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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2002
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO
____________________
Commission File No. 0-31805
POWER EFFICIENCY CORPORATION
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(Exact name of Registrant as specified in its charter)
Delaware 22-3337365
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(State or other jurisdiction of (I.R.S. Employer Identification NO.)
incorporation ororganization)
4220 Varsity Drive Suite E
Ann Arbor, MI 48108
(734-975-9111)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirement for the past 90 days.
Yes X No__
The number of shares outstanding of the Issuer's Common Stock, $.001 Par Value,
as of August 6, 2002 was 6,580,620. Transitional Small Business Disclosure
Format (check one):
Yes ___No X
Table of Contents
POWER EFFICIENCY CORPORATION
FORM 10-QSB INDEX
Page
Index 2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets as of June 30, 2002 and December 31, 2001 3
Condensed Statements of Operations for the three months
ended June 30, and the six months ended June 30, 2002 and 2001 4
Condensed Statements of Cash Flows for the three months ended
June 30, and the six months ended June 30, 2002 and 2001 5
Notes to Condensed Financial Statements 6/7
Item 2. Management's Discussion and Analysis 8/9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities and Use of Proceeds 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
2
Power Efficiency Corporation
Condensed Balance Sheets
June 30, 2002 and December 31, 2001
(Unaudited)
June 30, 2002 December 31, 2001
------------- -----------------
Assets
Current Assets
Cash and Equivalents $ 1,433,525 $ 35,245
Accounts Receivable - Trade - Net of reserve of $5,000 108,690 11,118
Inventory 519,192 609,545
Prepaid Expenses 8,682 --
---------------- ------------------
Total Current Assets 2,070,089 655,908
---------------- ------------------
Property and Equipment, Net 132,867 148,565
---------------- ------------------
Other Assets
Deposits 15,500 15,500
Patent Application Costs (Net) 13,927 15,987
Goodwill 1,929,963 1,929,963
Customer Contacts, Manuals and Sales Literature 132,812 154,352
Website and Customer List 54,283 73,095
---------------- ------------------
Total Other Assets 2,146,485 2,188,897
---------------- ------------------
$ 4,349,441 $ 2,993,370
================ ==================
Liabilities and Stockholders' Equity
Current Liabilities
Line of Credit Agreement $ 225,387 $ 445,386
Accrued Salaries and Payroll Taxes 226,239 83,433
Accounts Payable and Accrued Expenses 417,280 672,122
Stockholder and Officers' Loans Payable 28,313 105,500
---------------- ------------------
Total Current Liabilities 897,219 1,306,441
---------------- ------------------
Long - Term Liability:
Stockholder Note Payable 375,000 300,000
---------------- ------------------
Total Liabilities 1,272,219 1,606,441
---------------- ------------------
Stockholders' Equity
Preferred Stock, $.001 par Value,
10,000,000 shares Authorized, 2,346,233 Series
A-1 Convertible Preferred Stock issued and
outstanding in 2002 and none issued and
outstanding in 2001 2,346 --
Common Stock, $.001 par Value, 50,000,000 shares
Authorized, 6,580,620 and 6,523,120 issued and
outstanding in 2002 and 2001, respectively 6,580 6,523
Additional paid-in capital 11,431,322 8,869,914
Accumulated Deficit (8,363,026) (7,489,508)
----------------- ------------------
Total Stockholders' Equity 3,077,222 1,386,929
----------------- ------------------
$ 4,349,441 $ 2,993,370
================= ==================
See notes to condensed Financial Statements.
3
Power Efficiency Corporation
Condensed Statements of Operations - Unaudited
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
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2002 2001 2002 2001
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REVENUES $ 109,304 $ 212,404 $ 248,446 $ 367,458
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COSTS AND EXPENSES:
Cost of Sales $ 53,783 $ 122,905 $ 125,728 $ 202,212
Research and Development 84,554 61,600 168,101 128,774
Manufacturing 44,924 59,878 97,775 95,083
Selling, general and administrative 436,508 290,182 669,946 576,151
Depreciation and Amortization 28,185 72,195 59,614 144,390
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Total Costs and Expenses $ 647,954 $ 606,760 $ 1,121,164 $ 1,146,610
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LOSS BEFORE PROVISION FOR INCOME TAXES $ (538,650) $ (394,356) $ (872,718) $ (779,152)
PROVISION FOR INCOME TAXES 1,003 200 1,003 200
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NET LOSS $ (539,653) $ (394,556) $ (873,721) $ (779,352)
=================================================================
BASIC LOSS PER COMMON SHARE $ (.08) $ (.06) $ (.13) $ (.12)
======================= =========================================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 6,548,120 6,440,000 6,548,120 6,440,000
=================================================================
See notes to condensed Financial Statements.
4
Power Efficiency Corporation
Condensed Statements of Cash Flow - Unaudited
Six Months Ended June, 30, 2002 and 2001
June 30, 2002 June, 30, 2001
----------------- -----------------
Cash Flow From Operating Activities
Net Loss $ (873,721) $ (779,352)
Adjustments to reconcile net loss to net cash:
Used for operation activities:
Depreciation and Amortization 59,614 144,390
Issuance of Stock for Services and Options 167,500 47,300
Debt Restructuring -- 130,000
Changes in Certain
Assets and Liabilities (Increase) Decrease
Accounts Receivable - Trade (97,572) (84,472)
Inventory - Raw Materials/Finished Goods 90,353 20,503
Prepaid Expenses (8,682) --
Accounts Payable and Accrued Expenses (95,520) (335,279)
-------------- -------------
Total Adjustments 115,693 (77,558)
-------------- -------------
Net Cash used for Operating Activities $ (758,028) $ (856,910)
-------------- -------------
Investing Activities
Equipment Purchases
(1,505) (29,716)
Deposit
-- (9,500)
-------------- -------------
Net cash from investing activities
(1,505) (39,216)
Financing Activities
Proceeds from issuance of equity securities 2,500,000 754,645
Notes Payable - Bank (220,000) 32,500
Costs related to issuance of Equity Securities (120,000) (15,000)
Officer' and Stockholder Notes Payable, net (2,187) 200,000
-------------- -------------
Net Cash From Financing Activities 2,157,813 972,145
-------------- -------------
Net Increase (Decrease) in Cash $ 1,398,280 $ 76,019
============== =============
Summary:
Cash Balance At End Of Period $ 1,433,525 $ 84,511
Cash Balance At Beginning Of Period 35,245 8,492
-------------- -------------
Net Increase (Decrease) in Cash $ 1,398,280 $ 76,019
============== =============
Noncash Investing and Financing Activities
Common Stock issued in connection
with the settlement of accounts
payable/Conversion Stockholder
loan payable $ 7,500 $ 240,375
Common Stock issued for services rendered $ 167,500 $ --
============== ==============
See notes to condensed Financial Statements.
5
POWER EFFICIENCY CORPORATION NOTES
TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1, BASIS OF PRESENTATION
The accompanying unaudited financial statements, which are for interim
periods, do not include all disclosures required to be presented in the
annual financial statements. These unaudited financial statements
should be read in conjunction with the financial statements and the
footnotes thereto for the year ended December 31, 2001 contained in
Power Efficiency Corporation's (the "Company") Form 10-KSB Annual
Report and Form 10-SB Registration Statement, as amended from time to
time, as filed with the Securities and Exchange Commission. The June
30, 2002 balance sheet was derived from unaudited financial statements,
and does not include all disclosures required by generally accepted
accounting principles.
NOTE 2, INTERIM PERIODS
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (which are of a normal recurring
nature) necessary for a fair presentation of the financial statements.
The results of operations for the six months ended June 30, 2002 are
not necessarily indicative of the results to be expected for the full
year.
NOTE 3, GOING CONCERN
The accompanying condensed interim financial statements have been
prepared assuming the Company is a going concern which assumption
contemplates the realization of assets and satisfaction of liabilities
in the normal course of business. The financial statements do not
include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amount of liabilities
that might be necessary should the Company be unable to continue in
existence. Continuation of the Company as a going concern is dependent
on achieving profitable operations. Management's plans to achieve
profitability include developing new products, obtaining new customers
and increasing sales to existing customers. Management has raised
additional capital through issuance of Series A-1 Convertible Preferred
Stock in the amount of $2,500,000 to Summit Energy Ventures, LLC.
NOTE 4, PER SHARE DATA
Per share data was computed by dividing net loss by the weighted
average number of shares outstanding during the period.
NOTE 5, REVENUE
For financial reporting purposes, the Company reports revenues from
sales as product is shipped and invoiced.
NOTE 6, LINE OF CREDIT AGREEMENT
On April 30, 2002 the company's line of credit with the bank expired.
The bank agreed to forbear from taking any collection activity
concerning the expired line of credit until June 17, 2002. During June,
2002, the company received the proceeds from the investment of Summit
Energy Ventures, LLC and has paid the bank the amount of $220,000 thus,
reducing the line of credit to $225,387. As of the present time, the
bank has not taken any collection action and they can be repaid out of
current available cash, however, the company is in the process of
negotiating a new bank line and believes that it will shortly be
successful in consummating a new line. The balance due the current bank
would be repaid from the proceeds of the new line of credit. In the
event that the current bank is not in agreement with the Company's
plan, the bank would be paid from current available cash.
6
NOTE 7, GOODWILL
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No.142, " Goodwill and Other Intangible Assets", for
the year ended December 31, 2002. SFAS No. 142 was applied at the
beginning of the fiscal year. SFAS No.142 requires that Goodwill shall
no longer be amortized. Goodwill shall be tested for impairment on an
annual basis and between annual tests in certain circumstances.
NOTE 8, RELATED PARTY TRANSACTIONS
During the six months ended June 30, 2002, a stockholder lent the
Company $50,425 and officers lent the Company $120,000. During the six
months ended June 30, 2002, the Company repaid the stockholder $40,000
and repaid the officers $107,200.
NOTE 9, ISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK
The Company received $2,500,000 from the sale of 2,346,233 shares of
Series A-1 Convertible Preferred Stock to Summit Energy Ventures, LLC,
which resulted in Summit owning a 28% fully diluted stake in the
Company. Summit also received a stock purchase warrant which is
exercisable after December 14, 2003, to purchase such number of
additional shares of Series A-2 Convertible Preferred Stock, $.001 par
value per share, of the Company enabling Summit to purchase up to 51%
of the Company's fully diluted Common Stock. The sale and issuance of
Series A-1 Convertible Preferred Stock to Summit is described in the
Company's Form 8-K filing on June 20, 2002.
NOTE 10, ISSUANCE OF COMMON STOCK FOR SERVICES
On April 15, 2002, the Company issued 50,000 shares of common stock to
a consultant of the Company for services rendered. Since the price per
share was $3.35, the Company recognized additional compensation
expenses of $167,500. This additional compensation expense is included
in selling, general and administrative expenses.
NOTE 11, FILING OF FORM 10-KSB FOR FISCAL YEAR 2001-APRIL 2002
In conjunction with the Company's filing of its Form 10-KSB for the
year ended December 31, 2001 with the United States Securities and
Exchange Commission (the "SEC") on or about April 1, 2002, certain
modifications were made to previously filed financial statements for
2000 and the first, second and third quarters of 2001. Such
modifications related primarily to the valuation of the Performance
Control acquisition, the valuation of the repriced options, the value
of options issued during the periods and settlement of a loan payable
for common stock.
7
Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion is designed to provide a review of the financial
condition and results of operations of Power Efficiency Corporation (the
"Company"). This discussion should be read in conjunction with the financial
statements and related notes.
Forward-Looking Statements:
This discussion and analysis of financial condition and results of operations,
and other sections of this report, contain forward-looking statements that are
based on management's beliefs, assumptions, current expectations, estimates and
projections about the industrial and commercial motor industry, the economy, and
about the Company itself. Words such as "anticipates" "believes," "estimates,"
"judgment," "expects," "forecasts," "intends," "is likely," "plans," "predicts,"
"projects," variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions
("Risk Factors") that are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and outcomes may
materially differ from what may be expressed, implied or forecasted in such
forward-looking statements.
Risk Factors include, but are not limited to, demand for products and services;
the degree of competition by competitors; changes in tax laws, changes in
prices; levies and assessments; the impact of technological advances and issues;
governmental and regulatory policy changes; the outcomes of pending and future
litigation and contingencies; trends in customer behavior; the ability to raise
capital and maintain financing sources; development of the Company's products;
and changes in the national economy. These are representative of the Risk
Factors that could cause a difference between an ultimate actual outcome and a
preceding forward-looking statement. The Company undertakes no obligation to
update, amend or clarify forward-looking statements, whether as a result of new
information, future events or otherwise.
Results of Operations:
Revenues. Revenues for the three months ended June 30, 2002 was $109,304
compared to $212,404 of revenues for the prior comparable quarter, a decrease of
$103,100. The decrease in revenue was principally attributable to the stagnation
of the economy which delayed purchase orders.
Cost of revenues. Cost of revenues for the three months ended June 30, 2002 was
$53,783, or 49.2% of revenues compared to $122,905, or 57.9% of revenues for the
three months ended June 30, 2001. The decrease in cost of revenues was due to
purchases of inventory from new sources at lower prices.
Research and development. Research and development expenses were $84,554, or
77.4% of revenues, for the three months ended June 30, 2002 as compared to
$61,600, or 29% of revenues, for the three months ended June 30, 2001 due to
increased R&D activity including independent testing.
Selling, general, manufacturing and administrative. Selling, general,
manufacturing and administrative expenses increased to $481,432 or 193.8% of
revenues, for the three months ended June 30, 2002 from $350,060 or 164.8% of
revenues, for the three months ended June 30, 2001. The increase in expenses was
primarily due to increases in sales expense, administrative personnel and
compensation expense.
As a result, the Company incurred a net loss of $539,653 for the three months
ended June 30, 2002 compared to a loss of $394,556 during the three months ended
June 30, 2001.
Financial Condition, Liquidity, and Capital Resources
Since inception, the Registrant has financed its operations primarily through
the sale of equity securities and using bank borrowings. As of June 30, 2002,
the Registrant has received a total of approximately $4,757,261 from public and
private offerings of its equity securities and received approximately $245,387
under a bank line of credit. As of June, 30, 2002, the Registrant had cash and
cash equivalents of $1,433,525.
8
Cash used in operating activities was for the six months ended June 30, 2002,
was $758,028 in 2002, and $856,910 in 2001. Cash used in operating activities in
the six months ended June 30, 2002 reflected a net loss of $873,721. In 2001 for
the same period, cash used in operating activities reflected a net loss of
$779,352.
The Registrant expects to experience growth in its operating expenses,
particularly in research and development and selling, general and administrative
expenses, for the foreseeable future in order to execute its business strategy.
As a result, the Registrant anticipates that operating expenses, as well as
planned increases in inventory expenditures, will constitute a material use of
any cash resources.
Management believes that its existing cash and cash equivalents are sufficient
to meet the Registrant's anticipated cash needs for the next 6 months. Even
though capital resources are sufficient to satisfy the Registrant's liquidity
requirements, management still intends to seek additional financing through a
line of credit.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company settled certain claims and counterclaims related to
litigation for breach of contract arising out of the manufacture and assembly of
certain electronic component parts. The Company and the manufacturer entered
into a settlement agreement under terms of which the Company paid the
manufacturer $5,000 and issued the manufacturer 7,500 shares of common stock,
$.001 par value per share, of the Company against delivery of certain products
by the Manufacturer, as performed by the Company as of June 30, 2002.
ITEM 2. CHANGES IN SECURITIES
The Company received $2,500,000 from the sale of 2,346,233 shares of
Series A-1 Convertible Preferred Stock to Summit Energy Ventures, LLC, which
resulted in Summit owning a 28% fully diluted stake in the Company. Summit also
received a stock purchase warrant which is exercisable after December 14, 2003,
to purchase such number of additional shares of Series A-2 Convertible Preferred
Stock, $.001 par value per share, of the Company enabling Summit to purchase up
to 51% of the Company's fully diluted Common Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
On August 12, 2002, the Board of Directors of the Company replaced
Stephen Shulman as President and Chief Executive Officer of the Company and in
his place, the Company appointed Raymond J. Skiptunis to serve as interim
President and Chief Executive Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A Form 8-K was filed by the Company on June 20, 2002 to describe the
issuance of Series A-1 Convertible Preferred Stock to Summit Energy Ventures,
LLC.
9
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized
POWER EFFICIENCY CORPORATION
Date: August 13, 2002 /s/ Raymond J. Skiptunis
---------------------------------
Raymond J. Skiptunis
Interim President and
Chief Executive Officer
10