UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-QSB
-------------
|X| Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 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 November 13, 2001.
Transitional Small Business Disclosure Format (check one): Yes [ ] No: [X]
1
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 and December 31, 2000
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
ASSETS
------
September 30, December 31,
2001 2000
----------- -----------
(Unaudited)
CURRENT ASSETS
Cash $ 247,417 $ 2,152,593
Cash - restricted 43,664 23,706
Advances to employees 356,720 320,567
Prepaid expenses 191,532 222,235
----------- -----------
Total Current Assets 839,333 2,719,101
----------- -----------
EQUIPMENT, NET 1,106,356 922,980
----------- -----------
OTHER ASSETS
Debt offering costs 9,000 --
Deposits 52,775 55,348
Patents and licensing agreements, net 6,682,513 7,281,679
Goodwill, net 5,820,951 6,315,183
----------- -----------
Total Other Assets 12,565,239 13,652,210
----------- -----------
TOTAL ASSETS $14,510,928 $17,294,291
=========== ===========
F-1
The accompanying notes are an integral part of these
consolidated financial statements.
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September 30, December 31,
2001 2000
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 3,946,117 $ 1,127,414
Accrued expenses 8,080,189 6,844,282
Notes payable - related parties 1,165,277 1,317,618
Notes and convertible debentures payable - current portion 2,742,047 488,457
Research advances -- 473,145
------------ ------------
Total Current Liabilities 15,933,630 10,250,916
------------ ------------
LONG-TERM LIABILITIES
Notes and convertible debentures payable 2,207,784 1,294,588
------------ ------------
Total Long-Term Liabilities 2,207,784 1,294,588
------------ ------------
Total Liabilities 18,141,414 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 30,349,020 25,611,288
Deferred compensation and consulting expense (1,484,517) (410,667)
Other comprehensive income 320,442 195,258
Deficit accumulated during the development stage (33,199,822) (20,028,591)
------------ ------------
Total Stockholders' Equity (3,630,486) 5,748,787
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,510,928 $ 17,294,291
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations and Other Comprehensive Income
(Unaudited)
For the For the From
Nine Months Ended Three Months Ended Inception on
September 30, September 30, March 26,
---------------------------- ---------------------------- 1992 Through
September 30,
2001 2000 2001 2000 2001
------------ ------------ ------------ ------------ ------------
REVENUES $ -- $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------
EXPENSES
General and administrative 6,527,977 5,853,770 1,687,670 1,726,410 22,471,265
Impairment of intangible assets -- 400,000 -- 400,000 400,000
Research and development 3,823,689 223,156 2,151,715 82,306 5,369,145
Depreciation and amortization 1,253,141 246,069 423,925 168,859 1,736,500
------------ ------------ ------------ ------------ ------------
Total Expenses 11,604,807 6,722,995 4,263,310 2,377,575 29,976,910
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (11,604,807) (6,722,995) (4,263,310) (2,377,575) (29,976,910)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Currency gain 994 -- 994 -- 1,516
Interest income 32,117 115,861 2,841 36,283 247,661
Loss on sale of assets -- -- -- -- (387,649)
Interest expense (1,599,535) (215,304) (1,111,779) (71,685) (3,249,781)
------------ ------------ ------------ ------------ ------------
Total Other Expense (1,566,424) (99,443) (1,107,944) (35,402) (3,388,253)
------------ ------------ ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY
ITEM (13,171,231) (6,822,438) (5,371,254) (2,412,977) (33,365,163)
EXTRAORDINARY ITEM
Gain on settlement of debt -- 165,349 -- -- 165,341
------------ ------------ ------------ ------------ ------------
NET LOSS (13,171,231) (6,657,089) (5,371,254) (2,412,977) (33,199,822)
------------ ------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME
(LOSS)
Currency translation adjustment 125,184 198,927 (45,240) 198,927 320,442
------------ ------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE
INCOME (LOSS) $(13,046,047) $ (6,458,162) $ (5,416,494) $ (2,214,050) $(32,879,380)
============ ============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations and Other Comprehensive Income (Continued)
(Unaudited)
For the For the
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------- --------------------------
2001 2000 2001 2000
------------- ---------- ---------- -------------
BASIC AND DILUTED LOSS PER
SHARE
Operating loss $ (0.34) $ (0.19) $ (0.14) $ (0.07)
Extraordinary item -- -- -- --
------------- ---------- ---------- -------------
Total $ (0.34) $ (0.19) $ (0.14) $ (0.07)
============= ========== ========== =============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 38,269,334 35,282,677 38,439,094 36,405,608
============= ========== ========== =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
Deficit
Deferred Accumulate
Common Stock Additional Other Compensation During the
--------------------------- Paid-In Comprehensive and Consulting Development
Shares Amount Capital Income (Loss) 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 warrants
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.
F-5
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
Deficit
Deferred Accumulate
Common Stock Additional Other Compensation During the
--------------------------- Paid-In Comprehensive and Consulting Development
Shares Amount Capital Income (Loss) 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.
F-6
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
Deficit
Deferred Accumulate
Common Stock Additional Other Compensation During the
--------------------------- Paid-In Comprehensive and Consulting Development
Shares Amount Capital Income (Loss) Expense Stage
------------ ------------ ------------ ------------- ------------- ------------
Balance, December 31, 2000 38,149,942 $ 381,499 $ 25,611,288 $ 195,258 $ (410,667) $(20,028,591)
March 5, 2001, warrants issue
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 at $1.50 per share (unaudited) 50,000 500 74,500 -- -- --
June 8, 2001, common stock
issued for conversion of research
advances at $3.20 per share (unaudited) 119,152 1,192 380,095 -- -- --
June 29, 2001, common stock
issued for consulting contract at $2.80
per share (unaudited) 120,000 1,200 334,800 -- (334,800) --
June 29, 2001, warrants granted
for consulting contract (unaudited) -- -- 336,000 -- (336,000) --
September 1, 2001, options issued
below market value (unaudited) -- -- 861,000 -- (861,000) --
Amortization of deferred
compensation and consulting
expense (unaudited) -- -- -- -- 166,070
Warrants issued in connection
with debt obligations - 3rd quarter
(unaudited) -- -- 999,243 -- -- --
Valuation adjustment to warrants
granted for consulting services
(unaudited) -- -- (291,880) -- 291,880 --
Currency translation adjustment
(unaudited) -- -- -- 125,184 -- --
Net loss for the nine months ended
September 30, 2001 (unaudited) -- -- -- -- -- (13,171,231)
------------ ------------ ------------ ------------- ------------- ------------
Balance, September 30, 2001
(unaudited) 38,439,094 $ 384,391 $ 30,349,020 $ 320,442 $ (1,484,517) $(33,199,822)
------------ ------------ ------------ ------------- ------------- ------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
From
Inception on
For the Nine Months Ended March 26,
September 30, 1992 Through
---------------------------- September 30,
2001 2000 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(13,171,231) $ (6,657,089) $(33,199,822)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 1,253,141 246,069 1,736,500
Deferred compensation and consulting expense 166,070 225,000 495,403
Value of common stock, warrants, options
and discounts on equity instruments issued
for services -- 3,188,931 3,802,930
Loss on sale of assets -- -- 387,649
Amortization of debenture discount 1,163,169 -- 1,813,169
Amortization of debt issue costs 3,000 -- 3,000
Gain on disposition of debt -- -- (165,340)
Impairment loss -- 400,000 400,000
Change in operating asset and liability
accounts, net of amounts acquired in
business combination:
(Increase) in overpayment receivable -- (162,350) --
(Increase) decrease in advances to employees,
prepaid expenses, deposits and debt offering costs 128,323 (348,768) (5,758,254)
Decrease in other assets -- 775,872 --
Increase (decrease) in accounts payable 3,085,836 (685,586) 4,119,297
Increase (decrease) in accrued expenses 1,164,907 (150,428) 7,782,056
------------ ------------ ------------
Net Cash Used by Operating Activities (6,206,785) (3,168,349) (18,583,412)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments on license agreement -- (400,000) (400,000)
Cash acquired in Sigma acquisition -- 142,254 142,254
Proceeds from sale of assets -- -- 1
Purchase of fixed assets (354,575) (745,615) (1,098,550)
Equipment procurement costs -- -- (564,110)
------------ ------------ ------------
Net Cash Used by Investing Activities (354,575) (1,003,361) (1,920,405)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 4,775,000 -- 4,775,000
Repayment of notes payable - related parties (164,341) -- (1,685,541)
Repayment of notes payable (346,517) (2,566,019) (1,685,591)
Proceeds from notes payable - related parties 12,000 82,178 7,236,287
Issuance of convertible debentures 400,000 -- 1,050,000
Common stock issued for cash -- 10,240,750 11,131,032
Stock offering costs -- -- (26,289)
------------ ------------ ------------
Net Cash Provided by Financing Activities $ 4,676,142 $ 7,756,909 $ 20,794,898
------------ ------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
From
Inception on
For the Nine Months Ended March 26,
September 30, 1992 Through
---------------------------- September 30,
2001 2000 2001
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH $(1,885,218) $ 3,585,199 $ 291,081
CASH AT BEGINNING OF PERIOD 2,176,299 368,276 --
CASH AT END OF PERIOD $ 291,081 $ 3,953,475 $ 291,081
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 $ -- $ 3,188,931 $ 3,802,930
Equity instruments issued for deferred
consulting expense $ 1,533,000 $ 900,000 $ 2,273,000
Common stock issued for recapitalization $ -- $ -- $ 2,761,773
Common stock issued for conversion of debt $ 456,287 $ 831,812 $ 2,963,572
Acquisition of licenses through
license agreement payable $ -- $ 6,940,000 $ 6,940,000
Options granted for deferred compensation $ 861,000 $ -- $ 861,000
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 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 includes normal recurring adjustments and reflects all
adjustments, which, in the opinion of management, are necessary
for a fair presentation of such financial statements. Although
management believes the disclosures and information presented are
adequate to make the information not misleading, it is suggested
that these interim condensed consolidated financial statements be
read in conjunction with the Company's most recent audited
financial statements and notes thereto included in its December
31, 2000 Annual Report on Form 10-KSB. Operating results for the
nine months ended September 30, 2001 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2001. On June 18, 2001, the Company incorporated a
wholly owned subsidiary named Powerco US, Inc.
NOTE 2 - PATENTS AND LICENSING AGREEMENT
The Company's patents and license agreement consisted of the
following at September 30, 2001 and December 31, 2000:
September 30, December 31,
2001 2000
----------------- ------------------
(Unaudited)
Patents $ 971,592 $ 973,658
Licensing Agreement - Aquamax and Keeran 6,540,000 6,540,000
Accumulated amortization (829,079) (231,979)
----------------- ------------------
$ 6,682,513 $ 7,281,679
================= ==================
As part of the purchase of Sigma (Note 3), the Company acquired
patents valued at their fair value of $971,592, 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 $494,396 at September 30, 2001. The license
agreement relates to rights to patents and patent applications
pertaining to technology acquired from Aquamax and Keeran (Note
7). The cost of the license agreement is being amortized over its
estimated useful life of 10 years. Amortization expense for the
period ended September 30, 2001 and accumulated amortization at
September 30, 2001 amounted to $56,343 and $127,729, respectively
(Patents) and $510,500 and $701,350, 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 acquisition was accounted for as
a purchase in accordance with APB 16, "Business Combinations." The
acquisition 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 $494,232 and $109,850 for the nine months ended September 30,
2001 and 2000, respectively.
F-10
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 2001 and December 31, 2000
NOTE 4 - NOTES AND DEBENTURES PAYABLE
Notes and debentures payable at September 30, 2001 and December 31, 2000
consist of the following:
September 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 -
Notes payable to ten parties bearing interest at 10%,
without collateral, due in full one year from issue. 1,175,000 -
Three (3) convertible debentures payable due August to November
2004, bearing interest at 12% per annum, uncollateralized, and
convertible into shares of the
Company's common stock at $1.50 per share. 550,000 550,000
Three (3) convertible debentures payable due August to September
2006, bearing interest at 12% per annum, uncollateralized, and
convertible into shares of the
Company's common stock at $1.00 to $1.50 per share. 400,000 -
Four (4) convertible debentures payable due August 2006, bearing
interest at 12% per annum, uncollateralized and convertible into
shares of the
Company's common stock at $1.50 per share. 71,000 -
Less discount resulting from allocation of proceeds
to warrants and conversion rights issued with the debt (1,880,049) -
----------------- ------------------
Subtotal 3,915,951
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. 96,004 121,049
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. 417,702 569,964
Note payable to Silent Clean Power bearing interest at 12.00%, due
in equal semi-annual payments, collateralized
by patents and licenses 494,396 498,696
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. 25,778 43,336
----------------- ------------------
Total Notes and Debentures Payable $ 4,949,831 $ 1,783,045
================= ==================
F-11
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 2001 and December 31, 2000
NOTE 4 - NOTES AND DEBENTURES PAYABLE (Continued)
Annual maturities of notes and debentures payable are as follows:
Years Ending
December 31,
------------
2002 $ 2,742,047
2003 1,186,784
2004 550,000
2005 -
2006 471,000
-----------------
$ 4,949,831
=================
On November 13, 2001, the Company obtained an extension of the
payment due date which was due to Silent Clean Power from May 2001
to December 31, 2001. Payment of approximately $7,600, of accrued
interest, will be paid in Swedish kroner on December 1, 2001 and
principle in the approximate amount of $83,000 plus accrued
interest from December 1, 2001 will be paid on December 31, 2001.
Accordingly, as of September 30, 2001, the company is not in
default on the agreement to purchase the patents from Silent Clean
Power. The Company expects it will obtain the capital needed in
order to 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 funds necessary to make such payment to the Company. In
the event that the Company is unable to make such payment to
Silent Clean Power, 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.
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
remaining 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.
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
remaining 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.
F-12
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 2001 and December 31, 2000
NOTE 4 - NOTES AND DEBENTURES PAYABLE (Continued)
As additional consideration for $1,175,000 of the non-convertible
notes payable, the Company granted 425,006 warrants with an
exercise price of $1.50 per share and 300,000 warrants with an
exercise price of $1.00 per share, all with an expiration date of
five years from the dates of grant (third quarter of 2001). The
warrants were valued at an average of $1.63 per share ($1,187,871
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 $528,244, and the
remaining balance of $646,756 has been recorded as debt, net of
discount. The discount of $528,244 will be amortized to interest
expense over the term of the debt using the effective interest
rate method.
During the quarter ended September 30, 2001, the Company issued
convertible debentures with detached warrants in exchange for
$400,000 in cash from three entities and for interest due of
$71,000 to four entities. The convertible debentures bear interest
at 12% and are due in five years from the dates of issuance unless
converted into the Company's common stock. The debentures payable
are convertible into the Company's common stock at a price of
$1.00 to $1.25 per share. Concurrent with the convertible
debentures, the Company granted 794,667 warrants to purchase one
share of the Company's common stock with an exercise price of
$1.00 to $1.25 per share. The warrants were granted as additional
consideration to the lenders for funding the convertible
debentures and will be valued at $2,273,433 pursuant to the Black
Scholes pricing model. The proceeds of the convertible debenture
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 features) elements of the
transactions. The portion to be allocated to equity will be
$379,392. The discount of $379,392 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:
September 30, December 31,
2001 2000
----------------- -----------------
(Unaudited)
Accrued payroll taxes payable $ 40,744 $ 26,657
Accrued interest payable - payroll 52,717 52,717
Accrued payroll tax penalty 98,845 98,845
Accrued interest payable - notes 440,801 118,155
Other accrued items 907,082 7,908
Accrued license agreement costs (Note 2) 6,540,000 6,540,000
----------------- -----------------
Total $ 8,080,189 $ 6,844,282
================= =================
F-13
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 2001 and December 31, 2000
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
September 30, 2001 of approximately $33,000,000. 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 and 2002. However, management
cannot provide any assurances that the Company will be successful
in accomplishing any of its plans.
The ability of the Company to continue as a going concern is
dependent upon its ability to successfully accomplish the plan
described in the preceding paragraph and eventually establish
profitable operations. The accompanying consolidated financial
statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
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 a 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 September 30, 2000, the consulting
contract was valued at $562,000, representing the 100,000 shares
of common stock issued on July 25, 2000 at the then trading price
of $4.00 per share and the value of the warrants at September 30,
2001 of $162,000, as determined by the Black Scholes pricing
model. For the quarter ended September 30, 2001, the Company
recorded compensation expense of $(12,967) representing
amortization of the contract offset by the change in value of the
warrants during the quarter ended September 30, 2001, leaving a
remaining balance of $234,167 at September 30, 2001, which is
included as a reduction of stockholders' equity.
F-14
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 2001 and December 31, 2000
NOTE 7- COMMITMENTS AND CONTINGENCIES (Continued)
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
Company to issued 120,000 shares of common stock and granted
120,000 warrants exercisable for two years at $1.50. Pursuant to
EITF 96-18, "Accounting For Equity Instruments that Are Issued To
Other Than Employees For Acquiring Or In Conjunction With
Selling, Goods or Services", the Company will continue to revalue
the warrants until earned upon completion of services. As of
September 30, 2001, the consulting contract was valued at
$558,120, 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 at September 30, 2001 of $222,120, as
determined by the Black Scholes pricing model. For the period
ended September 30, 2001, the Company recorded compensation
expense of $65,020 representing amortization of the contract
offset by the change in value of the warrants during the quarter
ended September 30, 2001, leaving deferred compensation expense
with a remaining balance of $465,100 at September 30, 2001, which
is included as a reduction of stockholders' equity.
On June 20, 2001, the Company (through its subsidiary Powerco US,
Inc.) entered into an employment agreement with David Moard
(Moard). Terms of the agreement are as follows: (1) Moard's base
salary will be $240,000 per year with the first and second years
salary being deferred to future years, and (2) Moard was issued
820,000 stock options exercisable at $1.50 per share of which
260,000 vest in year one, 360,000 vest in year two and 200,000
vest in year three. The employment agreement is in effect for
three years. The Company has accrued wages of $66,593, which
represents the deferred salary through September 30, 2001, and
has expensed $75,750, which represents amortization of the
intrinsic value of the stock options. At September 30, 2001, the
unamortized intrinsic value of the stock options amounted to
$785,250, which is included as an offset to equity as deferred
compensation expense and will be amortized over the vesting
period of the options.
IF, LLC
-------
On September 1, 2001, the Company (through its subsidiary Powerco
US, Inc.) entered into a 24 month consulting agreement with IF,
LLC to provide consulting services relating to business
development through proactive communication to new customers of
Powerco's distribution generation equipment and to assist in the
development and forecasts of Powerco's business plan. The Company
has agreed to pay IF, LLC $15,000 per month of which $10,000 will
be paid monthly and $5,000 will be accrued until the Company has
received a minimum investment of $2,000,000.
F-15
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 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 Agreement provide a grant to the
Company of an exclusive right to sell products within the above
field of use, utilizing (i) over 60 issued and pending patents
and improvements (as defined in the License Agreement) on such
patents owned by the Licensors, and (ii) issued and pending
patents owned by third parties to which the Licensors have
licensed rights, which consist of an international patent
application (which is expected to result in identical patents
covering the identical invention in eight different countries)
owned by Hadwaco Oy, a Finnish company ("Hadwaco"), under which
the Licensors have a license. The Company also granted Aquamax
and Keeran certain exclusive rights in its technology. In
exchange, the Company will receive 50% of any license royalty or
amounts of a similar nature they receive from third parties.
Under the terms of the License Agreement, the Company agreed to
pay a total of $4,000,000 and 600,000 shares of its common stock
for the rights under the License Agreement under a payment
schedule contingent on various factors as to timing but to be no
later than December 31, 2000. The Company has paid $400,000 to
the Licensors. No shares of common stock have been issued
pursuant to the License Agreement. The remaining amount payable
under the License Agreement was $6,540,000 at September 30, 2000,
which consisted of $3,600,000 payable in cash and $2,940,000
payable in common stock (representing the value of 600,000 shares
of common stock to be issued, valued at the market value of
shares of the Company's common stock as of the effective date of
the transaction, September 21, 2000), and has been accrued as a
liability and included in the amount recorded as a licensing
agreement asset along with the $400,000 paid in cash. 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.
F-16
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 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 parties and dated on the
original September signing date) were extended on October 2,
2000. The transaction was originally recorded in October 2000 in
the belief that, until properly executed signature pages were
received, it was not effective. Based on our reassessment of the
circumstances, we have determined that the agreement became
binding on September 21, 2000. Therefore, the September 30, 2000
financial statements were amended to reflect the transaction as
occurring in September 2000. The key points leading to the change
in the Company's position as to the effective date were: (1)
although the name and title of the representative signing on
behalf of Keeran Corporation were not disclosed on the signature
page or accompanying documents, the signature was an original and
the signer had actual authority from Keeran Corporation to
execute the agreement; (2) original signature pages for all
parties were exchanged in September 2000 with the intent to be
bound by the agreement; (3) the re-execution of the signature
page on behalf of Keeran Corporation was by the same person and
was dated by him as of the original signing date, which
presumably demonstrates that Keeran Corporation believed that the
agreement was effective as of the original signature date; and
(4) notwithstanding the position taken at the time by the
Company's intellectual property attorney, that the agreement was
not effective until the revised signature page was received, the
Company had wire transferred the additional payment of $300,000
due under the agreement to Aquamax/Keeran on September 30, 2000,
prior to receipt of the revised signature page. On the basis of
these facts, the Company has concluded that the better view is
that the agreement became legally binding on all parties during
the third, rather than the fourth, quarter of 2000. Accordingly,
the transaction has been accounted for as occurring in September
2000. The measurement date, for purposes of valuing shares of the
Company's common stock due as part of the purchase price that is
included in the accrued liability is as of September 21, 2000,
because the effective date of the agreement is the date the
rights to the patented technology were transferred to the
Company.
F-17
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 2001 and December 31, 2000
NOTE 7- COMMITMENTS AND CONTINGENCIES (Continued)
AQUAMAX AND 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 an exclusive basis, but actually licensed on a
non-exclusive basis. Consequently, the value of the licensed
technology is diminished due to the fact that Hadwaco is free,
contrary to the Licensors' original representations, to license
the same technology to third parties for its (potentially
competitive) use. 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
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, since the Company
intends to keep the patent rights, the Company has recorded the
liability, and related asset, because under the terms of the
agreement the Company has no discretion to avoid future payment
of the remaining cash and common stock payable. The amount of
payment under the agreement withheld pending resolution of the
dispute was not indicative of the diminished value of the patent
rights received as the Company's management has estimated that
approximately $400,000 of the purchase price represents the value
of the exclusivity feature of the one patent that was not
received. The failure of Aquamax/Keeran to deliver exclusive
rights to all patents resulted in a condition of default by
Aquamax/Keeran. Aquamax/Keeran has asserted that the Company's
subsequent withholding of payment resulted in a condition of
default by the Company.
F-18
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 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, was as follows: The Company would form
a new company (Newco) in Finland. Because it would control Newco,
the Company's financial statements would report its investment in
Newco on a consolidated basis. The Company would immediately
provide Newco with enough working capital to purchase from
Hadwaco its existing and ongoing water remediation business,
including all related intellectual property. The intellectual
property transferred to Newco would include technology, which
Hadwaco has licensed to Aquamax/Keeran and which is the source of
the Company's dispute with Aquamax/Keeran.
In July 2001, the aforementioned negotiations resulted in the
execution by Aquamax/Keeran and the Company, as well as Hadwaco
Ltd. Oy and Hackman Oy Abp, of agreements which would have, if
closing had occurred as stipulated, resolved the dispute between
the Company and Aquamax/Keeran. The Agreements provided that the
Company would make payments to Aquamax/Keeran of $1,800,000 in
cash and 600,000 shares of common stock on or before September
28, 2001, in addition to the $400,000 already paid to
Aquamax/Keeran, in exchange for ownership (as opposed to licenses
as provided in the September 2000 License Agreement) of all the
Aquamax/Keeran technology in any way connected to water
treatment. The agreements also provided that the Company would
grant back to Aquamax/Keeran an exclusive, worldwide license to
exploit Newco's water desalination technology for applications
where the volume of water processed is less than 1,000 cubic
meters per day. The license back of rights to Aquamax/Keeran was
to be exclusive for a term of five years and non-exclusive
thereafter. The agreements also included release of liability
provisions, whereby all parties would release each other of and
from all claims and liabilities, including the amount due in
connection with the Company's obligation under the September 2000
License Agreement as well as the Company's claim for a price
reduction due to the non-exclusivity of the Hadwaco license.
Contemporaneously, the Company entered into agreements with
Hadwaco Ltd Oy and Hackman Oy Abp (Hadwaco). The agreement of the
parties was as follows: The Company was to form a new company
(Newco) in Finland. The Company would immediately provide Newco
with $1,500,000 to purchase from Hadwaco a 100% interest in
Hadwaco's existing and ongoing water remediation business,
including all related intellectual property. Newco's purchase
price for Hadwaco's water remediation business was to be
$1,500,000 plus a 19% interest in Newco's common stock.
F-19
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 2001 and December 31, 2000
NOTE 7- COMMITMENTS AND CONTINGENCIES (Continued)
AQUAMAX AND KEERAN
The Company was to provide senior debt funding up to a principle
aggregate amount of $7,500,000 over a period of three years from
the date of closing of the Hadwaco purchase.
On August 29, 2001, the Company entered into an agreement with
Aquamax (International) Holdings B.V. and Keeran Corporation N.V.
("Aquamax/Keeran") to extend the deadline for consummation of the
transactions set forth in the agreement executed on July 20, 2001
by and among Aquamax/Keeran, Balantum Oy and the Company. As
amended, the closing of the transaction shall occur on the
earlier of September 28, 2001 or the first practically possible
day after the Company becomes listed on the Nasdaq OTC Bulletin
Board. Additionally, after August 31, 2001, the Company shall
take responsibility for paying for the processing and maintenance
of patents and patent applications, which shall be transferred to
Balantum Oy pursuant to the terms of the July 20, 2001 agreement.
In connection with the extension agreement, the Company has
assumed the obligation of Aquamax/Keeran to compensate a finder
in connection with the transactions between Aquamax/Keeran and
the Company an amount of $105,080 and 31,040 shares of the
Company's common stock.
On September 11, 2001, the terrorist attack on New York and
Washington D.C. occurred which disrupted the financial markets in
the United States and abroad. That event significantly affected
and delayed the Company's efforts to obtain the investment money
necessary to complete the transactions described above for the
formation of Newco, the purchase of the ongoing water remediation
business of Hadwaco, and the purchase of the Aquamax/Keeran
technology connected to water treatment. Because of the funding
delays, the Company was not able to fund the closing of the
transactions by the due date and the agreements for those
transactions are now null and void, including the agreements,
which included the release of liability provisions between the
Company and Aquamax/Keeran. As a consequence, the September
license agreement between the Company and Aquamax/Keeran remains
in effect and the disputes between the parties as to their
respective rights and obligations under the license agreement
remain unresolved. The Company has recommenced discussions with
Aquamax/Keeran in an attempt to resolve their disputes amicably
and intends to arbitrate resolution of those disputes if a
settlement cannot be reached.
Because its agreements with Hadwaco Ltd. Oy and Hackman Oy Abp
were non-binding, the Company does not believe that it has a
liability arising out of its failure to complete the transactions
described above, other than the loss of amounts the Company
agreed to pay in connection with obtaining extensions of the
agreements. In connection with its dispute with Aquamax/Keeran,
the Company still believes it has the right to a purchase price
reduction because of the failure of Aquamax/Keeran to deliver
exclusive rights to all of the patents and, while no claim has
been asserted, might be subject to a damage claim related to the
Company's withholding of payment on the Aquamax/Keeran license
agreement. The Company has recorded expenses of $800,000 related
to the costs of the terminated agreements with Hadwaco/Hackman
and the possible costs associated with the Aquamax/Keeran license
agreement dispute.
F-20
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 2001 and December 31, 2000
NOTE 7- COMMITMENTS AND CONTINGENCIES (Continued)
SIGMA
On March 6, 2001, the Company's wholly owned subsidiary, SIGMA,
entered into a collaboration agreement with Baxi Group Ltd. (a
manufacturer of heating systems in Europe) for the development
and marketing of a combined heat and power product (micro-CHP)
for the residential market in the United Kingdom. The objective
of the agreement is to form a joint working arrangement for the
development of a micro-CHP package, consisting of the Sigma
Energy Converter (Sigma Stirling engine) and the metal cabinet,
into which each unit will be mounted, including controls and
connections to both systems and the electricity supply network.
The purpose of the collaboration agreement is to design a
prototype micro-CHP package to be installed in compliance with
applicable regulations in older and larger houses as replacements
for boilers that have reached the end of their service life. The
parties will work together in assigning sufficient priority and
allocating necessary resources (which have already been budgeted
by Sigma) to the project to develop the package in a mutually
agreeable time frame, which is currently anticipated to be by
mid-2003 if the Company can raise sufficient capital to fund
completion of its Stirling engine and pay its portion of the
costs in connection with the collaboration agreement. Pursuant to
the terms of the Collaboration Agreement, each party pays its own
expenses. The agreement has no fixed termination date, but can be
terminated at any time by either party on three months notice.
The costs incurred by the Company, which are associated with the
Baxi collaboration, have been expensed when incurred. During the
three-month period ended September 30, 2001, such costs consisted
of travel costs and research and development costs. For the
three-months ended September 30, 2001, the Company expensed
$9,750 of travel costs for monthly planning and update meetings
in connection with the collaboration which is included in general
and administrative expenses and $5,758 of engineer compensation
costs which are included in the research and development
expenses.
Science Applications International Corporation (SAIC)
-----------------------------------------------------
Effective April 4, 2001, the Company signed a Technology License,
Consulting Services, and Asset Purchase Agreement with SAIC.
Terms of the agreement are as follows: SAIC will grant to the
Company a non-exclusive royalty-bearing right and license under
the SAIC Technology to make, use, import, offer to sell, and sell
components, sub-assemblies or systems for concentrating solar
energy incorporating SAIC Technology in the United States and
Canada. The term of the agreement will continue until the date of
the expiration of the last of the SAIC Patents. The Company's
obligation to pay royalties will continue until the sooner of
either 30 years or the expiration of the last SAIC patent. SAIC
will have the right to terminate this agreement if the Company
has failed to fund the $4,000,000 in SAIC dish development in two
years or to timely make any royalty or minimum royalty payment,
SAIC shall also have the right to terminate this agreement or
renegotiate the royalty of this agreement if the Company has
failed to deliver equity in a new business entity to SAIC. The
Company will be obligated to pay the following royalties based on
the net selling price of any licensed product in accordance with
the following schedule: (a) Three percent of the set selling
price for all sales made during the royalty term until after the
cumulative total of royalties exceeds $100,000, (b) Two and
One-Half percent of net selling price for all sales made during
the royalty term after the cumulative total paid to SAIC exceeds
$100,000, and until the cumulative total exceeds $500,000 and,
(c) Two percent of the net selling price for all sales made
during the royalty term once the cumulative total royalty exceeds
$500,000. During the royalty term, the Company shall make the
following minimum royalty payments: Contract year 1: no amounts
due, Contract year 2: minimum amount due is $25,000, Contract
year 3: minimum amount due is $50,000, and Contract year 4 and
thereafter: minimum amount due is $100,000. Within 30 days after
the end of each quarter, the Company will deliver to SAIC a
report of its activities relating to the preceding calendar
quarter.
F-21
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 2001 and December 31, 2000
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
Science Applications International Corporation (SAIC) (Continued)
-----------------------------------------------------
On September 1, 2001, the Company and SAIC entered into a
Professional Services Agreement as it relates to time and
materials. The terms of the agreement are as follows: (1) the
period of performance is from September 1, 2001 to August 31,
2003. (2) SAIC will consult and develop a program to create a
viable near-term solar dish concentrator power system for
electrical power production. This program will consist of four
tasks: Task 1 will relate to advanced dish development, Task 2
will consist of marketing and business development, Task 3 will
consist of receiver development and Task 4 will consist of
product testing and specification. The estimated costs of these
four tasks combined is $7,700,000. The Company will pay SAIC
monthly on a `time and materials' basis for labor expended and
costs and expenses incurred. The Company was to make an initial
payment of working capital to SAIC of $200,000 and shall
thereafter replenish the level of working capital by making
payments to keep the balance of working capital at $200,000. The
Company is to maintain the $200,000 working capital balance until
SAIC has been paid $6,800,000. Thereafter SAIC will draw down on
the working capital until the $7,700,000 is expended. SAIC will
have a lien upon and may retain or repossess any and all
deliverables if the Company does not make the full payment to
SAIC. At September 30, 2001, the Company had accrued $42,864
relating to expenses incurred by SAIC. The Company has not made
the required $200,000 working capital deposit. Amounts expensed
as they relate to SAIC Professional Services Agreement will be
classified as research and development expenses.
NOTE 8 - SUBSEQUENT EVENTS
Legal Proceedings
-----------------
On October 5, 2001, Ricardo Inc. filed a lawsuit against the
Company's subsidiary, Sigma Elektroteknisk AS in the Forliksklage
Court (Minor Civil Court) of Norway. The lawsuit seeks a judgment
for costs incurred and services rendered by Ricardo Inc. pursuant
to a contract with Sigma related to the design and procurement of
prototype parts for the Sigma MCHP Stirling engine lower end. The
total amount claimed to be due and owing is $1,458,248 plus legal
costs incurred in processing the claim. The Company has accrued
$1,458,248 which is included in accounts payable.
F-22
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 2001 and December 31, 2000
Elektryon, Inc.
---------------
On October 10, 2001, the Company and Elektryon, Inc. entered into
a licensing agreement whereby the Company was granted the
non-exclusive right and license within the United States and the
exclusive, worldwide right and license outside the United States
to buy, make, have made, use, distribute, install, offer to sell
and sell generators designed to power large commercial sites
which utilize Elektryon's patented improvements. The term of the
agreement is 5 years. The Company must pay to Elektryon the sum
of $150,000 and price per licensed product to be agreed upon by
the parties from time to time, which shall in no event exceed the
lowest price charged to any other third party purchaser of
Elektryon's licensed products. As further consideration, the
Company must pay five (5) percent of the raw cost of any licensed
product, on a per unit basis, which the Company makes or has made
by any party other than Elektryon.
Melaroba Note Payable
---------------------
On October 12, 2001, the Company borrowed $225,000 from the
Melaroba Corp. The note bears interest at 10% per annum and is
due within 90 days of the issuance of the note. If the note is
not repaid within 90 days, the Company agrees to issue 150,000
shares of common stock. The Company has accounted for this note
as a convertible note and has allocated $120,000 to additional
paid-in capital, which represents the fair value of the
beneficial conversion feature. The discount of $120,000 will be
amortized to interest expense over the term of the debt using the
effective interest rate method.
F-23
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 2001 and December 31, 2000
NOTE 8 - SUBSEQUENT EVENTS
Venture Investment Group, Inc. Convertible Debenture Payable
-------------------------------------------------------------
On October 29, 2001, the Company borrowed $100,000 from Venture
Investment Group, Inc. The note bears interest at 12% and is due
in five years from the date of issuance unless converted into the
Company's common stock. The debenture payable is convertible into
the Company's common stock at a price of $1.00 per share.
Concurrent with the convertible debenture, the Company granted
300,000 warrants to purchase one share of the Company's common
stock with an exercise price of $1.00 per share. The warrants
were granted as additional consideration to the lender for
funding the convertible debenture and will be valued at $921,200
pursuant to the Black Scholes pricing model. The proceeds of the
convertible debenture 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 features) elements of the transactions. The portion to
be allocated to equity will be $100,000. The discount of $100,000
will be amortized to interest expense over the term of the debt
using the effective interest rate method.
EPRIsolutions
-------------
On November 5, 2001, the Company's subsidiary, Powerco US, Inc.
and EPRIsolutions entered into an equipment lease and fixed price
services agreement for a term of 14 months, commencing November
1, 2001. Powerco will lease to EPRIsolutions for the term of the
agreement and deliver to its EPRI-Peac facility in Knoxville
Tennessee a Sigma beta Stirling engine generator. EPRIsolutions
will conduct a technology assessment and baseline testing and
validation of the engine as part of collaboration between Powerco
and EPRIsolutions to test and evaluate market entry Stirling
engines and pilot the market introduction of beta systems to
North America energy companies. In exchange for the lease of the
equipment, support services to be provided by Powerco and
shipping costs for the engine, EPRIsolutions will pay to Powerco
a firm fixed price of $79,000. At the end of the test period,
EPRIsolutions will prepare and deliver to Powerco a final report
on the results of its baseline tests of the engine unit.
Additionally, EPRIsolutions will receive an option to purchase
stock in Powerco for a value equal to $75,000 at the market value
of the stock at the time of exercise, exercisable after the
conclusion of the testing period provided in the agreement.
NOTE 9- NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No.'s 141 and 142 -- In June 2001, the Financial Accounting
Standards Board (FASB) adopted Statement of Financial Accounting
Standards SFAS No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 is
effective as to any business combination occurring 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 for the Company. SFAS No. 142 is effective,
generally, in fiscal years beginning after December 15, 2001,
which will be the fiscal year ending December 31, 2002 for the
Company.
F-24
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 2001 and December 31, 2000
NOTE 9- NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)
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 assess
whether an impairment loss should be recognized and measured by
comparing the fair value of the "reporting unit" to the carrying
value, including goodwill. If the carrying value exceeds fair
value, then the Company will 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.
While the Company has not completed the process of determining
the effect of these new accounting pronouncements on its
consolidated financial statements, the Company currently expects
that there will be no reclassification in connection with the
transition provisions of SFAS No. 141 based on clarifications of
the transition provisions issued by the FASB in October 2001.
Accordingly, the Company expects that, after implementation of
SFAS No. 142, all intangible assets will be amortizable and the
goodwill will not be amortizable.
SFAS No. 143 -- On August 16, 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," which is effective
for fiscal years beginning after June 15, 2002. It requires that
obligations associated with the retirement of a tangible
long-lived asset be recorded as a liability when those
obligations are incurred, with the amount of the liability
initially measured at fair value. Upon initially recognizing a
liability for an accrued retirement obligation, an entity must
capitalize the cost by recognizing an increase in the carrying
amount of the related long-lived asset. Over time, the liability
is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related asset.
Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. While the Company has not completed the process of
determining the effect of this new accounting pronouncement on
its consolidated financial statements, the Company currently
expects that the effect of SFAS No. 143 on the Company's
consolidated financial statements, when it becomes effective,
will not be significant.
F-25
OCEAN POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 2001 and December 31, 2000
NOTE 9- NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)
SFAS No. 144 - On October 3, 2001, the Financial Accounting
Standards Board issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which is effective
for financial statements issued for fiscal years beginning after
December 15, 2001 and, generally, its provisions are to be
applied prospectively. SFAS 144 supercedes SFAS Statement No. 121
(FAS 121), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS 144 applies to
all long-lived assets (including discontinued operations) and
consequently amends Accounting Principles Board Opinion No. 30
(APB 30), "Reporting Results of Operations Reporting the Effects
of Disposal of a Segment of a Business."
SFAS 144 develops one accounting model (based on the model in
SFAS 121) for long-lived assets that are to be disposed of by
sale, as well as addresses the principal implementation issues.
SFAS 144 requires that long-lived assets that are to be disposed
of by sale be measured at the lower of book value or fair value
less cost to sell. That requirement eliminates the requirement of
APB 30 that discontinued operations be measured at net realizable
value or that entities include under "discontinued operations" in
the financial statements amounts for operating losses that have
not yet occurred. Additionally, FAS 144 expands the scope of
discontinued operations to include all components of an entity
with operations that (1) can be distinguished from the rest of
the entity and (2) will be eliminated from the ongoing operations
of the entity in a disposal transaction.
While the Company has not completed the process of determining
the effect of this new accounting pronouncement on its
consolidated financial statements, the Company currently expects
that the effect of SFAS No. 144 on the Company's consolidated
financial statements, when it becomes effective, will not be
significant.
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 policies 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.
F-26
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.
Certain Business Developments
Ocean Power Corporation is a development stage company, which is still dependent
upon its ability to raise capital through loans and private or public sale of
stock. The Company believed and continues to believe that one of the main
impediments to its ability to raise significant operating capitol had been
delays in obtaining relisting on the NASDAQ OTC Bulletin Board. On Friday
September 7, 2001 the Company was successful in becoming relisted on the OTC
(over-the-counter) Bulletin Board. Three working days later, on Tuesday,
September 11, 2001, an act of war was committed on the United States with the
World Trade Center devastation. That event disrupted the financial markets and
significantly affected and consequently delayed the Company's efforts to obtain
investment funds necessary to carry out its business plans within the time lines
previously projected by the Company. While the delays in raising operating
capital have caused the Company to re-assess the timelines for implementation of
its business plan, the Company continues to believe that it will be able to
raise sufficient capital to meet its core business plan objectives as more fully
detailed below. However, management cannot provide any assurances that the
Company will be successful in accomplishing any of its plans. Failure to raise
sufficient capital to meet its business plan objectives could have a material
adverse effect on the Company's results of operations, financial condition and
liquidity.
Plan Of Operation
The Company's current operations began in January 1997 as 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
2
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 $33,199,822
in losses from inception of current operations on March 26, 1992 through to
September 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 September 30, 2001, the Company's cash position declined to $291,081 as
compared to $335,140 at June 30, 2001, $2,683,723 at March 31, 2001, and
$2,176,299 at December 31, 2000, and we have incurred accounts payable, notes
payable, and other obligations aggregating $18,141,414. During the 3 months
ended September 30, 2001, aggregate liabilities increased by $3,982,164.
At June 30, 2001, the Company was in discussion with Silent Clean Power to
convert the current semi-annual principle payment of approximately $83,000,
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 November 13, 2001, the Company obtained
an extension of the payment due date which was due to Silent Clean Power from
May 2001 to December 31, 2001. Payment of approximately $7,600 in accrued
interest, will be made on December 1, 2001 in Swedish kronor and principle in
the amount of approximately $83,000 plus accrued interest from December 1 will
be paid on December 31, 2001 in Swedish kronor.
Accordingly, as of September 30, 2001 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 January 1 to
November 13, 2001, the Company has raised $5,512,000 of additional financing
through proceeds from notes payable and convertible debentures (see note 4 in
the financial statements for additional details on notes payable and convertible
3
debentures). Also, the Company has received a loan of $12,000 from a related
party as of September 30, 2001.
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. In our Form 10-QSB for the second
quarter of 2001, the Company indicated that it expects to need $20,000,000 to
$30,000,000 of additional funds for operations and expansion in 2001. Due to the
delays in fund raising caused in part by the September 11 acts of war on the
United States, the Company expects that $20,000,000 to $30,000,000 will be
raised by the end of the first quarter of 2002, rather than the end of 2001. All
funds raised will be used to pay current debts and fund operations and expansion
consistent with the Company's business plan. However, management cannot provide
any assurances that the Company will be successful in accomplishing any of its
plans. Failure to raise sufficient capital could 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.
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.
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 $16
million pursuant to private placement financing and loans
4
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 the last quarter of 2001 and the
first quarter of 2002. 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
on an amount to be determined by the Company, in the second
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 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
This work is all aimed at improving the performance and
reducing the capital cost of the Company's products.
(iii) 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
(iv) 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
5
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
issue of the consideration we owe Aquamax/Keeran and does not assert that the
license does not exist or is not effective. Aquamax/Keeran did not formally
respond to our demand for arbitration. We suspended all further payments due to
Aquamax/Keeran under the license agreement pending resolution of the dispute
which is discussed below.
Nevertheless, we commenced development activities predicated on using the
technology licensed from Aquamax/Keeran regardless of whether the amounts owed
to Aquamax/Keeran and the value of the licenses are adjusted. The technologies
licensed from Aquamax/Keeran are part of the long-range development program for
distillation-based systems and are not part of the SWRO systems to be utilized
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.
Attempted Resolution of the Dispute
The arbitration procedures have not commenced while the Company and Licensors
have been involved in settlement negotiations. The negotiations resulted in the
6
execution by both parties, as well as Hadwaco Ltd. Oy and Hackman Oy Abp, of a
non-binding Letter of Intent (LOI). The LOI was executed by the various parties
between June 15, 2001 and June 20, 2001. Contemporaneously, the Company entered
into a related non-binding Letter of Intent with Hadwaco Ltd Oy and Hackman Oy
Abp. The agreement of the parties, as memorialized in both LOIs, was as follows.
The Company would form a new company (Newco) in Finland. Because it would
control Newco, the Company's financial statements would report its investment in
Newco on a consolidated basis. The Company would immediately provide Newco with
enough working capital to purchase from Hadwaco its existing and ongoing water
remediation business, including all related intellectual property. The
intellectual property transferred to Newco would include technology which
Hadwaco has licensed to Aquamax/Keeran and which is the source of our dispute
with Aquamax/Keeran.
In July 2001, the aforementioned negotiations resulted in the execution by
Aquamax/Keeran and the Company, as well as Hadwaco Ltd. Oy and Hackman Oy Abp,
of agreements which would have, if closing had occured as stipulated, resolved
the dispute between the Company and Aquamax/Keeran. The Agreements provided that
the Company would make to Aquamax/Keeran payments of $1,800,000 in cash 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 The agreements also provided that the Company would grant back
to Aquamax/Keeran a royalty free, exclusive, worldwide license to exploit
Newco's water desalination technology for applications where the volume of water
processed is less than 1,000 cubic meters per day. The license back of rights to
Aquamax/Keeran was to be exclusive for a term of five years and non-exclusive
thereafter. The agreements also included release of liability provisions,
whereby all parties would release each other of and from all claims and
liabilities, including the amount due in connection with the Company's
obligation under the September 2000 License Agreement as well as the Company's
claim for a price reduction due to the non-exclusivity of the Hadwaco license.
Contemporaneously, the Company entered into agreements with Hadwaco Ltd Oy and
Hackman Oy Abp (Hadwaco). The agreement of the parties was as follows: The
Company was to form a new company (Newco) in Finland. The Company would
immediately provide Newco with $1,500,000 to purchase from Hadwaco a 100%
interest in its existing and ongoing water remediation business, including all
related intellectual property. Newco's purchase price for Hadwaco's water
remediation business was to be $1,500,000 plus a 19% interest in Newco's common
stock. The Company was to provide senior debt funding up to a principle
aggregate amount of $7,500,000 over a period of three years from the date of
closing of the Hadwaco purchase.
On September 7,2001 the Company became relisted on the NASDAQ OTC Bulletin Board
which enhanced its ability to raise funds; however, three working days later, on
Tuesday, September 11, 2001 an act of war was committed on the United States
with the World Trade Center devastation occurring. That event significantly
affected and delayed the Company's efforts to obtain the investment money
necessary to complete the transactions described above for the formation of
Newco, the purchase of the ongoing water remediation business of Hadwaco and the
purchase of the Aquamax/Keeran technology connected to water treatment. Because
of the funding delays, the Company was not able to fund the closing of the
transactions and the agreements for those transactions are now null and void,
including the agreements which included the release of liability provisions
between the Company and Aquamax/Keeran. As a consequence, the September license
agreement between the Company and Aquamax/Keeran remains in effect and the
disputes between the parties as to their respective rights and obligations under
the license agreement remain unresolved. The Company has recommenced discussions
with Aquamax/Keeran in an attempt to resolve their disputes amicably and intends
to arbitrate resolution of those disputes if a settlement cannot be reached.
7
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. Because the agreements with Hadwaco
Ltd. Oy and Hackman Oy Abp were non-binding, the Company does not believe that
it has liability arising out of its failure to complete the transactions under
the agreements described above as the Company's attempt to resolve the dispute,
other than the loss of amounts the Company agreed to pay in connection with
obtaining extensions of the agreements. In connection with its dispute with
Aquamax/Keeran, the Company still believes it has the right to a purchase price
8
reduction because of the failure of Aquamax/Keeran to deliver exclusive rights
to all of the patents and, while no claim has been asserted, might be subject to
a damage claim related to the Company's withholding of payment on the
Aquamax/Keeran license agreement. The Company has recorded expenses of $800,000
related to the costs of the terminated agreements with Hadwaco/Hackman and the
possible costs associated with the Aquamax/Keeran license agreement dispute.
The related asset 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 (provisional patents filed August
2000 and patent pending patents filed August 2001). The remaining step is to
complete a PPI which consists of 14 projects, the combined effect of which is
projected to yield a more economically viable seawater desalination system, with
lower energy and operating costs for both the projected vacuum vapor compression
system and the existing seawater reverse osmosis technology. The formal PPI was
initially designed in 1997, after the first physical assessment of the Aquamax
equipment in Finland. The program was thereafter continuously developed and
refined to reflect new information gathered from the Aquamax equipment we have
acquired and have under testing in Malta, as well as data gathered about
competitive technologies from our consultants, and our own monitoring of the
market. The planning, scheduling and cost estimating of the formal program was
finalized in October of 2000. The PPI is expected to require approximately 4
full-time employees and 18 to 20 months to complete once additional funding of
approximately $5 million is arranged. Neither the time, manpower requirements or
cost necessary for the PPI have changed. Two of the projects represent critical
path projects on which the 18 to 20 month time line will be dependent. The two
critical path projects are: "High Efficiency Steam Ejector Development" Project,
the goal of which is to replace a mechanical compressor with a high efficiency
hypercritical ejector (OPC has a U.S. patent pending) and the
9
"Evaporator-Condenser Efficiency Increase" Project, the goal of which is to
increase the overall efficiency of the vapor compression cycle by at least 30%
(OPC has a U.S. patent pending. 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
have our common stock traded on the NASDAQ OTC Bulletin Board resulted in a
delay to our arranging funding for the PPI for two reasons: first, because
potential investors have elected not to invest until we are again eligible to
trade on the OTC Bulletin Board; and second, as a result of the diversion of
management resources to the task of amending the SEC filings and other efforts
necessary to re-attain eligibility to trade on the OTC Bulletin Board. On
September 7, 2001 the Company became relisted on the NASDAQ OTC Bulletin Board.
The following Tuesday, September 11, 2001 an act of war was committed on the
United States with the World Trade Center devastation, which further delayed the
funding necessary to pursue the PPI. 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
10
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 is required to pay us
royalties on the sale of the licensed products, plus 50% of any royalties they
receive pursuant to sales by their sub-licensees. Since this is an advanced
technology development program, the amount of future royalties due from sales
will be determined once the product is fully developed and the actual value of
the technology can be determined.
Sigma Elektroteknisk AS Acquisition
Ocean Power acquired its wholly owned subsidiary, Sigma Elektroteknisk AS
(Sigma) because of Sigma's advanced work in the development of a single-cylinder
Stirling engine system. A Stirling engine is an external combustion engine in
which an ambient pressure burner is used to heat a gas sealed in the engine. The
primary advantages of the Stirling engine are that the external combustion is
cleaner, quieter and more efficient than internal combustion engines and, since
it has fewer parts than an internal combustion engine, it is potentially lower
in cost with higher reliability. Sigma's research and design work had focused on
the development of an external combustion engine capable of generating 3 kW of
electricity and 9 kW of recoverable heat. We acquired Sigma in order to obtain
distributed power generation technology, such as Sigma's Stirling engines, that
we believe is commercially viable and has demonstrated technical viability.
After having evaluated all other known Stirling systems and evaluated such
factors as Sigma's core of knowledge and experience-based "know how," strategic
marketing, relationships with potential customers, an established vendor base
and its existing business plan, we concluded that Sigma, its product, its
management team, its intellectual property and its market focus, represented the
most attractive acquisition for us. At the time that we acquired Sigma, it had
spent over four years developing its Stirling engine. Sigma had built and tested
four prototypes -- three internally and one through an independent third party.
These tests included running each of three engines for 400 hours followed by a
wear analysis. The fourth engine had been run for endurance. Through these four
prototype engines, Sigma accumulated a total of approximately 4,000 hours of
operating experience prior to our acquisition. In addition to the engine
testing, Sigma had identified the flaws in the initial burner design and
completed a redesign intended to be more efficient with significantly lower
emissions. Prior to our acquisition, Sigma had focused primarily on developing
customers in Europe. Sigma's relationship with Statoil and the Norwegian
government had been in place since 1998. Outside of Norway, Sigma was in serious
negotiations with two boiler manufacturers, including Baxi Group Ltd., which led
to the final selection of Baxi as the first system integrator (see our
discussion of our agreement with Baxi below). Additionally, Sigma was then
engaged in ongoing discussions with utilities and energy service companies from
all over Europe. Prior to our acquisition, Sigma had focused its business
efforts on customers in Norway, with business development in Europe.
11
For the reasons set forth above, we concluded that Sigma had a clearly defined
Stirling engine product with strong market potential, that would best meet our
needs and, therefore, warranted an acquisition price of $7,862,148 which
consisted of shares of our common stock valued at $5,500,000 and assumption of
$2,362,148 of Sigma's liabilities.
We have concluded that Sigma's Stirling engine held the strongest potential for
economic viability in the distributed power market. Because the Sigma engine
combines both the displacer piston and the working piston into the same cylinder
for more compact engine design, it contains fewer parts and because of its
design simplicity and related operating reliability, we believe the Sigma
Stirling engine offers significant advantages over competing Stirling engines.
Our plan is to arrange for the manufacture of these engines by companies that
build engines for the automobile industry, thereby reducing the Company's
potential capital needs to produce a commercially viable distributed power
product.
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 believed that Sigma's focus could 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 H20kW
Systems (TM) sea water desalination systems. We believe that Sigma's basic
one-cylinder model can be expanded from the current 3kW to up to a 25kW engine
with no basic design change. Our long-term plan, ultimately, is to seek to
combine several 25kW 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.
12
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. 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 had not decreased.
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 quarterly balance sheet dates between September 2000 and
June 2001.
13
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 used as triggering events for impairment assessments
(which have remained unchanged since the acquisition of Sigma) 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 of 2001 or First proceeds from sale of prototypes.
First Quarter of 2002
- ------------------------------------------------------- -----------------------------------------------------
Late First Quarter or early Release of second generation prototype for external
Second Quarter of 2002 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 of 2003 Commence production of product (small energy
converter with electrical output of 3kW and thermal
output of 9kW)
- ------------------------------------------------------- -----------------------------------------------------
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 to 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.
Our initial anticipated time-line to develop our 3kW 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. That timeline has now been extended by six to twelve months due to
difficulty in raising funds resulting, in part, from delays in obtaining
relisting on the NASDQ OTC Bulletin Board (relisting occurred September 7, 2001)
14
and the September 11, 2001 act of war committed on the United States with the
World Trade Center devastation that disrupted the financial markets and
significantly affected and, consequently, delayed the Company's efforts to
obtain investment funds necessary to carry out its business plans within the
time lines previously projected by the Company. As a consequence of funding
availability, the Company has been forced to reduce the pace of development. We
currently expect that the benchmark originally projected to be completed in the
fourth quarter of 2001 will be delayed a minimum of six months and possibly up
to a year, depending on funding availability. The other benchmarks will be
delayed by periods comparable to the delay in the benchmark originally scheduled
for the fourth quarter 2001.
Our current estimate of our funding requirements to achieve the benchmarks set
forth above is $25.9 million due to delays in development caused by difficulties
in raising sufficient funding.. The $25.9 million aggregate amount needed over
the revised five year period to fund the activities in the Plan of Development
is as follows: $700,000 in 2000, $5.5 million in 2001, $10.4 million in 2002,
$7.6 million in 2003 and $1.7 million in 2004. As of September 30, 2001, the
Company has provided approximately $3.4 million of the $25.9 million revised
amount projected to be needed for project development. Sigma 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 approximately $3.4 million; (3) obtaining vendor credit of $1.5
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 than the first generation engine. Thirty units of the second
generation prototype units have been ordered and were in production before
production was suspended in September 2001 due to difficulties in raising
sufficient funding. The first three units that were scheduled for delivery in
the fourth quarter 2001 can be completed approximately 6 months after funding is
obtained in amounts sufficient to pay Ricardo the $1.5 million due for services
provided to date. Upon completion of production of the prototype units, we
expect 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.
Because of the delays in development caused by difficulties in raising funds,
the Company performed an impairment assessment of the assets employed in its
Stirling engine business, which consist largely of the Sigma patents and
goodwill. Using the estimated present value of future cash flows from the Sigma
engine business, taking into account the delay in development and related
increases in total development cost, as an estimate of fair value, the Company
concluded that no impairment in the assets of the Stirling engine business
exists at September 30, 2001. The impairment assessment considered whether any
significant changes have occurred in the targeted market place that would
diminish the value of the Stirling engine business, such as emergence of new
competing technologies, changes in market size and configuration, or changes in
competitors' businesses. We also considered whether the delay in development
should result in a decrease in the useful lives assigned to the Sigma patents
and goodwill and have concluded that, because we intend to re-commence
development as soon as funds are obtained, there is no reduction in useful lives
needed at this time. The Company will update its impairment and useful life
assessment each quarter.
15
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 and 2002 to complete the development tasks
under the revised schedule of completion. An impairment in the value of the
Sigma assets (including patents and goodwill) could occur if sufficient funding
to complete development is not obtained.
During the course of discussions with potential customers relating to a possible
business relationship, such as 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 extended delays in the
revised schedule and would likely result in an impairment of the carrying value
of Sigma assets (including patents and goodwill) and/or could lead to a
reduction in the estimated useful life used to amortize these assets.
Our initial estimate, 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 38 in 2002 and to 45 in 2003 and 53
people by 2004. 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. Sigma
increased its full time employees to 16 by March 31 and to 20 by September 30.
To date, Sigma's manpower requirements have been less than expected because of
lack of funding to proceed with the Stirling engine development as originally
planned.
Recently Issued Accounting Pronouncements
SFAS No.'s 141 and 142 -- In June 2001, the Financial Accounting Standards Board
(FASB) adopted Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 is effective as to any business combination after June 30, 2001 and
certain transition provisions that affect accounting for business combinations
prior to June 30, 2001 are effective as of the date that SFAS No. 142 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.
16
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 assess whether an impairment loss
should be recognized measured 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.
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 there will be no reclassification in connection with the
transition provisions of SFAS No. 141 based on clarifications of the transition
provisions issued by FASB in October 2001. Accordingly, the Company expects
that, after implementation of SFAS No. 142, all intangible assets will be
amortizable and the goodwill will not be amortizable.
SFAS No. 143 -- On August 16, 2001, the FASB issued SFAS No. 143, Accounting for
Asset Retirement Obligations, which is effective for fiscal years beginning
after June 15, 2002. It requires that obligations associated with the retirement
of a tangible long-lived asset to be recorded as a liability when those
obligations are incurred, with the amount of the liability initially measured at
fair value. Upon initially recognizing a liability for an accrued retirement
obligation, an entity must capitalize the cost by recognizing an increase in the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. While the Company has not completed the
process of determining the effect of this new accounting pronouncement on its
financial statements, the Company currently expects that the effect of SFAS No.
143 on the Company's financial statements, when it becomes effective, will not
be significant.
SFAS No. 144 -- On October 3, 2001, the Financial Accounting Standards Board
issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets which is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and, generally, its provisions are to be
applied prospectively.. SFAS 144 supercedes SFAS Statement No. 121 (FAS 121),
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30 (APB 30), Reporting Results of Operations Reporting the Effects
of Disposal of a Segment of a Business.
SFAS 144 develops one accounting model (based on the model in SFAS 121) for
long-lived assets that are to be disposed of by sale, as well as addresses the
principal implementation issues. SFAS 144 requires that long-lived assets that
are to be disposed of by sale be measured at the lower of book value or fair
value less cost to sell. That requirement eliminates APB 30's requirement that
discontinued operations be measured at net realizable value or that entities
include under "discontinued operations" in the financial statements amounts for
17
operating losses that have not yet occurred. Additionally, FAS 144 expands the
scope of discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2)
will be eliminated from the ongoing operations of the entity in a disposal
transaction.
While the Company has not completed the process of determining the effect of
this new accounting pronouncements on its financial statements, the Company
currently expects that the effect of SFAS No. 144 on the Company's financial
statements, when it becomes effective, will not be significant.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On October 5, 2001 Ricardo Inc. filed a lawsuit against the Company's
subsidiary, Sigma Elektroteknisk AS in the Forliksklage Court (Minor Civil
Court) of Norway. The lawsuit seeks a judgment for costs incurred and services
rendered by Ricardo Inc. pursuant to a contract with Sigma related to the design
and procurement of prototype parts for the Sigma MCHP Stirling engine lower end.
The total amount claimed to be due and owing is $1,458,248 plus legal costs
incurred in processing the claim. The Company has accrued $1,458,248 which is
included in accounts payable.
ITEM 2. Changes in Securities
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 Promissory Note to Bylin Heating Systems, Inc., Profit
Sharing Pension Plan.
On July 11, 2001, the Company issued a one year promissory note to
Bylin Heating Systems, Inc., Profit Sharing Pension Plan for $200,000.
The note accrues interest at a rate of 10% per annum. If the Company
elects to pre-pay the note, then the lender has the right to convert
both the principal or interest into the Company's common stock at $3.00
per share. As additional consideration, the Company granted 66,667
warrants with an exercise price of $1.50 per share, with an expiration
date of July 10, 2004. The market price for the Company's common stock
on July 11, 2001 was $2.40.
2. Issuance of Promissory Note to William Barron.
On July 24, 2001, the Company issued a one year promissory note to
William Barron for $50,000. The note accrues interest at a rate of 10%
per annum. If the Company elects to pre-pay the note, then the lender
has the right to convert both the principal or interest into the
Company's common stock at $3.00 per share. As additional consideration,
the Company granted 16,667 warrants with an exercise price of $1.50 per
share, with an expiration date of July 23, 2002. The market price for
the Company's common stock on July 24, 2001 was $2.25.
18
3. Issuance of Promissory Notes to Carl Fricke.
On July 24, 2001 and August 1, 2001, the Company issued one year
promissory notes to Carl Fricke for $50,000. The notes accrue interest
at a rate of 10% per annum. If the Company elects to pre-pay the notes,
then the lender has the right to convert both the principal or interest
into the Company's common stock at $3.00 per share. As additional
consideration for each note, the Company granted 16,667 warrants with
an exercise price of $1.50 per share, with an expiration date of July
23, 2002 and July 31, 2002 respectively. The market price for the
Company's common stock on July 24, 2001 and August 1, 2002 was $2.25
and $2.30, respectively.
4. Issuance of Promissory Note to Summit Petroleum Corporation.
On August 7, 2001, the Company issued a one year promissory note to
Summit Petroleum Corporation for $150,000. The note accrues interest at
a rate of 10% per annum. If the Company elects to pre-pay the note,
then the lender has the right to convert both the principal or interest
into the Company's common stock at $3.00 per share. As additional
consideration, the Company granted 50,000 warrants with an exercise
price of $1.50 per share, with an expiration date of August 6, 2002.
The market price for the Company's common stock on August 7, 2001 was
$2.35.
5. Issuance of Promissory Note to Edward Freidberg trustee for Freidberg
Law Corporation Pension Plan.
On August 8, 2001, the Company issued a one year promissory note to
Edward Freidberg trustee for Freidberg Law Corporation Pension Plan for
$100,000. The note accrues interest at a rate of 10% per annum. If the
Company elects to pre-pay the note, then the lender has the right to
convert both the principal or interest into the Company's common stock
at $3.00 per share. As additional consideration, the Company granted
33,334 warrants with an exercise price of $1.50 per share, with an
expiration date of August 6, 2002. Joseph Maceda, the president of the
Company, also pledged 75,000 shares as collateral for the loan to the
Company. The market price for the Company's common stock on August 8,
2001 was $2.40.
6. Issuance of Convertible Debenture to Venture Investment Group, Inc..
On August 20, 2001, the Company issued a five year convertible
debenture for $200,000. The note accrues interest at a rate of 12% per
annum and both the principal and interest are convertible into the
Company's common stock at $1.50 per share. As additional consideration,
the Company granted 266,667 warrants with an exercise price of $1.25
per share, with an expiration date of August 19, 2006. The market price
for the Company's common stock on August 20, 2001 was $2.30.
----------------- --------------- ---------------- -------------- ------------- ----------------
Date of Issuance Note Amount Conversion Number of Price per Expiration Date
Securities Shares share
----------------- --------------- ---------------- -------------- ------------- ----------------
8/20/01 $200,000 Common 133,333 $1.50 8/19/06
----------------- --------------- ---------------- -------------- ------------- ----------------
Warrants 266,667 $1.25 8/19/06
----------------- --------------- ---------------- -------------- ------------- ----------------
7. Issuance of Convertible Debenture to Freedom Funding Inc.
On August 20, 2001, the Company issued a five year convertible
debenture for $42,000 to Freedom Funding Inc.. This is the amount of
interest that was due on the $350,000 convertible debenture of November
16, 1999 for the year 2000. The note accrues interest at a rate of 12%
per annum and both the principal and interest are convertible into the
19
Company's common stock at $1.50 per share. As additional consideration,
the Company granted 56,000 warrants with an exercise price of $1.25 per
share, with an expiration date of August 19, 2006. The market price for
the Company's common stock on August 20, 2001 was $2.30.
----------------- --------------- ---------------- -------------- ------------- ----------------
Date of Issuance Note Amount Conversion Number of Price per Expiration Date
Securities Shares share
----------------- --------------- ---------------- -------------- ------------- ----------------
8/20/01 $42,000 Common 28,000 $1.50 8/19/06
----------------- --------------- ---------------- -------------- ------------- ----------------
Warrants 56,000 $1.25 8/19/06
----------------- --------------- ---------------- -------------- ------------- ----------------
8. Issuance of Convertible Debenture to Freedom Funding Inc.
On August 20, 2001, the Company issued a five year convertible
debenture for $12,000 to Freedom Funding Inc.. This is the amount of
interest that was due on the $100,000 convertible debenture of November
16, 1999 for the year 2000. The note accrues interest at a rate of 12%
per annum and both the principal and interest are convertible into the
Company's common stock at $1.50 per share. As additional consideration,
the Company granted 16,000 warrants with an exercise price of $1.25 per
share, with an expiration date of August 19, 2006. The Market price for
the Company's common stock on August 20, 2001 was $2.30.
----------------- --------------- ---------------- -------------- ------------- ----------------
Date of Issuance Note Amount Conversion Number of Price per Expiration Date
Securities Shares share
----------------- --------------- ---------------- -------------- ------------- ----------------
8/20/01 $12,000 Common 8,000 $1.50 8/19/06
----------------- --------------- ---------------- -------------- ------------- ----------------
Warrants 16,000 $1.25 8/19/06
----------------- --------------- ---------------- -------------- ------------- ----------------
9. Issuance of Convertible Debenture to Venture Investment Group, Inc.
On August 20, 2001, the Company issued a five year convertible
debenture for $12,000 to Venture Investment Group, Inc.. This is the
amount of interest that was due on the $100,000 convertible debenture
of November 16, 1999 for the year 2000. The note accrues interest at a
rate of 12% per annum and both the principal and interest are
convertible into the Company's common stock at $1.50 per share. As
additional consideration, the Company granted 16,000 warrants with an
exercise price of $1.25 per share, with an expiration date of August
19, 2006. The Market price for the Company's common stock on August 20,
2001 was $2.30.
----------------- --------------- ---------------- -------------- ------------- ----------------
Date of Issuance Note Amount Conversion Number of Price per Expiration Date
Securities Shares share
----------------- --------------- ---------------- -------------- ------------- ----------------
8/20/01 $12,000 Common 8,000 $1.50 8/19/06
----------------- --------------- ---------------- -------------- ------------- ----------------
Warrants 16,000 $1.25 8/19/06
----------------- --------------- ---------------- -------------- ------------- ----------------
10. Issuance of Convertible Debenture to Regis Investment Co. Ltd.
On August 20, 2001, the Company issued a five year convertible
debenture for $5,000 to Regis Investment Co. Ltd.. This is the amount
of interest that was due on the $100,000 convertible debenture of
20
November 16, 1999 for the five months prior to the conversion of the
debenture in the year 2000. The note accrues interest at a rate of 12%
per annum and both the principal and interest are convertible into the
Company's common stock at $1.50 per share. As additional consideration,
the Company granted 6,667 warrants with an exercise price of $1.25 per
share, with an expiration date of August 19, 2006. The Market price for
the Company's common stock on August 20, 2001 was $2.30.
----------------- -------------- ----------------- -------------- ------------- ----------------
Date of Issuance Note Amount Conversion Number of Price per Expiration Date
Securities Shares share
----------------- -------------- ----------------- -------------- ------------- ----------------
8/20/01 $5,000 Common 3,333 $1.50 8/19/06
----------------- -------------- ----------------- -------------- ------------- ----------------
Warrants 6,667 $1.25 8/19/06
----------------- -------------- ----------------- -------------- ------------- ----------------
11. Issuance of Warrants to Freedom Funding Inc.
On August 20, 2001, the Company amended the $350,000 convertible
debenture to Freedom Funding Inc. of November 16, 1999 and detached and
granted 466,667 warrants with an exercise price of $.75 per share, with
an expiration date of August 19, 2006. The Market price for the
Company's common stock on August 20, 2001 was $2.30.
12. Issuance of Warrants to Freedom Funding Inc.
On August 20, 2001, the Company amended the $100,000 convertible
debenture to Freedom Funding Inc. of November 16, 1999 and detached and
granted 133,333 warrants with an exercise price of $.75 per share, with
an expiration date of August 19, 2006. The Market price for the
Company's common stock on August 20, 2001 was $2.30.
13. Issuance of Warrants to Venture Investment Group, Inc.
On August 20, 2001, the Company amended the $100,000 convertible
debenture to Venture Investment Group, Inc. of November 16, 1999 and
detached and granted 133,333 warrants with an exercise price of $.75
per share, with an expiration date of August 19, 2006. The Market price
for the Company's common stock on August 20, 2001 was $2.30.
14. Issuance of Convertible Debenture to Venture Investment Group, Inc.
On August 23, 2001, the Company issued a five year convertible
debenture for $100,000. The note accrues interest at a rate of 12% per
annum and both the principal and interest are convertible into the
Company's common stock at $1.50 per share. As additional consideration,
the Company granted 133,333 warrants with an exercise price of $1.25
per share, with an expiration date of August 22, 2006. The Market price
for the Company's common stock on August 23, 2001 was $2.70.
----------------- --------------- ---------------- -------------- ------------- ----------------
Date of Issuance Note Amount Conversion Number of Price per Expiration Date
Securities Shares share
----------------- --------------- ---------------- -------------- ------------- ----------------
8/23/01 $100,000 Common 66,667 $1.50 8/22/06
----------------- --------------- ---------------- -------------- ------------- ----------------
Warrants 133,333 $1.25 8/22/06
----------------- --------------- ---------------- -------------- ------------- ----------------
21
15. Issuance of Promissory Note to David Weissberg.
On August 29, 2001, the Company issued a one year promissory note to
David Weissberg for $50,000. The note accrues interest at a rate of 10%
per annum. If the Company elects to pre-pay the loan, then the lender
has the right to convert both the principal or interest into the
Company's common stock at $3.00 per share. As additional consideration,
the Company granted 16,667 warrants with an exercise price of $1.50 per
share, with an expiration date of August 28, 2002. The Market price for
the Company's common stock on August 29, 2001 was $3.55.
16. Issuance of Promissory Note to Edward P.Engle Jr..
On September 4, 2001, the Company issued a one year promissory note to
Edward P. Engle Jr. for $10,000. The note accrues interest at a rate of
10% per annum. If the Company elects to pre-pay the loan, then the
lender has the right to convert both the principal or interest into the
Company's common stock at $3.00 per share. As additional consideration,
the Company granted 3,337 warrants with an exercise price of $1.50 per
share, with an expiration date of September 3, 2002. The Market price
for the Company's common stock on September 4, 2001 was $3.50.
17. Issuance of Promissory Note to Kare C. Anderson.
On September 4, 2001, the Company issued a one year promissory note to
Kare C. Anderson for $15,000. The note accrues interest at a rate of
10% per annum. If the Company elects to pre-pay the loan, then the
lender has the right to convert both the principal or interest into the
Company's common stock at $3.00 per share. As additional consideration,
the Company granted 5,000 warrants with an exercise price of $1.50 per
share, with an expiration date of September 3, 2002. The Market price
for the Company's common stock on September 4, 2001 was $3.50.
18. Issuance of Convertible Debenture to Venture Investment Group, Inc..
On September 14, 2001, the Company issued a five year convertible
debenture for $100,000. The note accrues interest at a rate of 12% per
annum and both the principal and interest are convertible into the
Company's common stock at $1.00 per share. As additional consideration,
the Company granted 300,000 warrants with an exercise price of $1.00
per share, with an expiration date of September 14, 2006. The Market
price for the Company's common stock on September, 17, 2001 was $3.40.
----------------- --------------- ---------------- -------------- ------------- ----------------
Date of Issuance Note Amount Conversion Number of Price per Expiration Date
Securities Shares share
----------------- --------------- ---------------- -------------- ------------- ----------------
9/14/01 $100,000 Common 100,000 $1.00 9/14/06
----------------- --------------- ---------------- -------------- ------------- ----------------
Warrants 300,000 $1.200 9/13/06
----------------- --------------- ---------------- -------------- ------------- ----------------
19. Issuance of Promissory Note to Michael D. Lockwood.
On September 19, 2001, the Company issued a one year promissory note to
Michael D. Lockwood for $500,000. The note accrues interest at a rate
of 10.5% per annum. If the principal and interest are not paid when
due, then they shall bear interest thereafter at 13.5%. If the Company
elects to pre-pay the loan, then the lender has the right to convert
both the principal or interest into the Company's common stock at $2.00
per share in the name of Algonquin Capital Management. As additional
consideration, the Company granted 500,000 warrants to Algonquin
22
Capital Management with an exercise price of $1.50 per share, with an
expiration date of September 18, 2002. The Market price for the
Company's common stock on September 19, 2001 was $3.00.
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 September 30, 2001.
ITEM 5. Other Information
The Company deems the following information to be of importance to its
security holders:
Recent Developments
On September 1,2001, the Company and SAIC entered into a professional services
agreement, pursuant to which SAIC will consult with the Company and develop a
program to create a viable near-term solar dish concentrator power system for
electrical power production. The estimated costs to the Company for the work to
be done by SAIC is $7,700,000 through August 31, 2003. For a more detailed
description of the terms of the agreement, see the discussion contained in
footnote 7 to the Company's consolidated financial statements for September 30,
2001.
On September 7, 2001 the Company became relisted on the NASDAQ OTC Bulletin
Board.
On October 10,2001 the Company and Elektryon, Inc entered into a licensing
agreement whereby the Company was granted the non-exclusive right and license
within the United States and the exclusive, worldwide right and license outside
the United States to buy, make, have made, use, distribute, install, offer to
sell and sell generators designed to power large commercial sites which utilize
Elektryon's patented improvements. The term of the agreement is 5 years. The
Company must pay to Elektryon the sum of $150,000 and a price per licensed
product to be agreed upon by the parties from time to time, which shall in no
event exceed the lowest price charged to any other third party purchaser of
Elektryon's licensed products. As further consideration, the Company must pay
five (5)percent of the raw cost of any licensed product, on a per unit basis,
which the Company makes or has made by any party other than Elektryon.
On October 22,2001 the Board of Directors unanimously confirmed Mr. Edward
Juchniewicz as an outside director. Mr. Juchniewicz spent 32 years at the
Central Intelligence Agency, retiring as the Associate Deputy Director of
Operations. He also served as the President of ESL International in Sunnyvale,
California. Additionally, he has formed a consulting firm specializing in joint
venture development primarily in the Middle East and Asia.
On November 5,2001 the Company's subsidiary, Powerco US,Inc and EPRIsolutions
entered into an equipment lease and fixed price services agreement for a term of
14 months, commencing November 1, 2001. Powerco will lease to EPRIsolutions for
the term of the agreement and deliver to its EPRI-Peac facility in Knoxville
Tennessee a Sigma beta Stirling engine generator. EPRIsolutions will conduct a
technology assessment and baseline testing and validation of the engine as part
of a collaboration between Powerco and EPRIsolutions to test and evaluate market
entry Stirling engines and pilot the market introduction of beta systems to
North America energy companies. In exchange for the lease of the equipment,
23
support services to be provided by Powerco and shipping costs for the engine,
EPRIsolutions will pay to Powerco a firm fixed price of $79,000. At the end of
the test period, EPRIsolutions will prepare and deliver to Powerco a final
report on the results of its baseline tests of the engine unit. Additionally,
EPRIsolutions will receive an option to purchase stock in Powerco for a value
equal to $75,000 at the market value of the stock at the time of exercise,
exercisable after the conclusion of the testing period provided in the
agreement.
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.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
- ----------------------- -------------------------------------------------------------------------------------
Exhibit
Number Description
- ----------------------- -------------------------------------------------------------------------------------
2.01 Aquamax/Keeran License Agreement - previously filed on September 4, 2001 with June
30, 2001 Form 10QSB/A
- ----------------------- -------------------------------------------------------------------------------------
2.02 Elektryon License Agreement as of October 10, 2001
- ----------------------- -------------------------------------------------------------------------------------
2.03 EPRIsolutions Equipment Lease and Fixed Price Services Agreement as of November 5,
2001
- ----------------------- -------------------------------------------------------------------------------------
2.04 SAIC Technology License, Consulting Services And
Asset Purchase Agreement as of April 20, 2001
- ----------------------- -------------------------------------------------------------------------------------
2.05 SAIC Professional Services Agreement as of September 1, 2001
- ----------------------- -------------------------------------------------------------------------------------
24
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: November 14, 2001 By: /s/ Joseph P. Maceda
- ----------------------- ------------------------
Joseph P. Maceda
President
25