UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended 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. 333-3074
OCEAN POWER CORPORATION
-----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-3350291
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5000 ROBERT J. MATTHEWS PARKWAY, 95672
EL DORADO HILLS, CALIFORNIA (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, (916) 933-8100
INCLUDING AREA CODE:
(1) Registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and
(2) has been subject to such filing requirements for the past 90 days [X] Yes
[ ] No
As of September 10, 2002, there were 56,182,746 shares outstanding of
issuer's common stock.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
2
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND DECEMBER 31, 2001
3
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Financial Statements
ASSETS
------
June 30, December 31,
2002 2001
----------- ------------
(Unaudited)
CURRENT ASSETS
Cash $ 12,849 $ 2,989
Advances to employees - 347,259
Prepaid expenses 5,828 44,080
----------- ------------
Total Current Assets 18,677 394,328
----------- ------------
EQUIPMENT, NET 425,993 1,000,892
----------- ------------
OTHER ASSETS
Assets of discontinued operations
(Note 9) 909,345 1,194,302
Debt offering costs 68,562 108,591
Deposits 42,447 42,447
Patents, and licensing agreements, net - 5,675,150
Goodwill, net - 5,656,207
----------- ------------
Total Other Assets 1,020,354 12,676,697
----------- ------------
TOTAL ASSETS $ 1,465,024 $ 14,071,917
============ ==============
The accompanying notes are an integral part of these
consolidated financial statements.
4
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Financial Statements (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
June 30, December 31,
2002 2001
------------- ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 2,116,113 $ 2,693,846
Accrued expenses 9,756,385 9,292,865
Notes payable - related parties 1,381,527 1,315,277
Notes and convertible debentures
payable - current portion 5,822,717 2,894,114
Deferred revenue 35,550 35,550
Liabilities of discontinued
operation (Note 9) 4,125,346 3,159,806
------------- ------------
Total Current Liabilities 23,237,638 19,391,458
------------- ------------
LONG-TERM LIABILITIES
Notes payable-related parties 5,000 65,000
Convertible debentures payable, net 769,605 2,293,886
------------- ------------
Total Long-Term Liabilities 774,605 2,358,886
------------- ------------
Total Liabilities 24,012,243 21,750,344
------------- ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock: 20,000,000 shares
authorized of $0.001 par value;
no shares outstanding - -
Common stock: 500,000,000 shares
authorized of $0.01 par value;
43,936,765 and 38,439,094 shares
issued and outstanding, respectively 439,368 384,391
Additional paid-in capital 34,882,613 30,254,067
Deferred consulting expense and asset
acquisition (875,128) (1,141,000)
Other comprehensive income (loss) (403,525) 334,549
Deficit accumulated during the
development stage (56,590,547) (37,510,434)
------------- ------------
Total Stockholders' Equity (Deficit) (22,547,219) (7,678,427)
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 1,465,024 $ 14,071,917
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
5
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations and Other Comprehensive Income
FROM INCEPTION
ON
MARCH 26, 1992
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED THROUGH
JUNE 30, JUNE 30, JUNE 30,
------------------------------ --------------------------------- ------------------
2002 2001 2002 2001 2002
--------------- -------------- ---------------- --------------- ------------------
REVENUES $ - $ - $ - $ - $ -
--------------- -------------- ---------------- --------------- ------------------
EXPENSES
General and administrative 5,868,308 3,890,557 2,762,658 2,098,105 28,433,153
Impairment of intangible assets 7,433,043 - 7,433,043 - 8,203,589
Research and development 666,669 - 254,036 107,532 3,400,705
Depreciation and amortization 401,339 736,541 252,208 545,585 2,334,284
--------------- -------------- ---------------- --------------- ------------------
Total Expenses 14,369,359 4,627,098 10,701,945 2,751,222 42,371,731
--------------- -------------- ---------------- --------------- ------------------
LOSS FROM OPERATIONS (14,369,359) (4,627,098) (10,701,945) (2,751,222) (42,371,731)
--------------- -------------- ---------------- --------------- ------------------
OTHER INCOME (EXPENSE)
Currency gain - - - - 1,258
Interest income 5,799 29,276 173 12,169 295,510
Loss on sale of assets - - - - (387,649)
Interest expense (1,245,073) (413,646) (439,389) (280,794) (5,676,203)
--------------- -------------- ---------------- --------------- ------------------
Total Other Income (Expense) (1,239,274) (384,370) (439,216) (268,625) (5,767,084)
--------------- -------------- ---------------- --------------- ------------------
LOSS BEFORE DISCONTINUED OPERATIONS (15,608,633) (5,011,468) (11,141,161) (3,019,847) (48,138,815)
Loss from discontinued operations (6,363,480) (2,788,509) (5,880,571) (2,124,608) (11,666,895)
--------------- -------------- ---------------- --------------- ------------------
LOSS BEFORE EXTRAORDINARY ITEM (21,972,113) (7,799,977) (17,021,732) (5,144,455) (59,805,710)
EXTRAORDINARY ITEM
Gain on settlement of debt 2,892,000 - 2,892,000 - 3,215,163
--------------- -------------- ---------------- --------------- ------------------
NET LOSS (19,080,113) (7,799,977) (14,129,732) (5,144,455) (56,590,547)
--------------- -------------- ---------------- --------------- ------------------
OTHER COMPREHENSIVE INCOME (LOSS)
Currency translation adjustment (738,074) 170,424 (625,279) 152,268 (403,525)
--------------- -------------- ---------------- --------------- ------------------
TOTAL COMPREHENSIVE LOSS $ (19,818,187) $ (7,629,553) $ (14,755,011) $ (4,992,187) $ (56,994,072)
=============== ============== ================ =============== ==================
The accompanying notes are an integral part of these
consolidated financial statements.
6
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations and Other Comprehensive Income (Continued)
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ --------------------------------
2002 2001 2002 2001
--------------- ------------- --------------- -------------
BASIC AND DILUTED LOSS PER SHARE
Loss before discontinued operations $(0.40) $(0.13) $(0.28) $(0.08)
Discontinued operations (0.16) (0.07) (0.15) (0.05)
Extraordinary item 0.07 - 0.07 -
--------------- ------------- --------------- -------------
Net loss $(0.49) $(0.20) $(0.36) $(0.13)
=============== ============= =============== =============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 39,144,913 38,184,499 39,405,851 38,160,423
=============== ============= =============== =============
The accompanying notes are an integral part of these
consolidated financial statements.
7
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit)
DEFERRED DEFICIT
CONSULTING ACCUMULATED
ADDITIONAL OTHER EXPENSE DURING THE
COMMON STOCK PAID-IN COMPREHENSIVE AND ASSET DEVELOPMENT
SHARES AMOUNT CAPITAL INCOME (LOSS) ACQUISITION STAGE
---------- ------------ ------------ ------------- ----------- ------------
Balance, December 31, 2000 38,149,942 $ 381,499 $25,611,288 $ 195,258 $ (410,667) $(20,028,591)
April 23, 2001, common stock issued for
conversion of accounts payable at $1.50
per share 50,000 500 74,500 - - -
June 8, 2001, common stock issued for
conversion of research advances at
$3.20 per share 119,152 1,192 380,095 - - -
June 29, 2001, common stock issued for
consulting contract at $2.80 per share 120,000 1,200 334,800 - (334,800) -
June 29, 2001, warrants granted for
consulting contract - - 302,112 - (302,112) -
September 1, 2001, options issued below
market value - - 861,000 - (861,000) -
Valuation adjustment and amortization of
deferred compensation - - (571,112) - 767,579 -
Warrants issued in connection with debt
obligations - - 3,261,384 - - -
Currency translation adjustment - - - 139,291 - -
Net loss for the year ended December 31,
2001 - - - - - (17,481,843)
---------- ------------ ------------ ------------- ----------- ------------
Balance, December 31, 2001 38,439,094 384,391 30,254,067 334,549 (1,141,000) (37,510,434)
January 8, 2002, common stock issued for
consulting contract at $1.06 per share
(unaudited) 200,000 2,000 210,000 - (212,000) -
January 8, 2002, options granted to
employee's below market valve
(unaudited) - - 180,447 - - -
January 8, 2002, options granted to
consultants at fair market value
(unaudited) - - 90,106 - - -
January 8, 2002, common stock issued for
consulting contract at $1.06 per share
(unaudited) 130,000 1,300 136,500 - (137,800) -
January 8, 2002, warrants granted for
consulting contract (unaudited) - - 120,000 - (120,000) -
---------- ------------ ------------ ------------- ----------- ------------
Balance forward 38,769,094 $387,691 $30,991,120 $334,549 $(1,610,800) $(37,510,434)
---------- ------------ ------------ ------------- ----------- ------------
The accompanying notes are an integral part of these
consolidated financial statements.
8
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
DEFERRED DEFICIT
CONSULTING ACCUMULATED
ADDITIONAL OTHER EXPENSE DURING THE
COMMON STOCK PAID-IN COMPREHENSIVE AND ASSET DEVELOPMENT
SHARES AMOUNT CAPITAL INCOME (LOSS) ACQUISITION STAGE
---------- ---------- ----------- ------------- ------------- -------------
Balance forward 38,769,094 $ 387,691 $30,991,120 $ 334,549 $(1,610,800) $(37,510,434)
January 8, 2002, warrants granted for
technology rights (unaudited) - - 84,245 - - -
February 7, 2002 options granted for
consulting contract (unaudited) - - 79,000 - (79,000) -
Revaluation of existing warrants
(unaudited) - - 1,360,574 - - -
February 28, 2002, common stock issued
for conversion of debt to equity at
$1.92 per share (unaudited) 260,270 2,603 497,397 - - -
February 28, 2002, common stock issued
for loan default penalty at $0.75 per
share (unaudited) 150,000 1,500 111,000 - - -
April 8, 2002, warrants granted as
incentive to extend debt payment terms
(unaudited) - - 671,700 - - -
June 14, 2002, options granted for
consulting contract (unaudited) - - 128,000 - (128,000) -
June 14, 2002, common stock issued for
services at $0.40 per share (unaudited) 150,000 1,500 58,500 - - -
June 21, 2002, common stock issued for
conversion of convertible debentures at
$0.15 per share (unaudited) 85,526 855 12,143 - - -
June 25, 2002, common stock issued for
conversion of convertible debentures
At $0.06 per share (unaudited) 265,625 2,656 14,344 - - -
June 26, 2002, common stock issued for
purchase of Elektryon assets at $0.11
per share (unaudited) 3,500,000 35,000 350,000 - (385,000) -
June 27, 2002, common stock issued for
conversion of debt to equity at $0.08
per share (unaudited) 600,000 6,000 42,000 - - -
June 28, 2002, common stock issued for
conversion of convertible debentures At
$0.06 per share (unaudited) 156,250 1,563 8,438 - - -
Valuation adjustment and amortization of
deferred compensation (unaudited) - - (243,000) - 1,327,672 -
Warrants issued in connection with debt
obligations (unaudited) - - 717,152 - - -
---------- ---------- ----------- ------------- ------------- -------------
Balance Forward 43,936,765 $439,368 $34,882,613 $334,549 $(875,128) $(37,510,434)
---------- ---------- ----------- ------------- ------------- -------------
The accompanying notes are an integral part of these
consolidated financial statements.
9
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
DEFERRED DEFICIT
CONSULTING ACCUMULATED
ADDITIONAL OTHER EXPENSE DURING THE
COMMON STOCK PAID-IN COMPREHENSIVE AND ASSET DEVELOPMENT
SHARES AMOUNT CAPITAL INCOME (LOSS) ACQUISITION STAGE
---------- ---------- ----------- ------------- ------------ -------------
Balance Forward 43,936,765 $439,368 $34,882,613 $334,549 $(875,128) $(37,510,434)
Currency translations adjustment (unaudited) - - - (738,074) - -
Net loss for the six months ended, June 30,
2002 (unaudited) - - - - - (19,080,113)
---------- ---------- ----------- ------------- ------------ -------------
Balance, June 30, 2002 (unaudited) 43,936,765 $439,368 $34,882,613 $(403,525) $(875,128) $(56,590,547)
========== ========== =========== ============= ============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
10
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
FROM INCEPTION ON
MARCH 26, 1992
FOR THE SIX MONTHS ENDED THROUGH
JUNE 30, JUNE 30,
-------------------------------- ------------------
2002 2001 2002
--------------- -------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (19,080,113) $ (7,799,977) $ (56,590,547)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 401,339 829,216 2,747,312
Deferred consulting expense 1,084,672 98,667 1,611,670
Value of common stock, warrants, options and discounts on
equity instruments issued for services 2,475,326 - 6,278,256
Loss on sale of assets - - 387,649
Amortization of debenture discount and debt issue costs 688,757 583,282 2,967,143
Gain on disposition of debt (2,892,000) - (3,215,163)
Impairment loss 13,089,250 - 13,775,551
Bad debt expense 369,569 - 369,569
Change in operating asset and liability accounts, net of
amounts acquired in business combination:
(Increase) decrease in advances to employees, prepaid
expenses, deposits and debt offering costs 48,362 32,011 (5,867,465)
Increase (decrease) in accounts payable 914,499 1,276,024 5,099,779
Increase (decrease) in accrued expenses 1,837,520 278,891 11,216,441
Increase in deferred revenue - - 35,550
--------------- -------------- ------------------
Net Cash Used by Operating Activities (1,062,819) (4,701,886) (21,184,255)
--------------- -------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash lost in discontinued operation (4,713) - (4,713)
--------------- -------------- ------------------
Payments on license agreement - - (400,000)
--------------- -------------- ------------------
Cash acquired in Sigma acquisition - - 142,254
Proceeds from sale of assets - - 1
Purchase of fixed assets - (310,951) (1,164,570)
Equipment procurement costs - - (564,110)
Net Cash Used by Investing Activities (4,713) (310,951) (1,991,138)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 280,000 3,600,000 4,680,000
Repayment of related party notes payable (5,250) (81,805) (1,640,226)
Repayment of notes payable - (346,517) (1,519,062)
Loans from related parties 11,500 - 7,462,787
Issuance of convertible debentures 650,000 - 3,100,000
Common stock issued for cash - - 11,131,032
Stock offering costs - - (26,289)
--------------- -------------- ------------------
Net Cash Provided by Financing Activities 936,250 3,171,678 23,188,242
--------------- -------------- ------------------
The accompanying notes are an integral part of these
consolidated financial statements.
11
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
FROM INCEPTION
ON MARCH 26,
FOR THE SIX MONTHS 1992
ENDED THROUGH
JUNE 30, JUNE 30,
------------------------------- ---------------------
2002 2001 2002
---------------- ------------- ---------------------
NET INCREASE (DECREASE) IN CASH (131,282) (1,841,159) 12,849
CASH AT BEGINNING OF PERIOD 144,131 2,176,299 -
---------------- ------------- ---------------------
CASH AT END OF PERIOD $ 12,849 $ 335,140 $ 12,849
================ ============= =====================
CASH PAID FOR:
Interest $ - $ 68,459 $ 81,405
Income taxes $ - $ - $ -
NON-CASH FINANCING ACTIVITIES
Value of common stock, warrants, options and discounts on equity
instruments issued for services $ 2,475,326 $ - $ 6,278,256
Equity instruments issued for deferred consulting expense/asst
acquisition $ 818,800 $ 672,000 $ 1,558,800
Common stock issued for recapitalization $ - $ - $ 2,761,773
Common stock issued for conversion of debt $ 106,000 $ 456,287 $ 3,069,511
Acquisition of licenses through license agreement payable $ - $ - $ 6,940,000
Warrants granted in conjunction with debt instruments $ 717,149 $ - $ 3,978,535
The accompanying notes are an integral part of these
consolidated financial statements.
12
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted in accordance with such rules and regulations. The
information furnished in the interim condensed consolidated financial
statements includes normal recurring adjustments and reflects all
adjustments, which, in the opinion of management, are necessary for a
fair presentation of such financial statements. Although management
believes the disclosures and information presented are adequate to make
the information not misleading, it is suggested that these interim
condensed consolidated financial statements be read in conjunction with
the Company's most recent audited financial statements and notes
thereto included in its December 31, 2001 Annual Report on Form 10-KSB.
Operating results for the six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
NOTE 2 - PATENTS AND LICENSING AGREEMENT
The Company's patents and license agreement consisted of the following
at June 30, 2002 and December 31, 2001:
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED)
Licensing Agreement - Aquamax
and Keeran $6,540,000 $6,540,000
Licensing Agreement - STM 2,000,000 500,000
Accumulated amortization (8,540,000) (1,364,850)
------------ ------------
$ - $5,675,150
============ ============
As part of the purchase of Sigma (Note 3), the Company acquired patents
valued at their fair value of $1,006,670, adjusted for foreign currency
fluctuations since the date of purchase. The patents have an estimated
remaining life of 90 months from the date of Sigma acquisition. See
also Note 9 for a discussion about the Sigma operations being
discontinued. The patents at their net value of $719,421 are included
in net assets of discontinued operations. The license agreement relates
to rights to patents and patent applications pertaining to technology
acquired from Aquamax and Keeran (Note 7). The cost of the license
agreement was being amortized over its estimated useful life of 10
years. Because of the Company's cash flow shortages and uncertain
future, the Company recorded amortization expense of $163,500 and
elected to record an impairment expense of $5,348,150 associated with
the remaining value of the Aquamax and Keeran rights and technology.
13
NOTE 3 - BUSINESS COMBINATION
In August 2000, the Company acquired SIGMA Elektroteknisk, AS (SIGMA)
by exchanging 1,718,748 shares of its common stock for all of the
common stock of SIGMA. The acquisition was accounted for as a purchase
in accordance with APB 16, "Business Combinations." The excess of the
total acquisition cost over the fair value of the net assets acquired
of $6,589,756 was being amortized over 10 years by the straight-line
method. Amortization expense amounted to $-0- and $329,488 for the
three months ended June 30, 2002 and 2001, respectively.
Because of the adoption of SFAS No. 142, the Company is no longer
amoritizing the goodwill generated from the purchase of Sigma. Instead
the goodwill is subject to impairment testing. Because of the
bankruptcy of Sigma as discussed in Note 9, the Company recorded an
impairment of goodwill of $5,656,207 which is part of the loss from
discontinued operations.
NOTE 4 - NOTES AND DEBENTURES PAYABLE
During the quarter ended June 30, 2002, the Company received $80,000
from the issuance of notes payable to various individuals. All of the
notes bear interest at 12.00%, are unsecured and due on demand.
Additionally, a creditor of the Company converted $542,717 in accounts
payable to a note payable, the note bears interest at 10% per annum, is
unsecured and due upon demand.
During the quarter ended June 30, 2002, the Company received $11,500
from the issuance of notes payable to a related party. The note is
non-interest bearing, unsecured and due on demand. Additionally, the
Company repaid $5,250 on a note payable to a related party.
During the quarter ended June 30, 2002, the Company received $100,000
from the issuance of a convertible debenture. The debenture is
convertible at a price of $0.65 per share for a period of five years,
bears interest at 12.00%, is unsecured and is due 5 years from the date
of issue. As additional consideration for $100,000 of the convertible
debenture payable, the Company granted warrants to acquire 769,231
shares of common stock at an exercise price of $0.65 per share with an
expiration date 5 years from the date of grant. The warrants were
valued at $676,923 pursuant to the Black-Scholes pricing model. The
proceeds were allocated between debt and additional paid-in capital in
proportion to the relative fair value of the debt and equity (warrants
and beneficial conversion rights) elements of the transaction. The
portion allocated to equity was $100,000 or 100%.
During the quarter ended June 30, 2002, a holder of a convertible
debenture elected to convert $40,000 in principle for 507,401 shares of
common stock at a rate equal to 80% of the lowest closing bid price of
the Company's common stock for the five trading days immediately
proceeding the conversion date.
14
NOTE 5 - ACCRUED EXPENSES
The Company's accrued expenses are comprised of the following items:
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED)
Accrued payroll taxes payable $ 72,430 $ -
Accrued interest payable - payroll 52,717 52,717
Accrued payroll tax penalty 98,845 98,845
Accrued franchise taxes payable 100,274 97,828
Accrued payroll payable 1,244,417 -
Accrued vacation payable - 127,142
Accrued other expenses 615 15,149
Aquamax/Keeran contingency accrual 1,131,000 934,800
Aquamax/Keeran license fee payable 3,600,000 6,540,000
Accrued STM license fee payable 2,000,000 500,000
Accrued deferred compensation - Moard 143,516 115,824
Accrued legal settlement - Mchargue 63,400 63,400
Accrued interest payable 1,249,171 747,160
----------- -----------
Total $ 9,756,385 $ 9,292,865
=========== ===========
NOTE 6 - GOING CONCERN
The Company's financial statements are prepared using generally
accepted accounting principles applicable to a going concern which
contemplates the realization of assets and liquidation of liabilities
in the normal course of business. The Company has had limited
activities since inception and is considered a development stage
company because it has no operating revenues, and planned principal
operations have not yet commenced.
The Company has incurred losses from its inception through June 30,
2002 of approximately $56,600,000. The Company does not have an
established source of funds sufficient to cover its operating costs,
has a working capital deficit of approximately $23,200,000, has relied
exclusively on debt and equity financing. Additionally the Company's
wholly-owned subsidiary Sigma was forced into bankruptcy because of
non-payment of employee salaries. Accordingly, there is substantial
doubt about its ability to continue as a going concern.
In order to develop a reliable source of revenues, and achieve a
profitable level of operations, the Company will need, among other
things, additional capital resources. Management's plans include
raising additional capital through the private placement sales of
common stock and/or loans from third parties, the proceeds of which
will be used to develop the Company's products, pay operating expenses
and pursue acquisitions and strategic alliances. The Company expects
that it will need approximately $9,000,000 of additional funds for
operations and expansion over the next 12 months. However, management
cannot provide any assurances that the Company will be successful in
accomplishing any of its plans.
The ability of the Company to continue as a going concern is dependent
upon its ability to successfully accomplish the plan described in the
preceding paragraph and eventually attain profitable operations. The
accompanying consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to
continue as a going concern.
15
NOTE 7 - COMMITMENTS AND CONTINGENCIES
a. Consulting Agreements
During January 2000, the Company entered into a three-year consulting
agreement with Clement J. Wohlreich to receive financial, marketing and
management services. The agreement called for the Company to issue
100,000 units, each consisting of one share of the Company's common
stock and one attached warrant granting the right for three years to
purchase one share of common stock for an exercise price of $1.50. As
the agreement provided for issuance of the units upon commencement of
services, the Company accrued a liability and deferred consulting
expense as a reduction of shareholders' equity in an amount equal to
the value of the common stock and warrant at the inception of the
agreement.
The liability was converted to equity upon issuance of the units and
the value of the stock and warrants will be expensed over the term of
the agreement upon completion of services each quarter. Pursuant to
EITF 96-18, "Accounting For Equity Instruments That Are Issued To Other
Than Employees For Acquiring Or In Conjunction With Selling, Goods Or
Services", the Company will continue to revalue the warrants until
earned upon completion of services. At January 1, 2000, the consulting
agreement was valued at $1,500,000, representing the market value of
100,000 shares of the Company's common stock and 100,000 warrants. As
of December 31, 2000, the consulting contract was valued at $740,000,
representing the 100,000 shares of common stock issued on July 25, 2000
at the then trading price of $4.00 per share and the value of the
warrants at December 31, 2000 of $340,000, as determined by the Black
Scholes pricing model.
For the year ended December 31, 2000, the Company had amortized
$279,334 of the contract , leaving a remaining balance of $410,667 at
December 31, 2000 which is included as a reduction of stockholders'
equity. At December 31, 2001, the remaining balance was $152,166 which
is included as a reduction of stockholders equity. At June 30, 2002,
the remaining balance was $66,833 which as a reductions of stockholders
equity.
During June 2001, the Company entered into a two-year consulting
agreement with Gene Martineau to receive services related to
interfacing with institutional investors and brokerage firms. The
Company issued 120,000 shares of common stock and granted 120,000
warrants exercisable for two years at $1.50. Pursuant to EITF 96-18,
"Accounting For Equity Instruments that Are Issued To Other Than
Employees For Acquiring Or In Conjunction With Selling, Goods or
Services", the Company will continue to revalue the warrants until
earned upon completion of services. The unamortized fair value at
December 31, 2001 was $271,833 which is included as a reduction of
stockholders equity. The unamortized value at June 30, 2002 was
$168,600 which is included as a reduction of stock holders equity.
On June 20, 2001, the Company (through its subsidiary Powerco US, Inc.)
entered into an employment agreement with David Moard (Moard) wherein
Moard would serve as the president of the Powerco. Terms of the
agreement are as follows: (1) Moard's base salary will be $240,000 per
year with the first and second years salary being deferred to future
years,(later amended to deferring $60,000 per year starting November 1,
2001) and (2) Moard was granted 820,000 stock options exercisable at
$1.50 per share of which 260,000 vest in year one, 360,000 vest in year
two and 200,000 vest in year three. The employment agreement is in
effect for three years. The Company has accrued wages of $115,824,
which represents the deferred salary through December 31, 2001, and has
expensed $270,593, which represents amortization of the intrinsic value
of the stock options as well as the payroll expense. At December 31,
2001, the unamortized intrinsic value of the stock options amounted to
$717,000, which is included as an offset to equity as deferred
compensation expense and will be amortized over the vesting period of
the options. At June 30, 2002, the unamortized intrinsic value of the
stock options was $-0- because the Company fully vested all of the
options.
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
b. Options for Consulting Services
On February 7, 2002, the Company entered into a three year consulting
agreement for assistance in preparing material to be used in fund
raising activities, and business development activities as well as to
introduce the Company to potential strategic partners and investors. In
consideration for the consulting services, the Company has agreed to
16
grant 100,000 options with an exercise price $1.10 per share. The
options have a three year life.
The unamortized portion of the deferred compensation at June 30, 2002
was $68,028 and is included as a reduction of stockholders equity.
c. Extension of Consulting Agreement
On January 8, 2002, pursuant to an Extension and Expansion Agreement
with Weckstein, the Company extended the consulting agreement with
Weckstein for a minimum period of six months and up to three years at
the option of the Company. As compensation for this extension, the
Company has issued to Weckstein 200,000 shares of common stock valued
at $1.06 per share. The unamortized portion of the deferred
compensation at June 30, 2002 was $-0-.
On June 14, 2002, the Company extended the consulting agreement with
Weckstein for a period of one year from June 30, 2002. As compensation
for this extension, the Company has issued to Weckstein 400,000 options
with an exercise price of $0.40 per share. The unamortized portion of
the deferred compensation at June 30, 2002 was $128,000 and is included
as a reduction of stockholders' equity.
d. Investor Relations Agreement
On January 8, 2002, the Board of Directors authorized management to
execute a consulting agreement with Synergy International Partners S.A.
(Synergy). Synergy will provide investor relations consulting in
Europe. As payment for the consulting agreement, the Company has
authorized the issuance of 130,000 shares of common stock and 300,000
warrants with an exercise price of $1.25 per share for the term of the
agreement.
The unamortized portion of the deferred compensation at June 30, 2002
was $58,667 and is included as a reduction of stockholders equity.
e. License Agreements
STM
---
During April 2000, the Company entered into a licensing agreement with
STM to obtain exclusive rights to STM patented and unpatented
technology related to Stirling cycle heat engines. The agreement is for
thirty years and calls for annual payments. The payment due in each of
the next three years is set and is open for negotiation after three
years.
YEAR AMOUNT
--------------------- --------------
2002 $1,500,000
2003 2,000,000
2004 3,000,000
--------------
$6,500,000
==============
17
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
e. License Agreements (Continued)
STM (Continued)
---
The Company paid an initial amount of $500,000 that was amortized over
twelve months. The second annual payment in the amount of $500,000 was
due and payable on April 20, 2001 and the third payment was due and
payable on April 20, 2002. The Company defaulted on the second and
third annual payments and under the terms of the contract, lost the
exclusive rights to the Technology, but has retained the rights on a
non exclusive basis. Due to this default and the inability of the
Company to raise sufficient capital to develop the Company's products,
the technology was deemed to be impaired as of September 23, 2001, or
60 days after notification of default. As of June 30, 2002, the Company
has recognized a payable in the amount of $2,000,000, amortization
expense in the amount of $213,670 and loss on impairment in the amount
of $1,786,330.
AQUAMAX/KEERAN
--------------
During September 2000, the Company entered into a worldwide license
agreement (License Agreement) with Aquamax International Holdings, BV
of the Netherlands and Keeran Corporation NV, a Netherlands Antilles
Corporation (Licensors) for their issued and pending patents and other
intellectual property rights relating to the use of plastic heat
exchangers for the distillation of seawater. The scope of this license,
and thus the authorized "field of use," is for the distillation of
potable water from naturally occurring saline water in units of 1000
cubic meters per day or larger.
The basic terms of this License Agreement provide a grant to the
Company of an exclusive right to sell products within the above field
of use, utilizing (i) over 60 issued and pending patents and
improvements (as defined in the License Agreement) on such patents
owned by the Licensors, and (ii) issued and pending patents owned by
third parties to which the Licensors have licensed rights, which
consist of an international patent application (which is expected to
result in identical patents covering the identical invention in eight
different countries) owned by Hadwaco Oy, a Finnish company
("Hadwaco"), under which the Licensors have a license. The Company also
granted Aquamax and Keeran certain exclusive rights in its technology.
In exchange, the Company will receive 50% of any license royalty or
amounts of a similar nature they receive from third parties.
Under the terms of the License Agreement, the Company agreed to pay a
total of $4,000,000 and 600,000 shares of its common stock for the
rights under the License Agreement under a payment schedule contingent
on various factors as to timing but to be no later than December 31,
2000. The Company has paid $400,000 and has issued 600,000 shares of
common stock to the Licensors.
The remaining amount payable under the License Agreement was $6,540,000
at September 30, 2000, which consisted of $3,600,000 payable in cash
and $2,940,000 payable in common stock (representing the value of
600,000 shares of common stock to be issued, valued at the market value
of shares of the Company's common stock as of the effective date of the
transaction, September 21, 2000), and has been accrued as a liability
and included in the amount recorded as a licensing agreement asset
along with the $400,000 paid in cash, and $2,940,000 paid through the
issuance of common stock. The asset, with a cost of $6,940,000
($6,540,000 after an impairment adjustment of $400,000), is has been
amortized over its estimated useful life of ten years using the
straight-line method.
18
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
e. License Agreements (Continued)
AQUAMAX/KEERAN (Continued)
--------------
The license agreement was signed by the Company and Aquamax/Keeran
representatives as of September 21, 2000, but because of questions
raised as to the identity and authority of one Aquamax/Keeran
signatory, an exhibit was added to the agreement solely to clarify the
matter. Revised signature pages (signed by the original Aquamax/Keeran
parties and dated on the original September signing date) were extended
on October 2, 2000. The transaction was originally recorded in October
2000 in the belief that, until properly executed signature pages were
received, it was not effective. Based on our reassessment of the
circumstances, we have determined that the agreement became binding on
September 21, 2000.
Therefore, the September 30, 2000 financial statements were amended to
reflect the transaction as occurring in September 2000. The key points
leading to the change in the Company's position as to the effective
date were: (1) although the name and title of the representative
signing on behalf of Keeran Corporation were not disclosed on the
signature page or accompanying documents, the signature was an original
and the signer had actual authority from Keeran Corporation to execute
the agreement; (2) original signature pages for all parties were
exchanged in September 2000 with the intent to be bound by the
agreement; (3) the re-execution of the signature page on behalf of
Keeran Corporation was by the same person and was dated by him as of
the original signing date, which presumably demonstrates that Keeran
Corporation believed that the agreement was effective as of the
original signature date; and (4) notwithstanding the position taken at
the time by the Company's intellectual property attorney, that the
agreement was not effective until the revised signature page was
received, the Company had wire transferred the additional payment of
$300,000 due under the agreement to Aquamax/Keeran on September 30,
2000, prior to receipt of the revised signature page. On the basis of
these facts, the Company has concluded that the better view is that the
agreement became legally binding on all parties during the third,
rather than the fourth, quarter of 2000. Accordingly, the transaction
has been accounted for as occurring in September 2000. The measurement
date, for purposes of valuing shares of the Company's common stock due
as part of the purchase price that is included in the accrued liability
is as of September 21, 2000, because the effective date of the
agreement is the date the rights to the patented technology were
transferred to the Company.
The License Agreement provided that all technology covered by the
Agreement was to be exclusive within the specified field of use.
Subsequent to the execution of the License Agreement and the initial
payments to the Licensors, the Company discovered that the Licensors
rights to Hadwaco's patent application that was sub-licensed to the
Company pursuant to the License Agreement, was not an exclusive
license, as was represented and warranted by the Licensors but was,
rather, a non-exclusive license. As a result, the Company served a
notice of default under the terms of the License Agreement on the
Licensors on December 22, 2000. The Company demanded arbitration
pursuant to the License Agreement to determine the value of the
technology, which the Licensors agreed to license on an exclusive
basis, but actually licensed on a non-exclusive basis. Consequently,
the value of the licensed technology is diminished due to the fact that
Hadwaco is free, contrary to the Licensors' original representations,
to license the same technology to third parties for its (potentially
competitive) use.
19
NOTE 7 - COMMITMENTS AND CONTINGENCIES
e. License Agreements (Continued)
AQUAMAX/KEERAN (Continued)
--------------
The Company's request for arbitration does not assert that the license
does not exist or is not effective. The Company has suspended all
payments beyond the $400,000 paid in September 2000 and $2,940,000 paid
through the issuance of common stock in June 2002 under the License
Agreement pending the outcome of the resolution of the dispute in
connection with the one element of the Agreement. In any event, the
Company intends to proceed with its planned uses of the technology,
whether on an exclusive or non-exclusive basis. A portion of the cost
of the License Agreement amounting to $400,000 was expensed in
September 2000 which management has determined to be an appropriate
impairment adjustment to reduce the asset book value by management's
estimate of the difference between the amount the Company is obliged to
pay under the License Agreement and the fair value of the technology
based on management's estimate of the reduction in purchase price had
it been known that one patent application was non-exclusive.
The full purchase price has been recorded as a liability and offset by
the $400,000 and $2,940,000 paid to date. The full amount of the
liability was recorded (without offset for potential reduction in
resolution of the Hadwaco sublicense dispute) because management
believes that: (1) based on the oral opinion of the Company's General
Counsel, the full amount of the liability, until amended through
negotiation or legal process, represents an enforceable liability as
long as the Company retains the patent rights conveyed under the
agreement; (2) the liability meets the accounting definition of a
liability as stated in Statement of Financial Accounting Concepts No.
6, Elements of Financial Statements; and (3) the reduction of the
liability to anticipate a reduction in negotiations or legal process
would result in recording a contingent asset that is prohibited by SFAS
No. 5, Accounting for Contingencies. Accordingly, since the Company
intends to keep the patent rights, the Company has recorded the
liability, and related asset, because under the terms of the agreement
the Company has no discretion to avoid future payment of the remaining
cash and common stock payable. The amount of payment under the
agreement withheld pending resolution of the dispute was not indicative
of the diminished value of the patent rights received as the Company's
management has estimated that approximately $400,000 of the purchase
price represents the value of the exclusivity feature of the one patent
that was not received. The failure of Aquamax/Keeran to deliver
exclusive rights to all patents resulted in a condition of default by
Aquamax/Keeran. Aquamax/Keeran has asserted that the Company's
subsequent withholding of payment resulted in a condition of default by
the Company.
The Company has demanded arbitration of this dispute with
Aquamax/Keeran as contemplated in the license agreement. The
arbitration procedures have not commenced while the Company and
Licensors have been involved in settlement negotiations. The
negotiations resulted in the execution by both parties, as well as
Hadwaco Ltd. Oy and Hackman Oy Abp, of a non-binding Letter of Intent
(LOI). The LOI was executed by the various parties between June 15,
2001 and June 20, 2001. Contemporaneously, the Company entered into a
related non-binding Letter of Intent with Hadwaco Ltd Oy and Hackman Oy
Abp. The agreement of the parties, as memorialized in both LOIs, was as
follows: The Company would form a new company (Newco) in Finland.
Because it would control Newco, the Company's financial statements
would report its investment in Newco on a consolidated basis. The
Company would immediately provide Newco with enough working capital to
purchase from Hadwaco its existing and ongoing water remediation
business, including all related intellectual property. The intellectual
property transferred to Newco would include technology, which Hadwaco
has licensed to Aquamax/Keeran and which is the source of the Company's
dispute with Aquamax/Keeran.
20
NOTE 7 - COMMITMENTS AND CONTINGENCIES
e. License Agreements (Continued)
AQUAMAX/KEERAN (Continued)
--------------
In July 2001, the aforementioned negotiations resulted in the execution
by Aquamax/Keeran and the Company, as well as Hadwaco Ltd. Oy and
Hackman Oy Abp, of agreements which would have, if closing had occurred
as stipulated, resolved the dispute between the Company and
Aquamax/Keeran. The Agreements provided that the Company would make
payments to Aquamax/Keeran of $1,800,000 in cash and 600,000 shares of
common stock on or before September 28, 2001, in addition to the
$400,000 already paid to Aquamax/Keeran, in exchange for ownership (as
opposed to licenses as provided in the September 2000 License
Agreement) of all the Aquamax/Keeran technology in any way connected to
water treatment. The agreements also provided that the Company would
grant back to Aquamax/Keeran an exclusive, worldwide license to exploit
Newco's water desalination technology for applications where the volume
of water processed is less than 1,000 cubic meters per day. The license
back of rights to Aquamax/Keeran was to be exclusive for a term of five
years and non-exclusive thereafter. The agreements also included
release of liability provisions, whereby all parties would release each
other of and from all claims and liabilities, including the amount due
in connection with the Company's obligation under the September 2000
License Agreement as well as the Company's claim for a price reduction
due to the non-exclusivity of the Hadwaco license. Contemporaneously,
the Company entered into agreements with Hadwaco Ltd Oy and Hackman Oy
Abp (Hadwaco). The agreement of the parties was as follows: The Company
was to form a new company (Newco) in Finland. The Company would
immediately provide Newco with $1,500,000 to purchase from Hadwaco a
100% interest in Hadwaco's existing and ongoing water remediation
business, including all related intellectual property. Newco's purchase
price for Hadwaco's water remediation business was to be $1,500,000
plus a 19% interest in Newco's common stock. The Company was to provide
senior debt funding up to a principle aggregate amount of $7,500,000
over a period of three years from the date of closing of the Hadwaco
purchase.
On August 29, 2001, the Company entered into an agreement with Aquamax
(International) Holdings B.V. and Keeran Corporation N.V.
("Aquamax/Keeran") to extend the deadline for consummation of the
transactions set forth in the agreement executed on July 20, 2001 by
and among Aquamax/Keeran, Balantum Oy and the Company. As amended, the
closing of the transaction shall occur on the earlier of September 28,
2001 or the first practically possible day after the Company becomes
listed on the Nasdaq OTC Bulletin Board. Additionally, after August 31,
2001, the Company shall take responsibility for paying for the
processing and maintenance of patents and patent applications, which
shall be transferred to Balantum Oy pursuant to the terms of the July
20, 2001 agreement.
In connection with the extension agreement, the Company has assumed the
obligation of Aquamax/Keeran to compensate a finder in connection with
the transactions between Aquamax/Keeran and the Company an amount of
$43,050 and 20,000 shares of the Company's common stock.
21
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
e. License Agreements (Continued)
AQUAMAX/KEERAN (Continued)
On September 11, 2001, the terrorist attack on New York and Washington
D.C. occurred which disrupted the financial markets in the United
States and abroad. That event significantly affected and delayed the
Company's efforts to obtain the investment money necessary to complete
the transactions described above for the formation of Newco, the
purchase of the ongoing water remediation business of Hadwaco, and the
purchase of the Aquamax/Keeran technology connected to water treatment.
Because of the funding delays, the Company was not able to fund the
closing of the transactions by the due date and the agreements for
those transactions are now null and void, including the agreements,
which included the release of liability provisions between the Company
and Aquamax/Keeran. As a consequence, the September license agreement
between the Company and Aquamax/Keeran remains in effect and the
disputes between the parties as to their respective rights and
obligations under the license agreement remain unresolved. The Company
has recommenced discussions with Aquamax/Keeran in an attempt to
resolve their disputes amicably and intends to arbitrate resolution of
those disputes if a settlement cannot be reached.
Because its agreements with Hadwaco Ltd. Oy and Hackman Oy Abp were
non-binding, the Company does not believe that it has a liability
arising out of its failure to complete the transactions described
above, other than the loss of amounts the Company agreed to pay in
connection with obtaining extensions of the agreements. In connection
with its dispute with Aquamax/Keeran, the Company still believes it has
the right to a purchase price reduction because of the failure of
Aquamax/Keeran to deliver exclusive rights to all of the patents and,
while no claim has been asserted, might be subject to a damage claim
related to the Company's withholding of payment on the Aquamax/Keeran
license agreement. The Company has recorded expenses of $1,131,000
related to the costs of the terminated agreements with Hadwaco/Hackman
and the possible costs associated with the Aquamax/Keeran license
agreement dispute.
On June 27, 2002, the Company issued 600,000 shares as stipulated in
the acquisition agreement. At the date of issuance, the Company's
common stock closed at $0.08 per share. Accordingly the Company
recorded the issuance as a reduction of the Aquamax/Keeran liability of
$48,000 and a gain on extinguishment of debt of $2,892,000 as required
by APB No. 29 "Accounting for Non Monetary Transactions". The Company
recorded an impairment loss of $5,348,150 to write the value of the
asset down to zero because of the uncertainty of being able to fund
future development of the technology. The Company is in negotiations
with Aquamax/Keeran regarding the balance due of $3,600,000.
22
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
e. License Agreements (Continued)
SIGMA
-----
On March 6, 2001, the Company's wholly owned subsidiary, SIGMA, entered
into a collaboration agreement with Baxi Group Ltd. (a manufacturer of
heating systems in Europe) for the development and marketing of a
combined heat and power product (micro-CHP) for the residential market
in the United Kingdom. The objective of the agreement is to form a
joint working arrangement for the development of a micro-CHP package,
consisting of the Sigma Energy Converter (Sigma Stirling engine) and
the metal cabinet, into which each unit will be mounted, including
controls and connections to both systems and the electricity supply
network. The purpose of the collaboration agreement is to design a
prototype micro-CHP package to be installed in compliance with
applicable regulations in older and larger houses as replacements for
boilers that have reached the end of their service life. The parties
will work together in assigning sufficient priority and allocating
necessary resources (which have already been budgeted by Sigma) to the
project to develop the package in a mutually agreeable time frame,
which is currently anticipated to be by mid-2003 if the Company can
raise sufficient capital to fund completion of its Stirling engine and
pay its portion of the costs in connection with the collaboration
agreement. Pursuant to the terms of the Collaboration Agreement, each
party pays its own expenses. The agreement has no fixed termination
date, but can be terminated at any time by either party on three months
notice. The costs incurred by the Company, which are associated with
the Baxi collaboration, have been expensed when incurred. Sigma,
because of its bankruptcy, it is no longer performing on this contract.
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION (SAIC)
-----------------------------------------------------
Effective April 4, 2001, the Company signed a Technology License,
Consulting Services, and Asset Purchase Agreement with SAIC. Terms of
the agreement are as follows: SAIC will grant to the Company a
non-exclusive royalty-bearing right and license under the SAIC
Technology to make, use, import, offer to sell, and sell components,
sub-assemblies or systems for concentrating solar energy incorporating
SAIC Technology in the United States and Canada. The term of the
agreement will continue until the date of the expiration of the last of
the SAIC Patents. The Company's obligation to pay royalties will
continue until the sooner of either 30 years or the expiration of the
last SAIC patent. SAIC will have the right to terminate this agreement
if the Company has failed to fund the $4,000,000 in SAIC dish
development in two years or to timely make any royalty or minimum
royalty payment, SAIC shall also have the right to terminate this
agreement or renegotiate the royalty of this agreement if the Company
has failed to deliver equity in a new business entity to SAIC. The
Company will be obligated to pay the following royalties based on the
net selling price of any licensed product in accordance with the
following schedule: (a) Three percent of the set selling price for all
sales made during the royalty term until after the cumulative total of
royalties exceeds $100,000, (b) Two and One-Half percent of net selling
price for all sales made during the royalty term after the cumulative
total paid to SAIC exceeds $100,000, and until the cumulative total
exceeds $500,000 and, (c) Two percent of the net selling price for all
sales made during the royalty term once the cumulative total royalty
exceeds $500,000. During the royalty term, the Company shall make the
following minimum royalty payments: Contract year 1: no amounts due,
Contract year 2: minimum amount due is $25,000, Contract year 3:
minimum amount due is $50,000, and Contract year 4 and thereafter:
minimum amount due is $100,000. Within 30 days after the end of each
quarter, the Company will deliver to SAIC a report of its activities
relating to the preceding calendar quarter.
23
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
e. License Agreements (Continued)
Science Applications International Corporation (SAIC) (Continued)
-----------------------------------------------------
On September 1, 2001, the Company and SAIC entered into a Professional
Services Agreement as it relates to time and materials. The terms of
the agreement are as follows: (1) the period of performance is from
September 1, 2001 to August 31, 2003. (2) SAIC will consult and develop
a program to create a viable near-term solar dish concentrator power
system for electrical power production. This program will consist of
four tasks: Task 1 will relate to advanced dish development, Task 2
will consist of marketing and business development, Task 3 will consist
of receiver development and Task 4 will consist of product testing and
specification. The estimated costs of these four tasks combined is
$7,700,000. The Company will pay SAIC monthly on a `time and materials'
basis for labor expended and costs and expenses incurred.
The Company was to make an initial payment of working capital to SAIC
of $200,000 and shall thereafter replenish the level of working capital
by making payments to keep the balance of working capital at $200,000.
The Company is to maintain the $200,000 working capital balance until
SAIC has been paid $6,800,000. Thereafter SAIC will draw down on the
working capital until the $7,700,000 is expended. SAIC will have a lien
upon and may retain or repossess any and all deliverables if the
Company does not make the full payment to SAIC.
At December 31, 2001, the Company had accrued $42,864 relating to
expenses incurred by SAIC. The Company has not made the required
$200,000 working capital deposit. Amounts expensed as they relate to
SAIC Professional Services Agreement will be classified as research and
development expenses.
In its Form 10-KSB for the year ended December 31, 2001 the company
reported in its discussion of Strategic Relationships that it had
entered into a Technology License Consulting Services and Asset
Purchase Agreement with Science application International Corporation
and a related Professional Service Agreement. The Company and SAIC have
agreed to suspend both agreements based on the decision of the Company
to focus more of its distributed energy efforts toward its Stirling
engine and related Home Power Unit business and the decision of SAIC to
independently pursue its solar photovoltaic dish development business.
However, the parties have agreed that, once the Company has raised the
funds necessary to proceed with its business plan as described in the
Form 10-KSB the parties will either reinstate the agreements or
negotiate a new contract as appropriate under the circumstances at that
time.
f. License Option Agreement
During March 2001, the Company entered into a License Option Agreement
with the Defence Evaluation and Research Agency (DERA), an English
Corporation, whereby the Company purchased for $42,855 an option to use
certain fuel cell technology for nine months with an option to extend
the agreement by up to three months upon written request and the
payment of a $14,285 fee made at least one month prior to expiration of
the Agreement. The Company opted not to extend the agreement and
recorded $42,855 in amortization expense for the year ended December
31, 2001 related to this agreement.
24
NOTE 8 - EQUITY TRANSACTIONS
On January 8, 2002, the Company issued 200,000 shares of common stock
for prepaid consulting services (See Note 7). The shares were valued at
the closing price of $1.06 per share on the date of issue.
On January 8, 2002, the Company granted 3,007,456 options to employees
with an exercise price of $1.00 per share and a term of 10 years. The
Company recorded $180,447 of expense which related to the difference
between the closing price of the stock of $1.06 per share on January 8,
2002 and the exercise price of the options.
On January 8, 2002, the Company granted 87,132 options to consultants
of the Company which had a fair market value of $90,106 as computed by
the Black-Scholes pricing model using a risk free interest rate of
3.48%, volatility of 137.25% and a term of 10 years.
On January 8, 2002, the Company issued 130,000 shares of common stock
for prepaid consulting services (See Note 7). The shares were valued at
the closing price of $1.06 per share on the date of issue. Concurrent
with the issuance of the shares, the Company granted 300,000 warrants
with an exercise price of $1.25 per share. The fair market value of the
warrants as determined by the Black-Scholes pricing model was $120,000.
On February 7, 2002, the Company granted 100,000 warrants for prepaid
consulting services (See Note 7). The fair market value of the warrants
as determined by the Black-Scholes pricing model was $79,000.
On February 19, 2002, the Company cancelled a total of $3,554,015 of
warrants which had been previously granted in various private
placements and debt financings which had exercise prices of $1.50 and
$2.04 per share and reissued new warrants with a new exercise price of
$0.50 per share. This was done as additional consideration for amending
the terms of the debt instruments to extend the due dates of the
accrued but unpaid interest and to leave the interest rates at 10% per
annum. The cancellation and reissuance of the warrants resulted in the
recognition of $1,360,574 of additional expense relating to the
cancellation of the previous warrants and the reissuance of the new
warrants as determined by the Black-Scholes pricing model.
On February 28, 2002, the Company issued 260,270 shares of common stock
for the conversion of $500,000 of debt relating to the equity line of
credit commitment fee which had been accrued at December 31, 2001. The
shares were valued at $1.92 per share which was the closing price on
November 29, 2001 which was the date that the liability was incurred
and the number of shares was determined.
On February 28, 2002, the Company issued 150,000 shares of common stock
for a loan penalty cost. The shares were valued at $0.75 per share
which was the closing price on the date of issue. The shares were
issued pursuant to a penalty clause for non-payment of a loan.
On April 8, 2002, the Company granted 750,000 warrants to Ricardo as
part of an agreement to extend debt payment terms. The warrants have an
exercise price of $0.50 per share, are exercisable for four years and
are fully vested. The Company used the Black Scholes model to determine
fair market value of $671,700 with a risk free interest rate of $4.09%,
volatility of 191% and no expected dividends.
On June 14, 2002, the Company granted 400,000 options valued at
$128,000 for consulting services to be performed.
On June 14, 2002, the Company issued 150,000 shares of common stock for
consulting services. The shares were valued at $0.40 per share, or
$60,000
On June 21, 2002, the Company issued 85,526 shares of common stock for
the conversion of $13,000 in principle of a debenture payable, or $0.15
per share.
25
On June 25, 2002, the Company issued 265,625 shares of common stock for
the conversion of $17,000 in principle of a convertible debenture
payable, or $0.06 per share.
26
NOTE 8 - EQUITY TRANSACTIONS (Continued)
On June 26, 2002, the Company issued 3,500,000 shares of common stock
for the acquisition of certain specified assets of Elektryon. The
shares were valued at $0.11 per share. Since the assets have not been
received by the Company, their value of $385,000 is included in
deferred consulting expense and asset acquisition as a contra equity
account.
On June 27, 2002, the Company issued 600,000 shares of common stock for
the conversion of a portion of the Aquamax/Keeran payable. The shares
were valued at $0.08 per share.
On June 28, 2002, the Company issued 156,250 shares of common stock for
the conversion of $10,000 in principle of a convertible debenture
payable, or $0.06 per share.
NOTE 9 - DISCONTINUED OPERATIONS
On August 9, 2002, the Company's wholly-owned subsidiary SIGMA was put
into bankruptcy because if its inability to pay employee salaries and
was declared a discontinued operation. All officers and directors of
SIGMA have resigned and operations have completely closed. In
accordance with FASB Statement No. 144, the Company has classified all
prior operations of SIGMA as discontinued and has restated all prior
income statements. No income tax benefit has been attributed to the
transaction.
A summary of the Discontinued Operations are as follows:
FROM INCEPTION
ON MARCH 26,
1992
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED THROUGH
JUNE 30, JUNE 30, JUNE 30,
----------------------------------- -------------------------------- ---------------
2002 2001 2002 2001 2002
---------------- ----------------- ---------------- ------------- ---------------
REVENUES $ - $ - $ - $ - $ -
---------------- ----------------- ---------------- ------------- ---------------
EXPENSES
General and administrative 436,620 949,750 81,866 547,903 2,483,102
Impairment of intangible assets 5,656,207 - 5,656,207 - 5,656,207
Research and development 14,687 1,671,974 - 1,502,946 2,955,483
Depreciation and amortization 111,966 92,675 60,513 59,940 352,518
---------------- ----------------- ---------------- ------------- ---------------
Total Expenses 6,219,480 2,714,399 5,798,586 2,110,789 11,447,310
---------------- ----------------- ---------------- ------------- ---------------
LOSS FROM OPERATIONS (6,219,480) (2,714,399) (5,798,586) (2,110,789) (11,447,310)
---------------- ----------------- ---------------- ------------- ---------------
OTHER INCOME (EXPENSE)
Currency gain 156 - - - 522
Interest income - - - - 30,783
Interest expense (144,156) (74,110) (81,985) (13,819) (408,712)
---------------- ----------------- ---------------- ------------- ---------------
Total Other Income (Expense) (144,000) (74,110) (81,985) (13,819) (377,407)
---------------- ----------------- ---------------- ------------- ---------------
27
NOTE 9 - DISCONTINUED OPERATIONS (Continued)
FROM INCEPTION
ON MARCH 26, 1992
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED THROUGH
JUNE 30, JUNE 30, JUNE 30,
---------------------------- ------------------------------ ----------------
2002 2001 2002 2001 2002
------------- ------------ -------------- ------------- ----------------
LOSS BEFORE EXTRAORDINARY (6,363,480) (2,788,509) (5,880,571) (2,124,608) (11,824,717)
ITEM
EXTRAORDINARY ITEM
Gain on settlement of debt - - - - 157,822
------------- ------------ -------------- ------------- ----------------
NET LOSS $(6,363,480) $(2,788,509) $(5,880,571) $(2,124,608) $(11,666,895)
============= ============ ============== ============= ================
At June 30, 2002 and December 31, 2001, the assets and liabilities of the discontinued operations
consisted of the following:
JUNE 30, DECEMBER 31,
2002 2001
--------------- -------------
(UNAUDITED)
ASSETS
Cash and restricted cash $4,713 $141,142
Advances and pre-aids 19,326 64,591
Fixed assets 165,885 164,675
Deposits - 10,216
Patents, net 719,421 813,678
--------------- -------------
$909,345 $1,194,302
=============== =============
LIABILITIES
Accounts payable $2,312,828 $1,833,483
Accrued expenses 548,994 267,657
Notes payable 1,263,524 1,058,666
--------------- -------------
$4,125,346 $3,159,806
=============== =============
NOTE 10- SUBSEQUENT EVENTS
During July 2002, the Company issued 7,465,888 shares of common stock
for a $125,000 in draws on its equity line of credit at a price equal
to 95% of the lowest closing bid price of the Company's common stock
for the 5 days immediately following the notice date.
During July 2002, the Company issued 925,926 and 3,854,167 shares of
common stock at $0.022 and $0.096 per share, respectively, for the
conversion of $57,000 in principle of a convertible debenture payable.
28
During July 2002, the Company received $50,000 from the issuance of a
note payable bearing interest at 13% per annum, unsecured, quarterly
interest payments due in the amount of $1,625 with principle due one
year from the date of issue. As additional consideration, the Company
granted 50,000 warrants with an exercise price of $0.75 per share and
expire one year from the date of issuance.
29
NOTE 10- SUBSEQUENT EVENTS (Continued)
During July 2002, the Company entered into an agreement for the
purchase by Synergy International S.A. (Synergy) of all the rights,
titles and interests of the Company in and to the distributed power
generation technology and products owned, developed and created by the
Company for the territory of Europe. The agreement calls for Synergy to
provide a $68,000 bridge loan, the grant of 20% interest in and to the
common stock of the EuropeCo., to further develop and market this
technology, and a royalty interest on the sale of any products as
produced by EuropeCo.
During August 2002, the Company entered into a consulting agreement
with an individual to assist the Company in obtaining financing. The
agreement calls for cash compensation of 10% of the total financing
raised, payable in two payments, in-kind compensation in the amount of
7 1/2% of funds raised and a retainer of $5,000 per month.
During August 2002, the Company amended its agreement with Weckstein
that the 400,000 options granted on June 14, 2002, have an exercise
price of $0.05 per share instead of $0.40 per share.
During August 2002, the Company received $25,000 from the issuance of a
note payable to an individual. The note bears interest at 12.00%, is
unsecured and due on demand.
During August and September 2002, the Company received $60,000 from the
issuance of notes payable to an individual. All of the notes bear
interest at 15.00%, are secured by assets of the Company and are due on
demand.
During September 2002, the Company entered into a three month
consulting agreement with an individual to provide assistance with
overall management of the Company. The agreement calls for the payment
of a monthly retainer in the amount of $20,000 and the issuance of
options to purchase 50,000 shares of the Company's common stock at
$0.02 per share, vesting at the end of the three month term.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Forward-Looking Statements
This Form 10-QSB contains forward-looking statements. These statements
relate to future events or the Company's future financial performance. The
Company's financial projections contain figures relating to plans, expectations,
future results, performance, events or other matters. When used in the Plan of
Operations, or elsewhere in this form, words, such as "estimate," "project",
"intend," "expect," "anticipate," "believe," "can," "continue," "could," "may,"
"Plans," "potential," "predicts," "should" or "will," or the negative of these
terms or other similar express, are intended to identify forward-looking
statements.
These statements are only predictions and involve known and unknown
risks and uncertainties. Such forward-looking statements involve numerous risks
and uncertainties, pertaining to technology, development of the Company's
products and markets for such products, timing and level of customers' orders,
competitive products and pricing, changes in economic conditions and markets for
the Company's products, and other risks and uncertainties.
Actual results, performance and events are likely to differ and may
differ materially and adversely. Investors are cautioned not to place undue
reliance on these forward-looking statements which speak only as to the date of
the Plan of Operations.
The Company undertakes no obligation to publicly update or revise these
forward-looking statements for any reason, or to update the reasons actual
results could differ materially from those anticipated in these forward-looking
statements, even if new information becomes available in the future except as
otherwise required by law or its reporting obligations.
GOING CONCERN
The Company's auditors stated in their reports on the financial
statements of the Company for the years ended December 31, 2001 and December 31,
2000 that the Company is dependent on outside financing and has had losses since
inception that raise substantial doubt about its ability to continue as a going
concern. For the years ended December 31, 2001 and 2000, the Company incurred
net annual losses of $17,481,843 and 9,104,775, respectively, and the Company
had an accumulated deficit of $37,510,434 and $20,028,591, respectively.
Management believes that resources will be available from private sources in
2002 and 2003 to continue to develop the Company's products, pay operating
expenses and pursue acquisitions and strategic alliances. The financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
Due to the changes in the capital markets since 9/11, Ocean Power has
been forced to scale back its fund-raising goals. Ocean Power is currently
focused on two major funding options. The first is an approximate $3 million
round needed to finish the manufacturing prototypes of the Stirling engine for
its Home Power Unit. The second is an effort to restructure its water business
as a stand-alone activity for either retention or sale.
Management intends to seek new capital from loans and private or public
sale of stock needed to increase liquidity, fund growth and implement its
business plan; however, no assurance can be given that the Company will be able
to raise any additional capital.
CERTAIN BUSINESS DEVELOPMENTS
Effective July 31, 2002, the company laid off most of its employees due
to a severe cash-flow shortage. The Company's operation continue with the
remaining staff. In addition, effective August 9, 2002, Sigma Elektroteknisk AS,
the wholly-owned subsidiary of the Company was placed under administration of
the Ytre Follo Bankruptcy Court in Norway. Mr. Trygue Tonnessen was appointed as
trustee of the estate by the Ytre Follo Bankruptcy Court.
The Company is a development stage company, which is still dependent
upon its ability to raise capital through loans and private or public sale of
stock. The Company believes that prior to recent events described above, the
Company's ability to raise significant operating capital had been hindered due
to delays in obtaining relisting on the NASDAQ Over-the-Counter Bulletin Board.
On Friday September 7, 2001 the Company was successful in becoming relisted on
the OTC Bulletin Board. Three working days later, on Tuesday, September 11,
31
2001, an act of war was committed on the United States with the World Trade
Center devastation. That event disrupted the financial markets and significantly
affected and consequently delayed the Company's efforts to obtain investment
funds necessary to carry out its business plans within the time lines previously
projected by the Company. While the delays in raising operating capital have
caused the Company to re-assess the timelines for implementation of its business
plan, the Company continues to believe that it will be able to raise sufficient
capital to meet its core business plan objectives as more fully detailed below.
However, management cannot provide any assurances that the Company will be
successful in accomplishing any of its plans. Failure to raise sufficient
capital to meet its business plan objectives could have a material adverse
effect on the Company's results of operations, financial condition and
liquidity.
PLAN OF OPERATION
Ocean Power's current operation began in January 1997 as Manufacturing
Technologies Corporation ("MTC"). MTC was a Delaware corporation was originally
step-up to develop a business manufacturing modular seawater desalination and
power plants. In March 1998, MTC became a wholly owned subsidiary of PTC
Holdings, Inc. when PTC Holdings acquired 100% of the stock on MTC in return for
assuming $1.4 million of its debt which represented 100% of MTC's outstanding
debt. PTC Holdings subsequently merged with ocean Power, then named PTC Group,
in June 1999. PTC Group continued as the surviving corporate entity conducting
the business of PTC Holdings.
Ocean Power, like many companies today has been confronted with market
and financing realities that have forced the company to reevaluate its plans,
budgets and activities. As a development stage company, the Company relies
solely on investor support to survive until it is able to book sales and have an
ongoing revenue stream. Both past and prospective investors have indicated a
need for a revised corporate focus that will speed up the momentum towards a
fairly immediate commercial product line. Likewise, the synergistic approach on
which the company was founded of integrated water and power systems, though
technologically valid, has proven confusing and distracting to the capital
markets and institutional investors. This was further evidenced when the
company's former Financial Advisor ABN AMRO (no longer in the equity markets in
the U.S.) advised that water and power be separated to enhance the possibility
of major funding.
Given the message from the capital markets, our financial advisor and
individual investors along with the Boards concurrence, management has been in
the process of dramatically revising its plans to accomplish a more focused
company and its near term goals to secure contracts, customers and thus market
penetration. Very tough decisions have already occurred including workforce
reductions, overhead reductions, and ultimately the consolidation of engineering
to the El Dorado Hills facility by virtue of the company's Norwegian subsidiary,
Sigma, filing for bankruptcy. These and other decisions have forced a leaner
more focused operation to come into place.
The Company has also determined that shareholders, investors and
customers will best be served by product and service focus. Finally two distinct
markets have emerged more fully worldwide - that of Distributed Generation and
Power and Desalinated Water Services.
To respond to the distinct market and investor base that is only
interested in water and desalination services, Ocean Power is in the process of
identifying and securing equity sufficient to consummate a transaction that may
result in the divesture of the water assets and transfer of liabilities of the
business into a new entity.
WATER
As a result of investor preference and market demand, the Company's
Plan of Operation is being revised to accommodate a leaner operation and
ultimately clearer distinctions between its power and water divisions. The
Company is seriously evaluating the merits of divesting or selling the water
division. The Board will be working with its advisors over the next 3 months to
chart a path for the possible divestiture of the water division. The company has
had preliminary discussion with prospective purchasers and has developed an
Assets & Liabilities Schedule as necessitated by most deal structures. As yet,
no formal offer from a prospective buyer has been made though they are
anticipated.
POWER
The power division has been very active in securing prospective
customers for its Stirling engine Home Power Units (HPU's). A prototype
development budget of approximately $3 million has been set and current and new
investors are beginning to address the terms by which they would support the
prototype development of Ocean Powers unique Stirling system.
Ocean Power's Plan of Operations for the next three quarters follow:
32
1. Complete the internal transition and streamlining activities to
reduce burn rate, clarify commercial goals, establish management and consultant
priorities and secure customers.
2. Complete HPU prototype planning for the purpose of establishing
baseline performance.
3. Develop and complete an array of Distributed Generation projects
using currently available technology. The interim step of conventional
technology moving toward distributed power systems is anticipated to render near
term sales.
4. Secure strategic partner funding to complete work underway with the
company's hydrogen generation and alkaline fuel cell activity.
5. Focus engineering activities that moves technology into commercial
products in the areas of:
a. Platelet hot end;
b. ejectors;
c. enhanced heat transfer in plastic heat exchangers;
d. chemical-free water pretreatment;
e. low-temperature hydrogen generation;
f. high-performance alkaline fuel cells; and
g. Plasma chemical reactors.
This work is all aimed at improving the performance and reducing the
capitol of Ocean Power's products.
Ocean Power intends to build and install additional facilities in the
next year. They are:
a. further laboratory and test facilities;
b. system integration facilities; and
c. a manufacturing facility for proprietary components.
Although the company has radically reduced its work force, the
engineers and talent to conduct the described work remains available to the
company either through reemployment or subcontract.
Ocean Power has had no profit to date. It has experienced a total of
$56,590,547 in losses from inception on March 26, 1992 through to June 30, 2002.
Ocean Power's losses have resulted from the fact that our products are still in
development and planned principle operations have not commenced.
At June 30, 2002, Ocean Powers unrestricted cash position increased to
$12,849 as compared to $2,989 at December 31,2001 and we have incurred accounts
payable, notes payable and other current obligations aggregating $23,237,638. At
June 30, 2002 aggregate liabilities were $24,012,243 as compared to $21,750,344
at December 31, 2001, an increase of $2,261,899 or 10.4%
On November 13, 2001, Ocean Power obtained an extension of the payment
due date which was due to Silent Clean Power (SCP) from May 2001 to December 31,
2001. Payment of approximately $7,600 in accrued interest, was made in December
2001 in Swedish Kroner. Principal in the amount of approximately $83,000, plus
accrued interest from December 1 was due on December 31, 2001 in Swedish Kroner.
Silent Clean Power agreed to extend the payment due date to May 31, 2002 and the
company is currently in default on its payment to SCP.
In order to continue as a going concern, develop reliable revenue and
achieve a profitable level of operation, Ocean Power will need among other
things, additional capital resources. Management's plans to continue as a going
concern include raising additional capital through private placements sales of
33
Ocean Powers common stock and/or loans from third parties, the proceeds of which
will be used to develop Ocean Powers products and pay operating expense. All
funds raised will be used to pay current debts and fund operations and expansion
consistent with Ocean Powers revised business plan. The Company expects that it
will need approximately $9,000,000 of additional funds for operations and
expansion over the next twelve months. However, management cannot provide any
assurances that we will be successful in accomplishing any of our plans. Failure
to raise sufficient capital could have a materials adverse effect on Ocean
Powers results of operations, financial conditions and liquidity.
The ability of Ocean Power to continue as a going concern are dependent
on our ability to successfully accomplish the plan described in the preceding
paragraphs and eventually attain profitable operations. The accompanying
financial statements do not include any adjustments that might be necessary if
Ocean Power is unable to continue as a going concern.
As a development stage company, Ocean Power continues to have a limited
operating history on which to evaluate prospects. The risks, expenses and
difficulties encountered must be considered when evaluating Ocean Powers
prospects. All development efforts share the risk that the technology being
pursued may not perform to expectations. Also the cost to manufacture may exceed
the products value in the market. Changing market conditions and new technology
breakthroughs by competitors also pose risks.
Due to these uncertainties, the exact costs of the development plans
described cannot be guaranteed. Difficulties and setbacks occur and can
adversely effect ocean Power. If market conditions change, financial performance
projections may prove unreachable. All of these factors must be weighted when
evaluating the future prospects of a development stage company.
Finally, Ocean Power does not have an established source of revenue
sufficient to cover our operating costs and to allow us to continue as a going
concern. Also, management cannot provide any assurances that we will be
successful in accomplish any of out plans. The ability of Ocean Power to
continue as a going concern is dependent upon our ability to successfully
accomplish the plan described in the preceding paragraphs and eventually attain
profitable operations.
OUR LICENSE FROM AQUAMAX/KEERAN
In September 2000, we signed an agreement with Aquamax International
Holdings, BV of the Netherlands and Keeran Corporation NV, a Netherlands
Antilles Corporation, providing for a worldwide license for their issued and
pending patents and other intellectual property rights relating to the use of
plastic heat evaporator condensers for the distillation of seawater. The scope
of this license which we refer to as the authorized "field of use" is for the
distillation of potable water from naturally occurring saline water in units of
1000 cubic meters per day or larger. Additionally, Aquamax/Keeran has also
independently licensed certain of the same technology covered by its license to
us to Hadwaco Oy, a Finnish company ("Hadwaco"), but for a separate and distinct
field of use, that of wastewater treatment.
The basic terms of our license provide for the grant to us of an
exclusive right to sell products within the above field of use utilizing (i)
over 60 issued and pending patents and improvements on such patents, owned by
Aquamax/Keeran, and (ii) issued and pending patents owned by third parties to
which Aquamax/Keeran has licensed rights. Currently, third party intellectual
property to which we have rights consists of one international patent
application of Hadwaco (which is expected to result in identical patents
covering the identical invention in eight different countries) relating to a
heat exchange element for a thin film heat exchanger. Hadwaco's patent
application is directed to a manufacturing method to utilize the patented
technology of Aquamax/Keeran covered by our exclusive license from them.
Under the terms of the license, we agreed to pay a total of $4,000,000
US Dollars and 600,000 shares of our common stock for this license. To date, we
have paid to Aquamax/Keeran $400,000 US Dollars and have issued 600,000 shares
of common stock pursuant to the license. The total purchase price, including the
value of the shares issued which were measured as of the September 2000
effective date of the agreement, amounted to $6,540,000.
OUR DISPUTE WITH AQUAMAX/KEERAN
Our license to all technology covered by the license agreement was to
be exclusive within the specified field of use. Subsequent to the execution of
the license agreement and to our making of the initial payments to
Aquamax/Keeran under the license, we discovered that Aquamax/Keeran's license to
Hadwaco's international patent application that was sub-licensed to us pursuant
to the license agreement, was not exclusive, as was represented and warranted by
Aquamax/Keeran. As a result, on December 22, 2000, we served on Aquamax/Keeran a
notice of default under the terms of the license agreement. We demanded
arbitration pursuant to the license agreement and asserted that there is a
difference in the value of the Hadwaco sublicense because it is non-exclusive.
34
The possible diminished value arises due to the fact that Hadwaco is free to
license the same technology covered by the Hadwaco patent application to third
parties for their (potentially competing) use in the field of use provided in
our agreement with Aquamax/Keeran. Our request for arbitration was limited to
issue of the consideration we owe Aquamax/Keeran and does not assert that the
license does not exist or is not effective. Aquamax/Keeran did not formally
respond to our demand for arbitration. We suspended all further payments due to
Aquamax/Keeran under the license agreement pending resolution of the dispute
which is discussed below.
Nevertheless, we commenced development activities predicated on using
the technology licensed from Aquamax/Keeran regardless of whether the amounts
owed to Aquamax/Keeran and the value of the licenses are adjusted. The
technologies licensed from Aquamax/Keeran are part of the long-range development
program for distillation-based systems and are not part of the SWRO systems to
be utilized. As part of monitoring developments in the desalination market and
as mentioned in our discussion of the H2OkW System, there are several systems
for distillation which we are continuously in the process of researching and
evaluating.
ATTEMPTED RESOLUTION OF THE DISPUTE
The arbitration procedures have not commenced while the Company and
Licensors have been involved in settlement negotiations. The negotiations
resulted in the execution by both parties, as well as Hadwaco Ltd. Oy and
Hackman Oy Abp, of a non-binding Letter of Intent (LOI). The LOI was executed by
the various parties between June 15, 2001 and June 20, 2001. Contemporaneously,
the Company entered into a related non-binding Letter of Intent with Hadwaco Ltd
Oy and Hackman Oy Abp. The agreement of the parties, as memorialized in both
LOI's, was as follows. The Company would form a new company (Newco) in Finland.
Because it would control Newco, the Company's financial statements would report
its investment in Newco on a consolidated basis. The Company would immediately
provide Newco with enough working capital to purchase from Hadwaco its existing
and ongoing water remediation business, including all related intellectual
property. The intellectual property transferred to Newco would include
technology which Hadwaco has licensed to Aquamax/Keeran and which is the source
of our dispute with Aquamax/Keeran.
In July 2001, the aforementioned negotiations resulted in the execution
by Aquamax/Keeran and the Company, as well as Hadwaco Ltd. Oy and Hackman Oy
Abp, of agreements which would have, if closing had occurred as stipulated,
resolved the dispute between the Company and Aquamax/Keeran. The Agreements
provided that the Company would make to Aquamax/Keeran payments of $1,800,000 in
cash on or before September 28, 2001, unless extended by the parties, in
addition to the $400,000 and 600,000 shares of common stock already paid and
issued to Aquamax/Keeran, in exchange for ownership (as opposed to licenses as
provided in the September 2000 License Agreement) of all the Aquamax/Keeran
technology in any way connected to water treatment. The agreements also provided
that the Company would grant back to Aquamax/Keeran a royalty free, exclusive,
worldwide license to exploit Newco's water desalination technology for
applications where the volume of water processed is less than 1,000 cubic meters
per day. The license back of rights to Aquamax/Keeran was to be exclusive for a
term of five years and non-exclusive thereafter. The agreements also included
release of liability provisions, whereby all parties would release each other of
and from all claims and liabilities, including the amount due in connection with
the Company's obligation under the September 2000 License Agreement as well as
the Company's claim for a price reduction due to the non-exclusivity of the
Hadwaco license. Contemporaneously, the Company entered into agreements with
Hadwaco Ltd Oy and Hackman Oy Abp (Hadwaco). The agreement of the parties was as
follows: The Company was to form a new company (Newco) in Finland. The Company
would immediately provide Newco with $1,500,000 to purchase from Hadwaco a 100%
interest in its existing and ongoing water remediation business, including all
related intellectual property. Newco's purchase price for Hadwaco's water
remediation business was to be $1,500,000 plus a 19% interest in Newco's common
stock. The Company was to provide senior debt funding up to a principle
aggregate amount of $7,500,000 over a period of three years from the date of
closing of the Hadwaco purchase.
On September 7,2001 the Company became relisted on the NASDAQ OTC
Bulletin Board which enhanced its ability to raise funds; however, three working
days later, on Tuesday, September 11, 2001 an act of war was committed on the
United States with the World Trade Center devastation occurring. That event
significantly affected and delayed the Company's efforts to obtain the
investment money necessary to complete the transactions described above for the
formation of Newco, the purchase of the ongoing water remediation business of
Hadwaco and the purchase of the Aquamax/Keeran technology connected to water
treatment. Because of the funding delays, the Company was not able to fund the
closing of the transactions and the agreements for those transactions are now
null and void, including the agreements which included the release of liability
provisions between the Company and Aquamax/Keeran. As a consequence, the
September license agreement between the Company and Aquamax/Keeran remains in
effect and the disputes between the parties as to their respective rights and
obligations under the license agreement remain unresolved.
35
OUR ACCOUNTING FOR THE AQUAMAX/KEERAN LICENSE
In September 2000, $400,000 was expensed in connection with the dispute
with Aquamax/Keeran due to our belief at that time that the agreement would be
terminated and the $400,000 would not be recoverable. At the time that the
Company's financial statements for the year ended December 31, 2000 were filed,
it was no longer likely that the transaction would be voided but the $400,000
expense was then left as an expense due to an error in preparing such financial
statements. In connection with the process of preparing the Company's amended
Form 10-KSB for December 31, 2000, we identified this aforementioned error and
consider that amount to be a reasonable approximation of impairment of the asset
that results from having received one patent that did not contain the
exclusivity feature that was contemplated in the purchase price. In connection
with this recharacterization of the amount expensed in September 2000 as an
impairment rather than a contingent liability, our conclusion in this regard is
based on a two-part assessment. The first part is a legal exposure analysis. Our
general counsel reviewed the situation and estimated the recovery (i.e.,
estimated reduction in purchase price of the patent rights acquired under the
Aquamax Keeran license agreement) that we might expect by applying the standards
of SFAS 5, Accounting for Contingencies, and the related American Bar
Association Statement of Policy. The second part of the assessment was a
proportionate value methodology. While no appraisal of the patents was
conducted, we allocated the purchase price of the group of patents among the
various elements of technology acquired (including the exclusivity feature of
the Hadwaco patent) by applying our judgment, in consultation with our
intellectual property attorney most familiar with the relative value of the
patents. Both approaches resulted in amounts that approximated the $400,000
expensed in September 2000.
The full purchase price has been recorded as a liability and offset by
the $400,000 paid and 600,000 shares of common stock issued to date. The full
amount of the liability was recorded (without offset for potential reduction in
resolution of the Hadwaco sublicense dispute) because management believes that:
(1) based on the oral opinion of the Company's General Counsel, the full amount
of the liability, until amended through negotiation or legal process, represents
an enforceable liability as long as the Company retains the patent rights
conveyed under the agreement; (2) the liability meets the accounting definition
of a liability as stated in Statement of Financial Accounting Concepts No. 6,
Elements of Financial Statements; and (3) the reduction of the liability to
anticipate a reduction in negotiations or legal process would result in
recording a contingent asset that is prohibited by SFAS No. 5, Accounting for
Contingencies. Accordingly, and since the Company intends to keep the patent
rights, the Company has recorded the liability, and related asset, because under
the terms of the agreement the Company has no discretion to avoid future payment
of the remaining cash and common stock payable. The amount of payment under the
agreement withheld pending resolution of the dispute was not indicative of the
diminished value of the patent rights received as the management has estimated
that approximately $400,000 of the purchase price represents the value of the
exclusivity feature of the one patent that was not received. The failure of
Aquamax/Keeran to deliver exclusive rights to all patents resulted in a
condition of default by Aquamax/Keeran. Aquamax/Keeran has asserted that the
Company's subsequent withholding of payment resulted in a condition of default
by us. Because the agreements with Hadwaco Ltd. Oy and Hackman Oy Abp were
non-binding, the Company does not believe that it has liability arising out of
its failure to complete the transactions under the agreements described above as
the Company's attempt to resolve the dispute, other than the loss of amounts the
Company agreed to pay in connection with obtaining extensions of the agreements.
In connection with its dispute with Aquamax/Keeran, the Company still believes
it has the right to a purchase price reduction because of the failure of
Aquamax/Keeran to deliver exclusive rights to all of the patents and, while no
claim has been asserted, might be subject to a damage claim related to the
Company's withholding of payment on the Aquamax/Keeran license agreement. The
Company has recorded expenses of $800,000 related to the costs of the terminated
agreements with Hadwaco/Hackman and the possible costs associated with the
Aquamax/Keeran license agreement dispute.
The related asset was being amortized over the useful life of 10 years.
While there are approximately 60 patents, they represent a "basket" or dependent
set of intellectual property (IP set) which means that the primary patents are
dependent in that they represent components of one end product. As such, useful
life was assessed as a single life for the IP set. The individual patents have
remaining patent terms ranging from 8 to 20 years. The life of 10 years was
selected for the IP set as a whole because some of the key patents on which the
others are dependent have a remaining term at the shorter end of the range. In
addition to patent expiration pattern, the Company has assessed its expectations
as to term of use of the patented technology in its revenue generating
activities and concluded that the 10 year life resulting from the patent
expiration pattern was appropriate.
Our methodology for determining whether an impairment existed at each
balance sheet date was to monitor our progress against our vapor compression
desalination development program described in the next paragraph. However, due
to cash flow shortages and the uncertainty of being able to fund future
development of the technology, the Company wrote-off the remaining asset value
of $5,348,150 during the second quarter of 2002. Prior to commencement of the
plan of product improvement (PPI) described below, we will continue to monitor
the desalination marketplace and assess whether any significant changes, such as
emergence of new competing technologies, changes in market size and
configuration, or changes in the competitor's business have taken place. This
36
enables us to assess whether any market conditions threaten the viability of our
planned business.
The Company has accomplished the first two steps of its vapor
compression desalination development program: (1) acquisition of the
Aquamax/Keeran technology; and (2) obtaining patent rights on its own technology
that will be combined with the Aquamax/Keeran technology (provisional patents
filed August 2000 and patent pending patents filed August 2001). The remaining
step is to complete a PPI which consists of 14 projects, the combined effect of
which is projected to yield a more economically viable seawater desalination
system, with lower energy and operating costs for both the projected vacuum
vapor compression system and the existing seawater reverse osmosis technology.
The formal PPI was initially designed in 1997, after the first physical
assessment of the Aquamax equipment in Finland. The program was thereafter
continuously developed and refined to reflect new information gathered from the
Aquamax equipment we have acquired and have under testing in Malta, as well as
data gathered about competitive technologies from our consultants, and our own
monitoring of the market. The planning, scheduling and cost estimating of the
formal program was finalized in October of 2000. The PPI is expected to require
approximately 4 full-time employees and 18 to 20 months to complete once
additional funding of approximately $5 million is arranged. Neither the time,
manpower requirements or cost necessary for the PPI have changed. Two of the
projects represent critical path projects on which the 18 to 20 month time line
will be dependent. The two critical path projects are: "High Efficiency Steam
Ejector Development" Project, the goal of which is to replace a mechanical
compressor with a high efficiency hypercritical ejector (OPC has a U.S. patent
pending) and the "Evaporator-Condenser Efficiency Increase" Project, the goal of
which is to increase the overall efficiency of the vapor compression cycle by at
least 30% (OPC has a U.S. patent pending.) Management believes the seawater
desalination products market continues to be large, the competitive environment
is substantially unchanged from that of September 2000 when the Aquamax/Keeran
patent rights were obtained and continues to have the potential to generate
substantial profits from which the investment in the Aquamax/Keeran patents can
be recovered. The commencement of the PPI has been delayed until funding is
arranged. Losing our eligibility to have our common stock traded on the NASDAQ
OTC Bulletin Board resulted in a delay to our arranging funding for the PPI for
two reasons: first, because potential investors have elected not to invest until
we are again eligible to trade on the OTC Bulletin Board; and second, as a
result of the diversion of management resources to the task of amending the SEC
filings and other efforts necessary to re-attain eligibility to trade on the OTC
Bulletin Board. On September 7, 2001 the Company became relisted on the NASDAQ
OTC Bulletin Board. The following Tuesday, September 11, 2001 an act of war was
committed on the United States with the World Trade Center devastation, which
further delayed the funding necessary to pursue the PPI.
The license agreement was signed by the Company and Aquamax/Keeran
representatives as of September 21, 2000, but because of questions raised as to
the identity and authority of one Aquamax/Keeran signatory, an exhibit was added
to the agreement solely to clarify the matter. Revised signature pages (signed
by the original Aquamax/Keeran person and dated on the original September
signing date) were received by us on October 2, 2000. The transaction was
originally recorded in October 2000 in the belief that, until properly executed
signature pages were received, it was not effective. Based on our reassessment
of the circumstances, we have determined that the agreement became binding on
September 21, 2001. Therefore, the September 30, 2000 financial statements were
amended to reflect the transaction as occurring in September. The key points
leading to the change in the Company's position as to the effective date were:
(1) although the name and title of the representative signing on behalf of
Keeran Corporation was not disclosed on the signature page or accompanying
documents, the signature was an original and the signer had actual authority
from Keeran Corporation to execute the agreement; (2) original signature pages
for all parties were exchanged in September with the intent to be bound by the
agreement; (3) the re-execution of the signature page on behalf of Keeran
Corporation was by the same person and was dated by him to the original signing
date, which presumably demonstrates that Keeran Corporation believed that the
agreement was effective as of the original signature date; and (4)
notwithstanding the position taken at the time by the Company's intellectual
property attorney, that the agreement was not effective until the revised
signature page was received, the Company had wire transferred the additional
payment of $300,000 due under the agreement to Aquamax/Keeran on September 30,
2000, prior to receipt of the revised signature page. On the basis of these
facts, the Company has concluded that the better view is that the agreement
became legally binding on all parties during the third, rather than the fourth,
quarter of 2000. Accordingly, the transaction has been accounted for as
occurring in September 2000. The measurement date, for purposes of valuing
shares of the Company's common stock due as part of the purchase price that is
included in the accrued liability is as of September 21, 2000, because the
effective date of the agreement is the date the rights to the patented
technology were transferred to the Company.
OUR LICENSE TO AQUAMAX/KEERAN
Under the September 2000 license agreement we also granted to
Aquamax/Keeran an exclusive worldwide license to sell products utilizing issued
and pending patents and improvements (as defined in the license agreement) on
our patents relating to mechanical or thermal vapor compression distillation
applications. The scope of this license covers the distillation of potable water
37
from naturally occurring saline water in units of less than 1000 cubic meters
per day. In consideration for such license, Aquamax/Keeran is required to pay us
royalties on the sale of the licensed products, plus 50% of any royalties they
receive pursuant to sales by their sub-licensees. Since this is an advanced
technology development program, the amount of future royalties due from sales
will be determined once the product is fully developed and the actual value of
the technology can be determined.
SIGMA ELEKTROTEKNISK AS ACQUISITION
Ocean Power acquired its wholly owned subsidiary, Sigma Elektroteknisk
AS ("Sigma") because of Sigma's advanced work in the development of a
single-cylinder Stirling engine system. A Stirling engine is an external
combustion engine in which an ambient pressure burner is used to heat a gas
sealed in the engine. The primary advantages of the Stirling engine are that the
external combustion is cleaner, quieter and more efficient than internal
combustion engines and, since it has fewer parts than an internal combustion
engine, it is potentially lower in cost with higher reliability. Sigma's
research and design work had focused on the development of an external
combustion engine capable of generating 3 kW of electricity and 9 kW of
recoverable heat. We acquired Sigma in order to obtain distributed power
generation technology, such as Sigma's Stirling engines, that we believe is
commercially viable and has demonstrated technical viability.
After having evaluated all other known Stirling systems and evaluated
such factors as Sigma's core of knowledge and experience-based know how,
strategic marketing, relationships with potential customers, an established
vendor base and its existing business plan, we concluded that Sigma, its
product, its management team, its intellectual property and its market focus,
represented the most attractive acquisition for us. At the time that we acquired
Sigma, it had spent over four years developing its Stirling engine. Sigma had
built and tested four prototypes -- three internally and one through an
independent third party. These tests included running each of three engines for
400 hours followed by a wear analysis. The fourth engine had been run for
endurance. Through these four prototype engines, Sigma accumulated a total of
approximately 4,000 hours of operating experience prior to our acquisition. In
addition to the engine testing, Sigma had identified the flaws in the initial
burner design and completed a redesign intended to be more efficient with
significantly lower emissions. Prior to our acquisition, Sigma had focused
primarily on developing customers in Europe. Sigma's relationship with Statoil
and the Norwegian government had been in place since 1998. Outside of Norway,
Sigma was in serious negotiations with two boiler manufacturers, including Baxi
Group Ltd., which led to the final selection of Baxi as the first system
integrator (see our discussion of our agreement with Baxi below). Additionally,
Sigma was then engaged in ongoing discussions with utilities and energy service
companies from all over Europe. Prior to our acquisition, Sigma had focused its
business efforts on customers in Norway, with business development in Europe.
For the reasons set forth above, we concluded that Sigma had a clearly
defined Stirling engine product with strong market potential, that would best
meet our needs and, therefore, warranted an acquisition price of $7,862,148
which consisted of shares of our common stock valued at $5,500,000 and
assumption of $2,362,148 of Sigma's liabilities.
We have concluded that Sigma's Stirling engine held the strongest
potential for economic viability in the distributed power market. Because the
Sigma engine combines both the displacer piston and the working piston into the
same cylinder for more compact engine design, it contains fewer parts and
because of its design simplicity and related operating reliability, we believe
the Sigma Stirling engine offers significant advantages over competing Stirling
engines. Our plan is to arrange for the manufacture of these engines by
companies that build engines for the automobile industry, thereby reducing Ocean
Power's potential capital needs to produce a commercially viable distributed
power product.
Since the acquisition of Sigma, Ocean Power has worked aggressively on
the development of additional technology to improve the performance and reduce
the cost of the basic Sigma design. As in all other Stirling engines, the most
expensive and complex section of the engine is the "hot end". This is this part
where the combustion air is preheated, fuel is injected into the combustion
chamber, heat is transferred to the working fluid (helium in this case) and,
after the expanding gas has done its work, the remaining heat is recovered in a
device called a regenerator. These components have traditionally been the
majority of the engine's cost and major limits on performance.
Ocean power has patents pending on a different implementation of these
functions for its Stirling engine. This new approach involves the integration of
all of these functions into a compact, single component called a "platelet".
This is done through a process similar to what the electronics industry did in
the development of the integrated circuit. The only difference is that in this
case it is fluid functions (gases) that are being integrated instead of
electronic functions.
In the course of the Company's extensive market research into the
various potential customers for the Home Power Unit it became apparent that the
differentiation between Ocean Power and any other Stirling manufacturer is our
platelet technology. The combination of this with the basic SIGMA design offers
the potential for a leap in cost and performance.
38
With this in mind and the existing shortage of funds, Ocean Power began
planning for the consolidation of Sigma's engineering functions with the
platelet development at our facility in California. Due to the worsening
financial situation of Sigma, it became necessary for the Board of Sigma to file
the company for bankruptcy on August 9, 2002. As a result of the bankruptcy of
SIGMA, the Company recorded an impairment of goodwill of $5,656,207. For further
description, see footnotes 2, 3, and 9 of the Financial Statements.
The focus of this revised program is far narrower than our original
plans. The initial target market is for multi-family dwellings in the U.S. The
first phase of the project, which is projected to take six months from closing
of a funding will cost approximately $3 million.
Once the manufacturing prototypes are completed approximately $7
million will be necessary to put these units into production.
Once we have completed the production prototype hurdle, other markets
and products will follow as funding allows. Boiler replacement, single-family
homes, etc. will all follow as they can be externally supported. The Company
believes that it can attract these funds because the platelet technology is
applicable to any Stirling engine and therefore any application.
ACCOUNTING PRONOUNCEMENTS
SFAS No.'s 141 and 142 -- In June 2001, the Financial Accounting
Standards Board ("FASB") adopted Statement of Financial Accounting Standards
("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 is effective as to any business combination
after June 30, 2001 and certain transition provisions that affect accounting for
business combinations prior to June 30, 2001 are effective as of the date that
SFAS No. 142 was applied in its entirety, which is January 1, 2002 by Ocean
Power. SFAS No. 142 is effective, generally, in fiscal years beginning after
December 15, 2001 which is the year ending December 31, 2002 by Ocean Power.
SFAS No. 141 provides standards for accounting for business
combinations. Among other things, it requires that only the purchase method of
accounting be used and that certain intangible assets acquired in a business
combination (i.e., those that result from contractual or other legal rights or
are separable) be recorded as an asset apart from goodwill. The transition
provisions require that an assessment be made of previous business combinations
and, if appropriate, reclassifications be made to or from goodwill to adjust the
recording of intangible assets such that the criteria for recording intangible
assets apart from goodwill is applied to the previous business combinations.
SFAS No. 142 provides, among other things, that goodwill and intangible
assets with indeterminate lives shall not be amortized. Goodwill shall be
assigned to a reporting unit and annually assessed for impairment. Intangible
assets with determinate lives shall be amortized over their estimated useful
lives, with the useful lives reassessed continuously, and shall be assessed for
impairment under the provisions of SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Goodwill is
also assessed for impairment on an interim basis when events and circumstances
warrant.
The adoption of these new pronouncements had no effect on the Company.
SFAS No. 143 -- On August 16, 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations, which is effective for fiscal years
beginning after June 15, 2002. It requires that obligations associated with the
retirement of a tangible long-lived asset to be recorded as a liability when
those obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an accrued
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. While Ocean Power has not completed the
process of determining the effect of this new accounting pronouncement on its
financial statements, Ocean Power currently expects that the effect of SFAS No.
143 on Ocean Power's financial statements, when it becomes effective, will not
be significant.
SFAS No. 144 -- On October 3, 2001, the Financial Accounting Standards
Board issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets which is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and, generally, its provisions are to be
applied prospectively. SFAS 144 supersedes SFAS Statement No. 121 ("FAS 121"),
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
39
Opinion No. 30 ("APB 30"), Reporting Results of Operations Reporting the Effects
of Disposal of a Segment of a Business.
SFAS 144 develops one accounting model (based on the model in SFAS 121)
for long-lived assets that are to be disposed of by sale, as well as addresses
the principal implementation issues. SFAS 144 requires that long-lived assets
that are to be disposed of by sale be measured at the lower of book value or
fair value less cost to sell. That requirement eliminates APB 30's requirement
that discontinued operations be measured at net realizable value or that
entities include under discontinued operations in the financial statements
amounts for operating losses that have not yet occurred. Additionally, FAS 144
expands the scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction.
The adoption of this new pronouncement had no effect on the Company.
RISK FACTORS
Our Company is subject to various risks which may materially harm our
business, financial condition and results of operations. Certain risks are
discussed below.
WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE
We have historically lost money. For the six months ended June 30,
2002, we sustained net losses from operations of $14.4 million. In the year
ended December 31, 2001 and year ended December 31, 2000, we sustained net
losses from operations of $14.4 million and $9.2 million, respectively. Future
losses are likely to occur. Accordingly, we may experience significant liquidity
and cash flow problems if we are not able to raise additional capital as needed
and on acceptable terms. No assurances can be given that we will be successful
in reaching or maintaining profitable operations.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS
Our operations have relied almost entirely on external financing to
fund our operations. Such financing has historically come from a combination of
borrowings from and sale of common stock to third parties and funds provided by
certain officers and directors. We will need to raise additional capital to fund
our anticipated operating expenses and future expansion. Among other things,
external financing will be required to cover our operating costs. We cannot
assure you that financing whether from external sources or related parties will
be available if needed or on favorable terms. The sale of our common stock to
raise capital may cause dilution to our existing shareholders. Our inability to
obtain adequate financing will result in the need to curtail business
operations. Any of these events would be materially harmful to our business and
may result in a lower stock price.
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN DUE TO RECURRING LOSSES AND WORKING CAPITAL SHORTAGES, WHICH
MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS UNLESS WE OBTAIN
ADDITIONAL FUNDING
The report of our independent accountants on our December 31, 2000
financial statements, as noted in Note 11 and our December 31, 2001 financial
statements, as noted in Note 9 included an explanatory paragraph indicating that
there is substantial doubt about our ability to continue as a going concern due
to recurring losses and working capital shortages. Our ability to continue as a
going concern will be determined by our ability to obtain additional funding.
Our financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY
FLUCTUATE SIGNIFICANTLY
Prior to this offering, there has been a limited public market for our
common stock and there can be no assurance that an active trading market for our
common stock will develop. As a result, this could adversely affect our
shareholders' ability to sell our common stock in short time periods, or
possibly at all. Our common stock has experienced, and is likely to experience
in the future, significant price and volume fluctuations which could adversely
affect the market price of our common stock without regard to our operating
performance. In addition, we believe that factors such as quarterly fluctuations
in our financial results and changes in the overall economy or the condition of
the financial markets could cause the price of our common stock to fluctuate
substantially.
40
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE
DIFFICULT FOR INVESTORS TO RESELL THEIR SHARES DUE TO SUITABILITY
REQUIREMENTS
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny
stocks are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation
system (Nasdaq listed stock must still have a price of not less
than $5.00 per share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years)
or $5.0 million (if in continuous operation for less than three
years), or with average revenues of less than $6.0 million for the
last three years.
Broker/dealers dealing in penny stocks are required to provide
potential investors with a document disclosing the risks of penny stocks.
Moreover, broker/dealers are required to determine whether an investment in a
penny stock is a suitable investment for a prospective investor. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline.
OUR PROJECTS ARE EXPECTED TO REQUIRE SUBSTANTIAL UP-FRONT COSTS BEFORE
ANY REVENUES WILL BE REALIZED
A significant portion of our revenue is expected to be derived from
substantial long-term projects which require significant up-front expense to us.
There can be no assurance that revenues will be realized until the projects are
completed or certain significant milestones are met. Our failure, or any failure
by a third-party with which we may contract, to perform services or deliver
interactive video products on a timely basis could result in a substantial loss
to us.
In addition, difficulty in completing a project could have a material
adverse effect on our reputation, business and results of operations. In certain
instances, we may be dependent on the efforts of third parties to adequately
complete our portion of a project and, even if our products and processes
perform as required, a project may still fail due to other components of the
project supplied by third parties.
WE MAY NOT BE ABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY
RIGHTS
We regard certain aspects of our products, processes, services and
technology as proprietary. We have taken steps to protect them with patents,
copyrights, trademarks, restrictions on disclosure and other methods. Despite
these precautions, we cannot be certain that third parties will not infringe or
misappropriate our proprietary rights or that third parties will not
independently develop similar products, services and technology. Any
infringement, misappropriation or independent development could harm our
business and future financial results.
We have filed patent applications for certain aspects of our technology
and processes, but these may not be issued to us, and if issued, may not protect
our intellectual property from competition which could seek to design around or
invalidate these patents. Our failure to adequately protect our proprietary
rights in our products, services and technology could harm our business by
making it easier for our competitors to duplicate our services.
We own several Internet domain names, including www.powerco.com. The
regulation of domain names in the United States and in foreign countries may
change. Regulatory bodies could establish additional top-level domains or modify
the requirements for holding domain names, any or all of which may dilute the
strength of our name. We may not acquire or maintain our domain name or
additional common names in all of the countries in which our marketplace may be
accessed, or for any or all of the top-level domains that may be introduced. The
relationship between regulations governing domain names and laws protecting
proprietary rights is unclear. Therefore, we may not be able to prevent third
parties from acquiring domain names that infringe or otherwise decrease the
value of our trademarks and other proprietary rights.
We may have to resort to litigation to enforce our intellectual
property rights, protect our trade secrets, determine the validity and scope of
the proprietary rights of others, or defend ourselves from claims of
infringement, invalidity or unenforceability. Litigation may be expensive and
41
divert resources even if we win. This could adversely affect our business,
financial condition and operating results.
RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT
Technology-based industries, such as ours, are characterized by an
increasing number of patents and frequent litigation based on allegations of
patent infringement. From time to time, third parties may assert patent,
copyright and other intellectual property rights to technologies that are
important to us. While there currently are no outstanding infringement claims
pending by or against us, we cannot assure you that third parties will not
assert infringement claims against us in the future, that assertions by such
parties will not result in costly litigation, or that they will not prevail in
any such litigation. In addition, we cannot assure you that we will be able to
license any valid and infringed patents from third parties on commercially
reasonable terms or, alternatively, be able to redesign products on a
cost-effective basis to avoid infringement. Any infringement claim or other
litigation against or by us could have a material adverse effect on us.
NO ASSURANCE OF TECHNOLOGICAL SUCCESS
Our ability to commercialize our products is dependent on the
advancement of our existing technology. In order to obtain and maintain a
significant market share we will continually be required to make advances in
technology. We cannot assure you that our research and development efforts will
result in the development of such technology on a timely basis or at all. Any
failures in such research and development efforts could result in significant
delays in product development and have a material adverse effect on us. We
cannot assure you that we will not encounter unanticipated technological
obstacles which either delay or prevent us from completing the development of
our products and processes.
We believe there are certain technological obstacles to be overcome in
order to develop future products. In the field of water desalination, these
obstacles include proof of long-term stability of hydrophilic coatings,
long-term effective control of water chemistry through physical effects and
efficient operations of the hypercritical ejector. In the distributed power
field, these obstacles include successful testing for materials, equipment
endurance and overall system performance and the development of repeatable
manufacturing processes. In certain cases, we will be dependent upon
technological advances which must be made by third parties. We cannot assure you
that they or such third parties will not encounter technological obstacles which
either delay or prevent us from completing the development of our future
products. Such obstacles could have a material adverse effect on us.
CERTAIN OF OUR PRODUCTS AND SERVICES ARE REGULATED BY THE GOVERNMENT,
WHICH MAY IMPOSE BURDENSOME REGULATIONS ON US
Both the distribution of water industry and the power generation
industry are subject to governmental regulation. However, because of the
uncertainties surrounding the applicability of these rules to our current or
future business activities, we cannot be sure that we have been and will remain
in compliance with all applicable laws and regulations. Our failure to comply
with all applicable laws and regulations may result in the revocation or denial
of required licenses and approvals, government or private legal action, civil
and criminal liability and indemnification liability to third parties, among
other consequences. Such consequences could have a material adverse effect on
us.
We rely upon, and contemplate that we will continue to rely upon, our
corporate partners to comply with applicable regulatory requirements. We cannot
assure you that such regulations will not materially adversely affect us by
jeopardizing the projects in which we are participating, by imposing burdensome
regulations on the users of our products, by imposing sanctions that directly
affect us, or otherwise. Changes in the regulatory environment relating to the
industries in which we compete could have a material adverse effect on us. We
cannot predict the effect that future regulation or regulatory changes may have
on our business.
OUR LIMITED OPERATING HISTORY AND OUR EVOLVING BUSINESS MODEL MAKE IT
DIFFICULT TO EVALUATE OUR PROSPECTS
Our company began pursuing operations in the distributed water and
distributed power industries in 1997. Our limited operating history makes it
difficult to predict our future prospects, which are subject to the risks,
expenses and uncertainties encountered by early stage companies in new and
rapidly evolving markets. These risks include:
o our unproven and evolving business model;
o the potential development of comparable services by competitors;
42
o whether we can maintain and improve our technology to meet the
needs of our customers and to facilitate the offering of the
products and services contemplated in our business model; and
o our ability to manage our growth.
INCREASING COMPETITION COULD ADVERSELY AFFECT OUR MARKET SHARE AND
FINANCIAL PERFORMANCE
Although we do not currently believe there are any direct competitors
in the industries or markets in which we are operating or in which we intend to
operate, we expect competition from various other companies to occur and grow.
Many of our potential competitors are more established than we are and have
greater financial resources than we do. Some of our competitors have greater
marketing capabilities and technological and personnel resources than we do. As
a result, compared to us, these competitors may:
o develop and expand their offerings more quickly;
o adapt more swiftly to new or emerging technologies;
o take advantage of acquisitions and other opportunities more
effectively;
o devote more resources to sales and marketing; and
o more effectively use existing relationships with clients and
strategic partners with recognized brand names to market and sell
their services.
OUR STRATEGY DEPENDS IN PART UPON OUR ABILITY TO SUCCESSFULLY INTRODUCE
NEW PRODUCTS
We intend to expand the range of water desalination and power
production through the development of new technologies, including fuel cells.
New products may require us to expand our operations or make improvements to our
technology in ways that cannot be completed in a cost-effective or timely
manner. They may also subject us to additional and potentially burdensome
regulatory requirements. Additionally, we may not be able to attract significant
interest in trading these new products through our marketplace. Our failure to
successfully introduce new products could harm our business.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES
The distributed water and distributed power industries are
characterized by rapid technological change, varying usage and client
requirements and preferences, frequent introduction of products and services
embodying new technologies and the emergence of new industry standards and
practices that could render our existing technology and systems obsolete. Our
future success will depend on our ability to enhance and improve the
responsiveness, functionality, accessibility and features of our software
transaction processing systems. We expect that our marketplace will require
extensive technological upgrades and enhancements to accommodate many of the new
products and services that we anticipate adding to our marketplace. We cannot
assure you that we will be able to expand and upgrade our technology and
systems, or successfully integrate new technologies or systems we develop in the
future, to accommodate such increases in a timely manner.
WE MAY NOT EFFECTIVELY MANAGE OUR GROWTH
In order to achieve the critical mass of business activity necessary to
successfully execute our business plan, we must significantly increase the
number of strategic partners and customers that use our technology. This growth
will place significant strain on our personnel, systems and resources. We cannot
be sure that we will manage our growth effectively, and our failure to do so
could have a material adverse effect on our business, financial condition and
operating results. We also expect that we will continue to hire employees,
including technical, management-level employees, and sales staff for the
foreseeable future. This growth will require us to improve management,
technical, information and accounting systems, controls and procedures. We may
not be able to maintain the quality of our operations, control our costs,
continue complying with all applicable regulations and expand our internal
management, technical information and accounting systems in order to support our
desired growth.
43
DELAWARE LAW AND OUR CHARTER MAY INHIBIT A TAKEOVER OF OUR COMPANY THAT
STOCKHOLDERS MAY CONSIDER FAVORABLE
Provisions of Delaware law, such as its business combination statute,
may have the effect of delaying, deferring or preventing a change in control of
our company. In addition, our Certificate of Incorporation authorizes the
issuance of blank check preferred stock (that is, preferred stock which our
board of directors can create and issue without prior stockholder approval) with
rights senior to those of our common stock. These provisions may have the effect
of delaying or preventing changes of control or management of our company, even
if such transactions would have significant benefits to our stockholders. As a
result, these provisions could limit the price some investors might be willing
to pay in the future for shares of our common stock.
WE ARE CONTROLLED BY A GROUP OF OUR EXISTING STOCKHOLDERS, WHOSE
INTERESTS MAY DIFFER FROM OTHER STOCKHOLDERS
Joe Maceda, Robert Campbell and Gloria Rose Ott currently beneficially
own approximately 18.7%, 12.8% and 5.1% of our common stock. In addition, our
executive officers and directors, in the aggregate, beneficially own
approximately 38.7% of our common stock. Accordingly, our directors and
executive officers, whether acting alone or together, will have significant
influence in determining the outcome of any corporate transaction or other
matter submitted to our stockholders for approval, including mergers,
acquisitions, consolidations and the sale of all or substantially all of our
assets, and also the power to prevent or cause a change in control. The
interests of these stockholders may differ from the interests of the other
stockholders.
WE MAY BE EXPOSED TO INTERNATIONAL BUSINESS AND CURRENCY FLUCTUATION
Although we are not currently dependent on international sales for any
of our revenue, we still face the risks of international business and associated
currency fluctuations, which might adversely affect our operating results. These
risks include potential regulation of our technology by foreign governments,
general geopolitical risks associated with political and economic instability,
changes in diplomatic and trade relationships, and foreign laws affecting our
industry generally. Our risks of doing business abroad also include our ability
to develop and maintain distribution relationships on favorable terms. To the
extent we are unable to favorably develop and maintain distribution agreements
or make alternative arrangements, any future revenue may be decreased from our
international operations.
WE HAVE BEEN INFORMED OF AN INFORMAL SECURITIES AND EXCHANGE COMMISSION
INVESTIGATION
We have been informed that the staff of the Division of Enforcement of
the Securities and Exchange Commission is conducting an informal investigation
concerning our company and past sales of securities and accounting policies
relating to the company's acquisition of Sigma Electroteknisk and our
transactions with Aquamax International Holdings, BV and Keeran Corporation N.V.
We are cooperating with the inquiry. We cannot predict the length nor the
potential outcome of this informal investigation, nor any potential impact on
our company or our operations.
EXISTING SHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR
SALE OF SHARES UNDER THE EQUITY LINE OF CREDIT AND THE SALE OF
CONVERTIBLE DEBENTURES
On November 29, 2001, we entered into an Equity Line of Credit with an
investor. Pursuant to the Equity Line of Credit, we may, at our discretion, sell
to the investor shares of common stock for a total purchase price of up to $10.0
million. The sale of shares pursuant to the Equity Line of Credit had a dilutive
impact on our stockholders. As a result, our net loss per share increased, and
the market price of our common stock declined. In addition, the lower our stock
price is the more shares of common stock we will have to issue under the Equity
Line of Credit to draw down the full amount. Since our stock price is lower, our
existing stockholders experience greater dilution. On February 13, 2002, we
filed a registration statement on Form SB-2 registering 13,720,270 shares of our
common stock on behalf of certain selling shareholders. As of September 10,
2002, we have issued 12,753,382 shares of our common stock registered on
February 13, 2002 pursuant to the conversion of convertible debentures and
advances under the Equity Line of Credit.
THE INVESTOR UNDER THE EQUITY LINE OF CREDIT WILL PAY LESS THAN THE
THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK
The common stock issued under the Equity Line of Credit was issued at a
5% discount to the lowest closing bid price on the Over-the-Counter Bulletin
Board or other principal market on which our common stock is traded for the five
consecutive trading days after the notice date. These discounted sales caused
the price of our common stock to decline.
44
SELLING STOCKHOLDERS IN OUR MOST RECENT OFFERING INTEND TO SELL THEIR
SHARES OF COMMON STOCK IN THE MARKET, WHICH SALES MAY CAUSE OUR STOCK
PRICE TO DECLINE
Selling stockholders intend to sell in the public market the shares of
common stock registered in our most recent offering. That means that up to
13,720,270 shares of common stock, the number of shares being registered in our
most recent offering, may be sold. Such sales may cause our stock price to
decline.
THE SIGNIFICANT DOWNWARD PRESSURE ON THE PRICE OF OUR STOCK CAUSED BY
THE SALE OF MATERIAL AMOUNTS OF COMMON STOCK UNDER OUR MOST RECENT
OFFERING COULD ENCOURAGE SHORT SALES BY THIRD PARTIES, WHICH COULD
CONTRIBUTE TO THE FURTHER DECLINE OF OUR STOCK PRICE
The significant downward pressure on our stock price caused by the sale
of stock registered in our most recent offering could encourage short sales by
third parties. Such short sales could place further downward pressure on our
stock price.
OUR COMMON STOCK HAS BEEN RELATIVELY THINLY TRADED AND WE CANNOT
PREDICT THE EXTENT TO WHICH A TRADING MARKET WILL DEVELOP
Our common stock is traded on the Over-the-Counter Bulletin Board. Our
common stock is thinly traded compared to larger more widely known companies in
our industry. Thinly traded common stock can be more volatile than common stock
trading in an active public market. We cannot predict the extent to which an
active public market for the common stock will develop or be sustained after
this offering.
THE PRICE AN INVESTOR PAYS IN OUR MOST RECENT OFFERING WILL FLUCTUATE
AND MAY BE HIGHER OR LOWER THAN THE PRICES PAID BY OTHER PEOPLE
PARTICIPATING IN THE OFFERING
The price paid by an investor in our most recent offering will
fluctuate based on the prevailing market price of the common stock on the
Over-the-Counter Bulletin Board. Accordingly, the price an investor pays in our
most recent offering may be higher or lower than the prices paid by other people
participating in that offering.
PART II
ITEM 1. LEGAL PROCEEDINGS
Effective August 9, 2002, Sigma Elecktroteknisk, AS, the wholly-owned
subsidiary of Ocean Power was placed under the administration of the Ytre Follo
Bankruptcy Court in Norway. Mr. Trygue Tonnessen was appointed as trustee of the
estate by the Ytre Follo Bankruptcy Court.
On October 5, 2001, Ricardo Inc. filed a lawsuit against Ocean Power's
subsidiary, Sigma Elektroteknisk AS in the Forliksklage Court (Minor Civil
Court) of Norway. The lawsuit sought a judgment for costs incurred and services
rendered by Ricardo Inc. pursuant to a contract with Sigma related to the design
and procurement of prototype parts for the Sigma MCHP Stirling engine lower end.
A judgment was awarded in December 2001 without opposition in the total amount
of $1,458,248. The Company has accrued $1,458,248, which is included in
liabilities of discontinued operations. Ocean Power has since entered into a
forbearance agreement with Ricardo, which establishes a payment schedule for
repayment of the full sums owed by the end of June 2002. The agreement provides
for the payment of interest on the debt at the rate of 6%, to be increased to
12%, if any of the payments are late. The agreement also provides for the
issuance to Ricardo of warrants for the purchase of 750,000 shares of common
stock of the Company at a price of $.50 per share, exercisable for a period of
four years from the date of issuance, April 8, 2002. The Company failed to make
the first installment payment of $600,000, which was due by the end of April,
2002, and the remainder of $858,248 which was due by the end of June 2002,
resulting in an increase in the interest rate payable to 12%.
The Aquamax/Keeran dispute described above in "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Aquamax
International Holdings BV and Keeran Corporation" is the subject of negotiation
by the Company. Neither party has filed an arbitration proceeding pursuant to
the terms of the September, 2000 license agreement because the negotiations for
settlement of all claims are ongoing.
45
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
1) Issuance of Common Stock to XCEL Associates, Inc.
On June 14 the Board of Directors agreed to issue to XCEL & Associates,
Inc. ("XCEL"), a total of 150,000 shares. This issuance is per the terms of that
certain Agreement between XCEL and Ocean Power Corporation dated October 23,
2001 wherein Ocean Power acknowledged XCEL's continued and ongoing work to
develop Terra Systems Inc., technology and establish a new fuel source. At the
request of XCEL the shares were broken down into three certificates. The market
price for the Company's common stock on June 14 was $0.40.
Edward Myer, Jr. 75,000 shares
Grace Holding, Inc. 50,000 shares
Atlantic Investment Trust 25,000 shares
2) Issuance of Promissory Note to Cokomodo Investments, LLP.
On June 24, 2002 the Company issued a one-year promissory note to
Cokomodo Investments LLP for $50,000 received July 1, 2002. The note accrues
interest at a rate of 13% per annum. If the principal and interest are not paid
when due, then these shall bear interest thereafter at a rate of 13.5%. If the
Company elects to pre-pay any principal or interest then the lender has the
right convert any of the amount of the prepayment of the principal or interest
into the Company's common stock at $.75 per share. As additional consideration,
the Company granted 50,000 warrants to Cokomodo Investments, LLP with an
exercise price of $.75 per share and an expiration date of June 23, 2003. The
market price for the Company's common stock on June 24 was $.09.
3) Issuance of Common Stock to ELEKTYRON
On June 26, 2002 the Board of Directors approved the issuance of
3,500,000 of common stock to ELEKTRYON to purchase certain specified assets from
ELEKTRYON pursuant to the Asset Purchase Term Sheet dated January 29, 2002 as
amended on June 25, 2002. The market price for the Company's common stock on
June 26 was $0.11.
4) Vesting of Granted Options:
On June 26, 2002 the Board of Directors authorized the immediate
vesting of the following employee stock options that have not vested as of this
date at a price of $1.50 per share. These options were originally granted when
they became employees of the Company. The Options have a life of ten (10) years
and are exercisable at any time until 5:00 p.m. (PST) on June 26, 2012. The
market price of the Company's common stock on June 26 was $0.11.
-------------------------------------------------------
OPTION HOLDER AMOUNT OF OPTIONS
-------------------------------------------------------
Eric Adema 150,000
-------------------------------------------------------
Blair Aiken 500,000
-------------------------------------------------------
John Grimes 100,000
-------------------------------------------------------
Gustavo Guzman 35,000
-------------------------------------------------------
David Moard 820,000
-------------------------------------------------------
Michael Quah 500,000
-------------------------------------------------------
Wendy Kwok 15,000
-------------------------------------------------------
Kevin Tyson 250,000
-------------------------------------------------------
Thomas G. Redmon 500,000
-------------------------------------------------------
Philip M. Johnson 100,000
-------------------------------------------------------
5) On June 26, 2002 the Board of Directors also authorized and
approved extending the options granted to J. Michael Hopper in the amount of
598,680 that were due to expire in 2003 for a period of ten years from this date
and are now exercisable at any time until 5:00 p.m. (PST) on June 26, 2012. The
market price for the Company's common stock on June 26 was $0.11.
6) Issuance of Common Stock to Keeran Corporation, N.V.
46
On June 27 the Company issued 600,000 shares of common stock to Keeran
Corporation, N.V. pursuant to the Aquamax-Keeran-Ocean Power License Agreement
dated September 19, 2000. The market price for the Company's common stock on
June 27 was $0.08.
7) Granting of Options to the Employees of Ocean Power:
On August 2, 2002, the Board of Directors authorized 387,694 stock
options to the employees of Ocean Power as additional compensation for the delay
in the payment of their salary. The employees have the right to purchase shares
of the Company's common stock, $.01 par value at a price of $.05 per share. The
Options have a life of ten (10) years and are exercisable at any time until 5:00
p.m. (PST) on August 2, 2012. The market price for the Company's common stock on
August 2 was $0.04.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description Location
- ------------- -------------------------------------------------------- -------------------------------------------
2.01 Sigma Share Purchase Agreement dated July 25, 2000 Incorporated by reference to the
Registrant's Report filed on Form 8-K/A on
October 19, 2000
3.01 Certificate of Incorporation of Ocean Power Corporation Incorporated by reference to Exhibit 3.01
Dated July 21, 1999 to the Registrant's Registration Statement
on Form 10-SB filed on February 8, 2000
3.02 Bylaws of the Registrant Incorporated by reference to Exhibit 3.02
to the Registrant's Registration Statement
on Form 10-SB filed on February 8, 2000
3.03 Articles of Incorporation of Kaniksu American Mining Incorporated by reference to Exhibit 3.03
Company (Idaho), predecessor of registrant to the Registrant's Registration Statement
on Form 10-SB filed on February 8, 2000
3.04 Company (Idaho) Certificate of Amendment Kaniksu American Incorporated by reference to Exhibit 3.04
Mining Dated August 28, 1995 name change to Kaniksu to the Registrant's Registration Statement
Ventures, Inc. on Form 10-SB filed on February 8, 2000
3.05 Certificate of Amendment Kaniksu Ventures, Inc., Dated Incorporated by reference to Exhibit 3.05
April 2, 1997 name change to Intryst, Inc. to the Registrant's Registration Statement
on Form 10-SB filed on February 8, 2000
3.06 Articles of Amendment of Intryst, Inc., name change Dated Incorporated by reference to Exhibit 3.06
December 24, 1997 to PTC Group, Inc. to the Registrant's Registration Statement
on Form 10-SB filed on February 8, 2000
47
Exhibit No. Description Location
- ------------- -------------------------------------------------------- -------------------------------------------
3.07 Articles of Amendment of PTC Group, Inc., name change Incorporated by reference to Exhibit 3.07
Dated July 14, 1999 to Ocean Power Corporation to the Registrant's Registration Statement
on Form 10-SB filed on February 8, 2000
3.08 Articles of Merger of Ocean Power Corporation Idaho With Incorporated by reference to Exhibit 3.08
Ocean Power Corporation Delaware Dated July 28, 1999 to the Registrant's Registration Statement
on Form 10-SB filed on February 8, 2000
3.09 Certificate of Merger of Foreign and Domestic Corporation Incorporated by reference to Exhibit 3.09
dated July 28, 1999 to the Registrant's Registration Statement
on Form 10-SB filed on February 8, 2000
10.01 STM/GSI-Ocean Power Licensing Agreement Incorporated by reference to Exhibit 10.01
to Registrant's Amendment to Registration
Statement on Form 10-SB/A filed on February
6, 2001
10.02 Employment Agreement (Joseph P. Maceda) Incorporated by reference to Exhibit 10.02
to the Registrant's Registration Statement
on Form 10-SB filed on February 8, 2000
10.03 Employment Agreement (J. Michael Hopper) Incorporated by reference to Exhibit 10.03
to the Registrant's Registration Statement
on Form 10-SB filed on February 8, 2000
10.04 Employment Agreement (Lori L. O'Brien) Incorporated by reference to Exhibit 10.04
to the Registrant's Registration Statement
on Form 10-SB filed on February 8, 2000
10.05 Employment Agreement (Robert Campbell) Incorporated by reference to Exhibit 10.05
to the Registrant's Registration Statement
on Form 10-SB filed on February 8, 2000
10.06 Memorandum of Understanding with HyPerTech dated 15 June, Incorporated by reference to Exhibit 10.06
2000 to Registrant's Amendment to Registration
Statement on Form 10-SB/A filed on February
6, 2001
10.07 Purchase Order Memorandum of Understanding with Ecological Incorporated by reference to Exhibit 10.07
Engineering & Monitoring, Inc. dated 16 January, 2000 to Registrant's Amendment to Registration
Statement on Form 10-SB/A filed on February
6, 2001
10.08 Design and Procurement agreement between Sigma and Incorporated by reference to Exhibit 10.08
Ricardo, Inc. dated February 23, 2001 to the Registrant's Annual Report on
Form 10-KSB filed on September 4, 2001
10.09 Letter of Intent with Hadwaco Oy dated March 8, 2001 Incorporated by reference to Exhibit 10.09
to the Registrant's Annual Report on
Form 10-KSB filed on September 4, 2001
10.10 Letter of Intent with Hadwaco Oy dated November 28, 2000 Incorporated by reference to Exhibit 10.10
to the Registrant's Annual Report on
Form 10-KSB filed on September 4, 2001
48
Exhibit No. Description Location
- ------------- -------------------------------------------------------- -------------------------------------------
10.11 Letter of Intent with Organic Power dated March 14, 2001 Incorporated by reference to Exhibit 10.11
to the Registrant's Annual Report on
Form 10-KSB filed on September 4, 2001
10.12 Memorandum of Understanding with Organic Power dated Incorporated by reference to Exhibit 10.12
December 20, 2000 to the Registrant's Annual Report on
Form 10-KSB filed on September 4, 2001
10.13 Memorandum of Understanding with Ecological Engineering & Incorporated by reference to Exhibit 10.13
Monitoring, Inc. dated November 15, 2000 to the Registrant's Annual Report on
Form 10-KSB filed on September 4, 2001
10.14 Memorandum of Understanding with Battelle Memorial Incorporated by reference to Exhibit 10.14
Institute, Pacific Northwest Division dated October 12, to the Registrant's Annual Report on
2000 Form 10-KSB filed on September 4, 2001
10.15 Licensing Agreement with Aquamax/Keeran dated September Incorporated by reference to Exhibit 10.15
21, 2000 to the Registrant's Annual Report on
Form 10-KSB filed on September 4, 2001
10.16 Project Collaborative with EPRIsolutions dated Incorporated by reference to Exhibit 10.16
February 20, 2001 to the Registrant's Annual Report on
Form 10-KSB filed on September 4, 2001
10.17 Heads of Agreement and Affiliate System Guidelines with Incorporated by reference to Exhibit 10.17
CIMA Capital, LLC dated March 30, 2000 to the Registrant's Annual Report on
Form 10-KSB filed on September 4, 2001
10.18 Joint Venture Agreement with Apollo Water and Power Incorporated by reference to Exhibit 10.18
International, Inc. dated February 23, 2001 to the Registrant's Annual Report on
Form 10-KSB filed on September 4, 2001
10.19 Joint Venture Agreement with Caribbean Water and Power, Incorporated by reference to Exhibit 10.19
Inc. dated February 23, 2001 to the Registrant's Annual Report on
Form 10-KSB filed on September 4, 2001
10.20 Co-operation Agreement between Sigma and Kockums AB dated Incorporated by reference to Exhibit 10.20
November 14, 2000 to the Registrant's Annual Report on
Form 10-KSB filed on September 4, 2001
10.21 Employment Agreement dated September ___, 2001, between Incorporated by reference to Exhibit 10.21
Ocean Power and Cheng-guan (Michael) Quash to the Registrant's Registration Statement
on Form SB-2 filed on February 13, 2002
10.22 Securities Purchase Agreement dated November 29, 2001 Incorporated by reference to Exhibit 10.22
between Ocean Power and Cornell Capital Partners, L.P. to the Registrant's Registration Statement
on Form SB-2 filed on February 13, 2002
10.23 Investor Registration Rights Agreement dated November 29, Incorporated by reference to Exhibit 10.23
2001 between Ocean Power and Cornell Capital Partners, L.P. to the Registrant's Registration Statement
on Form SB-2 filed on February 13, 2002
10.24 Escrow Agreement dated November 29, 2001 between Ocean Incorporated by reference to Exhibit 10.24
Power, Cornell Capital partners, L.P., Butler Gonzalez, to the Registrant's Registration Statement
LLP and First Union National Bank on Form SB-2 filed on February 13, 2002
49
Exhibit No. Description Location
- ------------- -------------------------------------------------------- -------------------------------------------
10.25 Form of Debenture Incorporated by reference to Exhibit 10.25
to the Registrant's Registration Statement
on Form SB-2 filed on February 13, 2002
10.26 Transfer Agent Instructions dated November 29, 2001 Incorporated by reference to Exhibit 10.26
between Ocean Power, Cornell Capital Partners, L.P., to the Registrant's Registration Statement
Butler Gonzalez LLP and Interstate Transfer Company on Form SB-2 filed on February 13, 2002
10.27 Equity Line of Credit Agreement dated November 29, 2001 Incorporated by reference to Exhibit 10.27
between Ocean Power and Cornell Capital Partners, L.P. to the Registrant's Registration Statement
on Form SB-2 filed on February 13, 2002
10.28 Registration Rights Agreement dated November 29, 2001 Incorporated by reference to Exhibit 10.28
between Ocean Power and Cornell Capital Partners, L.P. to the Registrant's Registration Statement
on Form SB-2 filed on February 13, 2002
10.29 Escrow Agreement dated November 29, 2001 between Ocean Incorporated by reference to Exhibit 10.29
Power, Cornell Capital Partners, L.P., Butler Gonzalez LLP to the Registrant's Registration Statement
and First Union National Bank on Form SB-2 filed on February 13, 2002
10.30 Placement Agent Agreement between Ocean Power and Westport Incorporated by reference to Exhibit 10.30
Advisors, Inc. to the Registrant's Registration Statement
on Form SB-2 filed on February 13, 2002
10.31 Consulting Agreement, dated September 1, 2002 between Provided herewith
Ocean Power and Carl A. P. Fricke
21.01 Subsidiaries of the Registrant Incorporated by reference to Exhibit 21.01
to the Registrant's Annual Report on
Form 10-KSB filed on September 4, 2001
(b) REPORTS ON FORM 8-K.
On August 23, 2002, the Company filed a Current Report with respect to
Item 3 and Item 9 on Form 8-K.
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: September 13, 2002 OCEAN POWER CORPORATION
By: /s/Joseph J. Maceda
-------------------
Joseph J. Maceda
President
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Ocean Power Corporation (the
"Company") on Form 10-QSB for the period ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), each of
the undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of the
Company.
/s/Joseph J. Maceda
- --------------------------------
Joseph J. Maceda
President
/s/Michael Hopper
- --------------------------------
Michael Hopper
Chief Accounting Officer
51