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 September 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 Id. 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 – 17,831,807 shares outstanding at September 30, 2002.
POWERCOLD CORPORATION
AND SUBSIDIARIES
Form 10Q for the period ended September 30, 2002
INDEX
Page
PART I.
FINANCIAL INFORMATION
Item 1:
Consolidated Financial Statements
3
Table of Contents:
Accountants Review Report
5
Consolidated Balance Sheets
6
Consolidated Statement of Operations – Three Months
8
Consolidated Statement of Operations – Nine Months
9
Consolidated Statement of Stockholders' Equity
10
Consolidated Statement of Cash Flows
13
Notes to Consolidated Financial Statements
15
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations.
34
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings.
41
Item 2.
Changes in Securities.
41
Item 3.
Defaults Upon Senior Securities.
41
Item 4.
Submission of Matters to a Vote of
Security Holders.
41
Item 5.
Other Information.
41
Item 6.
Exhibits and Reports on Form 8-K.
41
Signatures
42
POWERCOLD CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
September 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
September 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
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 September 30, 2002 and the related consolidated statements of operations, stockholders' equity, and cash flows for the nine months ended September 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
November 15, 2002
POWERCOLD CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
September 30, ------------------------------
2002 2001 2000
Unaudited Restated Restated
-------------- -------------- --------------
ASSETS
CURRENT ASSETS
Cash $ 7,129 $ 290,174 $ 106,864
Trade accounts receivable, net of
Allowance 446,192 173,769 38,665
Receivables from related parties - 1,686 -
Inventory 164,495 241,853 241,272
Prepaid expenses 5,750 22,500 307,500
-------------- -------------- --------------
Total Current Assets 623,566 729,982 694,301
-------------- -------------- --------------
OTHER ASSETS
Property and equipment, net 139,584 41,113 19,499
Patent rights and related technology, net 325,027 382,108 459,343
License and technology, Alturdyne 400,000 - -
Goodwill, net 16,866 16,866 27,392
Securities available for sale 389,000 970,000 -
Deposits and prepaid rent 6,336 9,645 7,705
-------------- -------------- --------------
Total Other Assets 1,276,813 1,419,732 513,939
Net assets from discontinued operations - 689,810 572,620
-------------- -------------- --------------
TOTAL ASSETS $ 1,900,379 $ 2,839,524 $ 1,780,860
=============== ============== ==============
See accompanying notes and accountant's review report.
POWERCOLD CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
September 30, ------------------------------
2002 2001 2000
Unaudited Restated Restated
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 508,223 $ 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 34,014 36,329 43,328
Current portion of capital lease payable 3,012 3,018 3,419
-------------- -------------- --------------
Total Current Liabilities 600,316 326,618 350,915
-------------- -------------- --------------
CAPITAL LEASE PAYABLE, net of current
portion 1,815 5,413 6,826
COMMITMENTS AND CONTINGENCIES 149,820 168,300 168,300
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, 17,831,807, 16,027,882
and 12,669,383, shares issued and
outstanding, respectively 17,831 16,027 12,669
Additional paid-in capital 12,861,713 10,210,665 8,243,227
Stock options and warrants 384,040 471,980 -
Accumulated deficit (12,504,156) (9,329,479) (7,001,077)
Accumulated other comprehensive income 389,000 970,000 -
-------------- -------------- --------------
Total Stockholder's Equity 1,148,428 2,339,193 1,254,819
-------------- -------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,900,379 $ 2,839,524 $ 1,780,860
=============== ============== ==============
See accompanying notes and accountant's review report.
POWERCOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended September 30,
----------------------------------------------
2002 2001 2000
Unaudited Unaudited Unaudited
-------------- -------------- --------------
REVENUES
Product sales $ 435,201 $ 305,527 $ 200,591
Services 25,258 67,478 -
-------------- -------------- --------------
Total Revenues 460,459 373,005 200,591
-------------- -------------- --------------
COST OF REVENUES
Materials 220,338 184,274 75,220
Direct labor 86,920 72,593 29,632
Manufacturing supplies 3,758 2,792 1,140
Shipping and handling 23,333 19,544 7,978
-------------- -------------- --------------
334,349 279,203 113,970
-------------- -------------- --------------
GROSS PROFIT 126,110 93,802 86,621
-------------- -------------- --------------
OPERATING EXPENSES
Sales 58,466 23,830 23,021
Advertising and marketing 107,745 43,689 42,205
Corporate and administrative 662,076 266,107 257,063
Research and development 96,616 39,717 38,368
Legal and accounting 30,244 11,915 11,510
Occupancy 24,127 11,915 7,674
Depreciation and amortization 18,930 24,048 39,505
-------------- -------------- --------------
Total Operating Expenses 998,204 421,222 419,345
-------------- -------------- --------------
LOSS FROM OPERATIONS (872,094) (327,420) (218,754)
OTHER INCOME (EXPENSES)
Other income - - 3,929
Inventory impairment (143,742) - -
Interest income (expense) (2,764) 1,367 1,579
Interest and financing expense - (2,124) -
Gain on litigation settlement - - 76,400
-------------- -------------- --------------
Total Other Income (Expenses) (146,506) (757) 81,908
-------------- -------------- --------------
LOSS BEFORE INCOME TAX (1,018,600) (328,177) (136,846)
INCOME TAX EXPENSE - - -
-------------- -------------- --------------
Net loss from continuing operations (1,018,600) (328,177) (136,846)
Net loss from discontinued operations - (14,281) (53,952)
-------------- -------------- --------------
NET LOSS (1,018,600) (342,458) (190,798)
OTHER COMPREHENSIVE INCOME
Unrealized gain (loss) on investments (212,400) (388,000) -
-------------- -------------- --------------
COMPREHENSIVE LOSS $ (1,231,000) $ (730,458) $ (190,798)
============== ============== ==============
LOSS PER COMMON SHARE, BASIC AND DILUTED
CONTINUING OPERATIONS $ (0.06) $ (0.02) $ (0.02)
============== ============== ==============
LOSS PER COMMON SHARE, BASIC AND DILUTED,
DISCONTINUED OPERATIONS $ NIL $ NIL $ NIL
============== ============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 16,335,560 14,444,668 11,255,604
============== ============== ==============
See accompanying notes and accountant's review report.
POWERCOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Nine Months Ended September 30,
----------------------------------------------
2002 2001 2000
Unaudited Unaudited Unaudited
Restated Restated
-------------- -------------- --------------
REVENUES
Product sales $ 1,238,490 $ 661,772 $ 293,117
Services 68,459 135,331 14,190
-------------- -------------- --------------
Total Revenues 1,306,949 797,103 307,307
COST OF REVENUES
Material 612,809 338,653 129,704
Direct labor 276,082 151,091 57,868
Manufacturing supplies 17,649 10,420 3,990
Shipping and handling 38,818 20,840 7,981
-------------- -------------- --------------
945,358 521,004 199,543
-------------- -------------- --------------
GROSS PROFIT 361,591 276,099 107,764
OPERATING EXPENSES
Sales 144,477 75,460 37,328
Advertising and marketing 328,815 166,012 82,121
Corporate and administrative 1,808,167 1,071,531 530,056
Research and development 128,351 60,368 29,862
Legal and accounting 172,006 90,552 44,793
Occupancy 85,283 45,276 22,397
Depreciation and amortization 53,105 70,749 63,230
-------------- -------------- --------------
Total Operating Expenses 2,720,204 1,579,948 809,787
-------------- -------------- --------------
LOSS FROM OPERATIONS (2,358,613) (1,303,849) (702,023)
OTHER INCOME (EXPENSES)
Royalty income - 44,785 -
Interest income (expense) (4,649) (53,290) (10,405)
Other income (expenses) - - 2,607
Inventory impairment (143,742) - -
Gain on litigation settlement - - 76,400
-------------- -------------- --------------
Total Other Income (Expenses) (148,391) (8,505) 68,602
-------------- -------------- --------------
LOSS BEFORE INCOME TAX (2,507,004) (1,312,354) (633,421)
INCOME TAX EXPENSE - - (52,222)
-------------- -------------- --------------
NET LOSS FROM CONTINUING OPERATIONS (2,507,004) (1,312,354) (685,643)
NET LOSS FROM DISCONTINUED OPERATONS (667,673) (65,540) (161,856)
-------------- -------------- --------------
NET LOSS (3,174,677) (1,377,894) (847,499)
OTHER COMPREHENSIVE INCOME
Unrealized gain (loss) on investments (581,000) 1,067,000 -
-------------- -------------- --------------
COMPREHENSIVE LOSS $ (3,755,677) $ (310,894) $ (847,499)
=============== ============= ==============
LOSS PER COMMON SHARE, BASIC AND DILUTED
CONTINUING OPERATIONS, $ (0.15) $ NIL $ NIL
=============== ============= ==============
LOSS PER COMMON SHARE, BASIC AND DILUTED
DISCONTINUED OPERATIONS $ (0.04) $ NIL $ NIL
=============== ============= ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 16,291,115 13,658,973 9,609,521
=============== ============= ==============
See accompanying notes and accountant's review report.
POWERCOLD CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<C> <S> <S> <S> <S> <S> <S> <S> <S> <S>
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
</table>
See accompanying notes and accountants' review report.
POWERCOLD CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<C> <S> <S> <S> <S> <S> <S> <S> <S> <S>
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
</table>
See accompanying notes and accountants' review report.
POWERCOLD CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<C> <S> <S> <S> <S> <S> <S> <S> <S> <S>
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
Common stock rescinded
for failure to
perform - - (50,000) (50) 50 - - - -
Common stock and
options rescinded for
acquisition of PSI - - (50,000) (50) (108,400) - (66,500) - (174,950)
Common stock issued
for the acquisition of
Applied Building
Technology, Inc. at
$1.00 per share - - 200,000 200 199,800 - - - 200,000
Other comprehensive
income (loss) - - - - - - - (581,000) (581,000)
Net loss,
Sept. 30, 2002 - - - - - (3,174,677) - - (3,174,677)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
Sept. 30, 2002 - $ - 17,831,807 $ 17,831 $12,861,713 $(12,504,156)$ 384,040 $ 389,000 $ 1,148,428
=========== =========== =========== =========== =========== =========== =========== =========== ===========
</table>
See accompanying notes and accountants' review report.
POWERCOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
----------------------------------------------
2002 2001 2000
Unaudited Unaudited Unaudited
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,174,677) $ (1,377,894) $ (847,499)
Discontinued operations 667,673 65,540 161,856
-------------- -------------- --------------
(2,507,004) (1,312,354) (685,643)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 63,105 70,749 63,230
Bad debt expense 194,155 - -
Impairment of inventory 143,742 - -
Issuance of common stock for services 378,750 234,000 190,066
Issuance of common stock for compensation 30,000 - -
Issuance of common stock for interest and
financing - 54,000 -
Settlement of commitments and
contingencies (18,480) - -
(Increase) decrease in assets:
Accounts receivable (466,578) (214,676) 1,326
Receivable from related party (1,686) - -
Inventories (66,384) 27,454 (23,763)
Prepaid expenses 16,750 92,215 7,236
Refundable income taxes - - 52,222
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 276,019 30,805 (172,774)
Accounts payable, related part - (8,736) -
Deferred revenue - 29,426 -
Commissions payable - 13,282 -
-------------- -------------- --------------
Net cash used in operating activities (1,957,611) (983,835) (568,100)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits 3,309 (1,970) -
Purchase of property and equipment (7,234) (15,810) -
License and technology, Alturdyne (400,000) - -
Acquisition of subsidiary (65,000) - -
Investment in discontinued operations 18,248 (22,697) (119,013)
-------------- -------------- --------------
Net cash provided by (used in) investing
activities (450,677) (40,477) (119,013)
-------------- -------------- --------------
See accompanying notes and accountants' review report.
POWERCOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
----------------------------------------------
2002 2001 2000
Unaudited Unaudited Unaudited
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease (3,604) (1,582) -
Proceeds from issuance of shares under
private placement 2,131,162 1,012,500 1,158,000
Repayment of borrowings (2,315) (25,000) -
Proceeds from borrowing - 165,000 -
Proceeds from advance from affiliate - 192,500 -
Repayment of short-term borrowings,
affiliate - (5,072) -
Cost of issuance of shares under private
placement - (36,000) -
Repayment of short-term borrowings,
affiliate - (241,196) (205,476)
-------------- -------------- --------------
Net cash provided by financing activities 2,125,243 1,061,150 952,524
-------------- -------------- --------------
Net increase (decrease) in cash (283,045) 36,838 265,411
in cash
Cash at beginning of year 290,174 106,864 14,464
-------------- -------------- --------------
Cash at end of period $ 7,129 $ 143,702 $ 279,875
============== ============== ==============
SUPPLEMENTSL CASH FLOW INFORMATION
Interest paid $ 3,738 $ 17,850 $ 11,984
Income taxes paid $ - $ - $ -
NON-CASH TRANSACTIONS:
Unrealized gain (loss) on securities
available for sale $ (581,000) $ - $ -
Issuance of common stock as prepayment
for consulting services $ - $ 15,000 $ -
Issuance of common stock for services
and compensation $ 408,750 $ 234,000 $ 190,066
Issuance of common stock for payment
of accounts payable $ - $ 26,418 $ -
Issuance of common stock for payment of
interest and financing expenses $ - $ 54,000 $ -
Issuance of common stock as stock
offering costs $ - $ 69,625 $ -
Issuance of common stock for prepaid rent$ - $ 22,500 $ -
Issuance of stock for satisfaction of
notes payable $ - $ 100,000 $ -
Issuance of stock for accrued wages $ - $ 25,000 $ -
Issuance of common stock for acquisition $ 200,000 $ - $ -
Stock rescinded in disposition $ (175,000) $ - $ -
See accompanying notes and accountants' review report.
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 line applications. The first is a line of evaporative condensers and heat exchange systems for the HVAC and refrigeration industry. The second is the design and production of unique chiller systems for the HVAV and refrigeration industry. The third is proprietary applications for the HVAC industry; patented four pipe integrated piping system for large commercial buildings and turnkey HVAC systems for light commercial national chain store applications.
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. During the nine months ended September 30, 2002, the Company 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.
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended September 30, 2002, the Company also disposed of PSI. See Note 5.
The financial statements have been restated in prior periods for the disposition of CFTI and PSI.
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 September 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.
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 14.
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 September 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.
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 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.
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 No. 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.
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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. See Note 15.
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 perio d incurred. Market value is determined based on quoted market prices. At September 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 June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146,” Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”). SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and termination benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 was i ssued in June 2002, effective December 31, 2002 with early adoption encouraged. The impact on the Company’s financial position or results of operations from adopting SFAS No. 146 has not been determined.
In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, “Rescission of SFAS Statements No. 44, and 64, Amendment of SFAS Statement No. 13, and Technical Corrections”, which updates, clarifies and simplifies existing accounting pronouncements. SFAS No. 4, which required all gains and losses from the
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting Pronouncements (continued)
extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related tax effect was rescinded, as a result, SFAS No. 64, which amended SFAS No. 4, was rescinded as it was no longer necessary. SFAS No. 145 amended SFAS 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 September 30, 2002 and the years ended December 31, 2001 and 2000.
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 No. 144 replaces SFAS No. 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. SFAS No. 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. &nb sp;The Company adopted SFAS No. 144, which did not have a material impact on the financial statements of the Company at December 31, 2001 or at September 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 September 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,
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting Pronouncements (continued)
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.
In September 2000, the Financial Accounting Standards Board 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 Compan y 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 September 30, 2002, property, equipment and other intangibles and non-current assets comprise a material portion of the Company's assets. The recovery of 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 an d the acquisition of 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.
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 12.
See Note 10 regarding loans from shareholders.
NOTE 5 – ACQUISITIONS
Acquisition of Applied Building Technology, Inc.
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 consideration for the asset acquisition, the Company paid the owners of ABT $65,000 and 200,000 shares of PowerCold common stock at the fair market value of $200,000 plus an option to acquire 150,000 shares of the common stock of PowerCold at a price of $1.50 per share, for a period not to exceed three years from the date of closing.
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 formerly a wholly owned subsidiary of Utility Metal Research Corp. (“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.
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 5 – ACQUISITIONS (continued)
Acquisition of Power Sources, Inc. (continued)
During the nine months ended September 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.
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 defi ned 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 Products at September 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 September 30, 2002, December 31, 2001 and 2000 consist of the following:
September 30, 2002 | December 31, 2001 | December 31, 2000 | ||||||
Materials inventory | $ | 164,495 | $ | 133,432 | $ | 132,851 | ||
Finished goods inventory | - | 108,421 | 108,421 | |||||
$ | 164,495 | $ | 241,853 | $ | 241,272 | |||
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 6 – INVENTORY (continued)
Finished goods inventory consists of the specialized quick-freezing unit of the Company’s Channel Freeze Technology, Inc. subsidiary held as of December 31, 2001 by PowerCold Products, Inc. During the nine months ended September 30, 2002, the Company discontinued Channel Freeze Technologies, Inc. and impaired the quick-freezing unit previously recorded as finished goods inventory (see Note 18). The Company also recorded an additional loss on impairment materials inventory of $35,321 as of September 30, 2002.
NOTE 7 – PROPERTY, EQUIPMENT AND INTANGIBLES
Property and equipment is summarized as follows:
September 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 | 103,579 | 97,555 | 90,487 | |||||
Net Property and Equipment | $ | 139,584 | $ | 41,113 | $ | 19,499 | ||
Depreciation expense for the nine months ended September 30, 2002 and the years ended December 31, 2001 and 2000 was $6,024, $7,068 and $4,616, respectively.
The Company’s intangible assets are summarized as follows:
September 30, 2002 | December 31, 2001 | December 31, 2000 | ||||||
Patents and related technology | $ | 1,222,867 | $ | 822,867 | $ | 822,867 | ||
Goodwill | 105,269 | 105,269 | 105,269 | |||||
Total Intangibles | 1,328,136 | 928,136 | 928,136 | |||||
Less: Accumulated Amortization | 586,243 | 529,162 | 441,401 | |||||
Net Intangibles | $ | 741,893 | $ | 398,974 | $ | 486,735 | ||
Amortization expense for the nine months ended September 30, 2002 and years ended December 31, 2001 and 2000 was $57,081, $87,761 and $119,550, respectively.
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2002 the fair market value of the securities was reduced to $389,000, which has been recognized as other comprehensive income in accordance with SFAS No. 115.
NOTE 9 – LICENSED TECHNOLOGY
During the six months ended June 30, 2002, the Company signed a letter of intent to acquire Alturdyne, Inc., a privately held firm. During the quarter ended September 30, 2002, the Company withdrew its acquisition offer.
PowerCold has paid $400,000 as a prepayment against the first $8,000,000 in royalty payments to be paid to Alturdyne as part of an exclusive license with Alturdyne to manufacture, package, market, develop and use licensed technology and licensed intellectual property for a period not to exceed ten years. Alturdyne is also obligated to provide PowerCold consulting services for up to one thousand two hundred man-hours for a period not to exceed two years. Thereafter PowerCold shall pay $100 per hour for consulting services received from Alturdyne.
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.
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended September 30, 2002 the Company issued 1,284,970 shares of common stock for cash of $2,099,162. In the same period, 32,000 warrants 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 lo ans 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.
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
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 12 – COMMON STOCK (continued)
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 the nine months ended September 30, 2002, the Company issued 150,000 common stock options with an exercise price of $1.50 per share. These options expire in August 2006.
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:
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 | Year Ended December 31, 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) | |
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 13 – STOCK-BASED COMPENSATION AND STOCK OPTIONS (continued)
Number of Shares Under Option | Weighted Average 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 | (150,000) | 0.96 | ||
Granted | 150,000 | 1.50 | ||
Outstanding at September 30, 2002 | 3,692,558 | .86 | ||
Exercisable at September 30, 2002 | 3,692,558 | .86 | ||
Weighted average fair value of options granted during 2002: $ 0.49
The options granted at January 1, 2002 were rescinded in the disposition of PSI.
At September 30, 2002, exercise prices for outstanding options ranged from $0.50 to $1.50. The weighted average contractual life remaining of such options was 3 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.
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 13 – STOCK-BASED COMPENSATION AND STOCK OPTIONS (continued)
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 three reportable segments. 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 design-engineering services related to this technology. PowerCold Products, Inc. (formally known as RealCold Products, Inc.) designs, engineers and manufactures unique proprietary products for the HVAC and refrigeration industry. A fourth new segment, AES Energy Systems, Inc., will be operating as a division under PowerCold Products, Inc. Technicold Services, Inc. offers consulting engineering services to the HVAC and refrigeration industry.
Segment information (after intercompany eliminations) for the nine months ended September 30, 2002 and the years ended December 31, 2001, and 2000 are as follows:
September 30, 2002 | December 31, 2001 | December 31, 2000 | ||||||
Revenues: | ||||||||
Ultimate Comfort Systems, Inc. | $ | 659,973 | $ | 282,733 | $ | - | ||
PowerCold Products, Inc. | 578,516 | 531,605 | 312,865 | |||||
Technicold Services, Inc. | 68,460 | 67,751 | 82,175 | |||||
Corporate | - | - | - | |||||
Total Revenues | $ | 1,306,949 | $ | 882,089 | $ | 395,040 | ||
Operating income (loss): | ||||||||
Ultimate Comfort Systems, Inc. | $ | (178,671) | $ | (209,908) | $ | - | ||
PowerCold Products, Inc. | (1,113,179) | (1,016,673) | (537,475) | |||||
Technicold Services, Inc. | 9,336 | 7,295 | (109,771) | |||||
Corporate | (1,892,213) | (1,040,716) | (764,408) | |||||
Total Operating Loss | $ | (3,174,727) | $ | (2,260,002) | $ | (1,411,654) | ||
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 14 – REPORTABLE SEGMENTS (continued)
Identifiable assets: | ||||||||
Ultimate Comfort Systems, Inc. | $ | 452,602 | $ | 150,429 | $ | 152,415 | ||
PowerCold Products, Inc. | 620,671 | 336,398 | 132,371 | |||||
Technicold Services, Inc. | 24,819 | 26,318 | 120,833 | |||||
Corporate | 802,287 | 2,086,526 | 1,094,866 | |||||
Total Identifiable Assets | $ | 1,900,379 | $ | 2,839,524 | $ | 1,780,860 | ||
Depreciation and amortization: | ||||||||
Ultimate Comfort Systems, Inc. | $ | 7,396 | $ | 10,593 | $ | - | ||
PowerCold Products, Inc. | 54,856 | 56,902 | 83,946 | |||||
Technicold Services, Inc. | 853 | 26,804 | 12,090 | |||||
Corporate | - | - | 28,130 | |||||
Total Depreciation and Amortization | $ | 63,105 | $ | 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.
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 September 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.
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 15 –INCOME TAXES (continued)
The Company recorded approximately $400,000 and $341,000 paid by the issuance of common stock for expenses in the six months ended September 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 September 30, 2002 are as follows:
Year Ending December 31, | Amount | |
2002 | $ | 891 |
2003 | 3,321 | |
2004 | 615 | |
Total | $ | 4,827 |
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 nine months ended September 30, 2002 was $27,000 and for the year ended December 31, 2001 was $89,999.
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 December 31, | Amount | |
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.
POWERCOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 18 – DISPOSITION OF CHANNEL FREEZE TECHNOLOGIES, INC.
In connection with its acquisition of Channel Freeze Technologies, Inc., (CFTI), the Company made aggregate cash payments of $650,000 in 1998 and 1999 while also recording an unpaid acquisition liability of $200,000.
The Company elected to discontinue CFTI as an operating entity in 2002 and has returned to CFTI’s previous owners the entity’s patent and intellectual property in exchange for a release from the aforementioned, unpaid liability of $200,000 and a release from any other contingent or future liabilities.
In the quarter ended June 30, 2002, the Company elected to fully dispose of CFTI and recorded a loss from discontinued operations of $522,620.
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 $149,820 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.
POWERCOLD CORPORATION
AND SUBSIDIARIES
Form 10Q for the period ended September 30, 2002
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), 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.
POWERCOLD CORPORATION
AND SUBSIDIARIES
Form 10Q for the period ended September 30, 2002
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 prof its for this unique proprietary application over the next few years.
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.
POWERCOLD CORPORATION
AND SUBSIDIARIES
Form 10Q for the period ended September 30, 2002
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.
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.< /P>
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.
POWERCOLD CORPORATION
AND SUBSIDIARIES
Form 10Q for the period ended September 30, 2002
Alturdyne has granted the exclusive license (exclusive to both Licensor and Licensee) 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.
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 September 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.
POWERCOLD CORPORATION
AND SUBSIDIARIES
Form 10Q for the period ended September 30, 2002
RESULTS OF OPERATIONS
The Company's Consolidated Statement of Operations for the third quarter ended September 30, 2002 compared to the third quarter ended September 30, 2001:
Revenue for the nine months period ended September 30, 2002 increased 39% to $1,306,949 from $797,103 for the same period ended September 30, 2001. Revenue for the three months period ended September 30, 2002 increased 19% to $460,459 from $373,005 for the same period ended September 30, 2001.
Gross Profit for the nine months period ended September 30, 2002 increased to $361,591 compared to $276,099 for the year ended December 31, 2001. Gross Profit for the three months period ended September 30, 2002 was $126,110 or 27.4% of revenue.
Current revenue backlog pending some final purchase orders was some $2,682,000, and current work-in-process was $1,153,000, as of November 15, 2002. The Company announced that it plans to install over 350 HVAV systems for retail stores and fast food restaurants for over $15,000,00 pending continuous successful customer installations. The Company’s Ultimate Comfort Systems subsidiary is generating increasing orders each month for its energy saving HVAC systems and correspondingly an improving revenue picture. The Company's revenue for nine months of operations is $424,860 greater that 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 national ac count sales and customer proposals for hotel industry. 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™), air conditioning (EV Cool™), and refrigeration (EV Frig™). 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 new evolved Nauticon units 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; as sales volume increases and ma nufacturing 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 $100,000 plus range for the hotel industry.
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 over the next few years.
POWERCOLD CORPORATION
AND SUBSIDIARIES
Form 10Q for the period ended September 30, 2002
Operating expenses for the nine months period ended September 30, 2002 increased to $2,720,204 compared to $1,579,948 for the same period September 30, 2001, an increase of 42%. Operating expenses for the three month period increased to $998,204 compared to $421,222 for the same period September 30, 2002, an increase of 58%.
Net Loss for the nine months period ended September 30, 2002 increased 56% to $3,174,677 from $1,377,894 for the same period ended September 30, 2001. Net Loss for the three month period increased 66% to $1,018,600 from $342,458 for the same period ended September 30, 2001. The Net Loss for the nine months period ended September 30, 2002 included some $524,000 in excess one time corporate expense and inventory write-off from discontinued operations.
Net Loss per share was $0.15 for the nine month period and $0.06 loss per share for three months ended September 30, 2002. Net loss per share was based on weighted average number of shares of some 16,300,00 shares as of September 30, 2002.
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 nine months of operations was primarily due to the Company’s corporate and administrative overhead, increased focus on sales and marketing, and increase in research and development and warranty work (new Nauticon units and new EV chiller product line). Increased operating expenses were also due to manufacturing plant operations in La Vernia, Texas, and establishing new facilit ies in Tampa, Florida for Ultimate Comfort Systems, Inc.
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 indust ry chains are continually remodeling and added new restaurants both in the U.S. and international.
The Company's Consolidated Balance Sheet for the nine months ended September 30, 2002 compared to year ending December 31, 2001.
Total current assets decreased to $623,566 for the first nine months ended September 30, 2002 compared to $729,982 for the year ending December 31, 2001. Total assets decreased to $1,900,379 for the first nine months ended September 30, 2002 compared to $2,839,524 for the year ending December 31, 2001. The decrease in assets was mainly due to cash on hand and devalued securities available for sale.
POWERCOLD CORPORATION
AND SUBSIDIARIES
Form 10Q for the period ended September 30, 2002
Total liabilities increased to $600,316 for the first nine months ended September 30, 2002 compared to $326,618 for the year ending December 31, 2001. Total stockholders' equity decreased to $1,148,428 for the first nine months ended September 30, 2002 compared to $2,339,193 for the year ending December 31, 2001.
The decrease in total assets and increase in liabilities for the nine months ended September 30, 2002 was mainly due to dissolving four wholly owned non-productive operating companies. Commitments and contingencies, old outstanding accounts payable from the previous RealCold products and Nauticon operations, are being written down and have been reduced to $149,820.
Liquidity and Capital Resources: At September 30, 2002, the Company’s working capital decreased substantially compared December 31, 2001. The decrease in cash was primarily attributable to research and development of the enhanced patented Nauticon, which exceeded development time by eighteen weeks, and increased marketing and staffing personnel for its newly acquired ABT national accounts program. Simultaneously, management continued corporate and plant operations during this time because of the need to keep its quality personnel and operations in place.
During the three months ended September 30, 2002, the Company issued 86,667 total shares of common stock at an average $1.33 per share for consulting and other services, and 200,000 shares of common stock at $1.50 for the acquisition of Applied Building Technologies. The Company issues restricted common shares for private placement funding on a negotiated basis. The Company also issues restricted common shares for expenses, payables and service rendered based on a discount off the share price according to the value of the service.
Status of Operations: Management intends to continue to utilize and develop the intangible assets of the Company. At September 30, 2002, intangible assets comprise less than 38% 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 is implemented new operating procedures providing guidance for cash management and revenue growth. The Company has received funding on several occasions from Simco Group, Inc, a separate legal entity wholly owned by the Company's chairman and chief executive officer. The Company plans to raise private placement capital and establish a line of credit for current cash requirements. Management anticipates the Company generating positive cash flow from its national accounts business in the near future. Management is very positive with the Company’s unique product position and future growth plans for the heating, ventilating and air conditioning system (HVAC) industry, wh ich now includes light commercial applications as well as systems for large commercial buildings.
POWERCOLD CORPORATION
AND SUBSIDIARIES
Form 10Q for the period ended September 30, 2002
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 August 1, 2002 - Applied Building Technology Acquisition
8-K filed August 5, 2002 - Alturdyne Technology Agreement
POWERCOLD CORPORATION
AND SUBSIDIARIES
Form 10Q for the period ended September 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: November 18, 2001