The Amended Stockholders’ Agreement shall terminate upon (i) the Registrant closing a firmly underwritten public offering by the Registrant pursuant to a registration statement filed and declared effective under the Securities Act covering the offer and sale of Common Stock for the account of the Registrant yielding net proceeds of at least $15,000,000 to the Registrant at a price per share of Common Stock that yields a total enterprise value of the Registrant of not less than $50,000,000; (ii) bankruptcy receivership or dissolution of the Registrant; (iii) the voluntary agreement of all parties bound by the terms of the Agreement; (iv) the acquisition of all the shares of stock by one party; (v) the full and complete exercise of all the rights under the Warrant by Summit (or its assignee) pursuant to its terms; or (vi) on June 14, 2007.
The Registrant generates revenues from a single business segment: the design, development, marketing and sale of proprietary solid state electrical components designed to reduce energy consumption in alternating current induction motors.
Revenues for the twelve months ended December 31, 2002, were $538,819 compared to $633,563 for the twelve months ended December 31, 2001, a decrease of $94,744, or 15%. The decrease in revenues was principally attributable to organizational issues including funding problems and management issues.
Cost of revenues for the twelve months ended December 31, 2002, decreased to $379,684 from $428,463 a $48,779 or an 11% decline as compared to the twelve months ended December 31, 2001. The decrease in cost of revenues was primarily attributed to the decrease in revenues and an overall reduction in the cost of materials from the Registrant’s suppliers.
OPERATING EXPENSES
Research and Development Expenses
Research and development expenses were $271,634 for the twelve months ended December 31, 2002, as compared to $242,243, representing a $29,391 or a 12%, increase compared to the same period ended December 31, 2001. The development of the low cost, low horsepower Platform A product family, the single-phase controller, and the fast-reaction integrator board increased research and development costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $1,844,117 for the twelve months ended December 31, 2002, an increase of $542,579 or 42% as compared to the twelve months ended December 31, 2001. The increase in selling, general and administrative expenses was due primarily to the recognition of compensation expense and an increase in consulting and professional fees.
Financial Condition, Liquidity, and Capital Resources: For the Year Ended December 31, 2002
Since inception, the Registrant has financed its operations primarily through the sale of its equity securities and using bank borrowings. As of December 31, 2002, the Registrant has received a total of approximately $4,757,261 from public and private offerings of its equity securities and received approximately $445,386 under a bank line of credit which was repaid during 2002. As of December 31, 2002, the Registrant had cash and cash equivalents of $257,708.
Cash used for operating activities for the twelve months ended December 31, 2002 was $1,690,250 which primarily consisted of: a net loss of $2,354,775; less depreciation and amortization of $132,216, additional paid in capital related to issuance of stock options of $312,741, Common stock issued for services of $167,500, and interest accrued on stockholders, officers and former officers’ loans of $28,174; increases in accounts receivable of $76,118; decreases in inventory of $105,522; and increases in prepaid expenses of $9,628. In addition, operating activities reflected a $90,369 decrease in accounts payable and accrued expenses and an increase in accrued salaries and payroll taxes of $94,487. Net cash used for operating activities in fiscal year 2001 was $1,107,265 which primarily consisted of: a net loss of $1,863,802; less depreciation and amortization of $281,587 and additional paid-in capital related to issuance of stock options of $47,300; write-off of deferred financing costs of $38,502; debt restructuring costs of $130,000; decreases in accounts receivable of $103,048; increases in inventory of $83,091; and increases in prepaid expenses and deposits of $9,057. In addition, operating activities reflected a $216,426 increase in accounts payable and accrued expenses and an increase in accrued salaries and payroll taxes of $31,822. Cash used in investing activities for fiscal year 2002 was $7,214, compared to $51,981 in fiscal year 2001. The amounts for both years consisted of the purchase of fixed assets. Net cash provided by financing activities for fiscal year 2002 was $1,919,927, which primarily consisted of proceeds from the issuance of equity securities of $2,380,000, net of costs, and net repayments to stockholders and officers of $14,687. Repayments on a line of credit of $445,386 offset the amounts included above. During fiscal year 2001, net cash provided from financing activities was $1,185,999, which primarily consisted of proceeds from the issuance of equity securities of $613,000, advances on a line of credit of $167,499 and loans from stockholders and officers of $405,500.
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 will constitute a material use of any cash resources.
Since capital resources are insufficient to satisfy the Registrant’s liquidity requirements, management intends to sell additional equity or debt securities or obtain debt financing. The Registrant is currently in the process of negotiating a $1,000,000 debt facility with Summit Energy Ventures, LLC. The Board of Directors has approved the terms of the proposed financing but the Registrant is currently waiting for
22
Summit’s investment committee to approve the financing. According to the terms of the proposed financing, the outstanding balance would accrue interest at a rate of 15 percent and would be convertible into Series A Preferred Stock at a price per share of $0.183 if, after seven (7) days notice by Summit, the outstanding balance is not paid off. The Registrant is also currently meeting with many different potential equity investors and believes it can raise additional funds through private placements of equity.
Cash Requirements and Need for Additional Funds
The Registrant anticipates a substantial need for cash to fund its working capital requirements for the next twelve months. In accordance with the Registrant’s prepared expansion plan, it is the opinion of management that approximately $1.3 million will be required to cover operating expenses, including, but not limited to, marketing, sales and operations during the next twelve months.
Recent Accounting Pronouncements
See “Note 2 – Summary of Significant Accounting Policies” of the Financial Statements for an explanation of recent accounting pronouncements.
23
Item 7. | Financial Statements |
POWER EFFICIENCY CORPORATION
DECEMBER 31, 2002 AND 2001
INDEX
| | | Page |
| | |
|
| Independent Auditors’ Report | F-1 |
| | |
| Financial Statements: | |
| | |
| | Balance Sheet | F-2 |
| | | |
| | Statements of Operations | F-3 |
| | | |
| | Statements of Changes in Stockholders’ Equity | F-4 |
| | | |
| | Statements of Cash Flows | F-5 |
| | | |
| Notes to Financial Statements | F-6-F-19 |
INDEPENDENT AUDITORS’ REPORT
Board of Directors and Stockholders
Power Efficiency Corporation
Ann Arbor, Michigan
We have audited the accompanying balance sheet of Power Efficiency Corporation, (a Delaware corporation) (the “Company”) as of December 31, 2002, and the related statements of operations, changes in stockholders’ equity, and cash flows for each of the years ended December 31, 2002 and 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material respects, the financial position of Power Efficiency Corporation at December 31, 2002 and the results of its operations and its cash flows for the years ended December 31, 2002 and 2001 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations, the balance sheet reflects a deficiency in tangible net worth, the Company has experienced a deficiency of cash from operations and continues to have negative cash flows from operations and lacks sufficient liquidity to continue its operations. These matters raise substantial doubt as to the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note 3. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
| | /s/ SOBEL & CO., LLC |
| | Certified Public Accountants |
| March 5, 2003 | |
| Livingston, New Jersey | |
POWER EFFICIENCY CORPORATION
BALANCE SHEET
DECEMBER 31, 2002
ASSETS | | | | |
| CURRENT ASSETS: | | | | |
| Cash and cash equivalents | | $ | 257,708 | |
| Accounts receivable, net of reserve of $10,000 | | | 87,236 | |
| Inventories | | | 504,023 | |
| Prepaid expenses | | | 9,628 | |
| | |
|
| |
| Total Current Assets | | | 858,595 | |
| | |
|
| |
| PROPERTY AND EQUIPMENT, Net | | | 113,801 | |
| | |
|
| |
| OTHER ASSETS: | | | | |
| Deposits | | | 15,500 | |
| Patents, net | | | 14,994 | |
| Goodwill, net | | | 1,929,963 | |
| Customer contracts, manuals and sales literature, net | | | 111,272 | |
| Website and customer list, net | | | 26,930 | |
| | |
|
| |
| Total Other Assets | | | 2,098,659 | |
| | |
|
| |
| | | $ | 3,071,055 | |
| | |
|
| |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| CURRENT LIABILITIES: | | | | |
| Accounts payable and accrued expenses | | $ | 565,442 | |
| Accrued salaries and payroll taxes | | | 177,920 | |
| | |
|
| |
| Total Current Liabilities | | | 743,362 | |
| | |
|
| |
| LONG-TERM LIABILITIES: | | | | |
| Stockholder and former officers’ loans payable | | | 418,987 | |
| | |
|
| |
| Total Liabilities | | | 1,162,349 | |
| | |
|
| |
| COMMITMENTS AND CONTINGENCIES | | | | |
| STOCKHOLDERS’ EQUITY: | | | | |
| Series A-1 convertible preferred stock, $.001 par value, 10,000,000 shares authorized, 2,346,000 shares issued and outstanding | | | 2,346 | |
| Common stock, $.001 par value, 50,000,000 shares authorized, 6,580,620 shares issued and outstanding | | | 6,581 | |
| Additional paid-in capital | | | 11,744,062 | |
| Accumulated deficit | | | (9,844,283 | ) |
| | |
|
| |
| Total Stockholders’ Equity | | | 1,908,706 | |
| | |
|
| |
| | | $ | 3,071,055 | |
| | |
|
| |
|
See independent auditors’ report and notes to financial statements. | F-2 |
POWER EFFICIENCY CORPORATION
STATEMENTS OF OPERATIONS
| | | Year Ended December 31, | |
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
| REVENUES | | $ | 538,819 | | $ | 633,563 | |
| | |
|
| |
|
| |
| COSTS AND EXPENSES: | | | | | | | |
| Cost of sales | | | 379,684 | | | 428,463 | |
| Research and development | | | 271,634 | | | 242,243 | |
| Manufacturing | | | 213,472 | | | 163,544 | |
| Selling, general and administrative | | | 1,844,117 | | | 1,301,538 | |
| Depreciation and amortization | | | 132,216 | | | 281,587 | |
| | |
|
| |
|
| |
| Total Costs and Expenses | | | 2,841,123 | | | 2,417,375 | |
| | |
|
| |
|
| |
| LOSS FROM OPERATIONS | | | (2,302,304 | ) | | (1,783,812 | ) |
| OTHER INCOME (EXPENSE): | | | | | | | |
| Interest income | | | 7,595 | | | — | |
| Interest expense | | | (54,356 | ) | | (74,290 | ) |
| | |
|
| |
|
| |
| Total Other Expenses, Net | | | (46,761 | ) | | (74,290 | ) |
| | |
|
| |
|
| |
| LOSS BEFORE PROVISION FOR TAXES | | | (2,349,065 | ) | | (1,858,102 | ) |
| PROVISION FOR TAXES | | | (5,710 | ) | | (5,700 | ) |
| | |
|
| |
|
| |
| NET LOSS | | $ | (2,354,775 | ) | $ | (1,863,802 | ) |
| | |
|
| |
|
| |
| BASIC LOSS PER COMMON SHARE | | $ | (0.36 | ) | $ | (0.29 | ) |
| | |
|
| |
|
| |
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | | | 6,562,000 | | | 6,409,000 | |
| | |
|
| |
|
| |
|
See independent auditors’ report and notes to financial statements. | F-3 |
POWER EFFICIENCY CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
| | | Common Stock | | Preferred Stock | | Additional
Paid-in Capital | | Accumulated Deficit | | Stockholders’ Equity | |
| | |
| |
| | | | |
| | | Shares | | Amount | | Shares | | Amount | | | | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| BALANCE, January 1, 2001 | | | 6,043,370 | | $ | 6,043 | | | — | | $ | — | | $ | 7,950,094 | | $ | (5,625,706 | ) | $ | 2,330,431 | |
| Common stock sold at various times during the year, net of costs | | | 343,750 | | | 344 | | | — | | | — | | | 609,656 | | | — | | | 610,000 | |
| Issuance of stock options | | | — | | | — | | | — | | | — | | | 47,300 | | | — | | | 47,300 | |
| Shares issued in conjunction with extinguishment of debt for common stock | | | 125,000 | | | 125 | | | — | | | — | | | 229,875 | | | — | | | 230,000 | |
| Common stock issued for services rendered | | | 10,000 | | | 10 | | | — | | | — | | | 29,990 | | | — | | | 30,000 | |
| Exercise of warrants for common stock | | | 1,000 | | | 1 | | | — | | | — | | | 2,999 | | | — | | | 3,000 | |
| Net loss, 2001 | | | — | | | — | | | — | | | — | | | — | | | (1,863,802 | ) | | (1,863,802 | ) |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| BALANCE, December 31, 2001 | | | 6,523,120 | | | 6,523 | | | — | | | — | | | 8,869,914 | | | (7,489,508 | ) | | 1,386,929 | |
| Sale of preferred stock, net of costs | | | — | | | — | | | 2,346,000 | | | 2,346 | | | 2,377,654 | | | — | | | 2,380,000 | |
| Common stock issued for disputed accounts payable | | | 7,500 | | | 8 | | | — | | | — | | | 16,303 | | | — | | | 16,311 | |
| Common stock issued for services rendered | | | 50,000 | | | 50 | | | — | | | — | | | 167,450 | | | — | | | 167,500 | |
| Cancellation, reissuance and issuance of stock options | | | — | | | — | | | — | | | — | | | 312,741 | | | — | | | 312,741 | |
| Net loss, 2002 | | | — | | | — | | | — | | | — | | | — | | | (2,354,775 | ) | | (2,354,775 | ) |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| BALANCE, December 31, 2002 | | | 6,580,620 | | $ | 6,581 | | | 2,346,000 | | $ | 2,346 | | $ | 11,744,062 | | $ | (9,844,283 | ) | $ | 1,908,706 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
See independent auditors’ report and notes to financial statements. | F-4 |
POWER EFFICIENCY CORPORATION
STATEMENTS OF CASH FLOWS
| | | Year Ended December 31, | |
| | | | 2002 | | | 2001 | |
| | |
|
| |
|
| |
| CASH FLOWS PROVIDED BY (USED FOR): | | | | | | | |
OPERATING ACTIVITIES: | | | | | | | |
| Net loss | | $ | (2,354,775 | ) | $ | (1,863,802 | ) |
| Adjustments to reconcile net loss to net cash used for operating activities: | | | | | | | |
| Depreciation and amortization | | | 132,216 | | | 281,587 | |
| Write-off of deferred financing costs | | | — | | | 38,502 | |
| Debt restructuring | | | — | | | 130,000 | |
| Additional paid-in capital related to issuance of stock options | | | 312,741 | | | 47,300 | |
| Common stock issued for services | | | 167,500 | | | — | |
| Interest accrued on stockholder, officers and former officers’ loans | | | 28,174 | | | — | |
| Changes in certain assets and liabilities: | | | | | | | |
| (Increase) decrease in: | | | | | | | |
| Accounts receivable | | | (76,118 | ) | | 103,048 | |
| Inventory | | | 105,522 | | | (83,091 | ) |
| Prepaid expenses | | | (9,628 | ) | | 443 | |
| Deposits | | | — | | | (9,500 | ) |
| Increase (decrease) in: | | | | | | | |
| Accounts payable and accrued expenses | | | (90,369 | ) | | 216,426 | |
| Accrued salaries and payroll taxes | | | 94,487 | | | 31,822 | |
| | |
|
| |
|
| |
| Net Cash Used for Operating Activities | | | (1,690,250 | ) | | (1,107,265 | ) |
| | |
|
| |
|
| |
INVESTING ACTIVITIES: | | | | | | | |
| Purchase of fixed assets | | | (7,214 | ) | | (51,981 | ) |
| | |
|
| |
|
| |
FINANCING ACTIVITIES: | | | | | | | |
| Proceeds from issuance of equity securities, net of costs | | | 2,380,000 | | | 613,000 | |
| (Payments) advances on line of credit agreement | | | (445,386 | ) | | 167,499 | |
| Loans from stockholders, officers, and former officers | | | 155,438 | | | 405,500 | |
| Payments on loans to stockholders, officers and former officers | | | (170,125 | ) | | — | |
| | |
|
| |
|
| |
| Net Cash Provided by Financing Activities | | | 1,919,927 | | | 1,185,999 | |
| | |
|
| |
|
| |
| INCREASE IN CASH AND CASH EQUIVALENTS | | | 222,463 | | | 26,753 | |
| CASH AND CASH EQUIVALENTS: | | | | | | | |
| Beginning of year | | | 35,245 | | | 8,492 | |
| | |
|
| |
|
| |
| End of year | | $ | 257,708 | | $ | 35,245 | |
| | |
|
| |
|
| |
|
See independent auditors’ report and notes to financial statements. | F-5 |
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 1 - NATURE OF BUSINESS:
Power Efficiency Corporation (“Power Efficiency” and/or the “Company”), was incorporated in Delaware on October 19, 1994. Power Efficiency designs, develops, markets and sells proprietary solid state electrical devices designed to effectively reduce energy consumption in alternating current induction motors. Alternating current induction motors are commonly found in industrial and commercial facilities throughout the world. The Company currently has two principal and proprietary products: the Three Phase Power Commander®, which is used in industrial applications, and the Single Phase Power Commander®, which is used in consumer applications. The Company also engages in research and development of new, related energy saving products.
The Company’s primary customers are original equipment manufacturers (OEM’s) and commercial accounts located throughout the United States of America, Mexico, China, and Canada.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Cash Equivalents:
The Company considers all highly liquid investments with an original maturity of three months or less to be “Cash Equivalents”.
Inventories:
Inventories are valued at the lower of cost (first-in, first-out) or market. The Company reviews inventory for impairments to net realizable value whenever circumstances warrant.
Accounts Receivable:
The Company carries its accounts receivable at cost less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions.
Research and Development:
Research and development expenditures are charged to expense as incurred.
Property, Equipment and Depreciation:
Property and equipment are stated at cost. Maintenance and repairs are expensed as incurred, while betterments are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 7 years.
Website, Customer List and Amortization:
Website and customer list are stated at cost. Website costs capitalized include application and infrastructure development stage costs and graphics. Amortization is computed based upon the estimated useful life of the website and customer list, which is three years. Website maintenance and hosting costs are charged to expense as incurred.
Shipping and Handling Costs:
The Company bills customers for freight. Actual costs for shipping and handling are included as components of cost of sales.
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Patents:
Costs associated with applying for U.S. patents based upon technology developed by the Company are capitalized. At the time the patent is awarded, the asset will be amortized over the remaining term of the patent. If no patent is issued, these costs will be expensed in the period when it is determined that no patent will be issued.
Revenue Recognition:
Revenue from product sales to OEM’s and distributors is recognized at the time of shipment to the OEM’s and distributors when all services are complete. Returns and other sales adjustments (discounts and shipping credits) are provided for in the same period the related sales are recorded.
Loss Per Common Share:
Loss per common share is determined by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted loss per share is not presented since giving effect to potential common shares would be anti-dilutive.
Accounting for Stock Based Compensation:
The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB25). If the option price under the Stock Option Plans equals or exceeds the fair market value of the common shares on the date of grant, no compensation cost is recognized under the provisions of APB25 for stock options. If the option price under the Stock Option Plans is less than the fair market value of the common stock on the date of grant, compensation cost is recognized for the difference.
The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” for stock options issued. Under SFAS No. 123, compensation cost is measured at the grant date based on the value of award and is recognized over the service (or vesting period).
Product Warranties:
The Company warrants its products for eighteen months. During the warranty period, the Company’s policy is to replace the defective product. The Company has been providing for warranty costs as they are incurred. The Company periodically reviews warranty claims and will establish a reserve for warranty claims when such amount is determinable and necessary based on historical information.
Provision for Income Taxes:
The Company utilizes the asset and liability method of accounting for income taxes pursuant to SFAS No. 109, “Accounting for Income Taxes”. SFAS No. 109 requires the recognition of deferred tax assets and liabilities for both the expected future tax impact of differences between the financial statement and tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and tax credit carryforwards. SFAS No. 109 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.
The provision for taxes represents state franchise taxes.
Goodwill:
The Company adopted the provisions of Statement of SFAS No. 142, “Goodwill and Other Intangible Assets,” for the year ended December 31, 2002. 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.
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Customer Contracts, Manuals and Sales Literature and Amortization:
Customer contracts, manuals and sales literature acquired in connection with a business acquisition are deferred and amortized on the straight-line method over five years.
Advertising:
Advertising costs are expensed as incurred.
New Accounting Pronouncements:
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”; SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”; SFAS No. 141, “Business Combinations”; SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal”; SFAS No. 148 “Accounting for Stock Based Compensation”; FASB Intrepretation No. 145, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”; FASB Interpretation No. 46, “Consolidation for Variable Interest Entities” all became effective during 2002. The provisions and interpretations of these pronouncements, that are applicable to the Company, had no materal effect on the Company’s financial statements.
Financial Statement Reclassifications:
Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 financial statement presentation.
NOTE 3 - GOING CONCERN:
The accompanying 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 Company has suffered recurring losses from operations, there is a deficiency in tangible net worth of approximately $175,000, the Company experienced a $1,700,000 deficiency of cash from operations and continues to have negative cash flows from operations and lacks sufficient liquidity to continue its operations.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. 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 upon achieving profitable operations. Management’s plans to achieve profitability include developing new products, obtaining new customers and increasing sales to existing customers. Management is seeking to raise additional capital through equity issuance, debt financing or other types of financing.
NOTE 4 - PROPERTY AND EQUIPMENT:
At December 31, 2002, property and equipment is comprised as follows:
| Machinery and equipment | | $ | 149,091 | |
| Office furniture and equipment | | | 85,726 | |
| | |
|
| |
| | | | 234,817 | |
| Less: Accumulated depreciation | | | 121,016 | |
| | |
|
| |
| Property and Equipment, Net | | $ | 113,801 | |
| | |
|
| |
Depreciation for the years ended December 31, 2002 and 2001 amounted to $41,978 and $35,171, respectively.
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 5 - GOODWILL:
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, previously recognized intangible assets deemed to have indefinite useful lives were tested by management for impairment during fiscal 2002. An annual goodwill impairment test was performed by management in addition to the transitional goodwill impairment test. The impairment test consisted of a comparison of the fair value of the intangible asset with its carrying amount. Since the carrying amount of the intangible asset did not exceed its fair value, management concluded no impairment loss was required to be recognized.
For the year ended December 31, 2001, goodwill amortization was $142,080.
NOTE 6 - INTANGIBLE ASSETS:
Intangible assets subject to amortization consists of the following for the year ended December 31, 2002:
| Patents | | $ | 19,844 | |
| Website | | | 38,495 | |
| Customer lists | | | 100,000 | |
| Customer contract | | | 147,237 | |
| Manual/sales literature | | | 68,137 | |
| | |
|
| |
| | | | 373,713 | |
| Less: Accumulated amortization | | | 220,517 | |
| | |
|
| |
| Intangible Assets, Net | | $ | 153,196 | |
| | |
|
| |
Amortization expense in 2002 and 2001 amounted to $90,238 and $104,336, respectively.
Amortization expense expected in the succeeding five years is as follows:
| 2003 | | $ | 71,172 | |
| 2004 | | | 44,242 | |
| 2005 | | | 26,290 | |
| 2006 | | | 1,167 | |
| 2007 | | | 1,167 | |
| Thereafter | | | 9,158 | |
| | |
|
| |
| | | $ | 153,196 | |
| | |
|
| |
NOTE 7 - CONCENTRATIONS OF CREDIT RISKS:
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and temporary cash investments and accounts receivables.
The Company maintains cash balances at several financial institutions. Amounts at each of these institutions are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company may from time to time maintain balances in excess of the insured limits.
Sales and accounts receivable currently are from a relatively small number of customers of the Company’s products. The Company closely monitors extensions of credit.
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 7 - CONCENTRATIONS OF CREDIT RISKS: (Continued)
Four customers accounted for approximately 76% of 2002 sales and 76% of accounts receivable at December 31, 2002. Four customers accounted for approximately 84% of 2001 sales.
International sales as a percentage of total revenues for the years ended December 31, 2002 and 2001 are as follows:
County | | 2002 | | 2001 | |
| |
|
| |
|
| |
| Mexico | | | 14 | % | | 9 | % |
| China | | | — | | | 3 | % |
| Canada | | | — | | | 15 | |
NOTE 8 - INVENTORIES:
Inventories at December 31, 2002 consist of the following:
| Raw materials | | $ | 292,333 | |
| Finished goods | | | 211,690 | |
| | |
|
| |
| | | $ | 504,023 | |
| | |
|
| |
NOTE 9 - LINE OF CREDIT AGREEMENT:
The Company’s outstanding borrowings of $445,386 at December 31, 2001 under a line of credit agreement were paid in full during 2002.
NOTE 10 - PROVISION FOR TAXES:
As of December 31, 2002 and 2001, the Company has available, on a federal tax basis, net operating loss carryforwards of approximately $6,200,000 and $3,800,000, respectively, which expire at varying amounts through 2022. The net operating loss carryforwards result in deferred tax assets of approximately $2,100,000 and $1,300,000 at December 31, 2002 and 2001; however, a valuation reserve has been recorded for the full amount due to the uncertainty of realization of the deferred tax assets.
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 11 - WARRANTS:
Warrant activity during the years ended December 31, 2002 and 2001 follows:
| | | Warrants | | Average
Exercise
Price | |
| | |
|
| |
|
| |
| | | 586,720 | | $ | 2.94 | |
| Issued during 2001 | | | 300,000 | | | 3.00 | |
| Cancelled during 2001 | | | (75,000 | ) | | 2.00 | |
| Exercised during 2001 | | | (1,000 | ) | | 3.00 | |
| | |
|
| |
|
| |
| Warrants outstanding at December 31, 2001 | | | 810,720 | | | 2.96 | |
| Issued during 2002 | | | 175,000 | | | 1.70 | |
| Expired during 2002 | | | (36,720 | ) | | 2.00 | |
| | |
|
| |
|
| |
| Warrants outstanding at December 31, 2002 | | | 949,000 | | $ | 2.76 | |
| | |
|
| |
|
| |
During 2001, in connection with the May 16, 2000 Private Placement Memorandum, the Company issued 225,000 placement warrants pursuant to a Rule 506 - Private Placement. The placement warrants are five-year warrants to purchase additional shares of the Company’s common stock at $3.00 per warrant share during the first year; $4.00 per warrant share the second year; and $5.00 per warrant share during the third year. During 2001, 1,000 placement warrants were exercised at $3.00 per warrant share.
During 2002, in connection with the Summit equity transaction, the Company issued 175,000 warrants for services rendered.
NOTE 12 - STOCK OPTION PLAN:
Stock Option Plan activity during the years ended December 31, 2002 and 2001 follows:
| | | Shares | | Average
Exercise Price | |
| | |
|
| |
|
| |
| Options outstanding and exercisable at January 1, 2001 | | | 1,935,000 | | $ | 2.00 | |
| Granted during 2001 | | | 110,000 | | | 2.00 | |
| Exercised during 2001 | | | — | | | — | |
| Expired during 2001 | | | (36,360 | ) | | 2.00 | |
| | |
|
| |
|
| |
| Options outstanding and exercisable at December 31, 2001 | | | 2,008,640 | | | 2.00 | |
| Granted during 2002 | | | 1,725,000 | | | 1.99 | |
| Cancelled during 2002 | | | (500,000 | ) | | 1.60 | |
| Exercised during 2002 | | | — | | | — | |
| Expired during 2002 | | | (300,000 | ) | | 2.00 | |
| | |
|
| |
|
| |
| Options outstanding and exercisable at December 31, 2002 | | | 2,933,640 | | $ | 2.00 | |
| | |
|
| |
|
| |
Weighted average remaining contractual life at December 31, 2002, for all options is 8.3 years.
In 2000, the Company adopted the 2000 Stock Option and Restricted Stock Plan (the “2000 Plan”). The 2000 Plan provides for the granting of options to purchase up to 4,000,000 shares of common stock. No options have been exercised to date.
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 12 - STOCK OPTION PLAN: (Continued)
During 2002, the Company granted 1,725,000 stock options at exercise prices approximating fair market value of the stock on that day. Because the exercise prices approximated the fair market value of the stock, the Company was not required to recognize compensation expense. In connection with the employment agreement of the President, Chief Executive Officer and Chief Financial Officer dated November 7, 2002 (see Note 17), 500,000 stock options were canceled. These stock options were originally issued on June 26, 2002 and reissued on November 7, 2002. In connection with this option cancellation and new option award, the Company recognized additional compensation expense of $312,741. This additional compensation expense is included in selling, general and administrative expenses.
On May 23, 2001, the Company granted 10,000 stock options at an exercise price of $2.00. Because the weighted average price per share was $6.73, the Company recognized additional compensation expense of $47,300. This additional compensation expense is included in selling, general and administrative expenses.
On March 23, 2001, the Company granted 100,000 stock options at an exercise price of $2.00. Because the weighted average price per share was $1.83, the Company is not required to recognize compensation expense.
In 1994, the Company adopted a Stock Option Plan (the “1994 Plan”). The 1994 Plan provides for the granting of options to purchase up to 500,000 shares of common stock. No options have been exercised to date. 36,360 options issued under the 1994 Plan expired on October 31, 2001. There are 463,640 options outstanding under the 1994 Plan.
There are 2,470,000 options outstanding under the 2000 Plan.
On February 5, 2003, the Company granted 500,000 incentive stock options to two employees under the Company’s 2000 Plan. Since the grant occurred in fiscal 2003, such options are not reflected in the above table.
SFAS No. 123 Disclosures:
During the year ended December 31, 2002, the Board of Directors authorized the net issuance of 1,225,000 options at an average exercise price of $1.99 per share. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants: expected volatility of 51%; risk-free interest rate of 6.0%; and expected lives of 9.8 years.
Had compensation cost for the Company’s stock option plan been recognized based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Company’s net loss and loss per share for the years ended December 31, 2002 and 2001, would have been as follows.
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
| Net loss -- as reported | | $ | (2,354,775 | ) | $ | (1,863,802 | ) |
| Net loss -- pro forma | | $ | (3,269,850 | ) | $ | (2,287,141 | ) |
| Loss per common share - as reported | | $ | (0.36 | ) | $ | (0.29 | ) |
| Loss per common share - pro forma | | $ | (0.50 | ) | $ | (0.36 | ) |
POWER EFFICIENCY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 13 - COMMITMENTS AND CONTINGENCIES:
Leases:
The Company leases office, warehouse and research facilities under operating leases. The Ann Arbor, Michigan lease was renewed on December 1, 2002 and extends to May 31, 2003. The New Hyde Park, New York lease expires on June 30, 2004.
Minimum future rentals are as follows:
Year | | | | | |
| | | | | |
| 2003 | | | $ | 81,378 | |
| 2004 | | | | 28,332 | |
| | | |
|
| |
| | | | $ | 109,710 | |
| | | |
|
| |
Rent expense, including base rent and additional charges, for the year ended December 31, 2002 and 2001 was $117,747 and $94,431, respectively.
Patent License Agreements:
Power Efficiency was an exclusive licensee pursuant to a patent license agreement of certain power factor controller technology owned by the United States, as represented by the National Aeronautics and Space Administration (NASA). This license agreement covered the United States of America and its territories and possessions on an exclusive basis and foreign sales on a non-exclusive basis. Such license agreement did not require the Company to pay royalties to NASA in connection with the Company’s sale of products employing technology utilizing the licensed patents. The agreement terminated on December 16, 2002 upon the expiration of all of the licensed patents. The Company filed and received its own patent (No. 5.821.726) that expires in 2017 that management believes will protect the Company’s intellectual property position.
Termination of Employment Agreement:
Following the Company’s earlier termination of his employment agreement on October 10, 2002, the former President and Chief Executive Officer of the Company, filed a demand for arbitration with the American Arbitration Association (“AAA”) requesting payments from the Company aggregating approximately $530,000 pursuant to the provisions of his employment agreement with the Company. The former officer contends that the Company breached his employment agreement by not paying severance, deferred wages and certain expenses to which he claims entitlement by virtue of a “change in control.” The Company vigorously denies any liability to this former officer, and has counterclaimed for breach of fiduciary duty and conversion and misuse of corporate assets, claiming damages of approximately $75,000. No discovery responses have been exchanged to date, nor have any depositions been taken. The AAA has established an arbitration schedule that commences in the first quarter of 2003 with hearing dates scheduled for September 2003. The Company has accrued approximately $102,000 related to deferred wages and expenses. In accordance with FASB Statement No. 5, “Accounting for Contingencies”, no accrual for possible loss contingency has been reflected in these financial statements related to the change in control claim because the amount of the possible loss, if any, cannot be reasonably estimated.
Litigation:
The Company is involved with certain claims and other routine litigation matters in the normal course of business. Management, with the consultation of legal counsel, has provided reserves to accrue the potential loss from these matters of $184,061.
The Company was involved with certain claims and counterclaims related to litigation for breach of contract arising out of the manufacture and assembly of certain electronic component parts. In November 2001, the parties agreed to settlement of all of their respective claims. In exchange for full releases, the essential terms of the settlement are: (a) the Company agreed to pay $5,000 plus 7,500 newly issued shares of common stock to the manufacturer valued at $16,300; and (b) the manufacturer agreed to return to the Company items provided in order to fulfill the Company’s contracts. The settlement was satisfied during 2002 and for the year ending December 31, 2001, the Company recognized the expense in full.
DECEMBER 31, 2002 AND 2001
NOTE 13 - COMMITMENTS AND CONTINGENCIES: (Continued)
Requirements Contracts:
The Company entered into requirements contracts with four customers for the purchase of motor controllers. The quantities are not fixed or guaranteed. For financial reporting purposes, the Company incurred no liabilities or commitments as a result of these contracts.
Subcontractors:
Power Efficiency currently utilizes three subcontractors to manufacture the Company’s controller boards. These subcontractors provide facilities, equipment, supervision and labor required to assemble; wire; check; test; package; and ship the controller boards. These subcontractors are hired on an as needed basis to produce a minimum number of units via a purchase order. Power Efficiency does not incur any liabilities to subcontractors until purchase orders are issued. No purchase orders were issued or outstanding to subcontractors at December 31, 2002.
Investment Advisory Agreement:
The Company and Summit entered into a non-exclusive agreement with an investment advisor to provide the Company and Summit with advisory/consulting services beginning October 15, 2002. Such services include: exploring market opportunities for raising additional capital; assisting Summit in reviewing corporate financing opportunities for the Company; and review new investment and acquisition opportunities for Summit.
The agreement requires a retainer fee of $10,000, monthly in advance, for an initial period of three months. Half of the monthly retainer fee is paid for in cash by Summit and the balance is paid in common stock of the Company. At December 31, 2002, the Company has accrued its share of expense under this agreement with the common shares to be issued in the first quarter of 2003. After the initial three month period, the Company and the investment advisor may mutually agree to extend the agreement.
The agreement also includes a 10% equity placement fee should the Company raise financing or receive any formal financing commitments from investors introduced by the investment advisor within one year.
NOTE 14 - RELATED PARTY TRANSACTIONS:
During the years ended December 31, 2002 and 2001, consulting fees of $277,500 and $306,000 were paid to officers/directors/stockholders of the Company, respectively. These amounts are included in research and development and in selling, general and administrative expenses.
DECEMBER 31, 2002 AND 2001
NOTE 14 - RELATED PARTY TRANSACTIONS: (Continued)
On May 23, 2001, the Company’s board of directors ratified an agreement with a strategic advisor, owned by a director of the Company, to provide strategic direction and operational strategies to the Company. The initial term of this agreement is one year (January 1-December 31, 2001) and it shall automatically renew for successive thirty-six month periods. The agreement may be terminated by either party giving notice of termination at least 180 days prior to its conclusion. The strategic advisor receives $500 per month, plus expenses, until the Company raises $1.0 million or more in investments at which time the monthly compensation shall increase to $4,500 per month, plus expenses. The strategic advisor was paid approximately $70,296 in 2002 and $5,700 in 2001. The strategic advisor also received a warrant to purchase 50,000 shares of common stock at an exercise price of $2.00 per share. These warrants are exercisable at any time during each year the agreement is in effect.
During 2002 and 2001, the Company incurred legal fees of $122,548 and $102,215 to a law firm. A partner in that firm and the firm are currently stockholders of the Company. At December 31, 2002, the Company owes this law firm $125,323. Such amount is included on the balance sheet in accounts payable and accrued expenses.
Included in accounts payable and accrued expenses at December 31, 2002 is approximately $229,321, due to officers and former officers for back pay, interest and expense reimbursements.
NOTE 15 - SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year ended December 31, for:
| | | 2002 | | 2001 | |
| | |
|
| |
|
| |
| Income Taxes | | $ | — | | $ | — | |
| | |
|
| |
|
| |
| Interest | | $ | 28,161 | | $ | 34,843 | |
| | |
|
| |
|
| |
NON-CASH INVESTING AND FINANCING ACTIVITIES:
2002 | | | | |
| Common stock issued for services rendered | | $ | 167,500 | |
| | |
|
| |
| Common stock issued for settlement of disputed accounts payable | | $ | 16,311 | |
| | |
|
| |
2001 | | | | |
| Common stock issued in connection with extinguishment of stockholder note payable | | $ | 230,000 | |
| | |
|
| |
DECEMBER 31, 2002 AND 2001
NOTE 16 - DEBT RESTRUCTURING:
The Board of Directors, on September 7, 2000, authorized renegotiating a $100,000 loan from a stockholder until the earlier of (i) January 31, 2001; or (ii) the closing date of the Company’s receipt of $625,000 in gross proceeds from an equity financing. As additional consideration for the extension of the due date, the Company granted an option to purchase an aggregate 75,000 authorized but unissued shares of the Company’s common stock at the set exercise price of $2.00 per share.
On March 15, 2001, the $100,000 loan, plus accrued interest thereon, and the option to purchase 75,000 shares of common stock were renegotiated and converted into 125,000 shares of Power Efficiency’s common stock.
The Company accounted for this transaction as a capital transaction between related parties during the first quarter of 2001. The difference of $130,000 between the fair value of the equity interest and the carrying amount of the payable was recognized as a loss by the Company and is included in selling, general and administrative expenses.
NOTE 17 - EMPLOYMENT AGREEMENTS:
On August 7, 2000, the Company agreed to enter into five-year employment and compensation agreement with the Company’s chief technology officer. On May 23, 2001, the Company’s board of directors ratified the authorization to enter into this employment agreement. The agreement provides for first year salary of $120,000 for the period from September 2000 to August 31, 2001. The salary for the second through fifth years shall be $120,000 plus annual increases in $18,000 increments. In order to provide performance-based incentive compensation to the executive, bonuses tied to the level of the Company’s net pre-tax income will be paid. For bonus purposes, the Company’s net pre-tax income will be multiplied by the applicable percentage which shall equal (a) 4.0% if net pre-tax income of the Company is at least $500,000 but less than $750,000; (b) 4.25% if net pre-tax income is at least $750,000 but less than $1,000,000; and (c) 4.5% if net pre-tax income is at least $1,001,000. Net pre-tax income of the Company shall be determined by the Board of Directors in a consistent manner in accordance with accounting principles generally accepted in the United States of America.
In addition to comprehensive health benefits, the agreement includes vacation, expense reimbursement, confidentiality, non-compete and disability provisions.
The agreement also provides for severance payments equal to the greater of (I) $468,000 or (ii) the executive’s base salary for the preceding three years, in the event that at any time during the employment term the agreement is terminated by the Company (a) without cause, (b) for disability, or (c) for death, or if the executive terminates the agreement for cause. The agreement also provides for a payment to the executive upon a change in control equal to the product of the executive’s base salary in the year of the change in control times 2.99.
DECEMBER 31, 2002 AND 2001
NOTE 17 - EMPLOYMENT AGREEMENTS: (Continued)
On November 7, 2002, the Company entered into an employment and compensation agreement with the Company’s President, Chief Executive Officer and Chief Financial Officer. The agreement is for a base term of three years and is thereafter renewable for additional periods of one year unless the Company gives notice to the contrary not less than ninety days prior to the expiration of the term or any extension. In accordance with the terms of the agreement, the base salary for 2002 is $240,000, increasing annually thereafter in $18,000 increments. During the first year of the Agreement, an amount equal to $80,000 of the base salary shall be accrued and paid at such time as the net cash provided by operating activities of the Company is greater than zero for a period of three consecutive months. Upon satisfying this requirement, the officer shall be paid his accrued salary in monthly installments of $10,000 until such time as the accrued salary has been paid in full. In the event the Company is unable to pay a salary increment, the Board of Directors of the Company may elect to defer such payment. In the event of deferment, the salary increment shall continue to be accrued until such time as the Company is financially able to make such payments.
In addition to the officer’s base salary set forth above, the Company cancelled the 500,000 common stock options previously granted on June 26, 2002 and granted options to purchase up to 700,000 shares of common stock of the Company. The options were granted pursuant to the Company’s 2000 Amended and Restated Stock Option and Restricted Stock Plan and such options vest in accordance with the vesting provisions set forth in the Agreement.
The officer is entitled to such bonus amounts as shall from time to time be determined by the Company’s compensation committee in its sole discretion, and shall also be entitled to receive a bonus upon the occurrence of certain triggering events (as set forth in the agreement) in an amount based upon the valuation of the Company as of the date of the triggering event, as calculated in accordance with the agreement. The agreement also provides for certain non-competition and nondisclosure covenants from the officer.
NOTE 18 - PRIVATE COMMON STOCK OFFERING:
The May 16, 2000 Private Placement involved the sale of up to 40 Units. The closing of the Company’s purchase of certain assets and assumption of certain liabilities of Performance Control was conditioned upon the sale of a minimum of 12 Units ($300,000). Each Unit was comprised of 25,000 shares of common stock at $1.00 per share and a warrant to purchase an additional 25,000 shares of common stock. If reached, the maximum offering would have involved a total of 2 million shares of common stock. 1 million shares of stock issued with the 40 Units and 1 million shares of stock that were available under the 40 warrants. The Units were sold at a price of $25,000 per Unit. The Company sold a total of 29 Units with total proceeds of $725,000. The Company sold 20 Units in 2000 and nine Units from the beginning of 2001 through March 7, 2001, the date the Company’s board of directors agreed to terminate the Private Placement. The proceeds from the sale of these Units were deposited to the general operating account of the Company to be utilized for working capital purposes.
DECEMBER 31, 2002 AND 2001
NOTE 18 - PRIVATE COMMON STOCK OFFERING: (Continued)
In its original Form 10-SB, filed on October 20, 2000, the Company inadvertently filed its Private Placement Memorandum as an Exhibit. This may constitute general solicitation under Rule 502(c) of Regulation D and the Company may be in violation of Section 5 of the Securities Act of 1933 and be unable to avail itself of the exemption found in Rule 506 of Regulation D as to that offering. The Company believes it can establish pre-existing connections with all purchasers under the Private Placement Memorandum. If proceedings based on this inadvertent filing were commenced against the Company, purchasers under the Private Placement Memorandum, possible together with other purchasers of the Company’s securities, may make claim for rescission of their investments, which if successful may exceed $725,000. Such claims would be subject to any applicable defenses that the Registrant may assert, including statute of limitations. The last sale under the Private Placement Memorandum was made on March 1, 2001 and the shares were delivered to the investor on May 4, 2001. The Company, in consultation with legal counsel believes that, although rescission claims are possible, liability is remote. Therefore, the Company believes that the statute of limitations for such claims under the Securities Act has expired.
NOTE 19 - STOCKHOLDER AND OFFICERS LOANS:
At various times in 2002 and 2001, the Company borrowed a total of $375,000 from an officer and stockholder. The loan is due and payable in a single payment of principal and interest on June 1, 2004. The loan bears interest at 5% per annum payable on the due date.
At various times during the 2002 and 2001, two former officers advanced the Company funds totalling $103,500 and $32,200, respectively. The Company paid the $32,200 loan in full during 2002. There were payments of $75,000 on the $103,500 loan. The remaining $28,500 is evidenced by a promissory note which is due and payable in a single payment of principal and interest on June 1, 2004. The loan bears interest at 5% per annum payable on the due date.
Another stockholder advanced the Company $50,426 during 2002. The balance on this advance was paid in full during 2002.
NOTE 20 - ISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK:
The Company received $2,380,000 (net of issuance costs of $120,000) from the sale of 2,346,233 shares of Series A-1 Convertible Preferred Stock to Summit Energy Ventures, LLC, (Summit) which resulted in Summit owning a 28% fully diluted stake in the Company. Summit also received a stock purchase warrant which is exercisable after January 1, 2004, 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 exercise price of the warrant is a function of the Company’s future earnings.
The Company is prohibited from entering into certain transactions as long as the Series A-1 Convertible Preferred Stock is outstanding without written consent. Such transactions, include, but are not limited to, redemption of stock; declaration of dividends; issuance of debt or equity securities; sale of business; loans or advances to officers, directors, employees or consultants except in connection with compensation and expenses and incur debt in excess of $2,000,000.
DECEMBER 31, 2002 AND 2001
NOTE 21 - STOCKHOLDERS’ EQUITY:
On April 15, 2002, the Company issued 50,000 shares of common stock to a consultant, who subsequently became an officer of the Company and a member of the Board of Directors of the Company for services rendered. Since the per share market price of the common stock on the date of grant was $3.35 per share, the company recognized additional compensation expense of $167,500. This additional compensation expense is included in selling, general and administrative expenses.
On May 14, 2001, the Company sold 118,750 shares of common stock to an accredited investor, as that term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933. The first 25,000 shares were sold for $100,000 and the remaining 93,750 shares were sold for $300,000. The shares were sold in reliance on Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933.
On June 19, 2001, the Company issued 10,000 shares of common stock for payment of services. The total fees that were set aside in exchange for the stock were equal to $30,000. The shares were issued in reliance on Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933.
Item 8. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
| | |
| | Not Applicable |
PART III
Item 9. | Directors and Executive Officers of the Registrant |
See the information under the caption “Directors and Executive Officers of the Registrant” contained in the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held on or about June 2, 2003 which information is incorporated herein by reference.
Item 10. | Executive Compensation |
See the information under the caption “ Executive Compensation” contained in the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held on or about June 2, 2003 which information is incorporated herein by reference.
Item 11. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
See the information under the captions “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” contained in the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held on or about June 2, 2003 which information is incorporated herein by reference
Item 12. | Certain Relationships and Related Transactions |
See the information under the caption “Certain Relationships and Related Transactions” contained in the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held on or about June 2, 2003 which information is incorporated herein by reference.
Item 13. | Exhibits and Reports on Form 8-K |
The following exhibits are filed as part of this report:
Description of Document | | Location |
| 2.1 | Asset Purchase Agreement by and between the Registrant and Performance Control, L.L.C. dated August 7, 2000. | | ** |
| 3.1 | Certificate of Incorporation. | | ** |
| 3.2 | Amendment to the Articles of Incorporation dated June 5, 2002. | | * |
24
| 3.3 | By-Laws dated June 11, 2002. | | * |
| 4.1 | Certificate of Incorporation. See Exhibit 3.1 above. | | ** |
| 4.2 | By-Laws. See Exhibit 3.2 above. | | ** |
| 4.3 | Stock Purchase Agreement dated June 14, 2002. | | * |
| 4.4 | Stock Purchase Warrant dated June 14, 2002. | | * |
| 4.5 | Amended and Restated Stockholders’ Agreement dated June 14, 2002. | | * |
| 4.6 | Registration Rights Agreement dated June 14, 2002. | | * |
| 4.7 | Certificate of Designation dated June 13, 2002. | | * |
| 10.1 | Lease Agreement for Registrant’s Ann Arbor, Michigan facility dated February 16, 1996. | | ** |
| 10.2 | Purchase Agreement between the Registrant and Millar Elevator Service Company dated August 17, 2000. | | *** |
| 10.3 | Purchase Agreement between the Registrant and Montgomery Kone, Inc. dated December 1, 1998. | | *** |
| 10.4 | Certificate of Liability Insurance. | | ** |
| 10.5 | United States Patent #5,821,726. | | ** |
| 10.6 | Purchase Agreement between the Registrant and Defense Supply Center Richmond dated January 12, 2000. | | ** |
| 10.7 | 1994 Stock Option Plan. | | ** |
| 10.8 | Patent License Agreement (DN-858) with NASA. | | **** |
| 10.9 | Patent License Agreement (DE-256) with NASA. | | **** |
| 10.10 | Settlement and Release Agreement with NASA. | | **** |
| 10.11 | Modification No. 1 to Patent License Agreement (DE-256) with NASA. | | **** |
| 10.12 | Purchase Order from Otis Elevator Co. | | **** |
| 10.13 | Letter Agreement with Lee W. Greenberg d/b/a ARI Group. | | **** |
| 10.14 | Product Warranty. | | **** |
| 10.15 | Test Report from Medsker Electric, Inc. | | **** |
| 10.16 | Test Report from Oak Ridge National Laboratory. | | **** |
| 10.17 | Test Report from Oregon State University -- The Motor Systems Resource Facility. | | **** |
| 10.18 | Test Report from Otis Elevator Co. | | **** |
| 10.19 | Line of Credit Agreement with Bank One, Michigan dated May 10, 2001. | | **** |
| 10.20 | Waiver Letter from Bank One dated May 31, 2002 | | ***** |
| 10.21 | 2000 Stock Option Plan | | **** |
| 10.22 | Employment Agreement with Stephen Shulman | | **** |
| 10.23 | Employment Agreement with Nicholas Anderson | | **** |
| 10.24 | Employment Agreement with Raymond J. Skiptunis | | Filed
herewith |
| 10.25 | Amended and Restated 2000 Stock Option and Restricted Stock Plan | | Filed
herewith |
| 99.1 | Certificates filed pursuant to Section 906 of the Sarbanes Oxley Act of 2002 | | Filed
herewith |
| * | Previously filed by the Registrant as an Exhibit on Form 8-K, on June 18, 2002. |
| ** | Previously filed by the Registrant as an Exhibit on Form 10-SB, on October 20, 2000. |
| *** | Previously filed by the Registrant as an Exhibit on Form 10-SB/A, on April 12, 2001. |
| **** | Previously filed by the Registrant as an Exhibit on Form 10-SB/A, on October 26, 2001. |
| ***** | Previously filed by the Registrant as an Exhibit on Form 10-KSB/A, on September 9, 2002 |
25
Item 14. | Controls and Procedures. |
(a) Evaluation of Disclosure Controls and Procedures.
Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, have conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures in accordance with Rule 13a-14 under the Securities Exchange Act of 1934 as of a date (the “evaluation date”) within 90 days prior to the filing date of this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the evaluation date, the Company’s disclosure controls and procedures were effective in ensuring that all material information relating to the Company required to be filed in this annual report has been made known to them in a timely manner.
(b) Changes in Internal Controls.
Since the evaluation date, there have been no changes to the Company’s internal controls or in other factors that could significantly affect those controls.
26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | POWER EFFICIENCY CORPORATION |
| | |
| Dated: March 25, 2003 | By: | /s/ RAYMOND J. SKIPTUNIS |
| | | Raymond J. Skiptunis, President, CEO and CFO |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Dated: March 25, 2003 | | /s/ RAYMOND J. SKIPTUNIS |
| | | Raymond J. Skiptunis, CEO, CFO and Director |
| | | |
| Dated: March 27, 2003 | By: | /s/ NICHOLAS ANDERSON |
| | | Nicholas Anderson, Director |
| | | |
| Dated: March 26, 2003 | By: | /s/ SCOTT STRAKA |
| | | Scott Straka, Director |
| | | |
| Dated: March 26, 2003 | By: | /s/ STEVEN STRASSER |
| | | Steven Strasser, Director |
| | | |
| Dated: March 26, 2003 | By: | /s/ JOHN LACKLAND |
| | | John Lackland, Director |
| | | |
| Dated: March 27, 2003 | By: | /s/ ANTHONY ACONE |
| | | Anthony Acone, Director |
| | | |
27
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Raymond J. Skiptunis, certify that:
1. I have reviewed this annual report on Form 10-K of Power Efficiency Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | /s/ RAYMOND J. SKIPTUNIS |
| | |
| | RAYMOND J. SKIPTUNIS |
| | |
| | CHIEF EXECUTIVE OFFICER |
| | |
| Date: March 25, 2003 | (PRINCIPAL EXECUTIVE OFFICER) |
28
CERTIFICATION OF CHIEF FINANCIAL OFFICER AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Raymond J. Skiptunis, certify that:
1. I have reviewed this annual report on Form 10-K of Power Efficiency Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | /s/ RAYMOND J. SKIPTUNIS |
| | |
| | RAYMOND J. SKIPTUNIS |
| | |
| | CHIEF FINANCIAL OFFICER |
| | |
| Date: March 25, 2003 | (PRINCIPAL EXECUTIVE OFFICER) |
29
EXHIBIT INDEX
Description of Document | | Location |
| 2.1 | Asset Purchase Agreement by and between the Registrant and Performance Control, L.L.C. dated August 7, 2000. | | ** |
| 3.1 | Certificate of Incorporation. | | ** |
| 3.2 | Amendment to the Articles of Incorporation dated June 5, 2002. | | * |
| 3.3 | By-Laws dated June 11, 2002. | | * |
| 4.1 | Certificate of Incorporation. See Exhibit 3.1 above. | | ** |
| 4.2 | By-Laws. See Exhibit 3.2 above. | | ** |
| 4.3 | Stock Purchase Agreement dated June 14, 2002. | | * |
| 4.4 | Stock Purchase Warrant dated June 14, 2002. | | * |
| 4.5 | Amended and Restated Stockholders’ Agreement dated June 14, 2002. | | * |
| 4.6 | Registration Rights Agreement dated June 14, 2002. | | * |
| 4.7 | Certificate of Designation dated June 13, 2002. | | * |
| 10.1 | Lease Agreement for Registrant’s Ann Arbor, Michigan facility dated February 16, 1996. | | ** |
| 10.2 | Purchase Agreement between the Registrant and Millar Elevator Service Company dated August 17, 2000. | | *** |
| 10.3 | Purchase Agreement between the Registrant and Montgomery Kone, Inc. dated December 1, 1998. | | *** |
| 10.4 | Certificate of Liability Insurance. | | ** |
| 10.5 | United States Patent #5,821,726. | | ** |
| 10.6 | Purchase Agreement between the Registrant and Defense Supply Center Richmond dated January 12, 2000. | | ** |
| 10.7 | 1994 Stock Option Plan. | | ** |
| 10.8 | Patent License Agreement (DN-858) with NASA. | | **** |
| 10.9 | Patent License Agreement (DE-256) with NASA. | | **** |
| 10.10 | Settlement and Release Agreement with NASA. | | **** |
| 10.11 | Modification No. 1 to Patent License Agreement (DE-256) with NASA. | | **** |
| 10.12 | Purchase Order from Otis Elevator Co. | | **** |
| 10.13 | Letter Agreement with Lee W. Greenberg d/b/a ARI Group. | | **** |
| 10.14 | Product Warranty. | | **** |
| 10.15 | Test Report from Medsker Electric, Inc. | | **** |
| 10.16 | Test Report from Oak Ridge National Laboratory. | | **** |
| 10.17 | Test Report from Oregon State University -- The Motor Systems Resource Facility. | | **** |
| 10.18 | Test Report from Otis Elevator Co. | | **** |
| 10.19 | Line of Credit Agreement with Bank One, Michigan dated May 10, 2001. | | **** |
| 10.20 | Waiver Letter from Bank One dated May 31, 2002 | | ***** |
| 10.21 | 2000 Stock Option Plan | | **** |
| 10.22 | Employment Agreement with Stephen Shulman | | **** |
| 10.23 | Employment Agreement with Nicholas Anderson | | **** |
| 10.24 | Employment Agreement with Raymond J. Skiptunis | | Filed
herewith |
| 10.25 | Amended and Restated 2000 Stock Option and Restricted Stock Plan | | Filed
herewith |
30
| 99.1 | Certificates filed pursuant to Section 906 of the Sarbanes Oxley Act of 2002 | | Filed
herewith |
| * | Previously filed by the Registrant as an Exhibit on Form 8-K, on June 18, 2002. |
| ** | Previously filed by the Registrant as an Exhibit on Form 10-SB, on October 20, 2000. |
| *** | Previously filed by the Registrant as an Exhibit on Form 10-SB/A, on April 12, 2001. |
| **** | Previously filed by the Registrant as an Exhibit on Form 10-SB/A, on October 26, 2001. |
| ***** | Previously filed by the Registrant as an Exhibit on Form 10-KSB/A, on September 9, 2002 |
31
