necessary for a fair statement of the operations for the interim periods presented. 6 iQ POWER TECHNOLOGY INC. (a development stage company) Notes to the Consolidated Financial Statements (Expressed in United States dollars) -------------------------------------------------------------------------------- 5. SHARE CAPITAL Authorized An unlimited number of common shares Issued and outstanding Number of Common shares Amount ($ 000) ------------------ ------------------ Balance, January 1, 1998 (iQ Power) 787,896 493 Private placement, issued cash 1,483,874 927 ------------------------------------------------------------------------------------------------- Balance, December 31, 1998 2,271,770 1,420 Shares issued for cash 2,200,000 5,500 Issue costs - (653) ------------------------------------------------------------------------------------------------- Balance, June 17, 1999 4,471,770 6,267 Adjustment for reverse acquisition on June 17, 1999 - (6,207) ------------------------------------------------------------------------------------------------- 4,471,770 60 Issued to effect the reverse acqisition 5,120,000 5,495 Warrants exercised during the year 139,850 349 ------------------------------------------------------------------------------------------------- Balance, December 31, 1999 9,731,620 5,904 Options exercised during the year 15,000 37 ------------------------------------------------------------------------------------------------- Balance, December 31, 2000 9,746,620 5,941 Private placement, issued for cash 3,333,333 1,000 Other shares issued 436,733 216 Options exercised during the year 977,500 489 ------------------------------------------------------------------------------------------------- Balance, September 30, 2001 14,494,186 7,646

On April 10, 2000, the Company's board of directors declared a 2.5 to 1 reverse stock split of the Company's common stock. In addition, the authorized shares of common stock issued and outstanding were decreased from 24,366,550 to 9,746,620 shares. All references in the consolidated financial statements to shares and related prices, weighted average number of shares, per share amounts, and stock plan data have been adjusted to reflect the reverse split. (a) Agent's Warrants As a part of the issuance of 2,200,000 common shares, the agent to the offering was granted 220,000 Agent Warrants entitling the agent to purchase 220,000 common shares for $2.50 per share in the first year of the warrant and for $3.75 per share in the second year of the warrant. In 1999, 139,850 warrants were exercised for proceeds of approximately $350,000. In May 2001 the remaining 80,150 warrants were cancelled. (b) Stock options The Company has established a Stock Option Plan for employees, officers, directors, consultants, and advisors. Options granted under the Stock Option Plan may be either incentive stock option or non-qualified stock options. The Company has reserved 3,448,000 common shares for issuance under the Stock Option Plan. Thereof 1,415,000 options were granted in June 2001. Options granted for issuance under the Stock Option Plan generally are not transferable, and the exercise price of incentive stock options must be at least equal to 100% of the fair market value of the common shares on the date of the grant. 7 iQ POWER TECHNOLOGY INC. (a development stage company) Notes to the Consolidated Financial Statements (Expressed in United States dollars) -------------------------------------------------------------------------------- 5. SHARE CAPITAL (Continued) The Stock Option Plan may be administered by the Board of Directors or a committee of the Board (the "Committee"). The Board of Directors or the Committee, as the case may be, has the power to determine the terms of any options granted thereunder, including the exercise price, the number of shares subject to the option, and the exercisability thereof. The term of an option granted under the Plan may not exceed ten years. The specific terms of each option grant shall be approved by the Board of Directors or the Committee. The Company grants stock options both under the Stock Option Plan and by way of individual grants outside of the Stock Option Plan. Under the Stock Option Plan the following options have been granted and remain outstanding at September 30, 2001. Number of Options Exercise price Expiration date 300,000 $ 0.50 December 1, 2008 54,000 $ 0.50 June 28, 2009 160,000 $ 0.50 July 7, 2009 115,000 $ 0.50 October 15, 2009 186,000 $ 0.50 June 12, 2010 148,000 $ 0.50 January 16, 2011 1,415,000 $ 1.37 June 27, 2011 --------- 2,378,000 The following options have been granted to non-employees outside of the Stock Option Plan and remain outstanding at September 30, 2001: Number of Options Exercise price Expiration date 40,000 $ 0.50 June 12, 2002 As of September 30, 2001, 992,500 shares have been issued on the exercise of stock options granted under and outside the Stock Option Plan (thereof 60,000 shares outside the plan). Of the total shares issued, 977,500 shares were issued during the current year and 15,000 shares were issued in 2000. No options were exercised under the Stock Option Plan in 1999. As of September 30, 2001, 480,500 options were cancelled by the Board of Directors granted under and outside of the Stock Option Plan. SFAS No. 123, issued in October 1995, requires the use of the fair value based method of accounting for stock options. Under this method, compensation cost is measured at the grant date as the fair value of the options granted and is recognized over the exercise period. During the year ended December 31, 2000 and 1999, the Company issued options to individuals other than employees and directors which under SFAS No. 123 are recognized as share-based compensation rateably over the vesting period. SFAS No. 123, however, allows the Company to continue to measure the compensation cost of employee and director related stock options in accordance with APB 25. The Company has therefore adopted the disclosure-only provision of SFAS No. 123. 8 iQ POWER TECHNOLOGY INC. (a development stage company) Notes to the Consolidated Financial Statements (Expressed in United States dollars) -------------------------------------------------------------------------------- 5. SHARE CAPITAL (Continued) On June 12, 2000, the Board of Directors decreased the exercise price for the Stock Option Plan from $2.50 to $1.50 for all options granted under and outside of the plan. On January 16, 2001, the Board of Directors decreased again the exercise price for the Stock Option Plans from $1.50 to $0.50 for all options granted under and outside of the plan. Due to the changes, all options granted under the plan will be accounted for using variable plan accounting under APB 25. Therefore, as of September 30, 2001, the fair value of the Company's stock exceeded the adjusted exercise price, thus resulting in the recognition of compensation expense. Applying APB 25 resulted in a reduction of compensation expense by $701,800 in the third quarter of 2001. This was mainly due to the change of the stock price which reduced the compensation expense for the options outstanding. For the nine months period ending on September 30, 2001, $1,627,475 of compensation expense was recognized in the financial statements. In July 2001, the Company instituted an Incentive Plan reserving 1,500,000 shares for issue to officers, directors, employees of the company and its subsidiary and other persons, including consultants as an incentive. No incentive shares have been granted under this plan as of September 30, 2001. (c) Loss per share Loss per share calculations give effect to the reverse takeover described in Note 1. For the three month period ended September 30, 2001, 292,000 dilutive shares were added to the basic shares for the calculation of the diluted earnings per share. No change in the earnings/(loss) per share amount resulted. (d) iQ share capital The registered capital of iQ Battery is DM 100,000, which is fully paid. All equity securities were acquired by iQ Power as part of the business combination. (e) Issuance of shares due to private placements In May 2001, the Company completed a private placement of 3,000,000 common shares at $0.25 per share for proceeds of $750,000. The subscribers to the private placement were non-U.S. persons outside the United States in reliance upon an exemption from registration under Regulation S of the Securities Act of 1933, as amended. The Company paid a finder's fee to EH&P Investment AG, a non-U.S. person outside the United States, in connection with the offering consisting of 120,000 common shares. The cost of the finders fee was netted against the proceeds obtained from the financing. The shares were issued to EH&P pursuant to an exemption from registration available under Regulation S of the Securities Act. 9 iQ POWER TECHNOLOGY INC. (a development stage company) Notes to the Consolidated Financial Statements (Expressed in United States dollars) -------------------------------------------------------------------------------- 5. SHARE CAPITAL (Continued) In September 2001, the Company completed a private placement of 333,333 common shares at $0.75 per share for proceeds of $250,000. The subscriber to the private placement was a non-U.S. person outside the United States in reliance upon an exemption from registration under Regulation S of the Securities Act of 1933, as amended. The Company paid a finder's fee to a non-U.S. person outside the United States, in connection with the offering consisting of 33,333 common shares. The cost of the finders fee was netted against the proceeds obtained from the financing. The shares were issued pursuant to an exemption from registration available under Regulation S of the Securities Act. (f) Issuance of shares due to consulting agreements On May 7, 2001, the Company entered into a European Investor Relations Consulting Agreement with Magdalena, a non-U.S. person outside the United States. The Company agreed to pay Magdalena a consulting fee in the amount of $62,500 for such services, payable by issuing Magdalena a total of 250,000 common shares with a deemed value of $0.25 per share, issuable as follows: 20,850 common shares of the Company during the first eleven months and 20,650 common shares in the final month of the agreement. As of September 30, 2001, the Company had issued Magdalena 83,400 common shares under the agreement. The shares were issued to Magdalena pursuant to an exemption from registration available under Regulation S of the Securities Act. On July 1, 2001, the Company entered into a German Public Relations Consulting Agreement with Holtermann & Team GmbH (H&T), a non-U.S. person outside the United States. The Company agreed to pay H&T a consulting fee in the amount of EUR 7,500 ($6,822) per month for such services. Of the consulting fee, EUR 5,000 is due monthly while the remaining EUR 2,500 is payable by issuing H&T common shares with a deemed value of $1.48 per share, issuable on a quarterly basis. The first issuance will take place in October, 2001. The agreement has an initial term of 12 months. 6. RELATED PARTY TRANSACTIONS Related party transactions not disclosed elsewhere in the financial statements comprised: (a) Management fees for the three months ended September 30, 2001 of $18,000 (three months ended September, 2000 - $18,000) were paid to a company with a common director. (b) The Company issued convertible debentures to John Lawson, a Director of the Company, in the aggregate principal amount of CDN$300,000 ($198,000), at the annual rate of 24%, payable monthly in arrears. The convertible debentures were issued pursuant to the terms of a credit facility dated December 13, 2000, and are secured by the assets of the Company and its subsidiary under the terms of a General Security Agreement of equal date. The convertible debentures are convertible into common shares of the Company, at the rate of US$0.50 per share. The convertible debenture is payable one month after demand by the holder, and the Company may prepay the convertible debenture without penalty. The Company received net 10 iQ POWER TECHNOLOGY INC. (a development stage company) Notes to the Consolidated Financial Statements (Expressed in United States dollars) -------------------------------------------------------------------------------- 6. RELATED PARTY TRANSACTIONS (Continued) proceeds in the amount of CDN$100,000 ($66,000) from the issuance of the convertible debenture in December 2000, and CDN$200,000 ($132,000) in January 2001. No fees were paid in connection with this transaction. On May 24, 2001, the lender opted to convert CDN$77,365 ($50,000) of the convertible debenture into 100,000 common shares of the Company. On August 29, 2001, the lendor converted an additional CDN$77,015 ($50,000) into common stock. (c) iQ Battery acquired patents and know-how improving the current output of a chargeable battery at low outside temperatures and the registered design "iQ" based on a contract dated March 15, 1995 from two shareholders and directors of iQ Battery. The intangibles purchased relate to a German patent, an international patent application as well as the registered design "iQ". The Company and the shareholders agreed that the shareholders would receive DM 400,000 from future income. Any amounts paid will be charged to operations as a current expense. No other amounts are due as the Company has not realized any applicable revenues or royalties. 7. SEGMENT DISCLOSURES The Company is currently marketing and developing its proprietary technology. In accordance with SFAS No. 131 the Company considers its business to consist of one reportable operating segment. All of the Company's significant physical assets are located in Germany. 8. SUBSEQUENT EVENT Subsequent to the quarter ended September 30, 2001, the Company raised an additional $713,541 in equity capital through the private placement of 1,019,344 units of the Company at US$0.70 per unit, each such unit consisting of one common share of the Company and one non-transferable warrant exercisable for a period of six months following closing and entitling the holder to purchase one additional common share of the Company for US$1.00. The Company paid a finder's fee of 80,434 common shares in connection with the offering. The securities were issued subject to resale restrictions. The subscribers to the private placement and the finder were non-U.S. persons outside the United States and the offering was conducted pursuant to Regulation S as promulgated by the United States Securities and Exchange Commission. 11 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this Quarterly Report on Form 10-QSB constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of iQ Power Technology Inc. and its subsidiary, iQ Battery Research and Development GmbH (collectively, referred to as "we," "us," "our," iQ Power" and/or "the Company"), or developments in the Company's industry, to differ materially from the anticipated results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: the Company's limited operating history; lengthy development and sales cycles related to the commercialization of battery technologies; the Company's dependence upon a relative concentration of customers in the automotive and battery manufacturing industries; competition in the battery industry and competing battery technologies; risks related to the development of the Company's battery technologies and acceptance by the automotive and battery manufacturing industries; risks of technological change that may be inconsistent with the Company's technologies or the may render its technologies obsolete; dependence on selected vertical markets within the automotive and battery manufacturing industries; general economic risks that may affect the demand for automotive batteries; the Company's reliance on third-party marketing relationships and suppliers; the Company's ability to protect its intellectual property rights;and the other risks and uncertainties described under "Business - Risk Factors" in Part I of the Company's Annual Report on Form 10-KSB filed with the Securities and Exchange Commission. You are cautioned against placing undue reliance on forward looking statements. Unless provided otherwise, all amounts are in United States dollars. Overview The Company was incorporated on December 20, 1994 under the Canada Business Corporations Act as 3099458 Canada Inc. The Company changed its name to iQ Power Technology Inc. on May 9, 1997. The Company's principal executive offices are located at Suite 708-A, 1111 West Hastings Street, Vancouver, British Columbia, Canada V6E 2J3, and the Company's telephone number at that location is (604) 669-3132. iQ Battery Research & Development GmbH ("iQ Germany") was formed in 1991 to research and evaluate methods of maximizing lead-acid battery performance. The Company was formed to acquire iQ Germany and to license the technology developed by iQ Germany to others or to market products based on such technology. Throughout this quarterly report the Company refers to the technology developed by iQ Germany as the "iQ technology." The Company is an early stage company and its principal activity to date has been research and development. The Company has not derived revenues from operations. The Company does not anticipate that it will generate revenues until it begins marketing and selling its Generation I iQ Battery product which is expected to occur in 2002, assuming adequate financing is available. The Company anticipates it may generate additional revenues from service agreements with battery manufacturers and licensing agreements during 2002, although the Company currently has no service or licensing agreements in place. There can be no assurance that that sufficient financing will be available to successfully commercialize the Generation I iQ Battery or that the Company will generate any material revenues during 2002 from the sale of batteries or from service or license arrangements, if any. The Company has incurred substantial losses to date, and there can be no assurance that the Company will attain any particular level of revenues or that the Company will achieve profitability. The Company believes that its historic spending levels are not indicative of future spending levels because it is in a period in which it may be required to increase spending on product research and development, marketing, staffing and other general operating expenses in order to successfully commercialize its technology. For these reasons, the Company believes its expenses, losses, and deficit accumulated during the development stage will increase significantly before it begins to generate material revenues. Prior to June 18, 1999, the financial statements of the Company and iQ Germany were presented as separate and distinct, as the former shareholders of iQ Germany had a put option to enable them to reverse the August 25, 1998 transaction. That option terminated on June 18, 1999, when the Company raised in excess of $3,000,000 by equity financing. After June 17, 1999, all financial information is reported on a consolidated basis. Any financial information of 12 the Company used for comparative purposes prior to June 18, 1999, is financial information of iQ Germany only. All amounts are set forth in U.S. dollars unless provided otherwise. On March 30, 2000, the Company's shareholders approved a reverse-split of the Company's issued and outstanding common shares on a two and one-half (2 1/2) share for one (1) share basis. On April 10, 2000, the Company filed Articles of Amendment to effect the reverse split, and each 2 1/2 common shares issued and outstanding on April 10, 2000 were automatically converted into 1 common share. The information contained in the Company's financial statements, which are part of this report, and this report give effect to the reverse split. The Company's Results of Operations for the Three Months Ended September 30, 2001 compared to the Three Months Ended September 30, 2000 The Company recorded no revenues in either the three-month period ended September 30, 2001 or the three-month period ended September 30, 2000. The Company had net income of $208,000 for the three-month period ended September 30, 2001, compared to a net loss of $635,000 for the comparable period in 2000. The Company realized income for the three-month period ended September 30, 2001 as a result of non-cash stock based compensation which was reduced by $702,000. Absent the gain from non-cash stock based compensation, the Company would have realized a net loss of $494,000. For the same period in 2000, no stock based compensation was realized. The operating expenses for the three-month period ended September 30, 2001 were $602,000 compared to $688,000 for the comparable period in 2001, a decrease of $86,000 or 12.5%. Research and development expenses decreased by $69,000 to $220,000 for the three-month period ended September 30, 2001 from $289,000 for the comparable period in 2000. This decrease reflects the Company's completion of the initial development of the Company's battery technology in 2000, and research and development efforts during 2001 to finalize the development of the pre-series production of the Generation I iQ Battery technology. R&D personnel expenses decreased for the three-month period ended September 30, 2001 to $115,000 compared to $163,000 during the same period in 2000; laboratory expenses increased for the three-month period ended September 30, 2001 to $80,000 from $61,000 during the same period in 2000; R&D office expenses declined to $14,000 for the three-month period ended September 30, 2001 compared to $43,000 during the same quarter in 2000; no R&D Consulting services expenses were incurred in the third quarter of 2001 compared to $10,000 for the same quarter in 2000; and professional fees were stable at $11,000 for the third quarter 2001 compared to $12,000 for the same period in 2000. During the fiscal quarter ended September 30, 2001, the Company's research and development were conducted primarily by its employees. During the three-month period ended September 30, 2001, expenses related to marketing and general and administrative costs decreased by $17,000 to $382,000, compared to $399,000 in the same period in 2000. Personnel expenses for the three-month period ended September 30, 2001 decreased to $40,000 from $63,000 for the same period 2000. Consulting services decreased $56,000 from $72,000 for the three-month period ended September 30, 2001 to $16,000 in the same period 2001. Expenses for marketing activities for the three-month period ended September 30, 2001 were $48,000, compared to $67,000 in the same period in 2000, which included costs related to the launch of a new web site in 2000. In the third quarter of 2001, the Company focused its marketing activities on the International Automotive Show (IAA) in Frankfurt, Germany. Professional fees increased to $64,000 for the third quarter 2001 from $22,000 for the same quarter of the prior year, due primarily to auditing fees and legal expenses related to the Company's Securities and Exchange Commission filings. Expenses for investor relations increased to $113,000 from $32,000 for the third quarters 2001 and 2000, respectively. Other changes in the Company's general and administrative expenses from the three-month period ended September 30, 2001 compared to the same period ended September 30, 2000, included lower financing expenses ($5,000 in 2001, compared to $12,000 in 2000), decreased expenses on memberships ($Nil in 2001, compared to $50,000 in 2000, and other expenses ($11,000 in 2001, compared to $23,000 in 2000). Earnings / Loss per Share: The Company realized a basic and diluted income per share of $0.01 for the three-month period ended September 30, 2001, compared to a basic and diluted loss per share of $0.07 for the three-month period ended September 30, 2000. The Company realized net income during the three-month period ended September 30, 2001 as a result of an adjustment to non-cash base compensation in the amount of $702,000. Absent 13 the adjustment, the Company would have realized a net loss of $0.04 per share during the quarter ended September 30, 2001. The Company anticipates that expenditures related to marketing and general and administration will increase during the year ending December 31, 2001, as it conducts marketing efforts to introduce its Generation I iQ Battery, including cost related to building product awareness and increased efforts to enter into service and licensing arrangements to commercialize our Generation I iQ Battery and our related energy management technologies. The Company's Results of Operations for the Nine Months Ended September 30, 2001 compared to the Nine Months Ended September 30, 2000 The Company recorded no revenues in either the nine month period ended September 30, 2001 or the nine month period ended September 30, 2000. The Company incurred a net loss of $3,231,000 for the nine month period ended September 30, 2001, compared to a net loss of $1,570,000 for the comparable period in 2000. Total expenses increased to $3,258,000 during the nine month period ended September 30, 2001 compared with $1,752,000 for the same period in 2000. The main factor contributing to the expense increase was an increase in non-cash stock based compensation expense recorded by the Company, which rose from $10,000 during the first nine months of 2000 to $1,627,000 for the same period in 2001. The non-cash stock based compensation for the nine month period ended September 30, 2001 included $456,000 in expense recognized due to variable accounting treatment for fully vested options which remained outstanding and an increase in the price of the Company's common stock in the course of 2001. Total operating expenses decreased by $143,000 to $1,599,000 during the nine month period ended September 30, 2001 from $1,742,000 during the same period in 2000. Research and development expenses in total decreased to $741,000 in the nine month period ended September 30, 2001 from $920,000 in the comparable period in 2000, as the Company concentrated on finalizing the development of the pre-series production of the Generation I - iQ Battery technology. R&D Personnel costs were kept at the same level for the nine month period ended September 30, 2001 ($442,000) and 2000 ($443,000). Laboratory expenses decreased for the nine month period ended September 30, 2001 to $215,000 from $229,000 during the same period in 2000. R&D office expenses declined to $46,000 for the nine month period ended September 30, 2001, compared to $158,000 during the same quarter in 2000. R&D Consulting services expenses decreased to $1,000 for the nine month period ended September 30, 2001, compared to $31,000 for the same quarter in 2000. R&D Professional fees declined to $37,000 for the first three quarters in 2001, compared to $59,000 in the same period of 2000. This decrease is primarily attributed to our focus on later stage research and development efforts. We anticipate that expenditures related to research and development will remain consistent with our expenditures during the first three quarters of 2001 for the balance of 2001. The expenses related to marketing and general and administration increased $36,000 to $858,000 for the nine month period ended September 30, 2001, compared to $822,000 for the comparable period in 2000. For the comparable nine month periods ended September 30 for the years 2001 and 2000 the personnel expenses were $123,000 and $132,000, respectively, a $9,000 decrease. During the nine month period ended September 30, 2001, office expenses increased to $67,000 due to newly rented office space, compared to $61,000 in the same period in 2000. Professional fees increased to $186,000 during the nine month period ended September 30, 2001, from $97,000 during the same period during 2000, due primarily to auditing fees and legal expenses related to the Company's Securities and Exchange Commission filings. Investor relations expenses increased to $230,000 in the first three quarters of 2001 from $99,000 for the comparable period in 2000. Expenses for marketing activities for the nine months period ended September 30, 2001 were $59,000, compared to $109,000 in the same period in 2000, which included costs related to the launch of a new web site in 2000. Other changes in our operating expenses from the nine month period ended September 30, 2001 compared to the same period during September 30, 2000, included lower financing expenses ($6,000 in 2001, compared to $18,000 in 2000); decreased consulting services ($71,000 in 2001, $119,000 in 2000); decreased expenses on memberships ($Nil in 2001, compared to $50,000 in 2000; increased travel ($46,000 in 2001, compared to $30,000 in 2000); and decreased other expenses ($16,000 in 2001, compared to $53,000 in 2000). We anticipate that the level of expenditures related to our marketing and general and administration expenses will increase during the fourth quarter ending December 31, 2001. We anticipate this increase will be on account of our increased marketing efforts to introduce our Generation I iQ Battery. We also expect to increase our efforts to enter into service and licensing arrangements to commercialize our Generation I iQ Battery and our related energy management technologies. 14 Loss per Share: The Company experienced a basic and diluted loss per share of $0.28 for the nine month period ended September 30, 2001, compared to a basic and diluted loss per share of $0.16 for the nine month period ended September 30, 2000. We anticipate that losses will increase marginally, as we expect to begin generating revenues from the commercial sale of our Generation I iQ Battery in 2002, assuming adequate financing is available. Our Generation I iQ Battery is being manufactured by a third-party manufacturer for limited sales in Europe. There can be no assurance that our efforts to commercialize our Generation I iQ Battery will be successful or that we will not experience delays in introducing our battery to the market. Liquidity and Capital Resources Since inception, the Company has financed its operations primarily through sales of its equity securities. As of September 30, 2001, the Company had cash and cash equivalents of $362,000, and a working capital deficit of $8,000. From inception to September 30, 2001, the Company had raised approximately $8.4 million (net of issuance costs) from the sale of securities, excluding the issuance of 4,000,000 common shares for deemed proceeds of $2,500,000 on the business combination with iQ Germany. In May 2001, the Company completed a private placement of 3,000,000 common shares at $0.25 per share for proceeds of $750,000. The Company paid a finder's fee of 120,000 common shares in connection with the offering. The subscribers to the private placement were non-U.S. persons outside the United States and the offering was conducted pursuant to Regulation S as promulgated by the United States Securities and Exchange Commission. In August 2001, the Company completed a private placement of 333,333 common shares at $0.75 per share for proceeds of $250,000. The Company paid a finder's fee of 33,333 common shares in connection with the offering. The subscriber to the private placement was a non-U.S. person outside the United States and the offering was conducted pursuant to Regulation S as promulgated by the United States Securities and Exchange Commission. Subsequent to the quarter ended September 30, 2001, the Company raised an additional $713,541 in equity capital through the private placement of 1,019,344 units of the Company at US$0.70 per unit, each such unit consisting of one common share of the Company and one non-transferable warrant exercisable for a period of six months following closing and entitling the holder to purchase one additional common share of the Company for US$1.00. The Company paid a finder's fee of 80,434 common shares in connection with the offering. The securities were issued subject to resale restrictions. The subscribers to the private placement and the finder were non-U.S. persons outside the United States and the offering was conducted pursuant to Regulation S as promulgated by the United States Securities and Exchange Commission. The Company anticipates that the proceeds of the private placements, if completed, will be sufficient to meet its on-going obligations during 2001 and to fund its plan of operation through December 31, 2001. See "Plan of Operation." The Company plans to finance its capital needs principally from the proceeds of the private placement, cash flow from operations, if any, the net proceeds of their securities offerings and interest thereon and, to the extent available, lines of credit. There can be no assurance that the Company will successfully complete the private placement as planned. If the Company cannot complete the private placement, the Company's business and results of operations could be materially adversely affected. Obligations and Commitments iQ Germany is obligated to pay to Horst Dieter Braun, that iQ Germany's founding President and Peter Braun, our President, DM 400,000 in connection with iQ Germany's acquisition of the iQ technology and other intellectual property rights. The amount is payable only out of and only to the extent of the gross profits of iQ Germany. During the year ended December 31, 2000, the Company entered into a consulting agreement dated August 12, 2000 with Richard Singer under which the parties agreed that Mr. Singer would serve as a strategic advisor to the Company for an initial term of 24 months. The Company agreed to pay Mr. Singer a consulting fee of $2,000 per full working day in which services are provided to the Company. Mr. Singer will work an average of one full working day per week during the term of the agreement. The Company also agreed to grant Mr. Singer options exercisable to acquire 15 25,000 common shares at $1.50 per share, vesting 50% immediately on the date of the agreement and 50% on the first anniversary of such date. The Company also agreed to pay Mr. Singer a finder's fee for any financing agreement entered into by the Company as a result of Mr. Singer's efforts equal to: 6% on contracts in excess of $1,000,000; 4% on contracts between $1,000,001 to $4,000,000; 3% on contracts between $4,000,001 to 10,000,000 and 2% on contracts in excess of $10,000,001. In November 2000, the Company and Mr. Singer agreed that the consulting agreement would be suspended pending the Company's ability to obtain additional financing and subject to renegotiation of certain the terms of the agreement. On May 7, 2001, the Company entered into a European Investor Relations Consulting Agreement with Magdalena Finance Corp. ("Magdalena"). Under the terms of the agreement, Magdalena agreed to provide the Company with certain investor relations services in Europe for a term of one year, beginning May 1, 2001. The Company agreed to pay Magdalena a consulting fee in the amount of $62,500 for such services, payable by issuing Magdalena a total of 250,000 common shares with a deemed value of $0.25 per share, issuable as follows: 20,850 common shares of the Company during the first eleven months and 20,650 common shares in the final month of the agreement. On September 1, 2001, the Company and Magdalena entered into a supplement to the original agreement, under which the Company agreed to pay Magdalena a bonus of $70,000 and additional compensation of $25,000 per month for four months in consideration of additional services, including negotiating a letter of intent with Porsche to test the iQ technology and to coordinate the preparation and dissemination of not less than one in-depth research report to qualified institutional investors. On May 5, 2001, the Company entered into a Finders Fee Agreement with EH&P Investments AG. ("EH&P"). Under the terms of the agreement, the Company agreed to pay EH&P a finder's fee of $30,000 in connection with arranging a private placement of the Company's common stock. The finder's fee was paid by issuing EH&P 120,000 common shares of the Company. On June 30, 2001, the Company entered into an amendment to the credit facility dated December 13, 2000, by and between the Company and John Lawson. Under the terms of the amendment, the credit facility due date was extended from June 30, 2001 to December 31, 2001. As of September 30, 2001, Mr. Lawson has converted $100,000 of the principal balance into common shares of the Company at $0.50 per share. On July 1, 2001, the Company entered into a Financial Public Relations Consulting Agreement for Germany with Holtermann & Team GmbH ("H&T"). Under the terms of the agreement, H&T agreed to provide the Company with certain financial public relations services in Germany for a term of one year, beginning July 1, 2001. The Company agreed to pay H&T a consulting fee in the amount of EUR 7,500 ($6,822) per month for such services. Of the consulting fee, EUR 5,000 ($4,548) is due monthly while the remaining EUR 2,500 ($2,274) is payable by issuing H&T common shares with a deemed value of $1.48 per share, issuable on a quarterly basis. On August 29, 2001, the Company entered into a Finders Fee Agreement with Mohamed Alizade. Under the terms of the agreement, the Company agreed to pay Alizade a finder's fee of $25,000 in connection with arranging a private placement of the Company's common stock. The finder's fee was paid by issuing Alizade 33,333 common shares of the Company. The Company's capital requirements depend on several factors, including the success and progress of its product development programs, the resources the Company devotes to developing its products, the extent to which its products achieve market acceptance, and other factors. The Company expects to devote substantial resources toward marketing activities and research and development activities during 2001. The Company cannot adequately predict the amount and timing of its future cash requirements. The Company will consider collaborative research and development arrangements with strategic partners and additional public or private financing (including the issuance of additional equity securities) to fund all or a part of a particular program in the future. There can be no assurance that additional funding will be available or, if available, that it will be available on terms acceptable to the Company. If adequate funds are not available, the Company may have to reduce substantially or eliminate expenditures for research and development, testing, production and marketing of its proposed products, or obtain funds through arrangements with strategic partners that require it to relinquish rights to some of its technologies or products. There can be no assurance that the Company will be able to raise additional cash if its cash resources are exhausted. The Company's ability to arrange such financing in the future will depend in part upon the prevailing capital market conditions as well as its business performance. 16 Plan of Operation The Company has undertaken and is pursuing the following initiatives: o Since November 2000, the Company was awarded certification in accordance with the international standards organization (ISO) and Verein Deutscher Automobilzulieferer (VDA), the Association of German automotive suppliers. ISO and VDA certifications are generally required for battery suppliers. No governmental or regulatory approvals are required for the development of battery technologies. o The Company has been able to complete the development of the Generation I iQ intelligent battery and is currently attempting to organize the initial production run. The Company contracted with suppliers necessary to provide the components for the ramp-up of the production according to quality requirements and at fixed negotiated costs. o The Company developed the SEM smart energy management(TM) application together with DaimlerChrysler, which was displayed in the International Auto Show for Trucks in Frankfurt. This resulted in a joint proposal submitted to the European Union for funding of DaimlerChrysler's intelligent Powertrain X-by-wire concept. If this program is implemented, iQ will be responsible for development and delivery of the complete electrical energy storage and supply system. o Since July 2000, the Company has been attempting to form an alliance in the automotive industry, the DC-BUS Alliance. Supported by BMW, the purpose of this alliance is to standardize the powerline communication technology that was originally developed by YAMAR Electronics Israel, a strategic partner of the Company. In December, 2000, the founding members accepted the proposed structure and publicly announced the formation of the Alliance. Peter E. Braun, the Company's Chief Executive Officer, was appointed to coordinate the management and administration of the Alliance. o Since the first quarter of 2000, the Company has been invited to present its technology in several international conferences and to submit several technical papers. The Company has entered into negotiations with battery manufacturers, suppliers to the automotive industry and automakers regarding the use and licensing of the Company's products and/or its technology. The Company's strategic plan and plan of operation for the remainder of 2001 is as follows: Research and Development o expand research and development efforts with existing personnel, o prepare for and start production of the Generation I iQ batteries that incorporate the iQ technology, and prepare for a pre-production and initial production of batteries that incorporate the iQ technology, and o expand its third-party testing program. The Company anticipates that it will spend approximately $1,000,000 on research and development during the fiscal year ending December 31, 2001. Marketing o enter into development contracts with customers of the automotive industry and other industries to apply its technology to their individual demands with the goal of producing and supplying components for commercial applications in their products, o market the iQ technology and our software as part of its technology for state of charge (SOC) and state of health (SOH) status indications solutions for original equipment manufacturer batteries and/or First Tier battery suppliers. ` The Company anticipates that it will spend approximately $150,000 on marketing and sales during the fiscal year ending December 31, 2001. 17 Financial o seek additional financing to expand the Company's operations and finance its development and marketing efforts. The Company anticipates that it will expend approximately $150,000 on capital raising efforts during 2001. Personnel The Company anticipates no significant changes in the number of Company employees during the fiscal year 2001 and for the next twelve calendar months. Similarly, the Company does not anticipate making purchases or sales of significant physical facilities or manufacturing equipment for the next twelve months. Administrative and General Operating Budget The Company estimates that its general administrative and operating budget will be approximately $650,000 during the year ending December 31, 2001. The Company anticipates that its total operating budget for 2001 will be approximately $2,000,000. The financing agreed upon in October 2001 is expected to satisfy the Company's additional working capital requirements of approximately $500,000 through December 31, 2001. The Company may need more financing if it experiences delays, cost overruns, additional funding needs for joint ventures or other unanticipated events. The Company cannot assure you that it will be able to obtain additional financing on favorable terms or on a timely basis. If the Company is unable to raise additional financing on acceptable terms, the Company may be required to take some or all of the following: o reduce expenditures on research and development; o reduce sales and marketing expenditures; o reduce general and administrative expenses through lay offs or consolidation of its operations; o suspend its participation in pilot programs that are not economically profitable; o sell assets, including licenses to its technologies; o suspend its operations until sufficient financing is available; or o sell or wind up and liquidate its business. Any of these action may affect the Company's ability to offer competitive products or compete in the market. The Company's inability to offer a competitive product or to effectively compete will affect its ability to continue as a going concern. Foreign Currency Translation Risk To date, exposure to foreign currency fluctuations has not had a material effect on our operations. The Company believes its risk of foreign currency translation is limited, as its operations are based in Germany with resulting transactions primarily denominated in United States dollars. The Company does not currently engage in hedging or other activities to control the risk of foreign currency translation, but may do so in the future, if conditions warrant. Political and Economic Uncertainties The Company's business and its ability to raise additional financing may be adversely affected by political and economic risks and uncertainties. The general economic slow down in the United States and Europe may reduce demand for automobiles and automotive products. The events of September 11, 2001 and the political uncertainty in the Middle East may negatively affect the capital markets and the Company's ability to raise capital on acceptable terms. There can 18 be no assurance that the Company will be able to raise sufficient financing to successfully commercialize the iQ Battery or that there will be sufficient demand for the iQ Battery. Part II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As of September 30, 2001, there is no material litigation pending against us or iQ Germany. On August 4, 2000, a civil lawsuit was filed by Gerhard Trenz against iQ Power and iQ Battery in the Labor Court of Munich (Case No. 3 Ca 10364/00). Mr. Trenz was dismissed as Chief Financial Officer of IQ Power in July, 2000. He filed a lawsuit claiming wrongful termination and seeks an order to continue his employment until August 2001. On December 21, 2000, the Labor Court of Munich allowed an action to be brought against us. We made an appeal to a superior court. In August, 2001, iQ Power and iQ Battery entered into a settlement agreement with Mr. Trenz. From time to time, the Company may be a party to litigation and claims incident to the ordinary course of business. While the results of litigation and claims cannot be predicted with certainty, the Company believe that the final outcome of such matters will not have a material adverse effect on its business, financial condition and operating results. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Sales of Unregistered Securities. During the quarter ended September 30, 2001, the Company issued a total of 62,550 common shares to Magdalena Finance Corp., a non-U.S. Person outside the United States, in consideration for services provided under the terms of a European Investor Relations Consulting Agreement. See "Management's Discussion and Analysis of Financial Results- Obligations and Commitments." Subsequent to September 30, 2001, the Company issued an additional 41,700 common shares to Magdalena under the terms of the agreement. The shares were issued in reliance upon exemption from registration available under Regulation S promulgated under Securities Act. On July 1, 2001, the Company entered into a Financial Public Relations Consulting Agreement for Germany with Holtermann & Team GmbH ("H&T"),a non- U.S. Person outside the United States. Under the terms of the agreement,H&T agreed to provide the Company with certain financial public relations services in Germany for a term of one year, beginning July 1, 2001. The Company agreed to pay H&T a consulting fee in the amount of EUR 7,500 ($6,822) per month for such services. Of the consulting fee, EUR 5,000 ($4,548) is due monthly while the remaining EUR 2,500 ($2,274) is payable by issuing H&T common shares with a deemed value of $1.48 per share, issuable on a quarterly basis. On October 30, 2001, the Company issued 4,300 common shares to H&T in reliance upon an exemption from registration available under Regulation S as promulgated under the Securities Act of 1933. On August 29, 2001, the Company issued 100,000 common shares to John Lawson, a Director of the Company, pursuant to the conversion of convertible debentures in the principal amount of $50,000. The common shares were issued in reliance upon Regulation S of the Securities Act as promulgated by the Securities and Exchange Commission. In September 2001, the Company completed a private placement of 333,333 common shares at $0.75 per share for proceeds of $250,000. The subscriber to the private placement was a non-U.S. person outside the United States in reliance upon an exemption from registration under Regulation S of the Securities Act of 1933, as amended. The Company paid a finder's fee to Mohamed Alizade, a non-U.S. person outside the United States, in connection with the offering consisting of 33,333 common shares at the deemed value of $25,000. The shares were issued pursuant to an exemption from registration available under Regulation S of the Securities Act. Subsequent to the quarter ended September 30, 2001, the Company raised an additional $713,541 in equity capital through the private placement of 1,019,344 units of the Company at US$0.70 per unit, each such unit consisting of one common share of the Company and one non-transferable warrant exercisable for a period of six months following closing and entitling the holder to purchase one additional common share of the Company for US$1.00. The Company paid a finder's fee of 80,434 common shares in connection with the offering. The securities were issued subject to resale restrictions. The subscribers to the private placement and the finder were non-U.S. persons outside the United States and the offering was conducted pursuant to Regulation S as promulgated by the United States Securities and Exchange Commission. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19 No matters were submitted to a vote of the Shareholders during the quarter ended September 30, 2001. ITEM 5. OTHER INFORMATION None. 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exh. No. Description 2.1(1) Certificate of Incorporation dated December 20, 1994, for 3099458 Canada Inc. 2.2(1) Articles of Incorporation dated December 21, 1994, for 3099458 Canada Inc. 2.3(1) Certificate of Amendment dated May 9, 1997, together with Form 4, Articles of Amendment for iQ Power Technology Inc. 2.4(1) Certificate of Amendment dated March 31, 1998, for iQ Power Technology Inc. 2.5(1) By-law Number One General By-Law of iQ Power Technology Inc. dated December 31, 1997, as confirmed on June 30, 1998 6.1(1) Form of Atypical Share Exchange Agreement 6.2(1) Share Exchange Agreement dated August 25, 1998, between iQ Power Technology Inc., iQ Battery Research and Development GmbH and the Shareholders of iQ Battery Research and Development GmbH 6.3(1) Pooling Agreement No. 1 dated August 25, 1998, between iQ Power Technology Inc., Montreal Trust Company of Canada and the Shareholders of iQ Power Technology Inc. 6.4(1) Pooling Amendment Agreement dated August 15, 1998, between iQ Power Technology Inc., Montreal Trust Company of Canada and the Shareholders of iQ Power Technology Inc. 6.5(1) Management Agreement dated January 1, 1997, between 3099458 Canada Inc. and Mayon Management Corp. 6.6(1) Consulting Agreement dated August 25, 1998, between iQ Power Technology Inc. and Mayon Management Corp. 6.7(1) Employment Agreement dated August 31,1998 with Dr. Gunther C. Bauer 6.8(1) Employment Agreement dated August 31, 1998 with Peter E. Braun 6.9(1) Employment Agreement dated September 1, 1998 with Gerhard K. Trenz 6.10(1) Form of Confidentiality Agreement between iQ Power Technology Inc. and certain Officers of the Company 6.11(1) Lease Agreement by and between iQ Battery Research and Development GmbH and Spima Spitzenmanufaktur GmbH dated December 9, 1997 (Translated to English) 6.12(1) Commercial Lease Agreement by and between iQ Battery Research and Development GmbH and Josef Landthaler, GmbH dated May 9, 1996, as amended (Translated to English) 6.13(1) Form of iQ Germany Confidentiality Agreement(Translated to English) 6.14(1) Form of iQ Germany Employee Confidentiality and Nondisclosure Agreement (Translated to English) 6.15(1) Cooperation Agreement by and between iQ Battery Research and Development GmbH and BASF Aktiengesellschaft(Translated to English) 6.16(1) Confidentiality Agreement by and between iQ Battery Research and Development GmbH and Bayerische Motoren Werke dated July 29, 1997 (Translated to English) 21 Exh. No. Description 6.17(1) Mutual Confidentiality Agreement among iQ Battery Research and Development GmbH, Akkumulatorenfabrik Moll GmbH & Co. KG, and Audi dated May 26, 1998 (Translated to English) 6.18(1) Confidentiality Agreement between iQ Battery Research and Development GmbH and Mercedes Benz Aktiengessellschaft dated March 21, 1997 (Translated to English) 6.19(1) Letter Agreement between iQ Battery Research and Development GmbH and Manufacturer of Batteries Moll Ltd. dated August 3, 1998 (Translated to English) 6.20(1) Mutual Confidentiality Agreement between iQ Battery Research and Development GmbH and Manufacturer of Batteries Moll dated September 8, 1997 (Translated to English) 6.21(1) Loan Contract by and between Karin Wittkewitz and iQ Battery Research and Development GmbH dated December 28, 1996 (Translated to English) 6.22(1) Contract Concerning Industrial Property Rights and Know How by and between Dieter Braun and Peter E. Braun and iQ Battery Research and Development GmbH dated March 15, 1995 (Translated to English) 6.23(1) Supplementary Contract to the Contract concerning Industrial Property Rights and Know How by and between H. Dieter Braun and Peter E. Braun and iQ Battery Research and Development GmbH dated August 16, 1996 (Translated to English) 6.24(1) Extension of Contract regarding Industrial Property Rights and Know How by and between Dieter Braun and Peter Braun and iQ Battery Research and Development GmbH dated September 20, 1996 (Translated to English) 6.25(1) Consulting Contract by and between iQ Battery Research and Development GmbH and Peter Braun dated August 28, 1994 (Translated to English) 6.26(1) Consulting Contract by and between iQ Battery Research and Development GmbH and Dr. Gunther Bauer dated October 30, 1996 (Translated to English) 6.27(1) Agreement (Debt Deferral) by and between iQ Battery Research and Development GmbH and Dieter Braun and Peter Braun dated December 27, 1996 (Translated to English) 6.28(1) Agreement (Debt Deferral) by and between iQ Research and Development GmbH and Gunther Braun dated December 27, 1996 (Translated to English) 6.29(1) Waiver among H. Dieter Braun, Peter E. Braun, Gunther Bauer, Karin Wittkewitz and iQ Battery Research and Development GmbH dated December 19, 1997 (Translated to English) 6.30(1) Agreement by and between iQ Battery Research and Development GmbH and Dieter Braun and Peter Braun dated October 9, 1998 (Translated to English) 6.31(1) 1998 Stock Option Plan 6.32(1) Form of Stock Option Agreement 6.33(1) License Agreement dated September 1, 1998 between iQ Power Technology, Inc. and Mattalex Management Ltd. 6.34(1) Agreement Re Rights and Interests dated December 9, 1998 by and among the Company, H. Dieter Braun and Peter E. Braun 6.35(1) Trademark Assignment dated December 9, 1998 by and between the Company and H. Dieter Braun 22 Exh. No. Description 6.36(1) Patent Assignment dated December 9, 1998 by and between the Company and H. Dieter Braun and Peter E. Braun 6.37(2) Pooling Agreement No. 2 dated December 1, 1998 between iQ Power Technology, Inc., Montreal Trust Company of Canada and certain shareholders of iQ Power Technology, Inc. 6.38(2) Lease Agreement effective as of February 16, 1999 between Dr. Arne Curt Berger and iQ Battery Research and Development GmbH (Translated to English) 6.39(2) Rescission Agreement dated January 13, 1999 between Spima Spitzenmanufaktor GmbH and iQ Battery Research and Development GmbH 6.40(3) Cooperation Agreement dated October 19, 1999 between Yamar Electronics Ltd. and iQ Battery R&D GmbH 6.41(3) Investor Relations Consulting Agreement dated December 8, 1999 between Boyle International (Guernsey) Investor Relations and iQ Power Technology Inc. 6.41(4) Corporate Consulting Agreement May 1, 2000, between TRT Capital Projects Inc. and iQ Power Technology Inc. and Letter of Amendment dated July 31, 2000 6.43(4) Consulting Agreement dated August 12, 2000, between iQ Power Technology and Richard J. Singer 6.44(4) Convertible Debenture dated December 27, 2000, among iQ Power Technology Inc.,John Lawson,and iQ Battery Research and Development GmbH 6.45(4) Grid Promissory Note dated December 27, 2000, between iQ Power Technology Inc. and John Lawson 6.46(4) Commitment Letter dated December 13, 2000, among iQ Power Technology Inc.,John Lawson,and iQ Battery Research and Development GmbH 6.47(4) Guarantee dated December 27, 2000, between John Lawson and iQ Battery Research and Development GmbH 6.48(4) General Security Agreement dated December 27, 2000, between iQ Power Technology Inc. and John Lawson 6.49(4) Agreement of Subordination in Priority in Association with a Conditional Waiver of Claim by and between IQ Power Technology Inc. and iQ Battery Research and Development GmbH dated May 2, 2001 6.50(5) Amendment No. 3 to iQ Power Technology 1998 Stock Option Plan 6.51(5) iQ Power Technology 2001 Incentive Plan 6.52(6) Finder's Fee Agreement by and between iQ Power and EH&P Investments AG dated May 5, 2001 6.53(6) European Investor Relations Agreement by and between iQ Power Technology Inc. and Magdalena Finance Corp. dated May 7, 2001 6.54 European Investor Relations Agreement- Supplement #1 by and between iQ Power Technology Inc.and Magdalena Finance Corp. dated September 1, 2001. 6.55 Financial Public Relations Adviser Consulting Agreement by and between iQ Power Technology Inc. and Holterman & Team GmbH dated July 1, 2001. 23 6.56 Amendment to Terms of Non-Revolving Term Credit Facility Effective June 30, 2001 by and between iQ Power Technology Inc. and John Lawson. 7.1(1) List of Material Foreign Patents --------------------- (1) Previously filed as an exhibit to the registrant's registration statement on Form SB-1 on December 10, 1998 (File No. 333-68649). (2) Previously filed as an exhibit to the registrant's registration statement on Form SB-1/A (Amendment No. 1) on March 18, 1998 (File No. 333-68649). (3) Previously filed as an exhibit to the registrant's annual report on Form 10-KSB for the year ended December 31, 1999. (4) Previously filed as an exhibit to the registrant's annual report on Form 10-KSB for the year ended December 31, 2000. (5) Previously filed as an exhibit to the registrant's registration statement on Form S-8 on July 25, 2001 (File No. 333-65848). (6) Previously filed as an exhibit to the registrant's quarterly report on Form 10-QSB for the quarter ended June 30, 2001. (b) Reports on Form 8-K. None. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IQ POWER TECHNOLOGY INC. By: /s/ Peter E. Braun ------------------------ Date: November 14, 2001 Name: Peter E. Braun Title: President (Principal Financial and Accounting Officer) 25

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