UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
[ ] 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
(Name of small business issuer in its charter)
Delaware 94-3350291
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Halperin Battaglia Raicht, LLP
555 Madison Avenue, 9th Floor
New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 765-9100
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act 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.
[ ] Yes [X] No
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. [ ] Yes [X] No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
56,182,746 shares outstanding as of January 28, 2008
Transitional Small Business Disclosure Format: [ ] Yes [X] No
NOTE: Unless otherwise indicated, this Form 10-QSB of Ocean Power Corporation
(the "Company") speaks as of the date of the filing thereof with the Securities
and Exchange Commission ("SEC"). On March 1, 2002, due to non-payment of
applicable taxes the Company's original charter became inoperative and void. On
October 25, 2007, the Company filed a certificate of renewal and revival of its
charter in the state of Delaware. During the period from March 1, 2002 to
October 25, 2007, the name Ocean Power was obtained by an unrelated entity upon
proper filing with the State of Delaware. As such, as part of the Company's
renewal and revival of its charter, the Company changed its name from Ocean
Power Corporation to OPC Liquidation Corporation.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
OPC LIQUIDATION CORPORATION
(Formerly Ocean Power Corporation and Subsidiaries)
(A Development Stage Company)
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
OPC LIQUIDATION CORPORATION
(Formerly Ocean Power Corporation and Subsidiaries)
(A Development Stage Company)
Consolidated Balance Sheet
September 30,
2007
-------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash - restricted $ 238,322
-------------
Total Current Assets 238,322
-------------
TOTAL ASSETS $ 238,322
=============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 2,906,113
Accrued expenses 9,876,792
Notes payable - related parties 1,033,469
Notes and convertible debentures payable - current portion 8,438,066
-------------
Total Current Liabilities 22,254,440
-------------
Total Liabilities 22,254,440
-------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock: 20,000,000 shares authorized of
$0.001 par value; no shares outstanding --
Common stock: 500,000,000 shares authorized of
$0.01 par value; 56,182,746 shares issued
and outstanding 561,827
Additional paid-in capital 35,169,137
Deficit accumulated during the development stage (57,747,082)
-------------
Total Stockholders' Equity (Deficit) (22,016,118)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 238,322
=============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
2
OPC LIQUIDATION CORPORATION
(Formerly Ocean Power Corporation and Subsidiaries)
(A Development Stage Company)
Consolidated Statements of Operations (Unaudited)
From
For the For the Inception on
Three Months Ended Nine Months Ended March 26,
September 30, September 30, 1992 Through
----------------------------- ----------------------------- September 30,
2007 2006 2007 2006 2007
------------- ------------- ------------- ------------- -------------
REVENUES $ -- $ -- $ -- $ -- $ --
------------- ------------- ------------- ------------- -------------
EXPENSES
General and administrative 95,130 29,763 352,809 88,982 1,029,239
Depreciation and amortization -- -- -- -- 15,964
------------- ------------- ------------- ------------- -------------
Total Expenses 95,130 29,763 352,809 88,982 1,045,203
------------- ------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (95,130) (29,763) (352,809) (88,982) (1,045,203)
------------- ------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest income 3,422 4,251 12,014 10,185 27,041
Gain (loss) on sale of assets -- -- -- -- 2,496,986
Gain on settlement of debt 21,768 -- 21.768 -- 45,704
Interest expense (3,651) (9,078) (21,511) (26,938) (8,962,431)
------------- ------------- ------------- ------------- -------------
Total Other Income (Expense) 21,539 (4,827) 12,271 (16,753) (6,392,700)
------------- ------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE
INCOME TAXES (73,591) (34,590) (340,538) (105,735) (7,437,903)
Income tax expense -- -- -- -- 116,883
------------- ------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE
DISCONTINUED OPERATIONS (73,591) (34,590) (340,538) (105,735) (7,554,786)
(Loss) from discontinued
operations -- -- -- -- (50,192,296)
------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (73,591) $ (34,590) $ (340,538) $ (105,735) $ (57,747,082)
============= ============= ============= ============= =============
BASIC AND DILUTED LOSS PER
SHARE
Income (loss) before discontinued
operations $ (0.00) $ (0.00) $ (0.01) $ (0.00)
Discontinued operations 0.00 0.00 0.00 0.00
------------- ------------- ------------- -------------
Net income (loss) $ (0.00) $ (0.00) $ (0.01) $ (0.00)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 56,182,746 56,182,746 56,182,746 56,182,746
============= ============= ============= =============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
OPC LIQUIDATION CORPORATION
(Formerly Ocean Power Corporation and Subsidiaries)
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)
Deferred Deficit
Consulting Accumulated
Common Stock Additional Other Expense During the
---------------------------- Paid-In Comprehensive and Asset Development
Shares Amount Capital Income (Loss) Acquisition Stage
------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2006 56,182,746 561,827 35,169,137 -- -- (57,406,544)
Net income for the six months ended
September 30, 2007 (Unaudited) -- -- -- -- -- (340,538)
------------- ------------- ------------- ------------- ------------- -------------
Balance, September 30, 2007 (Unaudited) 56,182,746 $ 561,827 $ 35,169,137 $ -- $ -- $ (57,747,082)
============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
OPC LIQUIDATION CORPORATION
(Formerly 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,
2007 2006 2007
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (340,538) $ (105,735) $ (57,747,082)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization -- -- 2,820,779
Deferred consulting expense -- -- 2,486,798
Value of common stock, warrants, options
and discounts on equity instruments issued
for services -- -- 7,962,847
Loss on sale of assets -- -- 387,649
Amortization of debenture discount and debt issue costs -- -- 4,628,538
Gain on disposition of debt and write off of subsidiary -- -- (6,109,475)
Gain on sale of assets -- -- (2,496,986)
Impairment loss -- -- 12,302,123
Change in operating asset and liability accounts,
net of amounts acquired in business combination:
(Increase) decrease in advances to employees,
prepaid expenses, deposits and debt offering costs -- -- (5,772,221)
Increase (decrease) in accounts payable 307,822 79,311 5,913,715
Increase (decrease) in accrued expenses (143,439) 26,938 13,651,033
-------------- -------------- --------------
Net Cash Provided (Used) by Operating Activities (176,155) 514 (21,972,282)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash lost in discontinued operation -- -- (4,713)
Payments on license agreement -- -- (400,000)
Cash acquired in Sigma acquisition -- -- 142,254
Proceeds from sale of assets -- 650,000 853,501
Purchase of fixed assets -- -- (1,164,570)
Equipment procurement costs -- -- (564,110)
-------------- -------------- --------------
Net Cash Provided (Used) by Investing Activities -- 650,000 (1,137,638)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable -- -- 4,951,818
Repayment of related party notes payable -- -- (1,640,226)
Repayment of notes payable (236,818) -- (1,755,880)
Loans from related parties -- -- 7,462,787
Issuance of convertible debentures -- -- 3,100,000
Common stock issued for cash -- -- 11,256,032
Stock offering costs -- -- (26,289)
-------------- -------------- --------------
Net Cash Provided by Financing Activities (236,818) -- 23,348,242
-------------- -------------- --------------
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
OPC LIQUIDATION CORPORATION
(Formerly Ocean Power Corporation and Subsidiaries)
(A Development Stage Company)
Consolidated Statements of Cash Flows (Unaudited) (Continued)
From
Inception on
For the Nine Months Ended March 26,
September 30, 1992 Through
------------------------------- September 30,
2007 2006 2007
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH $ (412,973) 650,514 $ 238,322
CASH AT BEGINNING OF PERIOD 651,295 4,069 --
-------------- -------------- --------------
CASH AT END OF PERIOD $ 238,322 $ 654,583 $ 238,322
============== ============== ==============
CASH PAID FOR:
Interest $ -- $ -- $ 16,488
Income taxes $ -- $ -- $ --
NON-CASH FINANCING ACTIVITIES
Value of common stock, warrants, options and
discounts on equity instruments issued for services $ -- $ -- $ 7,962,847
Equity instruments issued for deferred consulting
expense/asset acquisition $ -- $ -- $ 740,000
Common stock issued for recapitalization $ -- $ -- $ 2,761,773
Common stock issued for conversion of debt $ -- $ -- $ 2,963,511
Acquisition of licenses through license agreement
Payable $ -- $ -- $ 6,940,000
Warrants granted in conjunction with debt instruments $ -- $ -- $ 3,261,386
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
OPC LIQUIDATION CORPORATION
(Formerly Ocean Power Corporation and Subsidiaries)
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
September 30, 2007
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited 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 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 consolidated financial
statements be read in conjunction with the Company's most recent audited
financial statements and notes thereto included in its December 31, 2006
Annual Report on Form 10-KSB. Operating results for the nine months ended
September 30, 2007 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2007.
On December 1, 2002, the Company filed a voluntary petition under Chapter
11 of the bankruptcy code with the United States Bankruptcy Court Southern
District of New York. See Note 5 for the discussion regarding the
bankruptcy filing.
On March 1, 2002, due to non-payment of applicable taxes the Company's
original charter became inoperative and void. On October 25, 2007, the
Company filed a certificate of renewal and revival of its charter in the
state of Delaware. During the period from March 1, 2002 to October 25,
2007, the name Ocean Power was obtained by an unrelated entity upon proper
filing with the State of Delaware. As such, as part of the Company's
renewal and revival of its charter, the Company changed its name from
Ocean Power Corporation to OPC Liquidation Corporation.
NOTE 2 - ACCRUED EXPENSES
The Company's accrued expenses are comprised of the following items:
September 30,
2007
-------------
(Unaudited)
Accrued payroll taxes payable $ 60,266
Accrued interest payable - payroll 52,717
Accrued payroll tax penalty 98,845
Accrued taxes payable 277,624
Accrued payroll payable 2,103,656
Aquamax/Keeran license fee payable 3,600,000
Accrued STM license fee payable 2,000,000
Due to third parties 35,550
Accrued legal settlement - Mchargue 66,683
Accrued interest payable 1,359,040
Accrued contingency for additional post petition claims 222,411
-------------
Total $ 9,876,792
=============
NOTE 3 - GOING CONCERN
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern which contemplates the
realization of assets and liquidation of liabilities in the normal course
of business. The Company has had limited activities since inception and is
considered a development stage company because it has no operating
revenues, and planned principal operations have not yet commenced.
7
OPC LIQUIDATION CORPORATION
(Formerly Ocean Power Corporation and Subsidiaries)
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
September 30, 2007
NOTE 3 - GOING CONCERN (Continued)
The Company has incurred losses from its inception through September 30,
2007 of approximately $57,747,082. The Company does not have an
established source of funds sufficient to cover its operating costs, has a
working capital deficit of approximately $22,016,000, has relied
exclusively on debt and equity financing. Additionally the Company's
wholly-owned subsidiary Sigma was forced into bankruptcy because of
non-payment of employee salaries. Accordingly, there is substantial doubt
about its ability to continue as a going concern.
In October of 2006, the Company signed a term sheet with a company to
sponsor a plan of reorganization. Prior to confirmation of the Chapter 11
plan of reorganization, the plan sponsor will identify a merger candidate
to be merged into the Company. Before the merger can take place, the
Company is required to bring all of its financial, tax and SEC filings
current from the last filing date of 6/30/02. Pursuant to orders of the
United States Bankruptcy Court for the Southern District of New York, the
Company has engaged accountants, auditors and SEC counsel to complete this
task. Under the terms of the proposed plan, creditors of the Company will
receive a cash payment and stock consideration in the new merged entity.
The aforementioned consideration will be distributed to creditors of the
Company under the plan of reorganization.
The ability of the Company to continue as a going concern is dependent
upon its ability to successfully accomplish the plan described in the
preceding paragraph and eventually attain profitable operations. The
accompanying consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue
as a going concern.
NOTE 4 - DILUTIVE INSTRUMENTS
a. Stock Options
The Company had outstanding stock options to purchase 87,132 shares of the
Company's common stock to non-employees as of September 30, 2007. These
options expire in January 2012.
The following table summarizes information about employee stock options
outstanding at September 30, 2007:
Number of Weighted
Options Average Weighted Number of
Outstanding Remaining Average Exercisable at
Exercise September 30, Contractual Exercise September 30,
Price 2007 Life Price 2007
-------------- -------------- -------------- -------------- --------------
$ 1.00 3,007,456 4.25 years $ 1.00 3,007,456
$ 0.05 387,694 4.75 years $ 0.05 387,694
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for awards under
such plan consistent with the method of FASB Statement 123, "Accounting
for Stock-Based Compensation," the Company's net income (loss) and
earnings (loss) per share would have been reduced to the pro forma amounts
indicated below:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net income (loss) as reported $ (73,591) $ (34,590) $ (340,538) $ (105,735)
Proforma (73,591) (34,590) (340,538) (105,735)
Basic and diluted income (loss)
per share as reported (0.00) (0.00) (0.01) (0.00)
Pro forma (0.00) (0.00) (0.01) (0.00)
8
OPC LIQUIDATION CORPORATION
(Formerly Ocean Power Corporation and Subsidiaries)
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
September 30, 2007
NOTE 4 - DILUTIVE INSTRUMENTS (Continued)
There were no stock options granted during the nine months ended September
30, 2007.
b. Warrants
A summary of the Company's outstanding warrants as of September 30, 2007,
and changes during the nine months then ended is presented below:
Weighted
Average
Exercise
Shares Price
----------- -----------
Outstanding, December 31, 2006 3,554,944 $ 0.74
Granted -- --
Expired/Cancelled (3,554,944) (0.74)
Exercised -- --
----------- -----------
Outstanding, September 30, 2007 -- $ --
=========== ===========
Exercisable, September 30, 2007 -- $ --
=========== ===========
NOTE 5 - BANKRUPTCY
In September 2002, the Company was without sufficient capital to continue
to operate and had been unable to identify sources of additional
financing. The Board of Directors of the Company was concerned that a
sudden cessation of operations would not provide the best means to
maximize asset values. Therefore, at an October 3, 2002 meeting of the
Company's Board of Directors, the Board approved a resolution to commence
negotiations with the Company's secured creditors, Algonquin Capital
Management, L.L.C. and Hibernia Capital Management, L.L.C., to commence a
voluntary bankruptcy filing under chapter 11 of the Bankruptcy Code and
immediately thereafter a sale of the Company's assets pursuant to section
363 of the Bankruptcy Code.
The Company has a history of being financed primarily by raising capital
through private placements of its stock and/or loans from third parties.
The proceeds from the financing have been used to develop the Company's
technologies, pursue acquisitions and make strategic alliances and pay
operating costs. Over the past twelve months, the Company has endeavored
to stem severe cash flow shortages through, among other things, workforce
and overhead reductions, and the consolidation of its business operations.
Due to persistent cash flow shortages the Company terminated substantially
all of its employees. As a result of a confluence of events, including a
general contraction of available financing from capital markets and the
recent bankruptcy in Norway of Sigma Elektroteknisk, AS, a wholly owned
subsidiary, at a Special Meeting of the Board of Directors on November 27,
2002, the Board unanimously consented to authorizing the Company to file a
voluntary petition under Chapter 11 of the Bankruptcy Code.
On December 1, 2002, the Company filed a voluntary petition under Chapter
11 of the bankruptcy Code with the United States Bankruptcy Court Southern
District of New York. On December 16, 2002, the United States Trustee
appointed a creditors' committee pursuant to section 1102(a) of the
Bankruptcy Code (the "Committee").
Simultaneously with filing the Chapter 11 petition, the Company filed an
emergency motion to authorize it to obtain loans and advances under a
Debtor-In-Possession Loan Agreement with Algonquin Capital Management,
L.L.C. in order to continue operations so that the Company could attempt
to maximize the value of its assets. The Bankruptcy Court entered an
9
OPC LIQUIDATION CORPORATION
(Formerly Ocean Power Corporation and Subsidiaries)
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
September 30, 2007
NOTE 5 - BANKRUPTCY (Continued)
interim order approving the financing on December 5, 2002 and a final
order was entered on December 20, 2002. In addition, the Company filed a
motion in the bankruptcy case to approve the proposed sale of
substantially all of its assets to Algonquin Capital Management, L.L.C.
and Hibernia Capital Management, L.L.C., subject to higher and better
offers. By order dated February 6, 2003, the Bankruptcy Court authorized
the asset sale agreement with Algonquin Capital Management L.L.C. and
Hibernia Capital Management L.L.C. as modified by the Creditor Settlement
Agreement and assumption and assignment of certain executory contracts,
licenses and intellectual property rights for a credit bid of $2,000,000.
As part of the Creditor Settlement Agreement, Algonquin Capital Management
L.L.C. and Hibernia Capital Management L.L.C. reconveyed to the bankruptcy
estate a 60% ownership in the Water Assets of the Company. The Bill of
Sale consummating the sale was signed on February 19, 2003. During
September 2003, an additional $80,000 was paid to the Company by PowerPlay
Energy pursuant to the creditor settlement agreement.
Having sold its assets and ceased operations, the Company was not in a
financial position to support the on-going operations needed to develop
the Water Assets. On May 20, 2003, the Bankruptcy Court approved the sale
of the Company's interest in the Water Assets to Oases Desalination
International, Ltd. in exchange for their covenant to commercialize those
assets and make certain royalty payments. Since that time, and although
they have made certain minimal payments, Oases has been in default.
Subsequently, Oases Desalination International, Ltd. and ReEnergy Group
entered into an asset purchase agreement in which Oases Desalination
International, Ltd. would sell all of its assets, including the Water
Assets, to ReEnergy Group. Because Oases Desalination International, Ltd.
is in default with the Company and has not paid for the Water Assets,
Oases Desalination International, Ltd. and Renergy Group sought the
Company's consent wherein ReEnergy Group would directly purchase the Water
Assets from the Company. After significant negotiations, the Creditors'
Committee, Oases Desalination International, Ltd. and ReEnergy Group
entered into the Consent Agreement, in order to, among other things,
provide the Company's consent to transfer the Water Assets to ReEnergy
Group for a modified consideration of $750,000 for the Water Assets. On
October 26, 2005, an application was filed with the Bankruptcy Court to
approve this arrangement and the arrangement was approved by order dated
November 16, 2005. The Company has received all of the funds in this
transaction which are being held in an account maintained by bankruptcy
counsel for the Committee.
In October of 2006, the Company signed a term sheet with Trinad Capital
Master Fund Ltd. (the Sponsor) to sponsor a plan of reorganization. Prior
to confirmation of the Chapter 11 plan of reorganization, the Sponsor will
identify a merger candidate to be merged into the Company. The Sponsor is
currently in negotiations with NorthStar Systems International, Inc. as
the potential merger candidate. Before the merger can take place, the
Company is required to bring all of its financial, tax and SEC filings
current from the last filing date of June 30, 2002. Pursuant to orders of
the United States Bankruptcy Court for the Southern District of New York,
the Company has engaged accountants, auditors and SEC counsel to complete
this task. Under the terms of the proposed plan, creditors of the Company
will receive a pro rata cash payment and stock consideration in the new
merged entity. The aforementioned consideration will be distributed to
creditors of the Company under the proposed plan of reorganization.
In January 2008, the Company and the Official Committee of Unsecured
Creditors jointly filed a proposed plan of reorganization and its related
disclosure statement with the United States Bankruptcy Court for the
Southern District of New York. The plan is subject to further reviews and
hearings prior to confirmation.
NOTE 6 - SALE OF ASSETS
During the six months ending June 30, 2003, the Company filed a motion in
the bankruptcy case to approve the proposed sale of substantially all of
its assets to Algonquin Capital Management, L.L.C. and Hibernia Capital
Management, L.L.C., subject to higher and better offers. By order dated
February 6, 2003, the Bankruptcy Court authorized the asset sale agreement
10
OPC LIQUIDATION CORPORATION
(Formerly Ocean Power Corporation and Subsidiaries)
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
September 30, 2007
NOTE 6 - SALE OF ASSETS (Continued)
with Algonquin Capital Management L.L.C. and Hibernia Capital Management
L.L.C. as modified by the Creditor Settlement Agreement and assumption and
assignment of certain executory contracts, licenses and intellectual
property rights for a credit bid of $2,000,000. As part of the Creditor
Settlement Agreement, Algonquin Capital Management L.L.C. and Hibernia
Capital Management L.L.C. reconveyed to the bankruptcy estate a 60%
ownership in the Water Assets of the Company. The Bill of Sale
consummating the sale was signed on February 19, 2003. As a result of this
asset sale the Company recognized a gain on sale of assets in the amount
of $1,723,486. The Company had no basis in the water assets prior to the
original sale and therefore recognized no gain on the subsequent return of
those assets.
During the quarter ended December 31, 2005, the Company sold its ownership
interest in the water assets pursuant to an order dated November 16, 2005,
by the United States Bankruptcy Court for the Southern District of New
York. As consideration for this ownership interest the Company received
total cash proceeds of $750,000 paid in three installments. The first two
installments were made prior to December 31, 2005, and totaled $100,000.
The remaining $650,000 was recorded as a receivable balance at December
31, 2005, and was subsequently received during January 2006.
NOTE 7 - DEBTOR-IN-POSSESSION FINANCING
During the three months ending December 31, 2002, the Company received
$100,000 from the issuance of notes and advances pursuant to a
debtor-in-possession financing facility, approved pursuant to an order by
the United States Bankruptcy Court for the Southern District of New York.
The applicable interest rate was 15%.
During the six months ending June 30, 2003, the Company received $136,818
from the issuance of notes and advances pursuant to a debtor-in-possession
financing facility, approved pursuant to an order by the United States
Bankruptcy Court for the Southern District of New York. The applicable
interest rate was 15%.
During August 2007 the Company entered into a settlement agreement in
connection with the debtor-in-possession financing whereby the total
balance of principal and accrued interest was settled for a one time
payment of $380,000. As a result of the settlement the Company recognized
a gain on settlement of debt of approximately $21,700.
11
Item 2. Management's Discussion and Analysis of Results of Operations
Readers should refer to the description of the Company's bankruptcy case (the
"Bankruptcy Case") described in the Notes to the Financial Statements included
in Item 1 of this Form 10-QSB and in the Company's Form 10-KSB for the annual
period ended December 31, 2006.
Three Month Periods Ended September 30, 2007 and 2006
- -----------------------------------------------------
The business of the Company during the quarter ended September 30, 2007 included
only its consideration of various plan of reorganization opportunities and
incurring administrative expenses in connection with the Bankruptcy Case, e.g.,
related to legal, accounting and administrative activities. There were no
revenue-generating activities. The Company has had no employees since 2003. The
administrative activities of the Company are performed by outside consultants
and advisors. Direct administrative expenses of the Company totaled $95,130 and
$29,763 for the three-month periods ended September 30, 2007 and 2006,
respectively. The increase in the current period compared to the same period in
the prior year is due primarily to legal, auditing and consulting fees as the
Company attempts to complete and exit bankruptcy and bring its filings current
with the SEC.
Nine Month Periods Ended September 30, 2007 and 2006
- ----------------------------------------------------
The business of the Company during the nine months ended September 30, 2007
included only its consideration of various plan of reorganization opportunities
and incurring administrative expenses in connection with the Bankruptcy Case,
e.g., related to legal, accounting and administrative activities. There were no
revenue-generating activities. The Company has had no employees since 2003. The
administrative activities of the Company are performed by outside consultants
and advisors. Direct administrative expenses of the Company totaled $352,809 and
$88,982 for the nine-month periods ended September 30, 2007 and 2006,
respectively. The increase in the current period compared to the same period in
the prior year is due primarily to legal, auditing and consulting fees as the
Company attempts to complete and exit bankruptcy and bring its filings current
with the SEC.
Liquidity and Capital Resources
- -------------------------------
Primary sources of liquidity since the Company ceased operations have been cash
balances that have been used to pay administrative expenses. Operating expenses
of the Company have been funded with available cash retained from the two asset
sales effected as part of the Bankruptcy Case. As of the date of the filing of
this Form 10-QSB with the SEC, cash totals approximately $227,210. Based on such
balance and management's forecast of activity levels during the period that it
may remain without operations, the Company is uncertain as to whether the
present cash balance will be sufficient to pay its current liabilities and its
administrative expenses as such expenses become due; provided that, if the Plan
is confirmed, the Company believes that the present cash balance will be
sufficient to pay its current liabilities and its administrative expenses as
such expenses become due.
Uncertainties Relating to Forward Looking Statements
- ----------------------------------------------------
"Item 2. Management's Discussion and Analysis or Plan of Operation" and other
parts of this Form 10-QSB contain certain "forward-looking statements" within
the meaning of the Securities Act of 1934, as amended. While the Company
believes any forward-looking statements it has made are reasonable, actual
results could differ materially since the statements are based on current
management expectations and are subject to risks and uncertainties. These risks
and uncertainties include, but are not limited, to the following:
o There can be no assurance that the plan of reorganization filed with
the United States Bankruptcy Court for the Southern District of New
York ("Bankruptcy Court") on January 15, 2008, or any other plan of
reorganization, will be approved by the Bankruptcy Court and
effected.
o There can be no assurance that Trinad Capital Master Fund Ltd. (the
"Plan Sponsor") will reach agreement on definitive documentation for
a merger with NorthStar Systems International Inc. ("NorthStar"), or
any other potential merger candidate.
o Even if a plan of reorganization is approved by the Bankruptcy Court
and effected, there can be no assurance as to the terms of any such
plan, including without limitation as to the distributions, if any,
to be made to existing creditors and stockholders of the Company.
12
o The Plan Sponsor may withdraw at any time prior to confirmation of a
plan of reorganization, including without limitation, due to
unsatisfactory results of its due diligence on NorthStar. In such
event, the Company may substitute the Plan Sponsor with another
person or entity offering to purchase stock in the newly merged
entity under the plan of reorganization on terms and conditions that
may not be the same, or as economically favorable to the Company's
estate, as those are being offered by the Plan Sponsor. In such
event, the recovery for unsecured creditors would likely be
dramatically reduced.
o No public market exists for stock in the merged entity, and it is
not anticipated that any will necessarily develop in the foreseeable
future. Therefore, notwithstanding the legal ability to trade such
stock, any recipient thereof should expect that it might have to
hold the stock for an indefinite period of time.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our principal executive officer and
principal financial officer, has evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by this quarterly report. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that these disclosure controls and procedures are effective and
designed to ensure that the information required to be disclosed in our reports
filed or submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the requisite time periods.
(b) Changes in internal controls.
There was no change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) identified in connection with the evaluation of our internal control
performed during the quarter ended September 30, 2007 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits
Exhibits filed herewith are set forth in the Index to Exhibits and are
incorporated herein by reference.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
/s/ MICHAEL HOPPER
- ---------------------------
Name: Michael Hopper
Title: Authorized Signatory
Date: January 31, 2008
13
INDEX TO EXHIBITS
Exhibit Description of Exhibit
- ------- ----------------------
Number
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31.01 Certification pursuant to 15 U.S.C. 78m(a) or 78o(d) (Section 302 of
the Sarbanes Oxley Act of 2002).**
32.01 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.**
** Filed herewith.