FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal quarter ended June 30, 2001
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _____ to _____
Commission file number 000-29669
OnLine Power Supply, Inc.
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(Exact Name of Company as Specified in its Charter)
Nevada 84-1176494
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
8100 South Akron, # 308 Englewood, Colorado 80112
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(Address of principal executive offices) (Zip Code)
Company's telephone Number: (303) 741-5641
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Former Address through February 28, 2001:
6909 South Holly Circle #200, Englewood, Co 80112
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(Former name, former address and former
fiscal year, if changed since last report)
Check whether the Company: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Company was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. YES X NO
--- ---
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 2001
- ---------------------------------- ------------------------------------
Common stock, $.0001 par value 21,243,155 Shares
1
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Except for historic financial information, all of the information that is
contained in this Form 10- QSB is comprised of forward-looking statements within
the meaning of the Securities and Exchange Act of 1934. Specifically, all
statements in the report, other than historical facts, regarding our financial
position, business strategy, and plans for future operations are
forward-looking. These statements are based on beliefs of management and are
subject to known and unknown risks. These risks involve present and future
economic conditions, market conditions, financing, litigation and other
potentially threatening business influences, all of which may change and produce
risks and results very different than those now affecting us. The words "
anticipate", "believe", "estimate", "expect", "will", "may", "continue",
"intend", "could" and "should" or other words and phrases similar to these are
intended to caution the reader of the forward-looking nature of their use.
Statements containing these words should be considered "cautionary".
Management's statements in this report are based on the most accurate assessment
of the risks associated with the business today; however, certain facts and
assumptions may not be realized and the actual operating results may prove to be
different than expected. Although we believe our assumptions are reasonable, we
are qualifying all written statements attributed to management's estimates as
cautionary and forward-looking and accordingly expressly qualify their accuracy
pending substantial realization of the underlying estimates, conditions and
assumptions.
2
OnLine Power Supply, Inc.
Index
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Balance Sheets June 30, 2001 and December 31, 2000........4-5
Condensed Statements of Operations - Three and Six Months Ended
June 30, 2001 and June 30, 2000.......................................6
Condensed Statements of Cash Flows - Six Months Ended
June 30, 2001 and June 30, 2000.......................................7
Notes to Condensed Financial Statements............................8-10
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................10-13
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities ...............................................14
ITEM 4. Submission of Matter to a Vote of Shareholders.......................14
ITEM 6. Exhibits and Reports on Form 8-K.....................................14
Signatures...........................................................15
3
OnLine Power Supply, Inc.
Condensed Balance Sheets
June 30, December 31,
2001 2000
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(unaudited)
Assets
Current assets
Cash and cash equivalents $5,294,473 $3,181,728
Certificates of deposit 150,000 650,000
Short term investments -- 5,067,156
Accounts receivable, net 245,770 29,819
Accrued interest 23,793 50,239
Receivable from officers 103,780 40,050
Inventory, at lower of cost or market 141,283 79,643
Prepaid expenses 200,523 128,184
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Total current assets 6,159,622 9,226,819
Property and intangibles, net of depreciation and
amortization, and other assets
Property and equipment, net 1,033,647 434,437
Equipment under capital leases, net 64,571 72,976
Leasehold improvements, net 102,119 --
Goodwill, net 78,538 104,718
Acquired technology, net 38,220 50,960
Patents, net 68,546 58,582
Other assets -- 18,114
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Total property and other assets 1,385,641 739,787
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Total assets $7,545,263 $9,966,606
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OnLine Power Supply, Inc.
Condensed Balance Sheets (Continued)
June 30, December 31,
2001 2000
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(unaudited)
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 542,096 $ 379,836
Accrued interest 19,063 19,063
Capital lease obligations, current maturity 33,769 31,212
Officer's retirement liability 27,000 108,000
Notes payable, current maturities 20,593 19,840
Accrued liabilities 30,000 --
Other 194,524 52,650
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Total current liabilities 867,045 610,601
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Long-term liabilities
Capital lease obligations, less current maturities 15,721 33,329
Note payable, less current maturities 12,738 23,226
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Total long term liabilities 28,459 56,555
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Total liabilities 895,504 667,156
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Shareholders' equity
Preferred stock, $.0001 par value; 1,000,000 shares
authorized 2,800 shares issued and outstanding -- --
Common stock; $.0001 par value; 100,000,000
shares authorized; 21,243,155 shares issued
and outstanding 2,124 2,124
Stock option notes receivable (83,127) (83,127)
Additional paid-in capital 29,342,883 29,277,729
Accumulated (deficit) (22,612,121) (19,897,276)
------------ ------------
Total shareholders' equity 6,649,759 9,299,450
------------ ------------
Total liabilities and shareholders' equity $ 7,545,263 $ 9,966,606
============ ============
5
OnLine Power Supply, Inc.
Unaudited Condensed Statement of Operations
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, 2001 June 30, 2001 June 30, 2000 June 30, 2000
------------- ------------- ------------- -------------
Revenue $ 746,837 $ 949,240 $ 15,677 $ 28,111
Cost of Revenue 861,919 1,076,784 6,077 13,529
------------ ------------ ------------ ------------
Gross profit (loss) (115,082) (127,544) 9,600 14,582
------------ ------------ ------------ ------------
Operating expenses:
Research and development 544,538 1,009,886 315,059 576,679
Sales and marketing 311,081 547,113 89,414 142,627
General and administrative 607,307 1,233,810 570,683 1,142,345
------------ ------------ ------------ ------------
Total operating expenses 1,462,926 2,790,809 975,156 1,861,651
------------ ------------ ------------ ------------
(Loss) from operations (1,578,008) (2,918,353) (965,556) (1,847,069)
Interest & Investment Income 70,033 216,768 129,771 225,547
Interest (expense) (6,211) (13,260) (10,614) (23,617)
------------ ------------ ------------ ------------
Net (loss) $ (1,514,186) $ (2,714,845) $ (846,399) $ (1,645,139)
============ ============ ============ ============
Net loss per common share $ (.07) $ (.13) $ (.05) $ (.09)
============ ============ ============ ============
Weighted average shares
outstanding 21,243,155 21,243,155 17,782,490 16,955,337
============ ============ ============ ============
6
OnLine Power Supply, Inc.
Unaudited Condensed Statements of Cash Flows
For the Six Months Ended June 30,
---------------------------------
2001 2000
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Cash flows from operating activities
Net (Loss) $(2,714,845) $(1,645,139)
Adjustments to reconcile net loss to net cash:
Depreciation and amortization 157,788 89,333
Stock Based compensation 65,153 129,258
Options issued for services -- 63,783
Common stock issues for services -- 22,100
Impairment loss on fixed assets -- 7,540
Changes in certain assets and liabilities
Receivables, inventory and other current assets (369,100) (383,286)
Accounts payable and other current liabilities 253,134 (83,105)
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Net cash provided by (used in) operating activities (2,607,870) (1,799,516)
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Cash flows from investing activities
Payment of leasehold improvements (102,903) --
Purchases of equipment (703,316) (176,681)
Payments to acquire patent (15,536) (5,992)
Sale (purchases) of certificates of deposit 500,000 (50,000)
Sale (purchase) investments 5,057,156 (5,907,719)
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Net cash provided by (used in) investing activities 4,745,401 (6,140,392)
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Cash flows from financing activities
Proceeds from sale of stock -- 8,323,125
Payments for offering costs -- (960,074)
Payments on capital leases (15,051) (13,115)
Payments on line of credit -- (731)
Proceeds from (repayment of) long term debt (9,735) 52,446
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Net cash provided by (used in) financing activities (24,786) 7,401,651
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Net increase (decrease) in cash 2,112,745 (538,257)
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Cash and cash equivalents- beginning of period 3,181,728 1,941,367
----------- -----------
Cash and cash equivalents- end of period $ 5,294,473 $ 1,403,110
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest during the six months ended June 30, 2001 and June 30,
2000 was $13,260 and $23,617 respectively.
7
ONLINE POWER SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
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Basis of Presentation
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In the opinion of management, the accompanying balance sheets and related
interim statements of income, cash flows and shareholders' equity include all
adjustments, consisting only of normal recurring items, necessary for their fair
presentation in conformity with U.S. generally accepted accounting principles.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. Actual results may differ from these estimates and assumptions and
interim results are not necessarily indicative of the results for the full year.
Annual Versus Interim Statements
- --------------------------------
The interim financial statements are presented in accordance with the
requirements of SEC Form 10-QSB and therefore may not include all of the
disclosures made in the SEC Form 10-KSB annual report filing. These financial
statements should be read in conjunction with Management's Discussion included
in the SEC Form 10- QSB and the audited financial statements and notes included
in the 2000 SEC Form 10-KSB.
NOTE 2 - SHAREHOLDERS' EQUITY
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Qualified Stock Option Plan
- ---------------------------
The shareholders approved a Qualified Incentive Stock Option Plan on December 7,
1999. The purpose for the plan is to have the ability to offer stock incentives
to key employees as a reward for past performance and to attract the
best-qualified new employees by offering ownership as a means of reward and
retention. A total of 3,500,000 common shares have been set aside in this plan
to provide for stock options to participants. During this quarter, 97,000
qualified stock options were granted to several employees to reward their past
performance.
Non Qualified Options:
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During this quarter, 170,000 non-qualified stock options were granted to five
employees to reward their past performance, including 25,000 options granted to
the Chief Financial Officer. The options vest over three years, were awarded at
the market price of $ 3.50 per share and will expire at the end of ten years.
Stock Option Plan for Non-Executive Directors
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The Board of Directors adopted a Directors' Non-Qualified Stock Option Plan in
August 2000 to provide for stock options to non-executive members serving on the
Board. The plan will be used to attract and retain the most qualified candidates
by issuing them stock options in exchange for their service on the Board.
300,000 shares of common stock are reserved for issuance on exercise of options;
options on 30,000 shares have been issued to the three non-executive directors.
NOTE 3-STOCK OPTION NOTES RECEIVABLE
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The Company's Incentive Stock Option Plan (ISOP) administrators allow (beginning
October 2000) employee ISOP participants to borrow funds from the Company to
option their common stock. The advances are evidenced by recourse notes from the
employee to the Company bearing interest at 8% per annum. The outstanding stock
option exercise notes payable to the Company at December 31, 2000 and June 30,
2001 is $83,127.
8
NOTE 4 - INCOME TAXES
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A reconciliation of the US statutory federal income tax rate to the effective
rate follows:
June30, June 30,
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2001 2000
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U.S. statutory federal rate 34.00% 34.00%
State income tax rate, net of federal benefit 3.00% 3.00%
Provision for bad debts -- --
Net operating loss for which no tax benefit
is currently available (37.00%) (37.00%)
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-- % -- %
======= ========
Deferred taxes consisted of:
June 30, 2001 June 30, 2000
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Deferred tax asset as a result of a net operating
tax loss carry-forward (beginning 1996) $ 2,992,000 $ 1,748,290
Valuation allowance (2,992,000) (1,748,290)
Net deferred taxes $ -- $ --
The valuation allowance offsets the deferred tax assets for which there is no
assurance of recovery. The net operating losses prior to 1996 have been lost due
to the change of business and change of ownership. The losses since 1996 may be
limited because of the change of ownership during 2000. The available NOL is
based on the estimated time during the year that the greater than 50% ownership
change occurred, thereby, resulting in the loss becoming partially limited in
its future use.
NOTE 5 - CONTINGENCIES AND COMMITMENTS
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Office and Laboratory Space
- ---------------------------
The Company has leased their office-laboratory space in the Highland Park
complex in Englewood, Colorado through February 28, 2006. Future minimum rental
payments payable under the office lease are $465,304 at $8,309 per month until
February, 2006.
Performance Options
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As part of their executive employment agreements, two officers (including the
retired CEO) shall become fully vested to receive options to purchase 150,000
shares (three hundred thousand in total) of the Company's common stock upon
achieving the following performance goals: If the Company's consolidated gross
revenues exceed $9,000,000 for the year ended December 31, 2001, the executives
vest in the options; if this event does not occur, the options will not be
granted and will expire.
9
Manufacturing
- -------------
The Company has entered into an arrangement with Saturn Electronics and
Engineering Inc. for the turnkey manufacture of the initial power conversion
units developed by the Company. Saturn may, if asked by the Company, internally
finance certain costs normally associated with the production ramp-up process
and subsequently be reimbursed out of the proceeds of payments for the orders
when received by the Company. Subject to certain terms and conditions, Saturn
has the exclusive right to manufacture all of the products developed by OnLine
through the end of their first product development program.
NOTE 6- LITIGATION
- ------------------
The Company has settled and satisfied all claims that have arisen from a prior
business endeavor except for one known as Max Music (claiming $390,000)
currently being appealed by the bankruptcy trustee for the plaintiff. It was
litigated with the Magistrate's ruling given in favor of the Company in 1999.
The ruling is now being reviewed by the Federal District Court and the final
outcome is yet to be decided. Management has been advised by counsel that it is
likely the Company will prevail. However, as with all litigation results, the
actual outcome will not be known until the process is completed; in the
meantime, management believes that the eventual outcome will not have any
adverse financial effect on the Company.
NOTE 7 - DEVELOPMENTAL TECHNOLOGY RISKS AND REVENUE GENERATION
- --------------------------------------------------------------
The Company is dedicated to bringing its new, proprietary technology to market
that will compete favorably against existing technology for certain targeted
applications and customers. The Company is focusing on original equipment
manufacturer (OEM) customers for prospective sales during the balance of 2001
and has established a significant sales marketing budget to expedite the release
and introduction of the technology to these potential users. The technology
introduction process is complex and lengthy; however, initial orders are being
taken and production units were delivered in the first quarter 2001 to the first
customer. The Company has attracted numerous 2nd and 3rd tier type companies in
the United States, Canada and overseas that will lead to a strong
diversification of customers, industries and product applications However, we
are unable at this time to predict when net sales revenues will be adequate to
cover the overhead for the Company.
10
ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND ANALYSIS OF RESULTS
OF OPERATIONS
BUSINESS STRATEGY
The Company successfully released the PFC product late in 2000 to signify
the beginning of the operational phase of the Company following research and
development work leading to the patented technology that forms the basis for
several iterations of new power supply products.
Shortly, the Company expects to release a family of single output 48 volt
power supplies beginning with 500 watts, 750 watts and 1000 watts of DC output,
all incorporating the highly successful front-end PFC module allowing design
engineers much greater design flexibility. The initial interest shown by
potential customers indicates that OnLine Power Supply Inc. will have start up
orders after the product evaluation process is completed by the OEM engineers.
OnLine Power Supply Inc.'s goal is to lead the way in producing the newest
generation of 48-volt power supply products. The new 48-Volt product should
provide the power industry much needed advancements in the size, weight,
efficiency and reliability of power products that can keep pace with all of the
other changes affecting the way the power component is presently being viewed.
The core technology has been thoroughly validated and an intense focus on our
potential customer's design engineers is ongoing to introduce the design
flexibility and innovative uses to ultimately persuade them to "design in" our
products as a strategic component for their next generation OEM products.
RESULTS OF OPERATIONS
Revenues
- --------
Revenues during the second quarter were $ 746,837 consisting of sales of
the PFC unit for resale and evaluation; this represents an increase of $ 544,434
over the previous quarter and $ 731,160 over the same quarter a year ago. The
gross profit margin for the initial revenue stream has been adversely affected
by introductory (preferential) pricing parameters, but ongoing sales will be
formulated with more normal industry profit margins. The second quarter sales
resulted in a gross loss of $ 115,082 for the reasons mentioned above, but
profit margin improvement should occur throughout the rest of 2001 with more
sales and coupled with realization of the cost saving benefits due to the
relocation of the production line operation to Monterrey, Mexico in June, 2001.
Since the fourth quarter of 2000, significant sectors of the U.S and global
economies have experienced a sharp slowdown in growth. The resulting impact on
our customers and markets is unclear but may cause a slowdown in our sales for
the balance of 2001 and our internal expectations for 2002.
Operating Costs and Expenses
- ----------------------------
The quarter over quarter cost structure for general and administrative
expenses has increased from $570,683 in 2000 to $607,307 in 2001, mainly due to
the Company's move into expanded and improved facilities and increased support
costs of four additional staff members. The main corporate offices and lab
facility were relocated in March 2001 to a custom designed space over twice as
large as the former space. The growth caused the general operating costs for the
offices to increase, but not in proportion to the increased size of the Company.
New laboratory equipment, new computer capabilities and new voice and data
communications were incorporated into the design of the space to serve us
adequately for the foreseeable future.
11
Research and development costs have almost doubled from the second quarter
2000 to second quarter, 2001. The cost of operating the laboratory was $ 544,538
this quarter versus $ 315,059 last year. The overall research and development
program has been stepped up to finish the 48-volt product work and to continue
to answer the customer application requests for the PFC unit. Presently, the
Company is seeking additional technical staff at all skill levels to further
increase the work capacity of the new product development program. The
expectations are for the costs of operations of the laboratory to increase
moderately for the remainder of 2001 and into 2002 until we achieve the optimum
operational management level to support our goals.
Sales and marketing has been operating, since third quarter 2000, with the
short-term goal and commensurate funding level to attain the most rapid
introduction of the PFC technology to the most likely first users. As planned,
the cost to carry out this plan was $ 311,081 in this quarter as compared to $
89,414 for this comparable quarter last year. The major sales and marketing cost
components include: direct advertisements, direct mail correspondence, travel
and lodging, distributor training seminar costs, attendance at trade shows and
public relations type industry projects. Early results indicate that the focus
of the campaign has produced steady and acceptable rewards and should lead to
additional orders accordingly during the rest of 2001. Also evident is the
longer-term educational goal for the potential OEM customer to begin to think
about adaptation of the new technology into their long-term product planning
processes. A new product and new application idea translates into long lead
times for converting leads to orders; however, in many instances, the process is
well underway and evaluation units are being investigated for suitability by
many prospects at this time.
FINANCIAL CONDITION
When the Company was re-focused in 1999 and 2000 to new technology research
for the power supply industry, it also successfully raised $ 14.2 million of new
equity capital to build a solid financial foundation for forecasted growth. The
present cash position is $5,295,000 which is twelve months cash in the bank at
the current burn rate. All cash resources (except the checking account cash) are
currently invested in institutional money market accounts. The interest earnings
have been reduced quarter over quarter by the lowering of the interest rates and
the lowering of the amount of cash for investment due to the working capital
consumed to sustain the operations during this pre-production phase.
The current quick ratio (ability to pay bills on time) is 9.8 to 1.0 and
the overall current ratio is 7.1 to 1.0, both results indicating excellent
financial health at this time. The debt to equity ratio is .13 to 1.0 which is
superior to industry averages and indicates a near term comfort level pending
the expected creation of profitable operations sometime within the next twelve
months.
The Company has not incurred any new debt this quarter and has routinely
paid down all of its note and finance lease obligations pursuant to their agreed
upon terms over the past quater and six months. The obligation to pay retirement
benefits to the retired CEO has been reduce to $27,000 at the end of June 30,
2001 and will be completely paid off at August 31, 2001. Accounts payable have
increased $162,620 from the end of last year to the end of this quater due to
the amounts owing to Saturn Electronics and Engineering for the manufacture of
the PFC units and for the $225,000 in pre-production costs incurred to set up
the production line. All of our trade payables are paid in the normal course of
business and within pre-arranged credit terms; accounts payable will increase as
the amount of business increases from quarter to quarter.
Management has historically placed idle funds in cash equivalents, such as
liquid money market accounts, and investments, such as short term, high grade
commercial paper, to achieve the most earnings within a conservative investment
program. Consequently, the previous quarters show cash equivalents and short
term investments. During this quarter, all of the maturing commercial paper
investments were placed in money market
12
accounts; therefore, no short term investments are on the balance sheet at June
30, 2001 and a large increase of cash is now reported as cash equivalents.
Based on our current business plans and operating strategy, we believe that
the current working capital and borrowing capacity are sufficient to fund the
Company's working capital, capital expenditures and other normal cash
requirements for the next twelve months. However, with sustained growth and the
completion of the 48-volt development and the product release, the Company may
need to seek a combination of debt and additional equity capital to keep
operations at expected levels, while we seek enhanced revenues from the launch
of the next line of 48-volt power supplies early next year. All of the necessary
steps of the business plan are being more fully developed, including hiring new
engineers and new engineering technicians. In addition, a new purchasing agent
has been hired to develop central purchasing and a newly hired chief operating
officer is now implementing manufacturing company operating policies and
procedures.
The Company will reap the benefits of an estimated $ 8,000,000 net tax loss
carry forward which can be applied to any future tax liability once the Company
reaches profitability. The loss may be limited in its use by tax regulations and
may expire if not utilized, but still represents a significant potential
economic benefit in the form of cash saved against otherwise payable income tax
that would be due and payable.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On April 25, 2001 the Company adopted (by authority of its board of
directors) a shareholder rights plan ("poison pill"), by which all shareholders
of record on that date (and all future shareholders of record) received rights
to purchase preferred stock under certain conditions. The plan was filed as an
exhibit to the Company's Form 8-A registration of the purchase rights, which
Form 8-A was filed with the Securities and Exchange Commission on April 25,
2001. That Form 8-A is incorporated by reference into this Form 10-QSB report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
The annual meeting of the shareholders was held on June 21, 2001 and the
following items were approved by a majority vote of the shareholders:
(a) All current serving members of the board of directors were re-elected
for another one year term. Shares were voted on the re-election of
directors as follows:
FOR AGAINST ABSTAIN
Kris M. Budinger 12,455,019 327,598 1,206,340
Gary R. Fairhead 12,631,049 132,818 1,206,340
Ronald W. Mathewson 12,631,049 151,568 1,206,340
Thomas Glaza 12,649,799 132,818 1,206,340
(b) The authorized shares of common stock was increased from 50,000,000
shares to 100,000,000 shares, with 11,294,877 shares voted in favor,
2,545,760 shares voted against, and 148,320 shares abstaining.
13
(c) The appointment of the current audit firm (Ehrhardt Keefe Steiner &
Hottman) to serve as the audit firm for 2001 was ratified by
shareholder vote (13,657,744 shares in favor, 97,949 shares against,
and 233,264 shares abstaining).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. None
(b) Reports on Form 8-K. The Company did not file any reports on
Form 8-K during the quarter ended June 30, 2001.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
ONLINE POWER SUPPLY INC.
(Company)
Date: August 7, 2001 By: /s/ Kris Budinger
----------------------------------
KRIS BUDINGER,
CEO and President
Date: August 7, 2001 By: /s/ Richard L. Millspaugh
----------------------------------
RICHARD L. MILLSPAUGH,
Chief Financial Officer
15