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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D C 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
COMMISSION FILE NUMBER 33-19584
POWERCOLD CORPORATION
(Exact name of small business issuer as specified in its charter)
NEVADA 23-2582701
(State of Incorporation) (IRS Employer
Identification No.)
115 CANFIELD ROAD
LA VERNIA, TEXAS 78121
(Address of principal executive offices)
830 -779-5223
(Registrant's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12months (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. (X) Yes ( ) No
Indicate the number of shares outstanding of the Registrant's Common Stock,
par value $0.001 - 17,631,808 shares outstanding at June 30, 2002.
1
POWERCOLD CORPORATION
AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
Accountants Review Report 4
Consolidated Balance Sheets 5
Consolidated Statement of Operations - Three Months 6
Consolidated Statement of Operations - Six Months 7
Consolidated Statement of Stockholders' Equity 8
Consolidated Statement of Cash Flows 10
Notes to Consolidated Financial Statements 12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 33
PART II. OTHER INFORMATION 39
ITEM 1. LEGAL PROCEEDINGS.
ITEM 2. CHANGES IN SECURITIES.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURES 40
2
POWERCOLD CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
WILLIAMS & WEBSTER PS
CERTIFIED PUBLIC ACCOUNTANTS
BANK OF AMERICA FINANCIAL CENTER
W 601 RIVERSIDE, SUITE 1940
SPOKANE, WA 99201
(509) 838-5111
POWERCOLD CORPORATION
TABLE OF CONTENTS
June 30, 2002
ACCOUNTANT'S REVIEW REPORT 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statement of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
3
To the Board of Directors
PowerCold Corporation
Cibolo, Texas
ACCOUNTANT'S REVIEW REPORT
We have reviewed the accompanying consolidated balance sheet of PowerCold
Corporation as of June 30, 2002, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the six months ended June
30, 2002, 2001, and 2000. All information included in these financial
statements is the representation of the management of PowerCold Corporation.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with accounting principles generally accepted in the United States
of America.
The consolidated financial statements for the year ended December 31, 2001 were
audited by us and we expressed an unqualified opinion on them in our report
dated March 4, 2002. We have not performed any auditing procedures since that
date.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3, the Company
has sustained substantial operating losses in recent years and has used
substantial amounts of working capital in its operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding those matters also are described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Williams & Webster, P.S.
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
August 15, 2002
4
POWERCOLD CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December31,
2002 2001 2000
Unaudited Restated Restated
------------- ------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 517,017 $ 290,174 $ 106,864
Trade accounts receivable, net of allowance 508,003 173,769 38,665
Receivables from related parties - 1,686 -
Loan receivable, Alturdyne 400,000 - -
Inventory 280,125 241,853 241,272
Prepaid expenses 13,125 22,500 307,500
------------- ------------- -------------
Total Current Assets 1,718,270 729,982 694,301
------------- ------------- -------------
Property and equipment, net 140,230 41,113 19,499
Patent rights and related technology, net 344,336 382,108 459,343
Goodwill, net 16,866 16,866 27,392
Securities available for sale 601,400 970,000 -
Deposits and prepaid rent 4,125 9,645 7,705
------------- ------------- -------------
Net assets from discontinued operations - 689,810 572,620
------------- ------------- -------------
TOTAL ASSETS $ 2,825,227 $ 2,839,524 $ 1,780,860
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 420,576 $ 232,204 $ 177,725
Account payable - related party - - 10,567
Commissions and royalty payable 55,067 55,067 42,240
Advances from affiliate - - 73,636
Notes payable 31,824 36,329 43,328
Current portion of capital lease payable 3,018 3,018 3,419
------------- ------------- -------------
Total Current Liabilities 510,485 326,618 350,915
CAPITAL LEASE PAYABLE, net of current portion 2,404 5,413 6,826
COMMITMENTS AND CONTINGENCIES 153,204 168,300 168,300
STOCKHOLDERS' EQUITY
Convertible preferred stock, Series A, $0.001
par value; 5,000,000 shares authorized, 0
shares issued and outstanding, respectively - - -
Common stock, $0.001 par value; 200,000,000
shares authorized, 17,631,807, 16,027,882 and
12,669,383, shares issued and outstanding
respectively 17,631 16,027 12,669
Additional paid-in capital 12,661,963 10,210,665 8,243,227
Stock options and warrants 384,040 471,980 -
Accumulated deficit (11,505,900) (9,329,479) (7,001,077)
Accumulated other comprehensive income 601,400 970,000 -
------------- ------------- -------------
2,159,134 2,339,193 1,254,819
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,825,227 $ 2,839,524 $ 1,780,860
============= ============= =============
See accompanying notes and accountant's review report.
5
POWERCOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended June 30,
-----------------------------------------
2002 2001 2000
(Restated) (Restated)
Unaudited Unaudited Unaudited
------------- ------------ ------------
REVENUES
Product sales $ 475,702 $ 109,241 $ 63,818
Services 20,038 24,747 -
------------- ------------ ------------
Total Revenues 495,740 133,988 63,818
------------- ------------ ------------
COST OF REVENUES 323,880 92,110 40,754
------------- ------------ ------------
GROSS PROFIT (LOSS) 171,860 41,878 23,064
------------- ------------ ------------
OPERATING EXPENSES
Sales and marketing 86,012 499,785 -
General and administrative 756,390 187,478 96,146
Depreciation and amortization 7,140 37,836 15,863
------------- ------------ ------------
Total Operating Expenses 849,542 725,099 112,009
------------- ------------ ------------
LOSS FROM OPERATIONS (677,682) (683,221) (88,945)
OTHER INCOME (EXPENSES)
Other income 3,495 - -
Interest income 472 1,197 -
Interest and financing expense (3,052) 108 (667)
------------- ------------ ------------
Total Other Income (Expenses) 915 1,305 (667)
------------- ------------ ------------
LOSS BEFORE INCOME TAX (678,597) (681,916) (89,612)
INCOME TAX EXPENSE - - (52,222)
------------- ------------ ------------
Net loss from continuing operations (678,597) (681,916) (141,834)
Loss from discontinued operations (659,461) (25,630) (53,952)
------------- ------------ ------------
NET LOSS (1,338,058) (707,546) (195,786)
------------- ------------ ------------
OTHER COMPREHENSIVE INCOME
Unrealized gain on investments (368,600) 1,455,000 -
------------- ------------ ------------
COMPREHENSIVE LOSS $ (1,706,658) $ 39,908 $ (391,572)
============= ============ ============
LOSS PER COMMON SHARE, BASIC AND DILUTED,
CONTINUING OPERATIONS $ (0.04) $ (0.05) $ (0.01)
============= ============ ============
LOSS PER COMMON SHARE, BASIC AND DILUTED,
DISCONTINUED OPERATIONS $ (0.04) $ Nil $ (0.01)
============= ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 16,281,220 13,560,305 10,273,012
============= ============ ============
See accompanying notes and accountant's review report.
6
POWERCOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Six Months Ended June 30,
-----------------------------------------
2002 2001 2000
(Restated) (Restated)
Unaudited Unaudited Unaudited
------------- ------------ ------------
REVENUES
Product sales $ 803,289 $ 356,245 $ 92,526
Services 43,201 67,853 14,190
------------- ------------ ------------
Total Revenues 846,490 424,098 106,716
COST OF REVENUES 611,010 241,801 85,575
------------- ------------ ------------
GROSS PROFIT (LOSS) 235,480 182,297 21,141
------------- ------------ ------------
OPERATING EXPENSES
Sales and marketing 138,286 630,501 -
General and administrative 1,564,204 467,244 337,546
Depreciation and amortization 44,175 60,981 49,058
------------- ------------ ------------
Total Operating Expenses 1,746,665 1,158,726 386,604
------------- ------------ ------------
LOSS FROM OPERATIONS (1,511,185) (976,429) (365,463)
OTHER INCOME (EXPENSES)
Royalty income 3,495 44,785 -
Interest income 2,044 3,193 -
Interest and financing expense (3,052) (55,726) (11,984)
Other expenses - - (1,322)
------------- ------------ ------------
Total Other Income (Expenses) 2,487 (7,748) (13,306)
------------- ------------ ------------
LOSS BEFORE INCOME TAX (1,508,698) (984,177) (378,769)
INCOME TAX EXPENSE - - (52,222)
------------- ------------ ------------
NET LOSS FROM CONTINUING OPERATIONS (1,508,698) (984,177) (430,991)
LOSS FROM DISCONTINUED OPERATIONS (667,723) (51,259) (107,904)
------------- ------------ ------------
NET LOSS (2,176,421) (1,035,436) (538,895)
OTHER COMPREHENSIVE INCOME
Unrealized gain on investments (368,600) 1,455,000 -
------------- ------------ ------------
COMPREHENSIVE LOSS $ (2,545,021) $ 419,564 $ (538,895)
============= ============ ============
LOSS PER COMMON SHARE, BASIC AND DILUTED,
CONTINUING OPERATIONS $ (0.09) $ (0.07) $ (0.04)
============= ============ ============
LOSS PER COMMON SHARE, BASIC AND DILUTED,
DISCONTINUED OPERATIONS $ (0.04) $ Nil $ (0.01)
============= ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 16,268,893 13,259,614 10,186,853
============= ============ ============
See accompanying notes and accountant's review report.
7
POWERCOLD CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accum-
ulated
Preferred Stock Common Stock Stock Other Total
------------------------ ---------------------- Additional Accum- Options Comphre- Stock-
Number of Number of Paid-in ulated and hensive holders'
Shares Amount Shares Amount Capital Deficit Warrants Income Equity
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December
31, 1999 1,250,000 1,250 7,876,641 7,876 6,034,592 (5,681,882) - - 362,836
Stock issued for
cash at an average
of $0.87 per
common share - - 1,329,602 1,330 1,156,670 - - - 1,158,000
Stock issued as
prepaid consulting
fees at $0.50 per
common share - - 615,000 615 306,885 - - - 307,500
Stock issued for
services at an
average of $.058
per common share - - 593,355 593 296,085 - - - 296,678
Perferred stock
converted to
common stock at par (1,250,000) (1,250) 1,354,785 1,355 (105) - - - 1,250
Stock issued and
options exercised in
exchange for
technology license
at $0.50 per
common share - - 100,000 100 49,900 - - - 50,000
Stock issued and options
exercised in
exchange for debt at
$0.50 per common share - - 800,000 800 399,200 - - - 400,000
Net loss, December
31, 2000 - - - - - (1,319,195) - - (1,319,195)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December
31, 2000 - - 12,669,383 12,669 8,243,227 (7,001,077)$ - - 1,257,069
See accompanying notes and accountants' review report.
8
POWERCOLD CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accum-
ulated
Preferred Stock Common Stock Stock Other Total
------------------------ ---------------------- Additional Accum- Options Comphre- Stock-
Number of Number of Paid-in ulated and hensive holders'
Shares Amount Shares Amount Capital Deficit Warrants Income Equity
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Common stock issued
for services at
$0.59 per share - - 42,500 43 24,958 - - - 25,000
Common stock issued
for consulting
services at $0.50
per share - - 230,000 230 114,770 - - - 115,000
Common stock issued
for conversion of
debt at $0.61
per share - - 372,081 372 207,128 - - - 207,500
Common stock issued
as pre payament of
rent at $0.50
per share - - 45,000 45 22,455 - - - 22,500
Common stock issued
as interest and
financing expense
at $0.50 per share - - 240,419 240 122,010 - - - 122,250
Common stock issued
as compensation at
$0.50 per share - - 113,000 113 56,387 - - - 56,500
Common stock issued
for payment of
accounts payable at
$0.75 per share - - 35,000 35 26,383 - - - 26,418
Common stock and
options issued for
acquisition of PSI
at $2.16 per share - - 50,000 50 108,450 - 66,500 - 175,000
Common stock: 2,144,820
shares issued with
603,083 attached
warrants for cash
at $0.86 per share
and 85,679 shares
valued at $1.73 per
share as issuing
costs less total
issuing costs of
$296,142 - - 2,230,499 2,230 1,284,898 - 405,480 - 1,692,608
Other comprehensive
income - - - - - - - 970,000 970,000
Net loss,
December 31, 2001 - - - - - (2,328,402) - - (2,328,402)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 2001 - $ - 16,027,882 $ 16,027 $10,210,665 $(9,329,479)$ 471,980 $ 970,000 $2,341,443
Common stock issued
for cash at $1.63
per share less
$4,642 for cost
of insurance - - 1,284,970 1,285 2,097,877 - - - 2,099,162
Common stock issued
as compensation
at $1.00 per share - - 30,000 30 29,970 - - - 30,000
Common stock issued
for services at
$1.06 per share - - 356,955 357 378,393 - - - 378,750
Warrants exercised
at $1.00 per share - - 32,000 32 53,408 - (21,440) - 32,000
Rescind common stock
for failure to
perform - - (50,000) (50) 50 - - - -
Rescind common stock
and options for
acquisition of PSI - - (50,000) (50) (108,400) - (66,500) - (174,950)
Other comprehensive
income (loss) - - - - - - - (368,600) (368,600)
Net loss,
June 30, 2002 - - - - - (2,176,421) - - (2,176,421)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2002 - $ - 17,631,807 $ 17,631 $12,661,963 $(11,505,900)$ 384,040 $ 601,400 $2,159,134
(unaudited) =========== =========== =========== =========== =========== =========== =========== =========== ===========
See accompanying notes and accountants' review report.
9
POWERCOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
-----------------------------------------
2002 2001 2000
(Restated) (Restated)
Unaudited Unaudited Unaudited
------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,176,421) $(1,035,436) $ (538,895)
Discontinued operations 667,723 51,259 107,904
------------- ------------ ------------
(1,508,698) (984,177) (430,991)
------------- ------------ ------------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 44,715 60,982 20,496
Issuance of common stock for services 378,750 207,500 139,065
Issunace of common stock for current debt - 26,418 -
Issuance of common stock for compensation 30,000 - -
Issuance of common stock for interest
and financing - 54,000 -
(Increase) decrease in assets:
Accounts receivable 586,916 (54,595) 69,932
Receivable from related party 1,686 - -
Inventories (38,272) 18,600 -
Prepaid expenses 9,375 77,893 -
Refundable income taxes - - 52,222
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (619,724) (872) (122,511)
Accounts payable, related party - 1,705 (1,312)
Commitments and contingencies (15,096) - -
Deferred revenue - 80,900 -
Commissions payable - 20,363 -
------------- ------------ ------------
Net cash used in operating activities (1,130,348) (491,283) (273,099)
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits 5,520 (1,265) -
Purchase of property and equipment (7,234) (7,838) -
Loans to Alturdyne, Inc. (400,000) - -
Payment on capital lease (3,009) - -
Proceeds from advances from affilate - - -
Investment in discontinued operations (364,743) (54,713) (61,607)
------------- ------------ ------------
Net cash provided by (used in investing
activities (769,466) (63,816) (61,607)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease - (1,351) -
Proceeds from issuance of shares under
private placement 2,131,162 337,500 451,000
Repayment of borrowings (4,505) (2,783) -
Proceeds from borrowing - 165,000 -
Proceeds from advance from affiliate - 127,500 26,616
Repayment of short-term borrowings,
affiliate - (137,196) -
------------- ------------ ------------
Net cash provided by financing activities 2,126,657 488,670 477,616
------------- ------------ ------------
Net increase (decrease) in case 226,843 (66,429) 142,910
Cash at beginning of year 290,174 106,864 14,464
------------- ------------ ------------
Cash at end of year $ 517,017 $ 40,435 $ 157,374
============= ============ ============
See accompanying notes and accountants' review report.
10
POWERCOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
-----------------------------------------
2002 2001 2000
(Restated) (Restated)
Unaudited Unaudited Unaudited
------------- ------------ ------------
Supplemental cash flow
information:
Interest paid $ - $ 12,726 $ 11,984
Income taxes paid $ - $ - $ -
NON-CASH TRANSACTIONS:
Unrealized gain (loss) on securities $ (368,600) $ 1,455,000 $ -
available for sale
Issuance of common stock as
prepayment for consulting services $ $ 85,000 $ 139,065
Issuance of common stock for
services and compensation $ 408,750 $ 122,500 $ -
and compensation
Issuance of common stock for
payment of accounts payable $ - $ 26,418 $ -
Issuance of common stock for
payment of interest and
financing expenses $ - $ 54,000 $ -
financing expenses
Issuance of common stock as stock
offering costs $ - $ 65,625 $ -
Issuance of common stock for
prepaid rent $ - $ 22,500 $ -
See accompanying notes and accountants' review report.
11
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
PowerCold Corporation, formerly International Cryogenic Systems Corporation,
(the Company) was incorporated on October 7, 1987 in the State of Nevada.
PowerCold is a solution provider of energy efficient products for the
refrigeration, air conditioning and power industries. The Company operates
across many market sectors from large industrial food processors to small
commercial air conditioning systems. The Company develops, manufactures and
markets proprietary equipment to achieve significant electric power cost
savings for commercial and industrial firms. PowerCold's energy efficient and
environmentally safe products are designed to reduce power costs for air
conditioning, refrigeration and on-site building power. The Company derives its
revenues from three principal product lines. The first is a line of
evaporative heat exchange systems for the HVAC and refrigeration industry. The
second line is the design and production of unique products for the
refrigeration industry. The third is consulting engineering services, including
process safety management compliance, and ammonia refrigeration and carbon
dioxide system design.
On December 28, 1992, the Company acquired the patent rights (U.S. Patent No.
5,501,269) and related engineering and technology to a process of quick
freezing food products, and cleaning and treating various nonfood products.
This process was accomplished by using a circulating cryogenic liquid in a
closed pressurized vessel system. The patent acquisition was made in exchange
for 2,414,083 shares of the Company's common stock. Two directors of the
Company were also directors of the company selling the patent rights.
On August 4, 1995, the Company acquired Nauticon, Inc., including its related
technology and assets for 900,000 shares and 300,000 options (expired July 31,
2000) of the Company's stock. The assets currently include U.S. Patent No.
5,501,269 issued on March 26, 1996, and entitled Condenser Unit, and U.S.
Patent No. 5,787,722 issued August 4, 1998, and entitled Heat Exchange Unit.
During the six months ended June 30 2002, Nauticon's assets, liabilities and
operations have been absorbed into PowerCold Products, Inc., the Company's
wholly owned subsidiary.
On May 18, 1998, the Company incorporated a wholly owned subsidiary, Channel
Freeze Technologies, Inc., to acquire intellectual property rights of Channel
Ice Technologies. The Company has produced its first unit with this technology
(see Note 17) and is awaiting its sale. During the six months ended June 30,
2002 the Company has disposed of Channel Freeze. See Note 18.
The Company formed Alturdyne Energy Systems, Inc. in September 1999 to support
the natural gas engine driven water chiller business. Subsequent to its
formation, the entity has been essentially dormant.
12
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)
On December 1, 2000, the Company acquired assets of Ultimate Comfort Systems,
Inc., including its technology rights, patent rights (U.S. Patent No.
5,183,102), and license agreement for integrated piping technology for a
heating and air conditioning system. This acquisition gave the Company
exclusive, non-transferable United States transfer rights to the aforementioned
technology and all related assets. This technology was then placed into a
newly formed, wholly-owned subsidiary of the Company, Ultimate Comfort Systems.
See Note 5.
On December 1, 2001, Powercold acquired all of the common stock of Power
Sources, Inc. (hereinafter "PSI"), a newly formed entity engaged in the
development and marketing of cogeneration systems technology. During the six
months ended June 30, 2002 the Company also disposed of PSI. See Note 5.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist in
understanding the financial statements. The financial statements and notes are
representations of the Company's management, which is responsible for their
integrity and objectivity. These accounting policies conform to accounting
principles generally accepted in the United States of America and have been
consistently applied in the preparation of the financial statements.
Accounting Methods
The Company's financial statements are prepared using the accrual method of
accounting.
Use of Estimates
The process of preparing financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements.
Accordingly, upon settlement, actual results may differ from estimated amounts.
Interim Financial Statements
The interim financial statements for the period ended June 30, 2002 included
herein have not been audited, at the request of the Company. They reflect all
adjustments, which are, in the opinion of management, necessary to present
fairly the results of operations for the period. All such adjustments are
normal recurring adjustments. The results of operations for the period
presented is not necessarily indicative of the results to be expected for the
full fiscal year.
13
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, after elimination of the intercompany accounts
and transactions. Wholly owned subsidiaries of the Company are listed in Note
13.
Reclassification
Certain amounts from prior periods have been reclassified to conform to the
current period presentation. This reclassification has resulted in no changes
to the Company's accumulated deficit or net losses presented.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents.
Inventories
Inventories are stated at the lower of cost or market on a first-in, first-out
basis. See Note 6.
Fair Value of Financial Instruments
The Company's financial instruments as defined by SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments," include cash, advances to related
party, trade accounts receivable, accounts payable, accrued expenses and notes
payable. All instruments are accounted for on the historical cost basis,
which, due to the short maturity of these financial instruments, approximates
fair value at June 30, 2002
Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 130"), "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB No. 133", and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", which is effective for
the Company as of January 1, 2001. This standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the consolidated balance sheet and measure those instruments at
fair value.
14
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative Instruments (continued)
If certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the changes
in the fair value of the hedged asset or liability that are attributable to the
hedged risk or (ii) the earnings effect of the hedged forecasted transaction.
For a derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.
Historically, the Company has not entered into derivatives contracts to hedge
existing risks or for speculative purposes.
At June 30, 2002, the Company has not engaged in any transactions that would be
considered derivative instruments or hedging activities.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated
useful lives of the assets, which range from three to ten years. See Note 7.
Concentration of Credit Risk
The Company maintains its cash in several commercial accounts at major
financial institutions. At December 31, 2001, the Company's cash balance, in
two accounts, exceeded Federal Deposit Insurance Corporation (FDIC) limits by
$24,824 and $54,568. At June 30, 2002, the Company's cash balance exceeded
FDIC limits by $428,961.
Goodwill
Goodwill represents the excess of the purchase price and related direct costs
over the fair value of net assets acquired as of the date of the acquisition.
Goodwill was amortized on a straight-line basis over 10 years through December
31, 2001. At January 1, 2002 the Company adopted SFAS 142 which eliminates
amortization of good will. The Company periodically reviews its goodwill to
assess recoverability based on projected undiscounted cash flows from
operations. Impairments are recognized in operating results when a permanent
diminution in value occurs.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to the
customer. Service revenue is recognized when services are performed and
billable.
Bad Debts
The Company estimates bad debts utilizing the allowance method, based upon past
experience and current market conditions.
15
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Product Warranties
The Company sold the majority of its products to consumers along with one-year
unconditional repair or replacement warranties. Warranty expense is included
in cost of sales.
Research and Development
Research and development expenses are charged to operations as incurred. The
cost of intellectual property purchased from others that is immediately
marketable or that has an alternative future use is capitalized and amortized
as intangible assets. Capitalized costs are amortized using the straight-line
method over the estimated economic life, typically 10 years, of the related
asset. The Company periodically reviews its capitalized patent costs to assess
recoverability based on the projected undiscounted cash flows from operations.
Impairments are recognized in operating results when a permanent diminution in
value occurs.
Advertising Expenses
Advertising expenses consist primarily of costs incurred in the design,
development, and printing of Company literature and marketing materials. The
Company expenses all advertising expenditures as incurred.
Stock Based Compensation
The Company accounts for stock issued for compensation in accordance with APB
25, "Accounting for Stock Issued to Employee." Under this standard,
compensation cost is the difference between the exercise price of the option
and fair market of the underlying stock on the grant date. In accordance with
SFAS No. 123, "Accounting for Stock Based Compensation," the Company provides
the pro forma effects on net income and earnings per share as if compensation
had been measured using the "fair value method" described therein.
Compensated Absences
Employees of the Company are entitled to paid vacation, sick, and personal days
off, depending on job classification, length of service, and other factors.
The Company accrues vacation expense throughout the year and, if employees do
not utilize their allotment, the Company will cash out all unused pay on the
last calendar day of the year.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statements and tax basis of assets and
liabilities using statutory income tax rates in effect for the year in which
the differences are expected to reverse.
16
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment in Securities
Investments in debt and marketable equity securities are designated as trading,
held to maturity, or available for sale in accordance with statement of
Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." Trading securities are reported at
fair value, with changes in fair value included in earnings. Available for
sale securities are reported at fair value, with net unrealized gains and
losses included as a component of equity. Held-to-maturity securities are
reported at amortized cost. Gains and losses on the sale of securities are
determined using the specific identification method. For all investment
securities, unrealized gains and losses that are other than temporary are
recognized as a component of earnings in the period incurred. Market value is
determined based on quoted market prices. At June 30, 2002, all of the
Company's investment securities were classified as available for sale. See
Note 8.
Earnings Per Share
On January 1, 1998, the Company adopted SFAS No. 128, which provides for
calculation of "Basic" and "Diluted" earnings per share. Basic earnings per
share includes no dilution and is computed by dividing net income available to
common shareholders by the weighted average common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution of
securities that could share in the earnings of an entity similar to fully
diluted earnings per share. Although there are common stock equivalents
outstanding, they were not included in the calculation of earnings per share
because they would have been considered anti-dilutive for the periods
presented.
Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which
updates, clarifies and simplifies existing accounting pronouncements. FASB No.
4, which required all gains and losses from the extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net of
related tax effect was rescinded, as a result, FASB 64, which amended FASB 4,
was rescinded as it was no longer necessary. FASB 145 amended FASB 13 to
eliminate an inconsistency between the required accounting for sale-leaseback
transaction and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions.
Management has determined there will be no effects of adopting this Statement
on the financial position or results of operations at June 30, 2002 and the
years ended December 31, 2001 and 2000.
17
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Pronouncements (continued)
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). SFAS 144 replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." This new standard establishes a single accounting model
for long-lived assets to be disposed of by sale, including discontinued
operations. Statement 144 requires that these long-lived assets be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or discontinued operations. This statement is
effective beginning for fiscal years after December 15, 2001, with earlier
application encouraged. The Company adopted SFAS 144, which did not have a
material impact on the financial statements of the Company at December 31, 2001
or at June 30, 2002.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). SFAS No. 143 establishes guidelines related to
the retirement of tangible long-lived assets of the Company and the associated
retirement costs. This statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived assets. This statement is effective for financial statements issued
for the fiscal years beginning after June 15, 2002 and with earlier application
encouraged. The Company adopted SFAS No. 143, which did not have a material
impact on the financial statements of the Company at December 31, 2001 or at
June 30, 2002.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 provides for the
elimination of the pooling-of-interests method of accounting for business
combinations with an acquisition date of July 1, 2001 or later. SFAS No. 142
prohibits the amortization of goodwill and other intangible assets with
indefinite lives and requires periodic reassessment of the underlying value of
such assets for impairment. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. An early adoption provision exists for
companies with fiscal years beginning after March 15, 2001. Application of the
nonamortization provision of SFAS No. 142 is expected to result in an increase
in net income of approximately $10,000 in fiscal 2002.
18
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Pronouncements (continued)
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities and also
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 140 is
effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000, and is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The Company believes that the adoption of this standard
will not have a material effect on the Company's results of operations or
financial position.
Shipping and Handling Fees and Costs
The Emerging Issues Task Force ("EITF") issued EITF No. 00-10, "Accounting for
Shipping and Handling Fees and Costs", which was adopted during fiscal 2001.
The impact of adopting EITF No. 00-10 was to increase revenues and cost of
sales by approximately $19,489 and $16,955 in fiscal 2001 and 2000,
respectively. All amounts in the accompanying consolidated statements of
operations and comprehensive loss have been reclassified to reflect this
adoption
NOTE 3 - GOING CONCERN
The accompanying consolidated financial statements, which contemplate
continuation of the Company as a going concern, have been prepared in
conformity with accounting principles generally accepted in the United States
of America. The Company has, however, sustained substantial operating losses
in recent years and has used substantial amounts of working capital in its
operations. At June 30, 2002, property, equipment and other intangibles and
non-current assets comprise a material portion of the Company's assets. The
recovery upon these assets is dependent upon achieving profitable operations.
The ultimate outcome of these uncertainties cannot presently be determined.
Management is actively seeking additional equity financing. Additionally,
management believes that prior acquisitions and the acquisition of Power
Sources, Inc. technology will lead to the overall structure necessary to
fulfill the Company's current strategic plans.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, and the success of its future operations. Management believes that
actions presently being taken to obtain additional equity financing and
increase sales provide the opportunity to continue as a going concern.
19
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company has received funding on several occasions from Simco Group, Inc,
("Simco"), a separate legal entity wholly-owned by the Company's chairman and
chief executive officer.
During 2001, Simco was issued 262,500 shares of common stock for payment of
loans, interest and financing fees and consulting services.
During 2000, Simco converted $400,000 of its loans to the Company into 800,000
shares of the Company's common stock. See Note 11.
See Note 10 regarding loans from shareholders.
NOTE 5 - ACQUISITIONS
Acquisition of Power Sources, Inc.
On December 1, 2001, PowerCold acquired all of Power Sources, Inc. (hereinafter
"PSI"), a privately held firm engaged in the developing and marketing of
cogeneration systems technology. PSI was a wholly owned subsidiary of Utility
Metal Research Corp. (UMRI). The business activity of PSI had previously been
part of the activities of UMRI.
In the acquisition, PowerCold agreed to issue over a two-year period a total of
150,000 shares of PowerCold common stock and 150,000 common stock options to
UMRI. At December 31, 2001, the Company had issued 50,000 shares of its common
stock (valued at $108,500) and 50,000 of its common stock options (valued at
$66,500) to PSI, and had recorded a commitment of $227,000 for the future
issuance of the remaining stock and options. This acquisition was accounted
for under the purchase method of accounting.
Acquired in the transaction were trade receivables of $921,050, which were
December 31, 2001 revenues, with $721,392 accounts payable attached and
contracts in place of $331,175 with $281,499 accounts payable attached. The
Company also acquired technology rights valued at $222,666. The assets and
liabilities of PSI had been transferred to PSI by UMRI upon the creation of
PSI. PSI had no substantial operations prior to PowerCold's acquisition in the
month of December 2001.
During the six months ended June 30, 2002 the Company has disposed of PSI. The
acquired assets and liabilities have been returned to UMRI. The stock and
options given in exchange for the acquisition have been rescinded. The Company
has recorded a net gain on disposition of $45,000 which has been netted in the
loss from discontinued operations with the operating losses from this activity.
20
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 5 - ACQUISITIONS (CONTINUED)
Acquisition of Heating and Air Conditioning System Technology
On December 1, 2000, the Company acquired the technology rights, patent rights,
and license agreement for integrated piping technology for a heating and air
conditioning system. This acquisition gave the Company exclusive, non-
transferable United States transfer rights to the technology and all related
assets. In this transaction, the Company paid $65,000 cash, assumed two lines
of credit (see Note 10), forgave a payment of $28,571 from projects in process,
issued 100,000 shares of its common stock (see Note 12), granted 150,000 of
stock options at $1.00 per share (see Note 13), and agreed to the payment of
royalties at no more than $3,000 per month for one year. In addition, the
Company hired the seller of the technology for an annual salary of $70,000,
with annual renewals, based upon performance as defined within the purchase
agreement. This technology was then placed into a newly formed, wholly-owned
subsidiary of the Company, Ultimate Comfort Systems.
Acquisition of Rotary Power Enterprise, Inc.
Pursuant to the terms of the Rotary Power Enterprise, Inc. acquisition
agreement, effective October 1, 1998, the Company issued 100,000 shares of
common stock in exchange for 100% of the outstanding stock of Rotary Power
Enterprise, Inc. Rotary Power Enterprise, Inc. was formed during 1998 for the
purpose of developing a new product line for PowerCold. Rotary Power has been
absorbed into PowerCold Corporation at June 30, 2002.
NOTE 6 - INVENTORY
Inventories are stated at the lower of average cost or market. The cost of
finished goods includes the cost of raw material, direct and indirect labor,
and other indirect manufacturing costs.
Inventories at June 30, 2002, December 31, 2001 and 2000 consist of the
following:
June 30, 2002 December 31, 2001 December 31, 2000
-------------- ----------------- -----------------
Materials inventory $ 171,704 $ 133,432 $ 132,851
Finished goods inventory 108,421 108,421 108,421
-------------- ----------------- -----------------
$ 280,125 $ 241,853 $ 241,272
============== ================= =================
Finished goods inventory consists of the specialized quick-freezing unit of the
Company's Channel Freeze Technology, Inc. subsidiary., and held as of June 30,
2002 by PowerCold Products, Inc.
21
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 7 - PROPERTY, EQUIPMENT AND INTANGIBLES
Property and equipment is summarized as follows:
June 30, 2002 December 31, 2001 December 31, 2000
-------------- ----------------- -----------------
Machinery and equipment $ 141,653 $ 37,158 $ 31,342
Prototypes and molds 71,030 71,030 71,030
Furniture and fixtures 30,480 30,480 7,614
Total Property and
Equipment 243,163 138,668 109,986
Less: Accumulated
Depreciation 102,933 97,555 90,487
-------------- ----------------- -----------------
Net Property and Equipment $ 140,230 $ 41,113 $ 19,499
============== ================= =================
Depreciation expense for the six months ended June 30, 2002 and the years ended
December 31, 2001 and 2000 was $5,378, $7,068 and $4,616, respectively.
The Company's intangible assets are summarized as follows:
June 30, 2002 December 31, 2001 December 31, 2000
-------------- ----------------- -----------------
Patents and related
technology $ 822,867 $ 822,867 $ 822,867
Goodwill 105,269 105,269 105,269
Total Intangibles 928,136 928,136 928,136
Less: Accumulated
Amortization 566,934 529,162 441,401
-------------- ----------------- -----------------
Net Intangibles $ 361,202 $ 398,974 $ 486,735
============== ================= =================
Amortization expense for the six months ended June 30, 2002 and years ended
December 31, 2001 and 2000 was $39,337, $87,761 and $119,550, respectively.
22
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 8 - INVESTMENTS
In 1996, as part of a planned merger, which never took place, the Company
invested $1,000,000 in Rotary Power International, Inc. (hereinafter "RPI") in
exchange for 2,000,000 shares of RPI's common stock. As the Company's
investment in RPI represented more than 20% but less than 50% of RPI's common
stock outstanding, the equity method was used to account for the Company's
interest. Although the Company advanced additional funds of $216,768 to RPI,
deteriorating financial conditions and increasing losses in RPI caused the
Company to write off its entire investment in RPI by the end of 1997.
During 2001, the Company's investment in RPI decreased to less than 20% of
RPI's stock outstanding. In view of the changed circumstances, the Company's
management elected to recognize its investment in RPI as available-for-sale
securities. As of December 31, 2001, the fair market value of these securities
was $970,000 at June 30, 2002 the fair market value of the securities was
reduced to $601,400, which has been recognized as other comprehensive income in
accordance with SFAS No. 115.
NOTE 9 - LOAN RECEIVABLE
During the six months ended June 30, 2002, the Company loaned Alturdyne, Inc.,
a privately held firm, $400,000, and the Company signed a letter of intent to
acquire Alturdyne, Inc. Subsequent to June 30, 2002 the Company withdrew its
offer to acquire Alterdyne, Inc.
NOTE 10 - NOTES PAYABLE
At December 31, 2001, notes payable consisted of the following:
A note payable to Southtrust Bank, secured by G. Briley, the Company's
president, for $1,940 with an annual interest rate of 14.99%. This unsecured
note was repaid in March 2002.
Two lines of credit were assumed as part of the consideration for the December
2000 acquisition of a technology license and intellectual property. (See Note
5.) One line of credit is payable to Royal Bank of Canada for $34,014 U.S.,
and the second to T. D. Bank for $1,001 U.S. was repaid during the year ended
December 31, 2001.
In 2001, the Company received $165,000 in loan proceeds from its shareholders.
The unsecured loans, bearing interest at 10% and with no stated maturity, were
repaid before year-end with a combination of $140,000 of common stock and
$25,000 of cash.
23
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 11 - PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of $0.001 par value
preferred stock, which contain no voting privileges. Shareholders are entitled
to cumulative dividends, and each share of preferred stock may be converted
into the Company's common stock.
At December 31, 1999, the Company had 1,250,000 shares of preferred stock
issued and outstanding. This stock was designated as Series "A" Convertible
Preferred Stock and was issued to a single investor.
On June 30, 2000, 100% of the Company's outstanding Series "A" Convertible
Preferred Stock was converted to the Company's common stock. The conversion
resulted in the issuance of 1,354,785 shares of the Company's common stock at
an approximate conversion rate of one share of preferred stock for 1.08 shares
of common stock. Subsequent to the stock conversion, the Company did not have
any shares of preferred stock outstanding.
NOTE 12 - COMMON STOCK
Upon incorporation, the Company was authorized to issue 200,000,000 shares of
its $0.001 par value common stock.
During the six months ended June 30, 2002 the Company issued 1,316,970 shares
of common stock for cash of $2,131,162 of which 32,000 warrents were exercised
at $1.07 per share. 30,000 shares of Company stock for compensation at the
fair market value of the stock of $1.00 per share and an additional 356,955
shares of common stock were issued for services at the fair market value of the
stock of $1.14 per share.
During the year ended December 31, 2001, the Company issued for cash 1,836,214
shares of common stock with 603,083 warrants attached. The stock was valued at
$1,284,020 and the warrants were valued at $405,480. These warrants have an
average exercise price of $1.10 and expire between May 31, 2002 and December 6,
2003. An additional 308,603 shares of common stock were issued for cash of
$150,833. The Company issued 85,679 shares of common stock as commissions to
various promoters for selling its stock. This stock was valued at the fair
market value of $148,503. The Company issued 385,500 shares of common stock
for consulting services valued at $115,000, general services valued at $25,000
and compensation valued at $56,500. The Company issued 372,081 shares of
common stock to repay loans in the amount of $207,500 and 240,419 common stock
shares for interest and financing expenses of $122,250. Additionally 45,000
common stock shares were issued for $22,500 in prepaid rent, 35,000 shares were
issued to satisfy $26,418 of accounts payable and 50,000 common stock shares
valued at $108,500 to acquire Power Sources, Inc. See Note 5.
24
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 12 - COMMON STOCK (CONTINUED)
During the year ended December 31, 2000, the Company issued 4,792,742 shares of
its common stock of which 1,329,602 shares were issued for cash of $1,158,000,
615,000 shares for prepaid consulting valued at $307,500, 593,355 for services
valued at $296,678, 100,000 shares for a technology license (see Note 5) valued
at $50,000, and 800,000 shares for debt valued at $400,000. Included in the
aforementioned issuances is a total of 1,480,000 shares issued to officers,
directors, or affiliates of the Company which are subject to transfer
restrictions as defined by Rule 144 of the Securities Act of 1933. In
addition, 1,354,785 shares were issued for the conversion of 100% of the
Company's Series "A" Convertible Preferred Stock. See Note 11.
During the year ended December 31, 1999, the Company issued 1,042,641 shares of
its common stock of which 483,641 shares were issued for services valued at
$162,110 and 559,000 shares were issued for cash of $348,750.
In addition 50,000 shares of common stock were rescinded for failure to perform
services and 50,000 share of common stock and 50,000 common stock option were
returned and cancelled by the Company when PSI was disposed of and returned to
UMRI. See Note 5.
NOTE 13 - STOCK-BASED COMPENSATION AND STOCK OPTIONS
During 2001, the Company authorized and issued 895,000 options at an average
exercise price of $0.96 for services, compensation and the acquisition of PSI.
See Note 5.
During 2000, the Company authorized and issued a total of 750,000 options at an
average exercise price of $1.20 for investment funding, and 250,000 options at
an average exercise price of $0.50 as compensation.
The Company applies APB Opinion No. 25 in accounting for options and,
accordingly, recognized no compensation cost for its stock options in 2001,
2000 and 1999. The following reflects the Company's pro forma net loss and net
loss per share had the Company determined compensation costs based upon fair
market values of options at the grant date, as well as the related disclosures
required by SFAS 123:
25
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 13 - STOCK-BASED COMPENSATION AND STOCK OPTIONS (CONTINUED)
Pro forma net loss and earnings per share had the Company accounted for its
options under the fair value method of SFAS 123 are as follows:
Year Ended December 31,
--------------------------------
2001 2000
--------------- ---------------
Net loss as reported $ (2,328,402) $ (1,319,195)
Adjustment required by SFAS 123
(345,277) (287,273)
Pro forma net loss $ (2,673,679) $ (1,606,468)
Pro forma net loss per share, Basic and diluted $ (0.18) $ (0.16)
Number of Weighted Average
Shares Under Option Exercise Price
-------------------- -----------------
Outstanding, January 1, 2000 2,947,558 $ 1.01
Granted 1,000,000 0.77
Exercised (450,000) 0.50
Forfeited - -
Expired (700,000) 2.29
-------------------- -----------------
Outstanding, December 31, 2000 2,797,558 0.74
====================
Exercisable, December 31, 2000 2,797,558 0.74
====================
Outstanding January 1, 2001 2,797,558 0.74
Granted 895,000 0.96
Exercised - -
Forfeited - -
Expired - -
-------------------- -----------------
Outstanding December 31, 2001 3,692,558 0.84
====================
Rescinded (50,000) 0.96
Granted 150,000 1.00
====================
Outstanding at June 30, 2002 3,792,558 .86
-------------------- -----------------
Exercisable at June 30, 2002 3,642,558 .83
====================
Weighted average fair value of options granted during 2002 $ 1.14
=========
26
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 13 - STOCK-BASED COMPENSATION AND STOCK OPTIONS (CONTINUED)
The options granted at January 1, 2002 vest at 50,000 shares each year on
January 1, 2003, 2004 and 2005.
At June 30, 2002, exercise prices for outstanding options ranged from $0.50 to
$1.36. The weighted average contractual life remaining of such options was 2.7
years.
In accordance with Statement on Financial Accounting Standard No. 123, the fair
value of the options granted was estimated using the Black-Scholes Option Price
Calculation. The following assumptions were made to value the stock options:
Risk-free Interest Rate 5%
Expected Life 1 to 5 years
Expected Volatility 75%
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NOTE 14 - REPORTABLE SEGMENTS
PowerCold currently has seven reportable segments: Nauticon Inc., PowerCold
Products (formerly known as RealCold Products, Inc.,) Technicold Services,
Inc., Rotary Power Enterprise, Inc., Channel Freeze Technologies, Inc.,
Ultimate Comfort Systems, Inc. and Power Sources, Inc. Nauticon Inc. offers a
product line of evaporative heat exchange systems for the HVAC and
refrigeration industry. Technicold Services, Inc. offers consulting
engineering services, including process safety management compliance and
ammonia refrigeration technicians and supervisors. RealCold Products, Inc.
designs and produces unique products for the refrigeration industry. Rotary
Power Enterprise, Inc. provides customized rotary engines to power a variety of
chiller and refrigeration systems. Channel Freeze Technologies, Inc. generates
revenue through the manufacture and sale of bulk freezing systems. Ultimate
Comfort Systems, Inc. holds the technology rights, patent rights and license
agreement for an integrated piping technology for heating and air conditioning
systems. Ultimate Comfort Systems, Inc. also provides consulting services
related to this technology. Power Sources, Inc. (PSI) holds the technology
rights to design and engineer cogeneration systems that use engine driven
generators to produce both electrical and thermal energy. PSI will also
package and market this technology.
27
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 14 - REPORTABLE SEGMENTS (CONTINUED)
Segment information (after intercompany eliminations) for the six months ended
June 30, 2002 and the years ended December 31, 2001, and 2000 are as follows:
June 30, December 31, December 31,
2002 2001 2000
--------------- --------------- ---------------
Revenues:
Ultimate Comfort Systems, Inc. $ 396,310 $ 282,733 $ -
PowerCold Products, Inc. 406,739 531,605 312,865
Technicold Services, Inc. 43,801 67,751 82,175
Rotary Power Enterprise, Inc. - - -
Power Sources, Inc. - - -
Corporate - - -
--------------- --------------- ---------------
TOTAL REVENUES $ 846,490 $ 882,089 $ 395,040
Operating income (loss):
Ultimate Comfort Systems, Inc. $ (53,772) $ (209,908) $ -
PowerCold Products, Inc. (1,860,041) (1,016,673) (537,475)
Technicold Services, Inc. (44) 7,295 (109,771)
Corporate (262,564) (1,040,716) (764,408)
--------------- --------------- ---------------
TOTAL OPERATING LOSS $ (2,176,421) $ (2,260,002) $ (1,411,654)
Identifiable assets:
Ultimate Comfort Systems, Inc. $ 144,781 $ 150,429 $ 152,415
PowerCold Products, Inc. 478,292 336,398 132,371
Technicold Services, Inc. 24,819 26,318 120,833
Corporate 2,490,299 2,086,526 1,094,866
--------------- --------------- ---------------
TOTAL IDENTIFIABLE ASSETS $ 2,841,931 $ 2,839,524 $ 1,780,860
Depreciation and amortization:
Ultimate Comfort Systems, Inc. $ 4,590 $ 10,593 $ -
PowerCold Products, Inc. 33,876 56,902 83,946
Technicold Services, Inc. 5,803 26,804 12,090
Corporate 446 - 28,130
--------------- --------------- ---------------
TOTAL DEPRECIATION AND AMORTIZATION $ 44,715 $ 94,829 $ 124,166
=============== =============== ===============
All of the Company's assets are held within the United States.
PowerCold's reportable segments are strategic business units that offer
different products or services. They are managed separately because each
business requires different technology and marketing strategies.
28
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 15 -INCOME TAXES
Income taxes are provided based upon the liability method of accounting
pursuant to SFAS No. 109 "Accounting for Income Taxes." Under this approach,
deferred income taxes are recorded to reflect the tax consequences in future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year-end. A valuation allowance is
recorded against deferred tax assets if management does not believe the Company
has met the "more likely than not" standard imposed by SFAS No. 109 to allow
recognition of such an asset.
At December 31, 2001, the Company had net deferred tax assets of $1,380,000,
principally arising from net operating loss carryforwards for income tax
purposes. As management of the Company cannot determine that it is more likely
than not that the Company will realize the benefit of the net deferred tax
asset, a valuation allowance equal to the net deferred tax asset has been
established at June 30, 2002.
The Company incurred accumulated net operating losses for income tax purposes
of approximately $3,400,000 for the year ended December 31, 2000. At December
31, 2001, the Company's net operating losses increased by approximately
$2,200,000. At June 30, 2002, the Company's net operating losses increased by
approximately $1,300,000. The Company's net operating loss carryforwards for
income tax purposes are approximately $6,900,000, which will expire on various
dates through the year 2021.
The Company recorded approximately $400,000 and $341,000 paid by the issuance
of common stock for expenses in the six months ended June 30, 2002 and the year
ended December 31, 2001, respectively.
NOTE 16 - LEASES
Capital Lease
In 1999, the Company acquired a forklift, which was financed through a capital
lease. This capital lease is payable in monthly installments of $297, with
interest at 9.5%, through April 2004. Aggregate yearly maturities of this
capital lease for the years after June 30, 2002 are as follows:
Year Ending
December 31, Amount
------------- -----------
2002 $ 1,509
2003 3,298
2004 615
-----------
Total $ 5,422
===========
Operating Leases
The Company leases sales offices and plant space in LaVernia, Texas under an
operating lease agreement, which expires March 30, 2004. Total rent expense
for the six months ended June 30, 2002 was $18,000 and for the year ended
December 31, 2001 was $89,999.
29
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 16 - LEASES (CONTINUED)
The Company's subsidiary, Technicold Services, Inc. has a one year lease for
office space in San Antonio, Texas. The rent is $675 per month and the lease
expires September 30, 2002.
Future minimum rental commitments are as follows:
Year Ending Amount
December 31,
------------- ----------
2002 $ 20,025
2003 36,000
2004 12,000
----------
Total $ 68,025
==========
NOTE 17 - LITIGATION
On August 31, 2000, Nauticon Inc. and its former president agreed upon a full
and final settlement of a lawsuit. This settlement resulted in a gain for the
Company of $88,600 which was recorded as other income.
NOTE 18 - SUBSIDIARY - CHANNEL FREEZE TECHNOLOGIES, INC.
On May 18, 1998, Channel Freeze Technologies, Inc. (CFTI) was formed as a
wholly-owned subsidiary of the Company to accommodate the acquisition of
intellectual property assets related to Channel Ice Technology. On September
15, 1998, the Company entered into an agreement to acquire eighty percent (80%)
of the assets (primarily patents) of Channel Ice Technologies from SIR
Worldwide LLC (SIR) for $850,000 and options for SIR to purchase 400,000 shares
of PowerCold stock at a price of $2.50 per share, for a period not to exceed
two years from the date of closing. After the Company made cash payments of
$550,000 in 1998 and $100,000 in 1999, the remaining acquisition liability of
$200,000 is recorded in the accompanying financial statements as "acquisition
payable." The agreement also required the Company to issue two-thirds of the
stock of CFTI to SIR, which would leave the Company with only a one-third
ownership in CFTI. The board of directors of the Company passed a resolution
approving the issuance of two-thirds of the shares of stock of CFTI to SIR;
however, the shares were never issued. The agreement provided the Company the
ability to increase (buy back) their ownership interest (up to 80%) in CFTI by
making additional payments totaling $5,950,000. For each $1 million dollars in
Channel Ice Technology unit sales, PowerCold shall acquire an additional 1%
equity interest in CFTI for each payment of $85,000, up to a maximum ownership
interest by PowerCold in CFTI of 80%.
30
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 18 -SUBSIDIARY - CHANNEL FREEZE TECHNOLOGIES, INC. (CONTINUED)
The Company has disposed of CFTI. The remaining liability of $200,000 has been
recorded as part of a loss from discontinued operations. There is no remaining
obligations for common stock or common stock options.
Also, as part of the purchase agreement, CFTI has agreed to additional
compensation to SIR by payment of either a 10% net fee payment or a 13% net
sales fee payment. Ten percent net fee payments are payments of 10% of the net
gross invoice price on all Channel Ice Technology Units sold to distributors.
Thirteen percent net fee payments are payments of 13% of the net gross invoice
price on all Channel Ice Technology Units of direct sales to end users. At
June 30, 2002 and at December 31, 2001 and 2000, no additional compensation was
paid or owed to SIR in connection with this purchase agreement.
Since 1999, the Company has maintained its investment in CFTI as a wholly owned
subsidiary. The patent and intellectual property owned by the subsidiary is
consolidated with the Company's other activities.
The Company discontinued Channel Freeze Technologies, Inc. as an operating
entity and negotiated with the previous owners of the related technology to
return all assets as liabilities, except inventory. Inventory has a cost of
$108,422. Since the Company is allocating all its resources into its current
product line, management has decided there is limited synergy with the Channel
Freeze technology and does not envision continuing development of these
products.
NOTE 19 - COMMITMENTS AND CONTINGENCIES
Accounts Payable
The Company has trade accounts payable that date back to 1996. Management had
tried to contact these vendors to arrange settlement agreements. Included in
the caption Commitments and Contingencies on the Company's balance sheet are
the balances in the aggregate amount of $153,204 from vendors that could not be
contacted or did not respond to management's correspondence.
Royalty Agreement
See Note 5 regarding December 1, 2001 royalty agreement.
Additional Compensation
See Note 18 regarding potential payments to SIR.
31
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 20 - SUBSEQUENT EVENT
Effective August 1, 2002, PowerCold Corporation acquired 100% of the assets of
Applied Building Technology, Inc. (ABT), a St. Petersburg, Florida based
supplier of complete standardized heating, ventilation and air conditioning
packages for standard-sized commercial buildings. ABT's assets are being
transferred into PowerCold's wholly owned subsidiary Ultimate Comfort Systems.
In August 2002, Alturdyne, Inc. has granted the exclusive license to
manufacture, package, market, develop and use the Licensed Technology and
Licensed Intellectual Property in order to manufacture, package, market and
install, develop, service and warranty the Technology for a period not to
exceed ten years, unless otherwise extended.
v 32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Forward looking statements made herein are based on current expectations of the
Company that involves a number of risks and uncertainties and should not be
considered as guarantees of future performance. These statements are made under
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995. The factors that could cause actual results to differ materially include;
interruptions or cancellation of existing contracts, impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources than the Company, product
development and commercialization risks and an inability to arrange additional
debt or equity financing.
GENERAL FINANCIAL ACTIVITY
POWERCOLD CORPORATION - A solution provider of energy efficient products for
users of commercial heating, ventilating and air conditioning (HVAC) and
refrigeration systems worldwide. The Company operates across many market
sectors from large commercial refrigeration systems to small commercial air
conditioning systems. The firm's focus is to give customers products and
systems that allow them to benefit from current changes occurring in the
natural gas and electrical utility marketplace. Refrigeration and air
conditioning are the most energy intensive operations most business operators
face. PowerCold has the opportunity to provide energy efficient products and
systems that customers require, taking advantage of these industry changes, to
improve profitability by reducing their operating costs.
Deregulation of the gas and electric utilities will provide continuing
opportunities, creating new markets for more efficient HVAC and refrigeration
systems. PowerCold has the products, experience and creative ability to package
unique HVAC and refrigeration systems for this multi-billion dollar industry
market. The Company has acquired synergistic businesses, and marketing
alliances are being formed with major utility companies and established HVAC
companies for these products and services.
The Company's business operations are supported by a management team with over
(200) year's experience. The Company maintains administrative corporate offices
in La Vernia, Texas, and Philadelphia, Pennsylvania. Engineering and
manufacturing facilities are located in La Vernia, Texas.
The Company's mission is to be a solution provider of energy efficient products
for the multi-billion dollar heating, ventilating and air conditioning,
refrigeration and power industry. The Company's goal is to achieve profitable
growth and increase shareholder value - providing unique superior products and
services supported by experienced management.
The company reorganized into four wholly owned subsidiary companies, effective
July 1, 2002: PowerCold Products, Inc., supporting all "Cold" related products,
Ultimate Comfort Systems, Inc., supporting proprietary applications for
heating, ventilating and air conditioning systems (HVAC), Alturdyne (AES)
Energy Systems, Inc., supporting all "Power" related products, and Technicold
Services, Inc. provides engineering consulting services to the air condition,
refrigeration and power industries.
33
POWERCOLD PRODUCTS, INC. - designs, manufactures and markets a proprietary
product line of patented evaporative condensers and heat exchange systems for
the heating, ventilation and air condition (HVAC) and refrigeration industry.
PowerCold Products supports the Company's Nauticon and EV Chill product lines
by engineering design, manufacturing and packaging its products. PowerCold
Products also support custom refrigeration systems by engineering, designing
and packaging special customer orders. There are proposed alliances with other
refrigeration companies, whereas PowerCold Products will package various
components adding value for a total turnkey air condition or refrigeration
system.
The Nauticon patented products are innovative in design, use new material
technology, are simple to manufacture, and have a low operating cost. They are
used for evaporative condensers, fluid coolers, sub-coolers commercial and
industrial refrigeration system components, liquid recalculating packages and
custom refrigeration products for commercial and industrial use. Nauticon
products can reduce power cost in the air condition and refrigeration industry
by up to 40% making these units contribute to the utilities' needs to reduce
power demand. PowerCold has invested over $1M in operating capital into the
Nauticon product over the last few years. Initially major operating and legal
expenses due to previous inept Nauticon management hindered sales and
production. Therefore Nauticon did not meet its sales and revenue projections
over the past few years. Subsequently during the past year the Nauticon
product technology was greatly enhance from a single 40-ton evaporative
condenser up to five multi-configured units producing up to 1,000 ton of air
conditioning and other multi-unit chiller installations. Management believes
that Nauticon evaporative condenser will meet its sales objectives in 2002.
There are over 200 units installed in various commercial buildings.
The Chiller line of products includes: EV-Chill: water chillers, namely, water
chilling and refrigeration systems utilizing water evaporative condensers for
commercial and industrial use; EV-Cool: air conditioning units utilizing
evaporative condensers for commercial and industrial use; EV-Dry:
dehumidification system utilizing evaporative fluid coolers to cool warm dry
air for commercial and industrial use; EV-Frig: refrigeration condensing units
utilizing evaporative condensers for commercial and industrial use.
ULTIMATE COMFORT SYSTEMS, INC. - On December 1, 2000, the Company acquired the
technology rights, patent rights, and license agreement for integrated piping
technology for a heating and air conditioning system. This technology was then
placed into a newly formed wholly owned subsidiary of the Company, Ultimate
Comfort Systems, Inc. This acquisition gave the Company exclusive, non-
transferable United States transfer rights to the technology and all related
assets. There are 15 installations in hotel/motels and extended care
facilities. Some of the installations are saving over 40% energy costs. During
2001 the Company invested some $300,00 supporting engineering and marketing
programs for major hotel projects. The company anticipates that Ultimate
Comfort Systems will have major growth in revenue and profits for this unique
proprietary application over the next few years.
Subsequent Event: Effective August 1, 2002, PowerCold Corporation acquired 100%
of the assets of Applied Building Technology, Inc. (ABT), a St. Petersburg,
Florida based supplier of complete standardized heating, ventilation and air
conditioning (HVAC) packages for standard-sized commercial buildings such as
national chain businesses. ABT assets are being transferred into PowerCold's
wholly owned subsidiary Ultimate Comfort Systems as an operating engineering
division. This merger will give PowerCold a strong engineering and design staff
with veteran technical and service personnel.
34
Applied Building Technology designs and supplies a complete HVAC system
including equipment, controls, ductwork, fans, installation and warranty
service. ABT also manufactures and sells desiccant latent air conditioners
with its HVAC systems. ABT has offices in St. Petersburg, Florida and
Philadelphia, PA. and manufacture representatives in Denver and Dallas.
ALTURDYNE (AES) ENERGY SYSTEMS, INC. - AES designs and markets cogeneration
systems, which use engine-driven generators to produce both electricity and
thermal power as a way of cutting power costs. Cogeneration systems, also known
as distributed generation; use engine driven generators to produce both
electric power and thermal energy. As a result of the acquisition, PowerCold
will be able to offer customers complete self-contained heating/chilling units
to reduce peak power requirements as well as the ability to self-generate all
the power needed for a commercial building. Units range in size from 100
kilowatts to 2 megawatts. Customers can expect to reduce power or energy costs
by 40% or more.
The Company has a Strategic Alliance with Alturdyne, Inc., a San Diego based
company, for manufacturing and marketing of its respective products. Alturdyne
is an innovative manufacturer of standby diesel generator sets, turbine and
rotary generator sets, pumps and natural gas engine-driven chillers.
Alturdyne's strength lies in its power engineering personnel, who are
knowledgeable in the generator set business, telephone company applications,
small turbines, rotaries and chillers. Their capabilities and experience in
developing low cost, customer power packages that meet specific needs have
established Alturdyne's excellent reputation in the industry. Alturdyne's added
expertise is in the design and production of rotary engines.
On April 2, 2002, PowerCold Corporation signed a letter of intent to acquire
Alturdyne, Inc. a manufacturer of diesel, natural gas, turbine and rotary
generator sets. PowerCold expected to complete the acquisition by May 31, 2002
after a further detailed audit. The transaction, which would be non-dilutive
for present shareholders, involved a combination of cash and stock. Under the
proposed agreement, PowerCold would acquire all of Alturdyne's assets and
intellectual property. Alturdyne would then operate as an independent wholly
owned PowerCold subsidiary. Alturdyne sales during the past 10 years have been
in the $6.5 million to $11 million range with seven profitable sales years
including each of the last two years. Alturdyne has developed, packaged and
installed over 4,000 engine power units around the world.
Subsequent Event: On August 2, 2002, PowerCold Corporation and Alturdyne, Inc.
terminated their Letter of Intent. After thorough due diligence by the
Registrant's independent auditors, both parties agreed that it was best not to
proceed with the acquisition at this time.
PowerCold Corporation and Alturdyne, Inc. executed a Technology License
Agreement on August 9, 2002. Alturdyne granted a Licensed Technology and
Licensed Intellectual Property to PowerCold for Engine Driven Chillers and
Rotary Engine Generator Sets. Engine Driven Chillers include standard and
custom packaging of natural gas, electric and diesel-fueled Engine Driven
Chillers used for heating, ventilating and air-conditioning (HVAC) system
applications. Rotary Engine Generator Sets include a family of Wankel,
including Mazda Engine technology, type rotary internal combustion multi-rotor
engines used for pumps, generator, compressors, and auxiliary power units
applications.
Alturdyne, Inc. has granted the exclusive license and right to manufacture,
package (e.g. such as assembling of third party products), market, develop, and
use the Licensed Technology and Licensed Intellectual Property in order to
manufacture, package, market and install, develop, service and warranty the
Technology for a period not to exceed ten (10) years, unless otherwise
extended.
35
TECHNICOLD SERVICES, INC. - offers consulting engineering services, including
process safety management compliance and ammonia refrigeration and carbon
dioxide system design. TSI also provides operation, maintenance and safety
seminars for ammonia refrigeration technicians and supervisors.
Effective as of June 30, 2002, the Registrant dissolved four of its wholly
owned operating companies: Nauticon, Inc., Channel Freeze Technologies, Inc.,
Rotary Power Enterprise, Inc. and Power Sources, Inc.
Nauticon, Inc. has been dissolved as a corporate entity, and all assets
including the Nauticon and EV-Chiller product line have been transferred to
PowerCold Products, Inc., which will manufacture and market all related
Nauticon products.
Channel Freeze Technologies, Inc. has been dissolved as a corporate entity, and
the technology has been transferred back to the original owners. The Registrant
is allocating all its resources into its current product line's, therefore,
management decided there was no current synergy for the Channel Freeze
technology and does not foresee the technology in the Registrant's future
business plans.
Power Sources, Inc. has been dissolved as a corporate entity, and the
Registrant has formed a new wholly owned subsidiary, Alturdyne (AES) Energy
Systems, to market all the Registrants power related products, including
cogeneration, Combined Heat and Power (CHP), natural gas rotary power engines
and micro rotary generator sets. The restructure will provide greater revenue
and profits for the cogeneration business, by facilitating maximum flexibility
with equipment and construction vendors, and by supporting design, engineering
and installation projects.
The Registrant terminated by mutual agreement all contracts with Utility Metal
Research, Inc. ("UMRI") and transferred all open contracts through May 31, 2002
back to UMRI without penalty.
Rotary Power Enterprise, Inc. has been dissolved as a corporate entity, and all
assets have been transferred to Alturdyne (AES) Energy Systems, Inc., which
will market the natural gas rotary power engine products.
RESULTS OF OPERATIONS
THE COMPANY'S CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SECOND QUARTER ENDED
JUNE 30, 2002 COMPARED TO THE SECOND QUARTER ENDED JUNE 30, 2001:
Revenue for the six months period ended June 30, 2002 increased 100% to
$846,490 from $424,098 for the same period ended June 30, 2001. Revenue for the
three months period ended June 30, 2002 was $475,702 for product sales and
$20,038 for services.
Gross operating margins for the six months period ended June 30, 2002 increased
to 27.8% from 5.9% for the year ended December 31, 2001. Gross Profit for the
six months period ended June 30, 2002 increased to $235,480 compared to
$182,297 for the six months ended June 30, 2001. Gross Profit for the three
months period ended June 30, 2002 was $171,860 or 34.6% of revenue.
36
Current revenue backlog pending some final purchase orders was some $2,156,861,
and current work-in-process was $869,115, as of July 31, 2002. The first half
of 2002 has brought rapidly increasing orders for the Company's energy saving
cooling systems and correspondingly an improved revenue picture. The Company's
revenue in the first half of 2002 is nearly equal to the total revenue for all
of the year 2001, as a result of growing sales of the patented energy saving
cooling systems. The Company's sales and revenue should continue to increase
due to the increased volume of customer proposals for the newly designed
Nauticon Evaporative Condenser, which is the heart of its COLD product line,
and the exclusive Evaporative Chiller Product Line, which provides chilled
water (EV Chill{trademark}), air conditioning (EV Cool{trademark}), and
refrigeration (EV Frig{trademark}). The basic Nauticon unit has evolved from a
40-ton condenser into a multi-unit condenser product line offering up to 350-
ton capacity. The outcome is a new evolved Nauticon unit with nearly double its
capacity. A patent has been applied for on the new more efficient unit. These
Nauticon systems save up to 50% in energy costs. Management also believes
that product sales and revenues will continue to improve because of new sales
programs being implemented. Numerous proposals are continually being quoted to
prospective customers for all product lines. Gross margins will continue to
improve as the Company begins to capture economies of scale; sales volume
increases and manufacturing production cycles shorten and overall production
methods improve.
Last year orders were predominantly for basic Nauticon cooling units with a
base price of $6,000 to $8,000. This year, with the sales emphasis on larger
tonnage cooling systems, the majority of new sales have shifted to larger
chilling units in the $30,000 - $100,000 plus range. Some of the units exceed
$100,000 each when heating is added to the system installation.
PowerCold recently acquired Applied Building Technology, based supplier of
complete standardized heating, ventilation and air conditioning (HVAC) packages
for standard-sized commercial buildings such as national chain businesses.
This new proven entity is expected to generate substantial revenue and profits
for the Company.
Operating expenses for the six months period ended June 30, 2002 increased to
$2,176,421 compared to $1,035,436 for the same period June 30, 2001,
Net Loss for the six months period ended June 30, 2002 increased 102% to
$2,176,421 from $1,035,436 for the same period ended June 30, 2001. The Net
Loss for the six months period ended June 30, 2002 included some $430,000 in
excess corporate expense, as referenced below and loss from discontinued
operations of $667,723.
Net Loss per share for the six months period ended June 30, 2002 was $0.09
compared to $0.07 for the same period ended June 30, 2001.
Net loss per share was based on weighted average number of shares of 16,268,893
for June 30, 2002 compared to 13,259,614 for the same six-month period in 2001.
The current quarter operating loss was due to increased general and
administrative sales and marketing activity, and maintaining general Company
operating overhead including additional specific engineering and marketing
costs for the Nauticon product line. The Company has restructured its
operations to comply with its current productive product line of evaporative
condensers and new chiller systems. The large increase in operating expense for
the first six months of operations was primarily due to the Company's major
focus on sales and marketing, and a sharp increase in research and development
and warranty work (new Nauticon units and new EV chiller product line).
Increased operating expenses were also due to setting up additional new
manufacturing plant operations in La Vernia, Texas, and establishing new
facilities in Tampa, Florida for Ultimate Comfort Systems, Inc.
37
The Company is experiencing a unique sales momentum as customers aggressively
seek ways to reduce their power peak demand and energy costs in today's
escalating real time electricity world. Management believes that the wholly
owned subsidiary, Ultimate Comfort Systems including the recently acquired
Applied Building Technology business will be the largest major revenue
producers for the Company. The sales market for UCS is the hospitality
industry; packaged (HVAC) systems for larger-sized commercial buildings:
hotels/motels, nursing homes and extended care facilities. The new ABT sales
market is (HVAC) packaged systems for standard-sized commercial buildings such
as national chain businesses. The hotel/motel industry is planning to build
some 1,000 new buildings over the next three years. The numerous fast food
industry chains are continually remodeling and added new restaurants both in
the U.S. and international.
THE COMPANY'S CONSOLIDATED BALANCE SHEET AS OF THE FIRST SIX MONTHS ENDED JUNE
30, 2002 COMPARED TO YEAR ENDING DECEMBER 31, 2001.
Total current assets increased to $1,718,270 for the first six months ended
June 30, 2002 compared to $729,982 for the year ending December 31, 2001. Total
assets decreased to $2,825,227 for the first six months ended June 30, 2002
compared to $2,839,524 for the year ending December 31, 2001. Total liabilities
increased to $666,093 for the first six months ended June 30, 2002 compared to
$500,331 for the year ending December 31, 2001. Total stockholders' equity
decreased to $2,159,134 for the first six months ended June 30, 2002 compared
to $2,339,193 for the year ending December 31, 2001.
The decrease in total assets and liabilities for the three months ended June
30, 2002 was mainly due to dissolving four wholly owned non-productive
operating companies. Assets decreased $1,769,534 and liabilities decreased
$1,218,392. Commitments and contingencies, old outstanding accounts payable
from the previous RealCold products and Nauticon operations, are being written
down and have been reduced to $153,204.
Liquidity and Capital Resources: At June 30, 2002, the Company's working
capital increased to $1,207,785 compared to $403,364 at December 31, 2001. The
increase in cash was primarily attributable to equity capital from the sale of
Company stock.
During the six months ended June 30, 2002, the Company issued 1,316,970 total
shares of common stock at $1.62 per share and canceled 100,000 shares of common
stock at $1.09 per share. The Company issued 356,955 shares of common stock at
$1.06 per share for consulting and other services and 2,813 shares of common
stock for stock issuance costs of $4,642. The Company issues restricted common
shares for private placement funding on a negotiated basis. The Company also
issues 30,000 restricted common shares for compensation at $1.00 per share.
Status of Operations: Management intends to continue to utilize and develop
the intangible assets of the Company. At June 30, 2002, intangible assets
comprise less than 13% of the Company's assets. The recovery of these
intangible assets is dependent upon achieving profitable operations. It is
Management's opinion that the Company's cash flow generated from current
intangible assets is not impaired, and that recovery of its intangible assets,
upon which profitable operations will be based, will occur.
Management believes that its working capital may not be totally sufficient to
support both its current operations and growth plans. Management has
implemented a new operating plan providing guidance for cash management and
revenue growth. During the past few months the Company has raised sufficient
private placement capital for current cash requirements, and foresees continued
private placement funding to meet future production.
38
PART 11. 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.
8-K filed April 5, 2002 - Alturdyne Letter of Intent
8-K filed June 28, 2002 - Corporate Reorganization
8-K filed August 1, 2002 - Applied Building Technology Acquisition
8-K filed August 5, 2002 - Alturdyne Technology Agreement
39
POWERCOLD CORPORATION
FORM 10-Q
JUNE 30, 2002
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
POWERCOLD CORPORATION
/s/ Francis L Simola
-----------------------
FRANCIS L. SIMOLA
PRESIDENT AND CEO
DATE: AUGUST 19, 2001