UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-QSB/A
-------------
Amendment No.1 to
|X| Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 2001
OR
| | Transition report under Section 13 OR 15(d) of the Securities Exchange
Act of 1934
For The Transition Period From To
--------------- ----------------
Commission File Number 1-5742
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 No.)
5000 Robert J. Mathews Parkway
El Dorado Hills, California 95672
(Address of principal executive offices and Zip Code)
(916) 933-8100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. |X|
Yes |_| No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: The registrant had 38,439,094
shares of its $.01 par value common stock outstanding as of June 30, 2001.
Transitional Small Business Disclosure Format (check one): Yes [ ] No: [X]
1
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS FORM 10-QSB CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION," INCLUDING STATEMENTS CONCERNING (I) THE
COMPANY'S STRATEGY; (II) THE COMPANY'S EXPANSION PLANS, (III) THE MARKET FOR THE
COMPANY'S PRODUCTS; AND (IV) THE EFFECTS OF GOVERNMENT REGULATION OF THE
COMPANY'S PRODUCTS. BECAUSE SUCH STATEMENTS INVOLVE RISKS OF UNCERTAINTIES,
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY
REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT
MAY ARISE AFTER THE DATE HEREOF, EXCEPT AS REQUIRED BY ITS REPORTING
OBLIGATIONS.
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001 and December 31, 2000
3
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
ASSETS
------
June 30, December 31,
2001 2000
(Unaudited)
-------- ----------
CURRENT ASSETS
Cash $ 286,901 $ 2,152,593
Cash - restricted 48,239 23,706
Advances to employees 355,497 320,567
Prepaid expenses 143,295 222,235
-------- ----------
Total Current Assets 833,932 2,719,101
EQUIPMENT, NET 1,106,774 922,980
-------- ----------
OTHER ASSETS
Debt offering costs 10,500 --
Deposits 54,729 55,348
Patents, and licensing agreements, net 6,825,783 7,281,679
Goodwill, net 5,985,695 6,315,183
Total Other Assets 12,876,706 13,652,210
-------- ----------
TOTAL ASSETS $14,817,412 $17,294,291
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30,
2001 December 31,
(Unaudited) 2000
------------- -------------
CURRENT LIABILITIES
Accounts payable $ 2,134,070 $ 1,127,414
Accrued expenses 7,123,173 6,844,282
Notes payable - related parties 1,235,813 1,317,618
Notes payable - current portion 1,920,690 488,457
Research advances -- 473,145
Total Current Liabilities 12,413,746 10,250,916
------------- -------------
LONG-TERM LIABILITIES
Convertible debentures payable 550,000 550,000
Notes payable 1,195,504 744,588
------------- -------------
Total Long-Term Liabilities 1,745,504 1,294,588
------------- -------------
Total Liabilities 14,159,250 11,545,504
------------- -------------
STOCKHOLDERS' EQUITY
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; 38,439,094 and 38,149,942 shares
issued and outstanding, respectively 384,391 381,499
Additional paid-in capital 28,720,657 25,611,288
Deferred consulting expense (984,000) (410,667)
Other comprehensive income 365,682 195,258
Deficit accumulated during the development stage (27,828,568) (20,028,591)
------------- -------------
Total Stockholders' Equity 658,162 5,748,787
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,817,412 $ 17,294,291
============ ============
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
(Unaudited)
From
Inception on
For the For the June 30,
Six Months Ended Three Months Ended 1992 Through
June 30, June 30, March 26,
2001 2000 2001 2000 2001
---------- ---------- ---------- ---------- ----------
REVENUES $ -- $ -- $ -- $ -- $ --
EXPENSES
General and administrative 4,840,307 4,009,294 2,646,008 1,644,659 20,783,595
Impairment of intangible assets -- -- -- -- 400,000
Research and development 1,671,974 140,850 1,610,478 -- 3,217,430
Depreciation and amortization 829,216 195,276 605,525 5,944 1,312,575
---------- ---------- ---------- ---------- ----------
Total Expenses 7,341,497 4,345,420 4,862,011 1,745,978 25,713,600
---------- ---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (7,341,497) (4,345,420) (4,862,011) (1,745,978) (25,713,600)
OTHER INCOME (EXPENSE)
Currency gain -- -- -- -- 522
Interest income 29,276 79,578 12,169 43,405 244,820
Loss on sale of assets -- -- -- -- (387,649)
Interest expense (487,756) (143,619) (294,613) (66,243) (2,138,002)
Total Other Income (Expense) (458,480) (64,041) (282,444) (22,838) (2,280,309)
---------- ---------- ---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY
ITEM (7,799,977) (4,409,461) (5,144,455) (1,768,816) (27,993,909)
EXTRAORDINARY ITEM
Gain on settlement of debt -- 165,349 -- -- 165,341
---------- ---------- ---------- ---------- ----------
NET LOSS (7,799,977) (4,244,112) (5,144,455) (1,768,816) (27,828,568)
---------- ---------- ---------- ---------- ----------
OTHER COMPREHENSIVE INCOME
Currency translation adjustment 170,424 -- 152,268 -- 365,682
---------- ---------- ---------- ---------- ----------
TOTAL COMPREHENSIVE LOSS $ (7,629,553) $ (4,244,112) $ (4,992,187) $ (1,768,816) $(27,462,886)
============ ============ ============ ============ ============
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)
(Unaudited)
From
Inception on
For the For the June 30,
Six Months Ended Three Months Ended 1992 Through
June 30, June 30, March 26,
2001 2000 2001 2000 2001
---------- ---------- ---------- ---------- ----------
BASIC AND DILUTED LOSS PER
SHARE
Operating loss $ (0.20) $ (0.12) $ (0.13) $ (0.05)
Extraordinary item -- 0.00 -- 0.00
----------- ------------ ---------- ---------- ----------
Total $ (0.20) $ (0.12) $ (0.13) $ (0.05)
============ ============ ========== ============ ==========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 38,184,499 34,725,423 38,160,423 35,240,478
============ ============ ========== ============ ==========
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
Accumulated
Common Stock Additional Other Deferred During the
--------------------------- Paid-In Comprehensive Consultin Development
Shares Amount Capital Income Expense Stage
------------ ------------ ------------ ---------- ---------- ------------
Balance, December 31, 1999 32,835,925 $ 328,359 $ 5,589,224 $ -- $ -- $(10,923,816)
January 4, 2000, common stock
issued for debt and consideration
for loan default at $2.75 per share 147,580 1,476 236,024 -- -- --
January 5, 2000, common stock
issued for services at $4.34 per
share 60,000 600 259,800 -- -- --
January 26, 2000, common stock
issued pursuant to a private
placement at $2.10 per share 47,619 476 99,524 -- -- --
February 1, 2000, warrants
granted below market value -- -- 41,242 -- -- --
February 18, 2000, options
granted below market value -- -- 494,596 -- -- --
February 22, 2000, options
granted below market value -- -- 624,998 -- -- --
March 9, 2000, common stock
issued for exercise of warrant
at $1.99 per share 62,792 628 124,391 -- -- --
March 16, 2000, common stock
issued for conversion of convertible
debenture at $1.50 per share 66,667 667 99,333 -- -- --
March 16, 2000, common stock
issued for exercise of warrants
at $0.75 per share 133,333 1,333 98,667 -- -- --
------------ ------------ ------------ ---------- ---------- ------------
Balance Forward 33,353,916 $ 333,539 $ 7,667,799 $ -- $ -- $(10,923,816)
------------ ------------ ------------ ---------- ---------- ------------
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 (Continued)
Deficit
Accumulated
Common Stock Additional Other Deferred During the
--------------------------- Paid-In Comprehensive Consultin Development
Shares Amount Capital Income Expense Stage
------------ ------------ ------------ ---------- ---------- ------------
Balance Forward 33,353,916 $ 333,539 $ 7,667,799 $ -- $ -- $(10,923,816)
March 27, 2000, 3 stock issuances
for payment of debt at an average
price of $4.95 per share 46,486 465 231,347 -- -- --
May 26, 2000, options granted below
market value -- -- 1,272,195 -- -- --
July 25, 2000, common stock issued
for conversion of accounts payable
at $4.00 per share 100,000 1,000 399,000 -- (237,000) --
July 25, 2000, common stock issued
for purchase of SIGMA at $3.20 per
share 1,718,748 17,187 5,482,813 -- -- --
January 25 - August 14, 2000, 62
stock issuances pursuant
to a private placement
memorandum at average
price of $3.58 per share 1,930,792 19,308 6,896,423 -- -- --
August 8, 2000, options granted
below market value -- -- 358,000 -- -- --
September 15, 2000, 23 stock
issuances pursuant to a private
placement memorandum at $3.00
per share 1,000,000 10,000 2,990,000 -- -- --
Currency translation adjustment -- -- -- 195,258 -- --
Warrants granted for consulting
contract -- -- 340,000 -- (173,667) --
Stock offering costs paid -- -- (26,289) -- -- --
Net loss for the year ended
December 31, 2000 -- -- -- -- -- (9,104,775)
------------ ------------ ------------ ---------- ---------- ------------
Balance, December 31, 2000 38,149,942 $ 381,499 $ 25,611,288 $ 195,258 $ (410,667) $(20,028,591)
------------ ------------ ------------ ---------- ---------- ------------
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 (Continued)
Deficit
Accumulated
Common Stock Additional Other Deferred During the
--------------------------- Paid-In Comprehensive Consultin Development
Shares Amount Capital Income Expense Stage
------------ ------------ ------------ ---------- ---------- ------------
Balance, December 31, 2000 38,149,942 $ 381,499 $ 25,611,288 $ 195,258 $ (410,667) $(20,028,591)
Valuation adjustment to warrants
granted for consulting services
(unaudited) -- -- (60,000) -- 70,667 --
March 5, 2001, warrants issued
in connection with debt obligations
(unaudited) -- -- 1,662,746 -- -- --
April 2, 2001, warrants issued in
connection with debt obligations
(unaudited) -- -- 381,228 -- -- --
April 23, 2001, common stock
issued for conversion of accounts
payable (unaudited) 50,000 500 74,500 -- -- --
June 8, 2001, common stock
issued for conversion of research
advances (unaudited) 119,152 1,192 380,095 -- -- --
June 29, 2001, common stock
issued for consulting contract
(unaudited) 120,000 1,200 334,800 -- (322,000) --
June 29, 2001, warrants granted
for consulting contract (unaudited) -- -- 336,000 -- (322,000) --
Currency translation adjustment
(unaudited) -- -- -- 170,424 -- --
Net loss for the six months ended
June 30, 2001 (unaudited) -- -- -- -- -- (7,818,162)
------------ ------------ ------------ ------------ ----------- ------------
Balance, June 30, 2001
(unaudited) 38,439,094 $ 384,391 $ 28,720,657 $ 365,682 $ (984,000) $(27,846,753)
------------ ------------ ------------ ------------ ----------- ------------
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
(Unaudited)
From
Inception
on
March 26,
For the Six Months Ended 1992 Through
June 30, June 30,
2001 2000 2001
------------- ------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,799,977 $ (4,244,112) $ (27,828,568)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 829,216 195,276 1,312,575
Deferred consulting expense 98,667 135,416 428,000
Value of common stock, warrants, options
and discounts on equity instruments issued
for services -- 2,830,931 3,802,930
Loss on sale of assets -- -- 387,649
Amortization of debenture discount 581,782 -- 1,231,782
Amortization of debt issue costs 1,500 -- 1,500
Gain on disposition of debt -- -- (165,340)
Impairment loss -- -- 400,000
Change in operating asset and liability accounts, net of amounts acquired in
business combination:
(Increase) in overpayment receivable -- (74,700) --
(Increase) decrease in advances to employees,
prepaid expenses, deposits
and debt offering costs 32,011 -- (5,957,938)
(Increase) decrease in other assets -- 359,110 --
Increase (decrease) in accounts payable 1,276,024 (462,714) 2,309,485
Increase (decrease) in accrued expenses 278,891 (275,211) 6,999,412
------------- ------------ ------------
Net Cash Used by Operating Activities (4,701,886) (1,900,683) (17,078,513)
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
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) (745,615) (1,054,926)
Equipment procurement costs -- -- (564,110)
------------- ------------ ------------
Net Cash (Used) by Investing Activities (310,951) (745,615) (1,876,781)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 3,600,000 -- 3,600,000
Repayment of related party notes payable (81,805) -- (1,603,005)
Repayment of notes payable (346,517) (2,566,039) (1,685,591)
Loans from related parties -- 82,178 7,224,287
Issuance of convertible debentures -- -- 650,000
Common stock issued for cash -- 7,149,880 11,131,032
Stock offering costs -- -- (26,289)
------------- ------------ ------------
Net Cash Provided by Financing Activities 3,171,678 4,666,019 19,290,434
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,841,159) 2,019,721 335,140
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 2,176,299 368,276 --
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 335,140 $ 2,387,997 $ 335,140
============ ============ ============
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)
(Unaudited)
From
Inception
on
March 26,
For the Six Months Ended 1992 Through
June 30, June 30,
2001 2000 2001
------------- ------------ ---------------
CASH PAID FOR:
Interest $ 68,459 $ 12,946 $ 81,405
Income taxes $ -- $ -- $ --
NON-CASH FINANCING ACTIVITIES
Value of common stock, warrants, options and
discounts on equity instruments issued for
services $ -- $ -- $3,802,930
Equity instruments issued for deferred
consulting expense $ 672,000 $ -- $1,412,000
Common stock issued for recapitalization $ -- $ -- $2,761,773
Common stock issued for conversion of debt $ 456,287 $ -- $2,963,572
Acquisition of licenses through
license agreement payable $ -- $ -- $6,940,000
The accompanying notes are an integral part of these
consolidated financial statements.
12
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 2001 and December 31, 2000
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 include 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, 2000 Annual Report on Form 10-KSB. Operating results for the
six months ended June 30, 2001 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2001.
NOTE 2 - PATENTS AND LICENSING AGREEMENTS
The Company's patents and license agreements consisted of the
following at June 30, 2001 and December 31, 2000:
June 30, December 31,
2001 2000
---- ----
(Unaudited)
Patents $ 887,333 $ 973,658
Licensing Agreement - Aquamax and Keeran 6,540,000 6,540,000
Accumulated amortization (601,550) (231,979)
$ 6,825,783 $ 7,281,679
As part of the purchase of Sigma, the Company acquired patents
valued at their fair value of $887,333, 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. The patents are pledged as collateral for obligations
of $469,077 at June 30, 2001. The license agreement represents
rights to patent and patent applications for technology acquired
from Aquamax and Keeran (Note 7). The cost of the license
agreement is being amortized over its estimated useful life of 10
years. Amortization expense for the period ended June 30, 2001 and
accumulated amortization at June 30, 2001 amounted to $25,571 and
$71,386, respectively (Patents) and $347,000 and $537,850,
respectively (Licensing Agreement).
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 purchase 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 is being amortized over 10 years
by the straight-line method. Amortization expense amounted to
$329,488 and $-0- for the six months ended June 30, 2001 and 2000,
respectively.
13
19
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 4 - NOTES PAYABLE
Notes payable at June 30, 2001 and December 31, 2000 consist of
the following:
June 30, December 31,
2001 2000
(Unaudited)
Notes payable to two parties bearing interest at
10.5%, collateralized by guarantee of the president
of the Company, due in full by March 5, 2002. $ 3,000,000 $ -
Notes payable to two parties bearing interest at 10%, without
collateral, convertible into the Company's common
stock at $4.00 per share, due in full by April 2, 2003. 600,000 -
Less discount resulting from allocation of proceeds
to warrants and conversion rights issued with the debt (1,462,192) -
2,137,808
Note payable to SND bearing a variable interest rate, (10.9% at
December 31, 2000) due in equal semi-annual
payments which began May 1, 2000, uncollateralized. 91,087 121,049
Note payable to SND bearing a variable interest rate, (10.9% at
December 31, 2000) due in equal semi-annual
payments which began May 10, 2000, uncollateralized. 396,312 569,964
Note payable to Silent Clean Power bearing interest at 12.00%, due
in equal semi-annual payments, collateralized
by patents and licenses 469,077 498,696
Note payable to SND bearing a variable interest rate, (10.9% at
December 31, 2000) due in equal semi-annual
payments which began April 3, 2000, uncollateralized. 21,910 43,336
Total Notes Payable $ 3,116,194 $ 1,233,045
Annual maturities of notes payable are as follows:
Years Ending
December 31,
2002 $ 1,920,690
2003 1,195,504
$ 3,116,194
As additional consideration for $3,000,000 of the notes payable,
the Company granted 1,200,000 warrants valued at $3,730,212
pursuant to the Black Scholes pricing model using a risk-free
interest rate of 6.43% expected volatility of 228% and an expected
life of 3 years. The proceeds of the loans have been allocated
between debt and additional paid-in capital in proportion to the
relative fair value of the debt and the warrants. The portion
allocated to equity was $1,662,746 and the balance of $1,337,254
was recorded as debt, net of discount. The discount is being
amortized to interest expense over the term of the debt using the
effective interest rate method.
14
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 4 - NOTES PAYABLE (Continued)
As additional consideration for $600,000 of the convertible notes
payable, the Company granted 200,000 warrants with an exercise
price of $1.50 per share and an expiration date of April 1, 2003.
the warrants were valued at $2.73 per share ($546,000 in total)
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 $381,228 and the
balance of $218,772 has been recorded as debt, net of discount.
The discount of $381,228 and debt issue costs of $12,000 will be
amortized to interest expense over the term of the debt using the
effective interest rate method.
NOTE 5 - ACCRUED EXPENSES
The Company's accrued expenses are comprised of the following
items:
June 30, December 31,
2001 2000
---- ----
(Unaudited)
Accrued payroll taxes payable $ 23,946 $ 26,657
Accrued interest payable - payroll 52,717 52,717
Accrued payroll tax penalty 98,845 98,845
Accrued interest payable - notes 245,818 118,155
Other accrued items 161,849 7,908
Accrued license agreement (Note 7) 6,540,000 6,540,000
Total $ 7,123,173 $ 6,844,272
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 significant operating
revenues and, planned principal operations have not yet
commenced. The Company has incurred losses from its inception
through June 30, 2001 of approximately $28,000,000. The Company
does not have an established source of funds sufficient to cover
its operating costs and, 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 sale of common
stock, 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 $20,000,000 to $30,000,000 of additional funds for
operations and expansion in 2001. However, management cannot
provide any assurances that the Company will be successful in
accomplishing any of its plans.
15
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 6 - GOING CONCERN (Continued)
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 financial statements do
not include any adjustments that might be necessary if the
Company is unable to continue as a going concern.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Wohlreich
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. As of June 30, 2000, the consulting
contract was valued at $680,000, 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 of $280,000, as
determined by the Black Scholes pricing model. For the period
ended June 30, 2001, the Company had amortized $340,000 of the
contract, leaving a remaining balance of $340,000 at June 30,
2001 which is included as a reduction of stockholders' equity.
Martineau
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
agreement called for the Company to issue 120,000 shares of
common stock and grant 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. As of June 30, 2001, the consulting
contract was valued at $672,000, representing the 120,000 shares
of common stock issued on June 30, 2001 at the then trading price
of $2.80 per share and the value of the warrants of $336,000, as
determined by the Black Scholes pricing model. For the period
ended June 30, 2001, the Company had amortized $28,000 of the
contract, leaving a remaining balance of $644,000 at June 30,
2001 which is included as a reduction of stockholders' equity.
16
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
AQUAMAX AND 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 provide for the 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 to
the Licensors. No shares of common stock have been issued
pursuant to the License Agreement. The remaining amount payable
under the License Agreement is $6,540,000 at December 31, 2000,
which consists 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), 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. The asset,
with a cost of $6,940,000 ($6,540,000 after an impairment
adjustment of $400,000), is being amortized over its estimated
useful life of ten years using the straight-line method.
17
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
AQUAMAX AND 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 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, 2000. 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.
18
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
AQUAMAX/KEERAN (Continued)
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 a exclusive basis, but only licensed on a
non-exclusive basis. Consequently, the value the one portion 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 their (potentially competitive) use. 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 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.
Management believes that no loss, other than the impairment
adjustment, will be incurred in connection with the dispute over
the License Agreement.
The full purchase price has been recorded as a liability and
offset by the $400,000 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, 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.
19
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
AQUAMAX AND KEERAN (Continued)
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, is as follows. The Company will form a
new company (Newco) in Finland. Because it will control Newco,
the Company's financial statements will report its investment in
Newco on a consolidated basis. The Company will 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 will 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 will, if closing
occurs as stipulated, resolve the dispute favorably to the
Company. The Agreements therein entered into in July 2001 provide
that the Company will make to Aquamax/Keeran payments of
$1,800,000 in cash and 600,000 shares of common stock on or
before September 28, 2001, unless extended by the parties, 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, rather than
the $4,000,000 of cash and 600,000 shares of common stock
aggregate amount under the September 2000 License Agreement. The
agreements also provide that the Company will 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 is
exclusive for a term of five years and non-exclusive thereafter.
A similar grant back of rights was included in the September 2000
License Agreement but provided for royalties to be paid to the
Company based on Aquamax/Keeran's future revenues from use of the
technology. The agreements also include release of liability
provisions, whereby all parties 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 is as follows: The Company will form a new company
(Newco) in Finland. The Company will 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 will be $1,500,000 plus a
19% interest in Newco's common stock. The parties have agreed
that on June 30, 2004 Newco will reacquire the 19% interest in
its stock from Hadwaco three years after the effective date of
the purchase transaction at a price dependent on Newco's earnings
and other factors but is not to exceed $2,000,000. The
intellectual property transferred will include technology which
Hadwaco has licensed to Aquamax/Keeran and the Licensors, in
turn, licensed to the Company.
20
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
AQUAMAX AND KEERAN
Newco's failure to repurchase the shares would constitute a
breach under the shareholder agreement that the Company expects
to enter into with Hadwaco and Newco. In such an event, Hadwaco
would have the right to request arbitration. The Company has
agreed 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. The Board of Directors of
Newco will determine the timing and amounts of the $7.5 million
in loans by the Company to Newco. The terms governing the
repayment by Newco to the Company of the $ 7.5 million in loans
have not been established.
As the July 2001 Agreement with the Licensors represents a
significant change to the terms of the September 2000 agreement,
it will be accounted for by (1) redetermining the purchase price
to reflect a new measurement date for the 600,000 shares of stock
to be issued under the agreement from an original market price of
$3.85 per share (which reflected a variable accounting
methodology and was remeasured at each quarter end but was
amended to the September 21, 2000 market price of $4.90 per share
upon determination that a commitment date had occurred on
September 21, 2000) to the market price of $2.27 per share on the
revised commitment date of July 20, 2001 commitment date and (2)
reducing the liability and asset by the $2,888,000 difference
between the redetermined purchase price of $3,562,000 and the
September 2000 price of $6,450,000. The transaction between Newco
and Hadwaco will be accounted for as a business combination using
the purchase method and the provisions of SFAS No. 141, Business
Combinations.
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
for domestic use, 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 incompliance
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-2002. 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. During the
three-month period ended June 30, 2001, such costs consisted of
travel costs and research and development costs. For the
three-months ended June 30, 2001, the Company expensed $4,615 of
travel costs for monthly planning and update meetings in
connection with the collaboration which is included in general
and administrative expenses and $12,444 of engineer compensation
costs which are included in the research and development
expenses.
21
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 8 - SUBSEQUENT EVENTS
On various dates between July 1, 2001 and August 8, 2001, the
Company borrowed $600,000 under six convertible promissory notes
payable. Each note bears interest at 10% and is due in one year.
One note in the amount of $100,000 is guaranteed by the Company's
president. Each of the notes are convertible at any time by the
note holder into the Company's common stock at a conversion rate
of $3.00 per share. concurrent with the promissory notes, the
Company granted 133,335 warrants to purchase one share of the
Company's common stock with exercise prices of $1.50 per share.
The warrants were granted as additional consideration to the
lenders for funding the promissory notes and will be valued at
$470,838 pursuant to the Black Scholes pricing model. The
proceeds of the loans will be allocated between debt and
additional paid-in capital in proportion to the relative fair
value of the debt and the equity (warrants and beneficial
conversion feature) elements of the transactions. The portion to
be allocated to equity will be $398,389 and the balance of
$201,611 will be recorded as debt, net of discount. The discount
of $398,389 will be amortized to interest expense over the term
of the debt using the effective interest rate method.
On August 27, 2001, the Company obtained an extension of the
payment due date which was due to Silent Clean Power from May
2001 to October 20, 2001. Payment of approximately $90,000, which
includes accrued interest, will be paid in Swedish kronor on or
before October 20, 2001. Accordingly, the Company is not in
default of the agreement to purchase the patents from Silent
Clean Power. The Company expects it will make the payment to
Silent Clean Power either by raising funds from third parties or,
if such funding is not available, through contributions to
capital by the three directors of the Company, each of whom have
agreed jointly and severally to contribute to the Company funds
necessary to make such payment. In the event that the Company is
unable to make such payment, it would have a material adverse
effect on the Company and could result in an impairment charge on
Sigma's assets, including Stirling engine patents and its
goodwill.
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 (Newco)and the Company.
As amended, the closing of the transaction shall occur on the
earlier to occur 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 $105,080 and 31,040
shares of the Company's common stock.
22
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 8 - SUBSEQUENT EVENTS (Continued)
AQUAMAX/KEERAN AND HADWACO (Continued)
On August 30, 2001, the Company entered into an agreement with
Hadwaco OYJ ABP ("Hadwaco") to extend the deadline for
consummation of the transaction set forth in the July 20, 2001
agreement by and among Hadwaco OYJ ABP, Hadwaco Ltd. Oy and the
Company. Pursuant to the terms of the extension, the Company will
pay to Hadwaco an aggregate amount of $150,000 in four weekly
installments: $50,000 on each of September 7 and September 14,
and $25,000 on each of September 21 and September 28. In the
event that the closing of the transaction in the July 2001
agreement does not take place by September 28, 2001 and that is
not the sole fault of Hadwaco, the amount paid will remain with
Hadwaco as compensation for the delay. In the event that the
closing in the July 2001 agreement does take place on or before
September 28, 2001, Newco's payment obligations under the July
20, 2001 agreement shall be reduced by the amount paid for the
extension.
NOTE 9 - NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board adopted
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
is applied in its entirety which will be January 1, 2002 by the
Company. SFAS No. 142 is effective, generally, in fiscal years
beginning after December 15, 2001 which will be the year ending
December 31, 2002 by the Company.
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. Upon adoption of SFAS No. 142, the Company will
recognize and measure an impairment loss as follows: compare the
fair value of the "reporting unit" to the carrying value,
including goodwill. If the carrying value exceeds fair value,
then compare the implied fair value of the goodwill" (as defined
in SFAS No. 142) to the carrying amount of the goodwill. If the
carrying amount of the goodwill exceeds the implied fair value,
then the goodwill will be adjusted to the implied fair value.
23
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
June 30, 2001 and December 31, 2000
NOTE 9 - NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)
While the Company has not completed the process of determining
the effect of these new accounting pronouncements on its
financial statements, the Company currently expects that the
reclassification made in accordance with the transition
provisions of SFAS No. 141 will result in a decrease in goodwill
and an increase in intangible assets apart from goodwill in the
approximate range of 90% (or approximately $5,200,000) of the
goodwill recorded at of January 1, 2002. After implementation of
SFAS No. 142, all intangible assets will be amortizable and the
remaining goodwill will not be amortizable.
NOTE 10 - RECENT DEVELOPMENTS
The Company has been informed that the staff of the Division of
Enforcement of the Securities and Exchange Commission is
conducting an informal investigation concerning the company and
has requested information from the Company, including among other
things past sales of securities and accounting matters relating
to the Company's acquisition of Sigma Elektroteknisk and the
Company's transactions with Aquamax International Holdings, BV
and Keeran Corporation NV. The Company is cooperating with the
inquiry.
24
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 expressions 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.
Plan Of Operation
The Company's current operations began in January 1997 by Manufacturing
Technologies Corporation (MTC). MTC was a Delaware corporation and was
originally set up to develop a business manufacturing modular seawater
desalination and power plants. In March of 1998, MTC became a wholly owned
subsidiary of PTC Holdings, Inc., when PTC Holdings acquired 100% of the stock
of MTC in return for assuming $1.4 million of its debt which represented 100% of
MTC's outstanding debt. PTC Holdings subsequently merged with the Company, then
named PTC Group, in June 1999. PTC Group continued as the surviving corporate
entity conducting the business of PTC Holdings.
The Company is developing modular seawater desalination systems integrated with
environmentally friendly power sources. It is also developing stand alone
modular Stirling based power systems. These systems are intended to be sold to a
series of regional joint ventures that will ideally take 15-25 year contracts to
sell water and power. If successful, this will provide the Company dual income
streams from both equipment sales and royalties from the sale of water and
power. Entry into regional joint ventures may involve certain risks such as
exposure to liabilities incurred by the other joint venturer and the need to
share certain intellectual property with such regional joint venturers. However,
the Company plans to limit these risks by forming such regional joint ventures
with entities which limit liability of their owners, such as corporations and
limited liability companies. The Company does not currently plan to license its
intellectual property to these regional joint ventures. All such intellectual
property will remain the property of Ocean Power. Furthermore, any enhancements
to Company's intellectual property arising out of the regional joint ventures
will be licensed back to the Company for its use.
The Company has had no profit to date. It has experienced a total of $27,828,568
in losses from inception of current operations on March 26, 1992 through to June
30, 2001. The Company's losses have resulted from the fact that its products are
still in development and planned principle operations have not commenced.
At June 30, 2001, the Company's cash position declined to $335,140 as compared
to $2,683,773 at March 31, 2001 and $2,176,299 at December 31, 2000 and we have
incurred accounts payable, notes payable and other obligations aggregating
$14,159,250. During the 3 months ended June 30, 2001, aggregate liabilities
increased by $1,607,462.
At June 30, 2001, the Company was in discussion with Silent Clean Power to
convert the current semi-annual principle payment of approximately $80,000,
which was due on a note payable which is collateralized by patents used in the
Company's stirling engine business by its subsidiary, Sigma, into stock in the
Company. The discussions did not result in an agreement to convert debt to
stock. Management intends to cure the delinquency through future equity
infusions or borrowings, and does not believe that the delinquencies affect the
company's ownership of the patents. On August 27, 2001, the Company obtained an
25
extension of the payment due date which was due to Silent Clean Power from May
2001 to October 20, 2001. Payment of approximately $90,000, which includes
accrued interest, will be paid in Swedish kronor on or before October 20, 2001.
Accordingly, the Company is not in default of the agreement to purchase the
patents from Silent Clean Power. The Company expects it will make the payment to
Silent Clean Power either by raising funds from third parties or, if such
funding is not available, through contributions to capital by the three
directors of the Company, each of whom have agreed jointly and severally to
contribute to the Company funds necessary to make such payment. In the event
that the Company is unable to make such payment, it would have a material
adverse effect on the Company and could result in an impairment charge on
Sigma's assets, including Stirling engine patents and its goodwill.
Due to the increased level of activity projected during the next three years,
additional funding will be needed and is being sought. From June 30 to August 8,
2001, the Company has raised $600,000 of additional financing through proceeds
from notes payable (see note 8 in the financial statements for additional
details on notes payable).
The Company does not have an established source of revenues sufficient to cover
its operating costs and, accordingly, there is substantial doubt about the
ability of the Company to continue as a going concern.
In order to continue as a going concern, 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 to continue as a going
concern include raising additional capital through private placement sales of
the Company's 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 $20,000,000 to $30,000,000 of additional funds for operations and expansion
in 2001, including the funding necessary to close the purchase of Hadwaco and
the water treatment technology of Aquamax/Keeran.. In that regard, the Company
has entered into an agreement with Hadwaco Ltd Oy and its parent company,
Hackman Ojy Abp, of Finland to form a new company ("Newco") , which will be an
81% owned subsidiary of the Company and to immediately fund Newco with enough
working capital to purchase from Hadwaco its existing and ongoing water
remediation business and all related intellectual property. Unless extended by
the parties, the Company must fund Newco with $1.5 million on or before
September 28, 2001. The Company has also agreed to settle all ongoing disputes
with Aquamax/Keeran by the payment of $1.8 million and 600,000 shares of the
Company's stock on or before September 28, 2001 in exchange for all of the
Aquamax/Keeran technology in any way connected to water treatment. The
agreements with Hadwaco/Hackman and Aquamax/Keeran are described in more detail
in footnote 7 to the financial statements. However, management cannot provide
any assurances that the Company will be successful in accomplishing any of its
plans. Failure to raise sufficient capital to make the payments on these
agreements could have a material adverse effect on the company's results of
operations, financial condition, and liquidity. Even in the event that the
company is able to finance these payments, failure to raise sufficient operating
capital to finance the company's business plans through the end of 2001 would
also have a material adverse effect on the company's results of operations,
financial condition and liquidity.
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 financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
The Company has a limited operating history on which to evaluate its prospects.
The risks, expenses and difficulties encountered by start-up companies must be
considered when evaluating the Company's prospects. All development efforts
share the risks that the technology being pursued may not perform to
expectations. Also the cost to manufacture may exceed the product's value in the
market. Changing market conditions and new technological breakthroughs by
competitors also pose risks.
Due to these uncertainties, the exact cost of the development program described
below cannot be guaranteed. Difficulties and setbacks occur and can adversely
affect the Company. All plans contain contingencies but they may prove
insufficient.
If market conditions change, financial performance projections may prove
unreachable. All of these factors must be weighed when evaluating the future
prospects (value) of a development stage company.
26
The Company does not have an established source of revenue sufficient to cover
its operating costs and to allow it to continue as a going concern. Also,
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 following paragraphs and eventually attain profitable
operations.
As part of our monitoring the progress of Sigma on its Stirling engine
development program, we assess whether circumstances indicate that an impairment
of the value of the assets of Sigma, including its patents and goodwill. There
are no circumstances as of June 30, 2001 that indicate that there is an
impairment of Sigma's assets.
The Company's plan of operation for the next twelve months is as follows:
(i) Since completion of its water quality certification on 9
December 1999, the Company has raised approximately $13
million pursuant to private placement financing which has
allowed the Company to implement its Product Development
Program, as well as to further business development, strategic
partnering and acquisition activities. Based on an analysis of
its sales and development costs, the Company intends to raise
an additional $20-30 million pursuant to private placement
sales of its common stock and/or loans from third parties
during 2001. In addition, depending on the pace of actual
sales and the acquisition activities of the Company, the
Company may seek to raise an additional round of financing
(for a minimum of $100 million dollars) in the first half of
2002. The exact method by which this additional round of
financing will be raised will be based on the maximization of
shareholder value. The additional equity, if raised by the
Company, will allow the Company to execute its business plan.
Maximization of shareholder value is the basic lens through
which all investment and other business decisions are made.
One of the major reasons that the Company prefers to enter
into joint ventures to finance its endeavors is to off-load
the bulk of the expense of market development onto the joint
venture partners. This brings market share without dilution of
Ocean Power shareholders. However, there are potential
disadvantages to our reliance on joint ventures, such as, a
reliance on third parties to properly implement our business
plan. Similarly, the choice to subcontract manufacturing and
engineering wherever possible is done for the same reason. The
only in-house manufacturing will be of extremely proprietary
components using processes protected by trade secrets that
cannot be otherwise protected.
(ii) The Company intends to complete the formation of Newco (as
describe above an in footnote 7 to the financial statements)
and the purchase of the assets of Hadwaco, which constitute an
ongoing water remediation business with a backlog of existing
contracts. The Company believes that this business, which
utilizes technology similar to the technology to be utilized
in development of the Company's seawater thermal vapor
compression desalinization business, will complement the
Company's existing business plans and provide the Company with
an additional long term stream of income. The Company has
committed to fund the operations of Newco up to $7,500,000 in
senior debt funding for a period of three (3) years as
necessary for the operations of Newco
(iii) The Company will be doing technology and product development
in a number of areas. They are:
(a) low-temperature hydrogen generation
(b) ejectors
(c) chemical-free water pretreatment
(d) enhanced heat transfer in plastic heat exchangers
(e) high-performance alkaline fuel cells
(f) Stirling engines.
(g) Plasma chemical reactors
27
This work is all aimed at improving the performance and
reducing the capital cost of the Company's products.
(iv) The Company 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
(v) Although the Company plans to subcontract out as much work as
possible, during the next year it still anticipates increasing
the number of employees from the current 50 full time to
approximately 75 full time.
Aquamax International Holdings BV and Keeran Corporation
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 dollars, but we have not issued to
Aquamax/Keeran any shares of common stock pursuant to the license. The total
purchase price, including the value of the shares to be 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.
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
the 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.
28
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
in 2001. 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.
Potential Resolution of the Dispute
Arbitration proceedings have not commenced while the Company and Aquamax/Keeran
engaged in settlement negotiations. These negotiations resulted in the execution
by both parties and Hadwaco and Hackman Oy Abp (an affiliate of Hadwaco), of a
non-binding Letter of Intent in June 2001. Contemporaneously, the Company
entered into a related non-binding Letter of Intent with Hadwaco and Hackman Oy
Abp. Under the Letters of Intent, the Company will form a new company ("Newco")
in Finland. The Company would provide Newco with capital to purchase from
Hadwaco its water remediation business, including all related intellectual
property (which would include the patent underlying the license from
Aquamax/Keeran that is the basis of our dispute with Aquamax/Keeran).
Between July 20 and July 25, 2001, the Company entered into agreements with
Aquamax/Keeran, Hadwaco and Hackman, one purpose of which was to implement the
aforementioned letter with intent and to settle all outstanding disputes between
Aquamax/Keeran and the Company. Another purpose of the agreements was for the
Company to acquire the water remediation business of Hadwaco.
The agreements with Aquamax/Keeran entered into on July 20, 2001 represent a
renegotiation of the terms of the original license agreement entered into by the
Company and Aquamax/Keeran in September 2000. Under the July agreements (a) the
Company will make payments to Aquamax/Keeran of $1,800,000 in cash and 600,000
shares of common stock on August 31, 2001, unless extended by the parties, in
addition to the $400,000 already paid to Aquamax/Keeran, in exchange for
ownership of all the Aquamax/Keeran technology in any way connected to water
treatment; (b) the Company will 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, except that after five years such license will be non-exclusive;
(c) the parties release each other from all claims and liabilities, including
amounts 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.
Under the July 20, 2001 agreement with Hackman and Hadwaco: (a) the Company will
form a new company (Newco) in Finland; (b) the Company will immediately provide
Newco with $1,500,000 for the purchase from Hadwaco of a 100% interest in
Hadwaco's existing and ongoing water remediation business, including all related
intellectual property; (c) Newco's purchase price for Hadwaco's water
remediation business will be $1,500,000 plus a 19% interest in Newco's common
stock. The parties have agreed that on June 30, 2004 Newco will reacquire the
19% interest in its stock from Hadwaco at a price dependent on Newco's earnings
and other factors but is not to exceed $2,000,000. The intellectual property
transferred will include technology which Hadwaco has licensed to Aquamax/Keeran
and Aquamax/Keeran, in turn, licensed to the Company. Newco's failure to
repurchase the shares as provided would be a breach under the shareholder
agreement that we expect to enter into with Hadwaco and Newco at closing for
which Hadwaco would have the right to request arbitration thereunder. The
Company has agreed 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. The Board of Directors will determine the timing and
amounts of the $7.5 million in loans by the Company to Newco. All dates are
subject to extension by mutual agreement of the parties. See "Recent
Developments - Aquamax/Keeran and Hadwaco." The terms governing the repayment by
Newco to the Company of the $7.5 million in loans have not been established.
The agreement with Aquamax/Keeran remains subject to the satisfaction of certain
conditions, including: (a) the Company's formation of "Newco" in Finland; (b)
the Company's funding of Newco with enough working capital so that Newco will
pay to Hadwaco, on or before August 31, 2001, $1,5000,000 for the purchase by
Newco of certain assets constituting the water remediation business of Hadwaco;
and (c) the Company must also pay to Aquamax/Keeran $1,800,000 and 600,000
shares of the Company's common stock on or before August 31, 2001.
The agreement with Hadwaco and Hackman remains subject to the satisfaction of
certain conditions, including: Newco's acquisition of Aquamax/Keeran technology
pursuant to the terms of the July 20, 2001 agreement between the Company and
Aquamax/Keeran as described above.
29
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 to occur 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 $105,080 and
31,040 shares of the Company's common stock. On August 30, 2001, the Company
entered into an agreement with Hadwaco OYJ ABP ("Hadwaco") to extend the
deadline for consummation of the transaction set forth in the July 20, 2001
agreement by and among Hadwaco OYJ ABP, Hadwaco Ltd. Oy and the Company.
Pursuant to the terms of the extension, the Company will pay to Hadwaco an
aggregate amount of $150,000 in four weekly installments: $50,000 on each of
September 7 and September 14, and $25,000 on each of September 21 and September
28. In the event that the closing of the transaction in the July 2001 agreement
does not take place by September 28, 2001 and that is not the sole fault of
Hadwaco, the amount paid will remain with Hadwaco as compensation for the delay.
In the event that the closing in the July 2001 agreement does take place on or
before September 28, 2001, Newco's payment obligations under the July 20, 2001
agreement shall be reduced by the amount paid for the extension.
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 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.
30
The related asset is 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 is appropriate.
Our methodology for determining whether an impairment exists at balance sheet
dates is to monitor our progress against the our vapor compression desalination
development program described in the next paragraph. 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
enables us to assess whether any market conditions threaten the viability of our
planned business. If any such threatening conditions were to occur, we would
assess whether the market value of our vapor compression desalination business
is less than the carrying value of the assets employed in that business,
including the Aquamax/Keeran patent assets. Market value, in such circumstances,
would be based on fair value of future expected cash receipts or other methods.
If the market value were to be less than the carrying value, impairment
adjustments would be made. We would use any such significant negative market
conditions as a factor in our continuous assessment of useful life of the assets
employed in the vapor compression desalination business, including the
Aquamax/Keeran patent assets. After implementation of the PPI, we will assess
progress against the benchmarks within the PPI to determine whether impairment
exists. If we conclude that impairment exists, impairment adjustments will be
measured in the same manner as described above.
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 (preliminary patents filed August
2000 and nonpreliminary 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 application in process) 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 application in process). Timely completion of the two
critical path projects will be benchmarks for measuring progress for impairment
testing purposes. 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
31
have our common stock traded on the Nasdaq OTC Bulletin Board has 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. During
the period that the PPI has been delayed by the unavailability of funding, the
Company has assessed impairment of the carrying value of its assets employed in
the desalination business by monitoring developments in the market for
desalination products to determine if technological, competitive or market
conditions indicate that the value of the assets (including the amortized cost
of the licensed patents and the value of the research and development activities
that were expensed as incurred including research leading to Ocean Power's three
additional patents and the "know how" resulting from our testing of the unit in
Malta) is less than the carrying value of the related asset consisting
principally of the cost of the Aquamax/Keeran patent net of accumulated
amortization and the previous impairment adjustment. Management's assessment of
market conditions described above leads management to conclude that there has
been no impairment of the Aquamax/Keeran related license agreement asset other
than the $400,000 that was recorded in connection with the dispute with
Aquamax/Keeran over exclusivity of one of the patents, as described below.
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 from
naturally occurring saline water in units of less than 1000 cubic meters per
day. In consideration for such license, Aquamax/Keeran was 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 was an advanced
technology development program, the amount of future royalties due from sales
were to be determined once the product was fully developed and the actual value
of the technology was determined. Under the July 2001 agreements, Aquamax/Keeran
will receive a fully paid up license for the same licensed technology in
consideration for a reduction in purchase price to be paid by the Company for
the Aquamax/Keeran technology.
32
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 (which is discussed above
under "The Business - Distributed Power Generation/Renewable Energy Technologies
- - Strategic Relationships - Personal Combustion Power ("PCP") Project") 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 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 the Company's
potential capital needs to produce a commercially viable distributed power
product.
33
Another factor drawing us to Sigma was its focus on what we believe could be a
profitable business in the growing distributed power market in Europe -- home
heat and power generation. We believe that Sigma's focus can enable us to
develop a source of revenue from Sigma's Stirling engine design within as few as
15 months from acquisition (November 2001). We are seeking to configure Sigma's
basic engine design for a range of other uses in the commercial and industrial
power markets, as well as adapting these engines as a power source for our H20
kW sea water desalination systems. We believe that Sigma's basic one-cylinder
model can be expanded from the current 3 kW to up to a 25 kW engine with no
basic design change. Our long-term plan, ultimately, is to seek to combine
several 25 kW engine systems in parallel arrays that will allow us to install
distributed power systems from kilowatts to megawatts with one basic design that
can share many common parts; thereby reducing the cost to produce the power
systems. This manufacturing efficiency, coupled with the inherent flexibility of
the fuel sources for a Stirling engine (any heat source will do, such as oil,
gas, solar power or any biomass) we believe will cause Stirling engines to have
significant commercial advantages as a source of distributed power over other
distributed technologies such as fuel cells, with their more stringent fuel
requirements.
The purchase price for Sigma of $7,862,148 represents the market value of the
shares of our common stock issued in the acquisition of $5,500,000 plus
liabilities of $2,362,148 assumed. In accordance with generally accepted
accounting principles, we allocated $1,272,392 of this purchase price to Sigma's
tangible and intangible assets representing our estimate of the fair value of
such net assets. Of the portion allocated to tangible and intangible assets,
approximately $978,000 was allocated to patents owned by Sigma. In the absence
of a third party appraisal of the individual assets and liabilities of Sigma at
the date of the acquisition, and the absence of an "open market" for patents
from which a market value could be determined, we estimated fair value of the
patents as being approximately equal to their carrying value in the books of
Sigma. Our decision was based on the following: (1) Sigma had acquired the
patent rights in negotiated transactions in 1997 and 1998, which established
their value at those dates, and (2) after acquisition of the patents, nothing
had occurred at Sigma or in the market place to warrant a change in the market
value of the patents, except for a reduction in value due to the passage of time
which had already been taken into account by Sigma's amortization of the
patents' carrying value for 23 months of the 134 months remaining on the term of
the patents. The remaining portion of the purchase price ($6,589,756), which
represented the excess of the purchase price over the fair value of Sigma's
identifiable tangible and intangible assets, was recorded as goodwill.
34
The process of allocating the purchase price for the Sigma acquisition included
assigning an estimated useful life to the patents and goodwill for purposes of
amortizing their carrying value of these assets on our financial statements as
required by generally accepted accounting principles. The useful life assigned
to the patents was 90 months (representing the remaining weighted average terms
on the patents at the date of the purchase of Sigma by the Company) and 10 years
for the goodwill which resulted from the acquisition. The time periods assigned
for these useful lives recognized that Sigma (1) was well along in its technical
development, (2) had identified a market for its product (i.e., the residential
distributed heat and power market in Europe), and (3) had developed a business
plan to exploit the European market for combined heat and power generation. Our
expectation at the time of allocating the purchase price was that the Sigma
business would begin generating modest amounts of revenues in late 2001 or early
2002, and that commercial production would begin in 2003 and continue on a
profitable basis at least through 2010, which would be 10 years from the date of
the acquisition.
We evaluate the carrying value of patents and goodwill for impairment by
monitoring the progress of the Sigma business against expectations of
accomplishment as well as developments in the market place with respect to
competing technology, obsolescence or other factors bearing on the commercial
viability of the Company's business. These expectations were informally
established at the time of the acquisition of Sigma in August 2000 and were set
forth in a business plan dated April 2001 which was updated in August 2001.
Until the updated business plan from August 2001, the Company's approach to
assessing impairment of Sigma-related assets was to monitor, without the formal
use of benchmarks, Sigma's progress against our expectations for development of
the technology and the positioning of such technology for commercial operations
under Sigma's business plan. Given that the Stirling engine development project
is discretely centered in Sigma, the small size of Sigma and the close working
relationship between Sigma and Ocean Power management teams, management believes
that it had sufficient information to recognize whether or not impairment was
likely. From the time of our acquisition of Sigma, Ocean Power has monitored its
progress in developing its Stirling engine. At the time of our acquisition, we
made it clear that we wanted to add a major manufacturing cost reduction effort
and US market development to Sigma's business plan. This monitoring process has
included establishing a regime of weekly conference calls, regular visits,
planning sessions, and design reviews. We also instituted an outside review of
Sigma's progress by consultants, including Ricardo and Kockums. (For further
description of our relationships with Ricardo and Kockums, see "The Business -
Distributed Power Generation/Renewable Energy Technologies - Strategic
Relationships - Ricardo US" and "The Business - Distributed Power
Generation/Renewable Energy Technologies - Strategic Relationships - Kockums,
Sweden".) These plans have specific development goals and progress has been
carefully monitored. This monitoring program was augmented by the April and
August revisions to the Sigma business plan and remains on-going.
The above mentioned activities were documented in normal engineering fashion.
Notebooks, PowerPoint presentations, timelines, schedules, design review
documents, drawings and hardware were all generated. Management also received
regular reports on the various activities.
With frequent contact among the CEO of Sigma, Ocean Power's Director of
Manufacturing, Chief Scientist and other staff, as well as regular visits and
internal reports, management concluded that all activities were progressing
acceptably. Continuous monitoring of competing technologies and review of our
development progress led management to believe that the new technologies Sigma
was applying to Stirling engines could result in competitive advantages and the
total value of their basic patents has not decreased.
35
The Board of Directors and management of Ocean Power were regularly apprised of
the progress on all activities, including Sigma. Based on management's regular
monitoring, we concluded that no impairment of the goodwill or Sigma patents
existed at any of the balance sheet dates since September 2000.
Beginning in August 2001, the benchmarks in the development plan are being
monitored and will be updated quarterly. We would view any failure to meet an
established benchmark by a significant degree as an indication that there may
exist an impairment of goodwill and/or the patent assets. In such case, we will
compare the then-estimated fair value of Sigma (using present value of projected
future cash flows of the Stirling engine business, adjusted to reflect the
change in circumstances leading to failure to meet the benchmark) against the
carrying value of the assets of the Stirling engine business. We will recognize
an impairment adjustment if the fair value of the Stirling engine business is
less than its carrying value. The assessment might also result in a change in
useful life of patents or goodwill even if an impairment adjustment is not
required. Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill
and Other Intangible Assets, will be effective January 1, 2002 for the Company
and, from such date, the Company will apply its provisions, and those of other
accounting pronouncements referenced therein, for assessing impairment.
The development benchmarks for Sigma's Stirling engine business are as follows:
Targeted Completion Date Benchmark
- ------------------------------------------------------- -----------------------------------------------------
First Quarter of 2001 Prime customer agrees to collaborate in
development efforts
- ------------------------------------------------------- -----------------------------------------------------
Fourth Quarter of 2001 Second generation prototype available to Sigma for
testing
- ------------------------------------------------------- -----------------------------------------------------
Fourth Quarter 2001 or First Quarter 2002 First proceeds from sale of prototypes
- ------------------------------------------------------- -----------------------------------------------------
Late First Quarter or early Second Quarter of 2002 Release of second generation prototype for external
testing
- ------------------------------------------------------- -----------------------------------------------------
Second Quarter 2002 Micro combined heat and power system ready for
internal testing
- ------------------------------------------------------- -----------------------------------------------------
Third Quarter 2002 Freezing (finalization) of design of the second
generation prototype
- ------------------------------------------------------- -----------------------------------------------------
Fourth Quarter 2003 Commence production of product (small energy
converter with electrical output of 3 kW and
thermal output of 9 kW)
- ------------------------------------------------------- -----------------------------------------------------
36
Sigma successfully achieved the first benchmark in March 2001 by reaching
agreement with Baxi Group Ltd, a major manufacturer of boilers in the United
Kingdom collaborate with Sigma in developing a micro-CHP package for residential
use consisting of the Sigma Energy Converter (Sigma Stirling engine in a metal
cabinet which also contains controls, electrical connections and tanks to both
heat and power system . The Company expects that the collaboration will take the
form of a vendor-customer relationship and not include a legal entity, such as a
partnership or joint venture.
The milestones have remained unchanged since the date of acquisition of Sigma
and we are on schedule. Nothing has occurred to date that brings into question
the valuation of the long-lived assets of Sigma or their useful lives.
Our initial anticipated time-line to develop our 3 kW Stirling engine for
commercial use was three years from the date of initial funding of the capital
necessary to continue the work already begun by Sigma before the date of the
acquisition. The initial funding and commencement of work began in September
2000 and, as of August 2001, there has been no change to the plan of
development. To reduce the risk that the time necessary for development will
have to be extended, the Company has contracted for outside engineering support
from Ricardo Inc.
Our initial estimate of our funding requirements to achieve the benchmarks set
forth above was approximately $19.9 million, which amount continues to be the
estimate. The $19.9 million aggregate amount needed over a three year period to
fund the activities in the Plan of Development is as follows: $700,000 in 2000,
$9.0 million in 2001, $6.7 million in 2002 and $3.5 million in 2003. As of
August 2001, the Company has provided approximately $3.0 million of the $9.7
million originally projected to be needed in 2000 and 2001. While the remaining
$6.7 million has not yet been provided to Sigma, it has been able to meet the
Stirling engine benchmarks to date by (1) focusing on the core activity of
designing, developing and engineering a production prototype of the first
generation Sigma 3kW electric/9 kW thermal Stirling engine; (2) using available
funds of $3.0 million; (3) obtaining vendor credit of $1.0 million; (4)
deferring development tasks (and the related costs) that were not part of the
core activity and could be deferred without causing delay to the time line for
development; and (5) converting of debt to stock of Ocean Power. By focusing on
the designing, developing and engineering of a production prototype of the
engine, we have been able to complete a pre-mass production engine ready for
manufacture. We have also been able to have Ricardo, our engineering consultant,
begin planning the design and manufacture of the second generation prototype
engine, which is intended to be lighter, simpler in design and less expensive
that the first generation engine. Thirty units of the second generation
prototype units have been ordered and are under production. The first three
units are scheduled for delivery (subject to the availability of funding) in the
fourth quarter 2001. In fourth quarter 2001 or first quarter 2002, we expect
(subject to the availability of funding) to start generating cash flow from the
release of second generation prototype engines to utilities and other potential
customers for testing. Because of the low volume of production, pricing of these
second generation engines will only cover the high initial manufacturing cost of
the initial thirty units. Therefore, early stage production will not generate
sufficient cash flow to fund other development tasks such as the deferred
activities and other second generation development activities such as marketing.
With respect to the conversions of debt to equity, Statoil converted
approximately $381,000 of its loans to Sigma into approximately 119,000 shares
of common stock of the Company. The temporary solution to our shortfall in
available funding was to focus on core activity. Additional funding will be
needed during the remainder of 2001 or the early part of 2002 to complete the
development tasks deferred during 2001 and to complete the benchmarks
established for the time period and to avoid an impairment in the value of the
Sigma assets (including patents and goodwill).
37
During the course of discussions with potential customers relating to a possible
business relationship, such as related to marketing, manufacturing, and
installation of our products, some of our potential customers expressed an
interest in purchasing equity securities of the Company. While we have had
preliminary discussions with potential customers concerning the possibility of
such an equity investment in the Company, we are not currently discussing with
any potential customer the terms of any such investment. The Company has no
intention of issuing equity securities to acquire customers for no, or nominal,
cash consideration.
While management believes sufficient funds can be raised from external sources
of capital, no assurance can be given that the funding will be obtained. In the
event that funding is not available, or is only available on terms that the
Company believes are unfavorable, adequate funding may not be obtained which
could have a material adverse effect on the Company's financial position,
results of operations and liquidity and would result in delays in the expected
schedule and would likely result in an impairment of the carrying value of Sigma
assets (including patents and goodwill) and could lead to a reduction in the
estimated useful life used to amortize these assets.
Our initial estimate, which remains unchanged, of our manpower requirements for
the Stirling engine development plan was a total of 53 people by 2004. Sigma
currently has 20 employees. To develop the Stirling engine as we currently plan,
we anticipate increasing Sigma's manpower to approximately 26 by the end of
2001, to 38 in 2002 and to 45 in 2003. At the time of acquisition in September
2000, Sigma had six full-time employees and by the end of 2000 that had
increased to ten. For the current year 2001, Sigma expects to increase that
amount by 16 to reach the total of 26 by year end. Sigma increased its full time
employees to 16 by March 31 and to 20 by June 30 of this year. To date, Sigma
has met its expected manpower requirements.
39
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board adopted
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 is
applied in its entirety which will be January 1, 2002 by the
Company. SFAS No. 142 is effective, generally, in fiscal years
beginning after December 15, 2001 which will be the year ending
December 31, 2002 by the Company.
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. Upon adoption of SFAS No. 142, the Company will
recognize and measure an impairment loss as follows: compare the
fair value of the "reporting unit" to the carrying value,
including goodwill. If the carrying value exceeds fair value,
then compare the "implied fair value of the goodwill" (as defined
in SFAS No. 142) to the carrying amount of the goodwill. If the
carrying amount of the goodwill exceeds the implied fair value,
then the goodwill will be adjusted to the implied fair value.
38
While the Company has not completed the process of determining
the effect of these new accounting pronouncements on its
financial statements, the Company currently expects that the
reclassification made in accordance with the transition
provisions of SFAS No. 141 will result in a decrease in goodwill
and an increase in intangible assets apart from goodwill in the
approximate range of 90% (or approximately $5,200,000) of the
goodwill recorded at of January 1, 2002. After implementation of
SFAS No. 142, all intangible assets will be amortizable and the
remaining goodwill will not be amortizable.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable.
ITEM 2. Changes in Securities and Use of Proceeds
Except as otherwise noted, the securities described in this Item 2 were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933. Each such issuance was made pursuant to individual
contracts which are discrete from one another and are made only with persons who
were sophisticated in such transactions and who had knowledge of, and access to,
sufficient information about the Company to make an informed investment
decision. Among this information was the fact that the securities were
"restricted securities".
1. Issuance of Convertible Notes Payable to Vesta Liv and Vesta
Forksikring.
On April 2, 2001, the Company issued two convertible notes payable,
each with the following terms: The notes accrue interest at a rate of 10%
per annum and are convertible into the Company's common stock at $4.00 per
share. As additional consideration, the company granted 200,000 warrants
with an exercise price of $1.50 per share, with an expiration date of April
1, 2003. A commission of $12,000 was retained by Sundal Collier & Co., in
Norway. The market price for the company's common stock on April 2, 2001
was $2.73 per share. Such convertible notes payable were issued as follows:
Date of Conversion Number of Price per Expiration
Issuance Note Amount Securities Shares Share Date Recipient
----------------- --------------- --------------- --------------- --------------- --------------- ---------------
4/2/01 $360,000 Common 90,000 $4.00 4/2/03 Vesta Liv
Warrants 120,000 $1.50 4/1/03
----------------- --------------- --------------- --------------- --------------- --------------- ---------------
----------------- --------------- --------------- --------------- --------------- --------------- ---------------
4/2/01 $200,000 Common 60,000 $4.00 4/2/03 Vesta
Warrants 80,000 $1.50 4/1/03 Forsikring
----------------- --------------- --------------- --------------- --------------- --------------- ---------------
2. Conversion of Debt
On April 2, 2001, the Company issued 50,000 shares of the company's
common stock to Wilke, Fluery, Hoffelt, Gould & Birney, LLP, (an unaffiliated
third party) for the cancellation of debt in the amount of $75,000, and the cash
payment of $500 (the par value of the stock issued). The company owed the debt
for legal services provided on behalf of the company. The market price of the
company's common stock on April 23, 2001 was $2.65 per share.
39
3. Conversion of Debt
On June 8, 2001, the Company issued 119,152 shares of the company's
common stock to Statoil ASA., (an unaffiliated third party) for the cancellation
of debt in the amount of $381,286. SIGMA, the Company's subsidiary, owed the
debt to Statoil for research advances. The market price of the company's common
stock on June 8, 2001 was $3.70 per share.
Except as otherwise noted, the securities described in this Item 2(3) were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933 and Regulation S.
4. Issuance to Gene Martineau
On June 1, 2001, the Company entered into a Consulting Agreement with
Gene Martineau for a 2 year term to receive services related to interfacing with
institutional investors and brokerage firms.
Pursuant to the contract, on June 29, 2001 the company issued common
stock and warrants to Gene Martineau as consideration for services. The company
issued 120,000 shares of its common stock on June 29, 2001. Also, the company
granted 120,000 warrants with an exercise price of $1.50 per share for two
years. The market price of the company's common stock on June 29, 2001 was $2.80
per share.
40
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders during the
thirteen-week period ended June 30, 2001.
ITEM 5. Other Information
The Company deems the following information to be of importance to its
security holders:
Recent Developments
SEC Matter
The Company has been informed that the staff of the Division of Enforcement of
the Securities and Exchange Commission is conducting an informal investigation
concerning the Company and has requested information from the Company, including
among other things past sales of securities and accounting matters relating to
the Company's acquisition of Sigma Elektroteknisk and our transactions with
Aquamax International Holdings, BV and Keeran Corporation NV. The Company is
cooperating with the inquiry.
Aquamax/Keeran and Hadwaco
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 to occur 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 $105,080 and
31,040 shares of the Company's common stock.
41
On August 30, 2001, the Company entered into an agreement with Hadwaco OYJ ABP
("Hadwaco") to extend the deadline for consummation of the transaction set forth
in the July 20, 2001 agreement by and among Hadwaco OYJ ABP, Hadwaco Ltd. Oy and
the Company. Pursuant to the terms of the extension, the Company will pay into
an escrow account an aggregate amount of $150,000 in four weekly installments:
$25,000 on each of September 7 and September 14, and $50,000 on each of
September 21 and September 28. In the event that the conditions precedent in the
July 2001 agreement are not completed by September 28, 2001, the escrow amount
shall be unconditionally refunded to the Company. In the event that the
conditions precedent in the July 2001 agreement are completed by September 28,
2001, the escrow amount shall be unconditionally released to Hadwaco, and should
the completion of the sale of assets under the July 20, 2001 agreement take
place on or before September 28, 2001, Newco's payment obligations under the
July 20, 2001 agreement shall be reduced accordingly.
Organic Power transaction update:
On page 24 of the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2000, we reported that discussions were ongoing regarding the
potential purchase by Ocean Power of up to 50% of the stock of Organic Power, a
Norwegian company ("Organic Power"). Such discussions have been suspended.
However, negotiations between the Company and Organic Power for an exclusive
license to use or sell Organic Power's gasification technology in the areas of
distributed power and seawater desalination in those regions currently covered
by our joint venture agreements or heads of agreement--Greece and Greek Cyprus,
Mexico and twenty-eight countries and territories and islands in the Caribbean
region, as well as the United States and Canada are ongoing on the same basis as
previously disclosed. The parties have agreed to complete the terms of a
definitive license agreement by August 31,2001 or the letter of Intent of March
14, 2001 between the parties will terminate unless extended by agreement. As of
September 4, 2001, a difinitive agreement had not been signed. However the
parties were continuing to negotiate.
Status of anticipated joint ventures with Apollo Water and Power
International, Inc. ("Apollo") and Caribbean Water and Power, Inc.
("Caribbean"):
On page 12-13 of the Company's Annual Report on Form 10-KSB we reported that on
February 23, 2001, the Company entered into Joint Venture Agreements with Apollo
and Caribbean, respectively, for the development of private water and power
systems in Greece and Greek Cyprus and a specific list of twenty-eight
countries, territories and islands throughout the Caribbean basin. Those Joint
Venture Agreements provided that the agreements are not binding unless certain
supporting documents identified in the Form 10-KSB are executed within 60 days
of the date the joint venture agreement is executed by both parties. The
supporting documents have not been executed, but the parties have agreed to
continue negotiations beyond the 60 day limit. The Company is also in
negotiations with the Apollo, Caribbean and our prospective joint venture
partner in Mexico to include the gasification technology of Organic Power within
the power systems which they will be able to market within their respective
territories.
Battelle Memorial Institute, Pacific Northwest Division
On pages 7 and 24 of the Company's Annual Report on Form 10-KSB, we reported
that since November 2000, we have been testing at our facilities in El Dorado
Hills, California, three ozone generators based upon the Plasma Chemical Reactor
("PCR") technology developed by the Kharkov Institute of Physics and Technology
("KIPT") in collaboration with Battelle Memorial Institute, Pacific Northwest
Division ("Battelle") and funded by the U.S. Department of Energy's Initiatives
for Proliferation Prevention Program. On March 8, 2001, Battelle proposed that
we participate in the development of the next phase of the project as an
industry partner with the United States Department of Energy's Pacific Northwest
National Laboratory ("PNNL"), which is operated by Battelle, to refine the ozone
generator technology derived from the PCR technology.
By accepting the position of Industrial Partner under a Thrust II CRADA, the
Company has secured an exclusive position to license the PCR technology for
seawater desalination applications, and a non-exclusive license for all other
applications. Under terms of the agreement, PNNL has taken possession of
additional higher capacity PCR units at KIPT and is providing such equipment to
the Company for testing with its desalination equipment in Malta.
42
Water Services Corporation and Malta Desalination Services Ltd.
On pages 7, 8, and 13 of the Company's Annual Report on Form 10-KSB/A we
reported that we were negotiating the terms of a joint venture arrangement for
the initial production of the Reverse Osmosis subsystem for the H2OkW System
with Water Services Corporation, a Maltese government owned public Limited
Liability Company. On June 19, 2001 the Company instead entered into an
Exclusive Distribution Agreement with Malta Desalination Services Ltd , which
grants to the Company the exclusive right to market, sell and install seawater
reverse osmosis desalination (SWRO) equipment produced by MDS on a global basis,
excluding only the island of Malta itself. The initial term of the agreement is
19 months. The Company and MDS have also agreed to continue to negotiate for the
formation of a jointly owned limited liability company for the production of the
SWRO desalination subsystem of the H2OkW System, with the understanding that the
new arrangement will supersede the Exclusive Distribution Agreement currently in
effect.
Baxi Group Ltd.
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). See "The Business--Distributed Power Generation/Renewable Energy
Technologies--Strategic Relationships--Baxi Group Ltd". The objective of the
agreement is for Sigma and Baxi to collaborate in developing and marketing a
prototype combined heat and power product (micro-CHP) package for residential
use in the United Kingdom consisting of the Sigma Energy Converter (Sigma
Stirling engine) in a metal cabinet which also contains controls, tanks and
electrical connections to both heating and power systems. 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-2002. 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. During the six-month period
ended June 30, 2001, such costs consisted of travel costs and research and
development costs. For the six-month period ended June 30, 2001, the Company
expensed $4,615 of travel costs for monthly planning and update meetings in
connection with the collaboration which is included in general and
administrative expenses and $12,444 of engineer compensation costs which are
included in the research and development expenses.
43
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
2.01 Sigma Share Purchase Agreement dated July 25, 2000****
- ----------- -----------------------------------------------------------------------------------------
3.01 Certificate of Incorporation of Ocean Power Corporation, a Delaware Corporation, Dated
July 21, 1999 **
- ----------- -----------------------------------------------------------------------------------------
3.02 Bylaws of the Registrant**
- ----------- -----------------------------------------------------------------------------------------
3.03 Articles of Incorporation of Kaniksu American Mining Company (Idaho), predecessor of
registrant**
- ----------- -----------------------------------------------------------------------------------------
3.04 Company (Idaho) Certificate of Amendment Kaniksu American Mining Dated August 28, 1995
name change to Kaniksu Ventures, Inc.**
- ----------- -----------------------------------------------------------------------------------------
3.05 Certificate of Amendment Kaniksu Ventures, Inc., Dated April 2, 1997 name change to
Intryst, Inc.**
- ----------- -----------------------------------------------------------------------------------------
3.06 Articles of Amendment of Intryst, Inc., name change Dated December 24, 1997 to PTC
Group, Inc.**
- ----------- -----------------------------------------------------------------------------------------
3.07 Articles of Amendment of PTC Group, Inc., name change Dated July 14, 1999 to Ocean
Power Corporation**
- ----------- -----------------------------------------------------------------------------------------
3.08 Articles of Merger of Ocean Power Corporation Idaho With Ocean Power Corporation
Delaware Dated July 28, 1999**
- ----------- -----------------------------------------------------------------------------------------
3.09 Certificate of Merger of Foreign and Domestic Corporation Dated July 28, 1999**
- ----------- -----------------------------------------------------------------------------------------
10.01 STM/GSI-Ocean Power Licensing Agreement***
- ----------- -----------------------------------------------------------------------------------------
10.02 Employment Agreement (Joseph P. Maceda)**
- ----------- -----------------------------------------------------------------------------------------
10.03 Employment Agreement (J. Michael Hopper)**
- ----------- -----------------------------------------------------------------------------------------
10.04 Employment Agreement (Lori L. O'Brien)**
- ----------- -----------------------------------------------------------------------------------------
10.05 Employment Agreement (Robert Campbell)**
- ----------- -----------------------------------------------------------------------------------------
10.06 Memorandum of Understanding with HyPerTech dated 15 June, 2000***
- ----------- -----------------------------------------------------------------------------------------
10.07 Purchase Order Memorandum of Understanding with Ecological Engineering & Monitoring,
Inc. dated 16 January, 2000.***
- ----------- -----------------------------------------------------------------------------------------
10.8 Design and Procurement agreement between Sigma and Ricardo, Inc. dated February 23,
2001*****
- ----------- -----------------------------------------------------------------------------------------
10.9 Letter of Intent with Hadwaco Oy dated March 8, 2001*****
- ----------- -----------------------------------------------------------------------------------------
10.10 Letter of Intent with Hadwaco Oy dated November 28, 2000*****
- ----------- -----------------------------------------------------------------------------------------
10.11 Letter of Intent with Organic Power dated March 14, 2001*****
- ----------- -----------------------------------------------------------------------------------------
10.12 Memorandum of Understanding with Organic Power dated December 20, 2000*****
- ----------- -----------------------------------------------------------------------------------------
10.13 Memorandum of Understanding with Ecological Engineering & Monitoring, Inc. dated
November 15, 2000*****
- ----------- -----------------------------------------------------------------------------------------
10.14 Memorandum of Understanding with Battelle Memorial Institute, Pacific Northwest
Division dated October 12, 2000*****
- ----------- -----------------------------------------------------------------------------------------
10.15 Licensing Agreement with Aquamax/Keeran dated September 21, 2000*****
- ----------- -----------------------------------------------------------------------------------------
10.16 Project Collaborative with EPRIsolutions dated February 20, 2001*****
- ----------- -----------------------------------------------------------------------------------------
10.17 Heads of Agreement and Affiliate System Guidelines with CIMA Capital, LLC dated March
30, 2000*****
- ----------- -----------------------------------------------------------------------------------------
10.18 Joint Venture Agreement with Apollo Water and Power International, Inc. dated February
23, 2001*****
- ----------- -----------------------------------------------------------------------------------------
10.19 Joint Venture Agreement with Caribbean Water and Power, Inc. dated February 23, 2001*****
- ----------- -----------------------------------------------------------------------------------------
10.20 Cooperation Agreement between Sigma and Kockums AB dated November 14, 2000 *****
- ----------- -----------------------------------------------------------------------------------------
10.21 Agreement for an Initial Collaboration Development MCHP between Sigma and Baxi Group
Ltd, dated March 2, 2001.******
- ----------- -----------------------------------------------------------------------------------------
10.22 Agreement for the purchase of certain intellectual property by and among Aquamax
(International) Holdings, B.V. , Keeran Corporation N.V. Balantum Oy (Newco) and Ocean
Power Corporation dated July 20, 2001*
- ----------- -----------------------------------------------------------------------------------------
10.23 Mutual Release by and among Aquamax (International) Holdings, B.V., Keeran Corporation
N.V. and Ocean Power Corporation dated July 20, 2001*
- ----------- -----------------------------------------------------------------------------------------
10.24 Co-operation and Sales Agreement by and among Aquamax (International) Holdings B.V.,
Keeran Corporation N.V., and Balantum Oy (Newco) dated July 20, 2001*
- ----------- -----------------------------------------------------------------------------------------
10.25 License Agreement by and among Aquamax (International) Holdings, B.V., Keeran Corporation
N.V., and Balantum Oy (Newco) dated July 20, 2001*
- ----------- -----------------------------------------------------------------------------------------
10.26 Side Leter by and among Aquamax (International) Holdings, B.V., Keeran Corporation N.V.,
Balantum Oy (Newco), Ltd. Oy and Ocean Power Corporation dated July 20, 2001*
- ----------- -----------------------------------------------------------------------------------------
10.27 Asset Purchase Agreement by and among Hadwaco Ltd. Oy, Hackman OYJ AP and Balantum Oy
(Newco) dated July 20, 2001*
- ----------- -----------------------------------------------------------------------------------------
44
* Filed herewith
** Incorporated by reference to the Company's Form 10-SB as filed February 8,
2000.
*** Incorporated by reference to the Company's Form 10-SB as amended and filed
February 6, 2001.
****Incorporated by reference to the Company's Form 8-K as amended and filed
October 19, 2000.
*****Incorporated by reference to the Company's Form 10-KSB/A as amended and
filed September 4, 2001.
*****Incorporated by reference to the Company's Form 10-QSB/A for the period
ended March 31, 2001, as amended and filed September 4, 2001.
(b) Reports on Form 8-K.
Not applicable.
45
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.
OCEAN POWER CORPORATION
Date: September 4, 2001 By: /s/ Joseph P. Maceda
------------------------
Joseph P. Maceda
President
Date: September 4, 2001
By: /s/ J. Michael Hopper
-------------------------
J. Michael Hopper
Secretary/Treasurer
(chief accounting officer)
46