NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 1- NATURE OF BUSINESS
Power Efficiency Corporation ("PEC"
or the "Company" or “we”), a Delaware Corporation, was formed in July 1994. Until 2012, the Company was in
the business of designing, developing, marketing and selling proprietary solid state electrical devices designed to reduce energy
consumption in alternating current induction motors. During such period of operations, the Company had one principal and proprietary
product called the three phase Motor Efficiency Controller, which was intended to be used in industrial and commercial applications,
such as rock crushers, granulators, and escalators. Additionally, during the period up to early 2012, the Company had developed
a digital single phase controller in preparation for working with Original Equipment Manufacturers to incorporate the technology
into their equipment.
In the spring of 2012 the then management
of the Company began winding down substantive operations and ceased all activities and sold or abandoned any remaining assets and
operations by the end of 2012.
The Company was a publicly reporting company
filing periodic reports with the Securities and Exchange Commission. On April 17, 2012, the Company filed a Form 15 with the SEC
to cease being a reporting company. At the time of the filing in April 2012, the Company had less than 200 shareholders of record
and little if, any assets.
Until current management gained control
of the Company in July 2015, the Company had no operations, did not incur any material liabilities and issued no additional securities.
In July 2015, current members of management
acquired a majority of the voting stock of the Company (through entities controlled by them) from the single majority shareholder
and commenced its plan to restart the operations of the Company in new business lines. The change of control and management occurred
on July 17, 2015, resulting in new management and a new Board of Directors. Management then commenced developing a new business
plan and operations in the business of the promotion, acquisition and development of battery energy storage systems and related
energy and power management services and businesses.
Since July 2015, management has been focused
on developing its business plan, of developing battery energy storage projects and energy storage systems and also commenced developing
relationships within the industry. The Company’s business plan is to originate, develop or own energy storage systems in
North America and may utilize different ownership structures for its projects; in certain cases, owning the projects and obtaining
financing; in other cases, developing joint ventures as majority or minority developers, or establishing projects to different
levels of development before selling the projects.
NOTE 2- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated
financial statements include the accounts of the Power Efficiency Corporation (“Company”) and its wholly owned subsidiary.
In the opinion of management all adjustments have been made, which include normal recurring adjustments necessary to present fairly
the consolidated financial statements. The accompanying financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the instructions to Article 10 of SEC Regulation S-X. Operating
results for the nine months ended September 30, 2016 are not necessarily indicative of the operating results for the full fiscal
year ending December 31, 2016. Certain information and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The
Company believes that the disclosures provided are adequate to make the information presented not misleading. These unaudited condensed
financial statements should be read in conjunction with the audited financial statements and related notes included in the Company's
Annual Report for the year ended December 31, 2015 on Form 10.
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 2- BASIS OF PRESENTATION (continued)
The Company filed a Form 10 with the Securities
and Exchange Commission on August 11, 2016 which became effective under the rules and regulations of the Securities and Exchange
Commission on October 10, 2016. The filing on Form 10 was made by the Company on a voluntary basis pursuant to Section 12(g) of
the Act. As of the date of effectiveness of the Form 10 and through the date of this filing, the Company is a shell company. Securities
Act Rule 405 and Exchange Act Rule 12b-2 define a shell company as a company, other than an asset-backed issuer, with no or nominal
operations; and either:
|
•
|
assets consisting of cash and cash equivalents; or
|
|
•
|
assets consisting of any amount of cash and cash equivalents
and nominal other assets.
|
On January 11, 2017, PEC filed an amendment
to its Amended and Restated Certificate of Incorporation to effectuate a reverse stock split (“Reverse Split”) on a
basis of each 15 shares of issued and outstanding shares of Common Stock representing 1 share of Common Stock. The Reverse Split
became effective on January 17, 2017. Except as stated otherwise, all shares numbers stated in this Form 10-Q for all periods inclusive
of December 31, 2015 reflect the post-split shares numbers of the 1 for 15 reverse stock split for its Common Stock, as well as
the conversion ratios for any issued and outstanding preferred stock.
NOTE 3- GOING CONCERN
These financial statements have been prepared
on a going concern basis, which implies the Company will continue to meet its obligations and continue its operations for the next
fiscal year. At September 30, 2016, the Company had a working capital deficiency of $276,966.
The financial statements do not include
any adjustments relating to the recoverability and classification of recorded asset amounts or the amount of liabilities that might
be necessary should the Company be unable to continue in existence.
Continuation of the Company as a going
concern is dependent upon achieving profitable operations or accessing sufficient operating capital. On July 17, 2015, the controlling
interest of the Company was purchased by members of management in a private transaction with the holder of the majority of voting
securities and new management commenced seeking and identifying and developing a line of business in the power energy management
sector to generate revenue and achieve profitability. However, there are no assurances that profitability will be achieved or that
sufficient capital will be raised to initiate such an operation and successfully implement the Company’s business plan. During
the two years since management has taken control of the Company, management has been working to identify potential projects and
sites on which to establish battery based or traditional generator systems. Although the Company does not presently have any battery
or generator systems in operation, management believes that its business plan and approach will result in successful systems which
will generate revenue for the Company.
The Company will be required to obtain
capital (whether through equity or debt or combination thereof) in substantial amounts in order to satisfy its working capital
needs and to develop projects as contemplated in its business plan and plan of operations. However, there are no assurances that
sufficient capital will be raised. If unable to obtain sufficient capital on reasonable terms, the Company would be forced to restructure,
file for bankruptcy or curtail or cease operations.
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 4- SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of Consolidation:
The accompanying consolidated financial
statements includes the accounts of Power Efficiency Corporation and its wholly owned subsidiary, Hillsborough Battery I LLC. The
subsidiary entity was established to serve as the legal entity for a battery system project to be located in Hillsborough, New
Jersey. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
may differ from those estimates. Actual results could differ from those estimates and the differences could be material.
Cash and Cash Equivalents:
The Company considers all highly-liquid
investments with maturities of three months or less when purchased to be cash equivalents.
Concentration of Credit Risk:
Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company places its cash
with high quality banking institutions. From time to time, the Company may maintain cash balances at certain institutions in excess
of the Federal Deposit Insurance Corporation limit.
Income Taxes:
Under ASC 740, “Income Taxes”,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and from net operating
loss carryovers. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when
it is more likely than not that some or all of the deferred tax assets will not be realized. As of September 30, 2016, there were
no deferred taxes from net operating loss carryovers as it is believed that the Corporation will not benefit from any deferred
tax benefits resulting from prior year net operating losses. The deferred tax asset of $5,584 at September 30, 2016 and $5,887
at December 31, 2015 is attributable to the future tax amortization of the organization costs.
Uncertain Tax Positions:
The Company has adopted FASB ASC 740-10-25,
Accounting for Uncertainty in Income Taxes. The Company is required to recognize, measure, classify, and disclose in the financial
statements uncertain tax positions taken or expected to be taken in the Company’s tax returns. Since tax matters are subject
to some degree of uncertainty, there can be no assurance that the Company’s tax returns will not be challenged by the taxing
authorities and that the Company will not be subject to additional tax, penalties, and interest as a result of such challenge.
The Company’s 2012 and subsequent years remain open for tax examination.
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 4- SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Accounting for Share Based Compensation:
The analysis and computation was performed
based on our adoption of ASC 718-10-25, which requires the recognition of the fair value of stock-based compensation. For the nine
months ended September 30. 2016 and 2015, we recognized $13,152 and $28,683, respectively, in share-based payments related to the
issuance of stock options and $480 and $6,432 for the three months ended September 30, 2016 and 2015, respectively. We recognized
no expense related to the issuance of warrants during the nine months or three months ended September 30, 2016 and 2015.
Advertising:
Advertising costs are expensed as incurred.
There were no advertising expenses for the nine and three months ended September 30, 2016 and 2015, respectively.
Research and Development:
Research and development expenditures are
charged to expense as incurred. There were no research and development expenses for the nine and three months ended September 30,
2016 and 2015, respectively.
Earnings Per Share:
Under the provisions of ASC 260, “Earnings
per Share,” basic loss per common share is computed by dividing net loss available to common shareholders by the weighted
average number of shares of common stock outstanding for the periods presented. Diluted net loss per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that would then share in the income of the Company. As of September 30, 2016, there
were options outstanding for the purchase of 26,666 shares of Common Stock which could potentially dilute future earnings per share.
No options were issued or exercised for the nine or three months ended September 30, 2016. All options which were outstanding as
of September 30, 2016 had expired as of December 31, 2016.
At September 30, 2016 the Company had outstanding:
an
aggregate of 472,002 shares of preferred stock issued and outstanding comprised of Classes B, C-1 and D preferred stock convertible
into an aggregate of 3,146,679 shares of Common Stock; and 28,886,843 shares of Common Stock at September 30, 2016.
At December 31, 2015, the Company had 26,420,177
shares of Common Stock issued and outstanding.
Fair Value of Financial Instruments:
The Financial Accounting Standards Board’s
ASC Topic 820, “Fair Value Measurements”, defines fair value, establishes a three-level valuation hierarchy for fair
value measurements and enhances disclosure requirements.
The three levels are defined as follows:
Level 1 – inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – inputs to the valuation
methodology included quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or
similar assets in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or
corroborated by observable market data.
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 4- SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Fair Value of Financial Instruments
(continued):
Level 3 – inputs to the valuation
methodology are unobservable.
The Company’s financial instruments,
classified as Level 1 within the fair value hierarchy, consist primarily of cash, deferred project costs, restricted deposits in
money market accounts, a note receivable from affiliate and accrued dividends payable and expenses. The carrying amount of such
financial instruments approximate their respective estimated fair value due to short term maturities and approximate market interest
rates of these instruments. The Company’s accrued dividends payable approximate the fair value of such instruments based
upon management’s best estimate of debt interest rates that would be available to the Company for financial arrangements
at September 30, 2016 and December 31, 2015.
Revenue Recognition:
The Company had no revenue during the nine
and three months ended September 30, 2016 and 2015. The Company’s business model provides that revenue will be derived from
payments to the Company as its battery storage systems generate revenue from electric market participants for the sale of electricity
into the market.
Recent Accounting Pronouncements:
A variety of proposed or otherwise potential
accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative
and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards
would be material to the consolidated financial statements of the Company.
NOTE 5- SHARE BASED COMPENSATION
As of September 30, 2016, there were options
outstanding for the purchase of 26,666 shares of Common Stock, with exercise prices ranging from $0.75 to $9.75 per share, all
of which were issued prior to 2012. All such previously issued options have expired. During the period from April 2012 to September
30, 2016, the Company did not issue any stock based options or other securities. There has been no active market for the Company's
Common Stock during the latest two fiscal years or during the nine and three months ended September 30, 2016.
In accordance with ASC 718, the Company
determines whether a share payment should be classified and accounted for as a liability award or equity award. All grants of share-based
payments to service providers classified as equity awards are recognized in the financial statements based on their grant date
fair values which are calculated using historical pricing. The Company has elected to recognize compensation expense based on the
criteria that the stock awards vest immediately on the issuance date. ASC 718 requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent period if actual forfeitures differ from initial estimates.
In computing
the impact, the fair value of each option is estimated on the date of grant based on the BlackScholes options-pricing model utilizing
certain assumptions for a risk-free interest rate; volatility; and expected remaining lives of the awards. The assumptions used
in calculating the fair value of share-based payment awards represent management's best estimates, but these estimates involve
inherent uncertainties and the application of management's judgment. As a result, if factors change and the Company uses different
assumptions, the Company's stock-based compensation expense could be materially
different in the future.
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 5- SHARE BASED COMPENSATION
(continued)
In addition, the Company is required to
estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company's
forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of
vested options as a percentage of total options outstanding. If the Company's actual forfeiture rate is materially different from
its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly
different from what we have recorded in the current period. The impact of applying ASC 718 approximated $13,152 in additional compensation
expense during the nine months ended September 30, 2016. Such amounts are included in expense on the statement of operations.
The Company adopted a new stock based compensation
plan in July, 2016 which provided for a reserve of 5 million shares of Common Stock (See Note 9).
In December, 2015 the Company authorized
the issuance of an aggregate of 1,651,266 shares of Common Stock to the following persons and entities for services (which shares
were not issued until June, 2016):
MCG Enterprises, Inc.
|
|
|
792,300
|
|
Becker & Poliakoff LLP
|
|
|
792,300
|
|
Steven A. Caputo
|
|
|
66,666
|
|
Total:
|
|
|
1,651,266
|
|
MCG Enterprises is an entity controlled
by the Company’s Chief Financial Officer. The issuance was for services provided to the Company, namely, making the chief
financial officer available to the Company in lieu of any salary or other compensation.
Becker & Poliakoff LLP is the Company’s
outside law firm, and one of its partners serves as Secretary of the Company.
Steven A. Caputo has provided legal services
to the Company with respect to the Hillsborough, NJ battery project, and is the brother of R. Scott Caputo, the Chief Operating
Officer and President.
In August 2016, the Company authorized
the issuance of, and issued, an aggregate of an additional 2,400,000 shares of restricted stock in consideration of services to
the following persons/entities:
Consultant – Energy Projects
|
|
|
666,667
|
|
Board services
|
|
|
66,667
|
|
Legal Services Law Firm - (Becker & Poliakoff LLP)
|
|
|
333,333
|
|
Chief Financial Officer services - (MCG Enterprises, Inc.)
|
|
|
333,333
|
|
General Advisory Services Consultant
|
|
|
1,000,000
|
|
Total:
|
|
|
2,400,000
|
|
In April, 2017, the Company issued an aggregate
of 4,500,000 options to two of its officers and a consultant with exercise prices ranging between $0.10 and $0.11 per share. In
January, 2017, the Company entered into a consulting agreement with a third party pursuant to which it agreed, subject to the conditions
contained in the agreement, to issue warrants to purchase up to 4,000,000 warrants for shares of common stock with an exercise
price of $0.01 per share. See Note 13, Subsequent Events.
NOTE 6- NET OPERATING LOSSES
As of September 30, 2016, the Company had
net operating losses (“NOLs”) of approximately $40,000,000 limited to approximately $1,200,000 under the provisions
of Section 382 of the Internal Revenue Code (see below). These amounts are available to be carried forward to offset future taxable
income. The carry forwards begin to expire during the year ended December 31, 2020. The Company has provided a full 100% valuation
allowance on the deferred tax assets at September 30, 2016 and December 31, 2015 to reduce such deferred income tax assets to zero
as it is management’s belief that realization of such amounts does not meet the criteria required by generally accepted accounting
principles.
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 6- NET OPERATING LOSSES (continued)
Management will review the valuation allowance
required periodically and make adjustments if warranted.
Under Section 382 of the Internal Revenue
Code of 1986, as amended (the “Code”), the utilization of net operating loss carry forwards is limited under the change
in stock ownership rules of the Code. As a result, NOLs prior to the changes of control in 2012 and July 2015 are limited. The
Company’s operating loss carry forwards are subject to these limitations. Future ownership changes could also further limit
the utilization of any net operating loss carry forwards as of that date.
NOTE 7- DEFERRED PROJECT COSTS
The Company incurred deferred project costs
aggregating the sum of $73,000 through September 30, 2016 related to two battery storage system projects. The costs incurred were
for the due diligence fees including consultants and application fees for both zoning and utility and local governments approval
of the projects. In light of the passage of time and subsequent events (See Note 8(d)) management has written off the project costs
in the amount of $73,000 at September 30, 2016 since the two projects will not be consummated. As of December 31, 2015, deferred
project costs were $50,538.
NOTE 8- COMMITMENTS AND CONTINGENCIES
(a) Management Agreement
During the period from 2012 until the change
of management and control completed in July 2015, the Company had a consulting arrangement with Northcoast Management, which was
engaged to provide management services to the Company, including provision of the services of its owner to serve as President of
the Company during this tenure at the Company. During the period from late 2012 to July 2015, the Company was either winding down
its operations or had ceased substantially all business activities other than maintaining its corporate existence. During the nine
months ended September 31, 2015, the Company made payments of $16,774 to Northcoast Management. The agreement with Northcoast Management
was terminated in September 2015.
(b) Employment Agreements
In October 2016, the Company entered into
formal employment agreements with the President and Chief Operating Officer and the Chief Executive Officer. The agreements have
a term commencing June 1, 2016 and ending May 31, 2019 (See Notes 13 (d) and (e) - Subsequent Events).
(c) Consulting/Employment Agreement
The Company entered into a consulting and
employment agreement with Mr. Jeffrey Lines in August 2016. As originally contemplated in the agreement, Mr. Lines was retained
on a consulting basis and had been serving as a consultant since July 2015. Under the terms of his arrangement with the Company,
Mr. Lines was to continue to serve as a consultant until the Company has obtained capital of at least $2,000,000 to employ him
on a full-time basis. Mr. Lines received total compensation of consulting fees of $14,580 during the year ended December 31, 2015
and $20,000 and $14,500 of fees during the nine and three month periods ended September 30, 2016. Mr. Lines also received 666,667
restricted shares of Common Stock under the 2016 Plan in August, 2016, the value of which ($10,000) is included in the compensation
amounts for the nine and three months ended September 30, 2016 (See Note 9). As a consultant, Mr. Lines was not required to devote
his full business time and efforts to the Company’s business. Under the original terms, assuming that Mr. Lines is employed
on a full-time basis, he will be entitled to participate on the same terms as other employees in the Company’s health and
other benefit plans. Additionally, the Company will pay him a base salary of $150,000 per year upon employment on a full-time basis.
Under the agreement at the time he is employed on a full-time basis as an employee, Mr. Lines will serve as Vice President –
Business Development. The term of employment will be one (1) year from the date employment on a full-time basis becomes effective.
In December 2017, the Company and Mr. Lines amended the agreement (See Note 13(j)
– Subsequent Events).
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 8- COMMITMENTS AND CONTINGENCIES
(continued)
(c) Consulting/Employment Agreement (continued)
To date, the Company has been unable to
obtain capital and therefore unable to employ Mr. Lines on a full time basis as originally contemplated at his expected base salary.
In April 2017, the Board of Directors approved the issuance of options to purchase 1,500,000 shares to Mr. Lines to reflect Mr.
Lines increased time spent on Company matters and his agreement to continue to make himself available to the Company on a consulting
basis in lieu of obtaining full time employment elsewhere. The options have an exercise price of $0.10 per share, vested immediately
and an exercise term of five years.
(d) Leases for Real Property
In connection
with a proposed battery storage project contemplated to be developed in Hillsborough, New Jersey, in October 2015, the Company
through its then newly formed wholly owned subsidiary Hillsborough Battery I LLC (a New Jersey limited liability company), entered
into a real property lease (guaranteed by the Company) for a .5 acre parcel of land to be used as the location for a battery storage
conversion system. Payments under the lease were contingent upon receipt of utility and municipal approvals and commencement of
operations of the battery storage system. Local utility approval was
received
in February
2016 and at September 30, 2016 the Company was awaiting approval from the municipality for zoning and other local regulatory approvals.
The initial lease was five years with an
option to extend for an additional five years. The monthly rent for the initial term was $3,000 to be increased by an additional
$2,500 if a second battery unit was installed on the premises. A $50,000 deposit was to be required upon commencement of the commercial
operation date of the battery system. The lease term never commenced as the Company was unable to obtain financing for the project,
never obtained all necessary local approvals and ceased pursuing the project as a result of changes in the power market rates which
made the economics for a 2 megawatt project unattractive from an economic viewpoint. In October 2017, the lease was terminated
without further liability to the Company.
(e) Litigation
The Company was not party to any litigation
during the nine and three months ended September 30, 2016 and 2015.
NOTE 9- RELATED PARTY
TRANSACTIONS
(a) Notes receivable are from GDD Ventures,
LLC, which is owned by the Company’s Chief Operating Officer and President who also is a director of the Company and during
the period ended September 30, 2016 was a principal shareholder of the Company. The notes were $20,000 and $10,000 principal amount
at September 30, 2016 and December 31, 2015, respectively. At September 30, 2016 there were two $10,000 principal notes due from
GDD Ventures, LLC; the notes bear interest at 3% and 5% per annum. The due dates on the notes have been extended from October 28,
2016 to October 28, 2018.
(b) In addition, consulting fees aggregating
$13,100 and $29,000 were paid to GDD Ventures LLC, during the nine months ended September 30, 2016 and 2015, respectively. During
the three months ended September 30, 2016, no fees were paid; the sum of $29,000 was paid during the three months ended September
30, 2015.
(c) The Company also paid consulting fees
to Valeo Partners LLC, an entity owned by the Chief Executive Officer of the Company, who also serves as Chairman of the Board.
These fees aggregated $14,000 during the nine and three months ended September 30, 2015. No fees were paid to Valeo Partners during
the nine and three months ended September 30, 2016. At September 30, 2016, Valeo Partners LLC and GDD Ventures LLC were, together
the majority shareholders of the Company.
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 9- RELATED PARTY TRANSACTIONS
(continued)
(d) In December, 2015 the Company authorized
the issuance of an aggregate of 1,651,266 shares of Common Stock to the following persons and entities for services. The Company’s
financial statements for the fiscal year ended December 31, 2015 reflect 1,584,600 shares of the total of 1,651,266 as being issued
and outstanding during the year ended December 31, 2015:
MCG Enterprises, Inc.
|
|
|
792,300
|
|
Becker & Poliakoff LLP
|
|
|
792,300
|
|
Steven A. Caputo
|
|
|
66,666
|
|
Total:
|
|
|
1,651,266
|
|
MCG Enterprises Inc. is an entity controlled
by the Company’s Chief Financial Officer. The issuance was for services provided to the Company, namely, making the chief
financial officer available to the Company in lieu of any salary or other compensation.
Becker & Poliakoff LLP is the Company’s
outside law firm, and one of its partners serves as Secretary of the Company.
Steven Caputo has provided legal services
to the Company with respect to the Hillsborough, NJ battery project, and is the brother of the Chief Operating Officer and President.
(e) In August 2016, the Company authorized
the issuance of, and issued, an aggregate of an additional 2,400,000 shares of restricted stock in consideration of services to
the following persons/entities:
Consultant – Energy Projects
|
|
|
666,667
|
|
Board services
|
|
|
66,667
|
|
Legal Services Law Firm - (Becker & Poliakoff LLP)
|
|
|
333,333
|
|
Chief Financial Officer services - (MCG Enterprises, Inc.)
|
|
|
333,333
|
|
General Advisory Services Consultant
|
|
|
1,000,000
|
|
Total:
|
|
|
2,400,000
|
|
(f) The Company utilizes office space at
the offices of an entity controlled by its Chief Executive Officer who is also a director of the Company. The space is provided
at the cost of $450 per calendar quarter. At September 30, 2016, the amount of $450 was owed with respect to accrued rent. Rent
expense was $1,350 and $450 for the nine and three months ended September 30, 2016. No sums were paid in the prior year periods.
The space is made available on a month-to-month basis and is terminable at any time by either party.
(g) Professional fees on the Statement
of Operations include legal fees to Becker & Poliakoff LLP aggregating $157,855 and $107,108 for the nine and three months
ended September 30, 2016, respectively. A partner in the firm serves as Corporate Secretary to the Company. Included in accrued
expenses payable is $165,252 due to the law firm.
Professional fees also include accounting
fees to Raphael Goldberg Nikpour Cohen & Sullivan CPA’s, PLLC aggregating $39,353 and $7,430 for the nine and three months
ended September 30, 2016, respectively. The Company’s Chief Financial Officer is a partner in the firm. Included in accrued
expenses payable is $87,958 due to his firm.
NOTE 10- EQUITY INCENTIVE PLANS AND
AWARDS
At September 30, 2016, there were options
outstanding to purchase 26,666 shares of Common Stock with exercise prices of between $0.75 and $9.75 per share. The Company did
not issue any options to acquire any of its securities in 2015 or during the nine and three months ended September 30, 2016 and
2015.
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 10- EQUITY INCENTIVE PLANS AND
AWARDS (continued)
In 2000, the Company adopted the 2000 Stock
Option and Restricted Stock Plan (the “2000 Plan”). On July 16, 2009, the 2000 Plan was amended and restated. The 2000
Plan, as restated and amended, provided for the granting of options to purchase up to 25,000,000 shares of common stock. The 2000
Plan has expired.
The fair market value of stock options
issued that has not been expensed was $8,775 and $351,000 to be expensed over .25 and 1.0 years as of September 30, 2016 and December
31, 2015, respectively.
The fair value of each option grant was
estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used
for grants:
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted average risk-free rate
|
|
|
1.07
|
%
|
|
|
1.17
|
%
|
Average expected life in years
|
|
|
0.25
|
|
|
|
1.00
|
|
Expected dividends
|
|
|
0
|
|
|
|
0
|
|
Volatility
|
|
|
152.20
|
%
|
|
|
154.22
|
%
|
Forfeiture rate
|
|
|
52
|
%
|
|
|
52
|
%
|
The fair value of options granted is estimated
on the date of grant based on the weighted-average assumptions in the table above. The assumption for the expected life is based
on evaluations of historical and expected exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at
the date of grant with maturity dates approximately equal to the expected life at the grant date. The historical daily stock volatility
of the Company’s common stock (the Company’s only class of publicly traded stock) over the estimated life of the stock
warrant is used as the basis for the volatility assumption.
The Company accounts for employee stock
options as compensation expense, in accordance with FASB ASC 718. FASB ASC 718 requires companies to expense the value of employee
stock options and similar awards over the requisite service period.
In computing the impact, the fair value
of each option is estimated on the date of grant based on the Black Scholes options pricing model utilizing certain assumptions
for a risk-free interest rate; volatility; and expected remaining lives of the awards. The assumptions used in calculating the
fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties
and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions,
the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required
to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company’s
forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of
vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is materially different
from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could
be materially different from what we have recorded in the current period.
On July 20, 2016, the Board of Directors
approved a new stock based compensation plan entitled the 2016 Omnibus Equity Incentive plan (this “2016 Plan”). The
2016 Plan was adopted by written consent by the holders of a majority of the shares of Common Stock (including holders of the
Series B, C-1, D and E preferred stock entitled to vote and voting on an as converted basis) effective July 22, 2016.
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 10- EQUITY INCENTIVE PLANS AND
AWARDS (continued)
There are a total of 5,000,000 shares of
common stock reserved for issuance in connection with awards under the 2016 Plan.
Under the 2016 Plan, options, stock appreciation
rights, restricted stock awards, restricted stock unit awards, other share-based awards and performance awards may be granted to
eligible participants. Subject to the reservation of authority by the board of directors to administer the 2016 Plan and act as
the committee thereunder, the 2016 Plan will be administered by a committee of (the “Committee”) established by the
Board, which committee will have the authority to determine the terms and conditions of awards, and to interpret and administer
the 2016 Plan.
The maximum number of shares of common
stock that are available for awards under the 2016 Plan (subject to the adjustment provisions described in the plan for changes
in capitalization), is 5,000,000 shares. If any shares of common stock subject to an award under the 2016 Plan, are forfeited,
expire or are settled for cash (in whole or in part), the shares subject to the award may be used again for awards under the 2016
Plan to the extent of the forfeiture, expiration or cash settlement.
Options, stock appreciation rights (“SARs”),
restricted stock awards, restricted stock unit awards, other share based awards and performance awards may be granted under the
2016 Plan. Options may be either “incentive stock options,” as defined in Section 422 of the Code, or nonstatutory
stock options. Awards may be granted under the 2016 Plan to an employee, non-employee member of the board of directors, consultant
or advisor who is a natural person and provides services to the Company or a subsidiary, except for incentive stock options which
may be granted only to employees.
During the nine and three months ended
September 30, 2016, the Company has granted a total of 733,333 restricted shares under the 2016 Plan and issued no other awards.
As the 2016 Plan had not been adopted as of December 31,2015, no awards were outstanding under this plan as of such date. No awards
were made under the 2016 Plan between October 1, 2016 and March 30, 2017.
NOTE 11- COMMON STOCK ISSUED
In June 2016, 66,666 shares of Common Stock
with a value of $1,000 were issued by the Company to Steven A. Caputo, the brother of the Chief Operating Officer for legal services.
In August 2016, an aggregate of 2,400,000
shares of Common Stock with a value of $36,000 were issued by the Company as follows:
Consultant – Energy Projects
|
|
|
666,667
|
|
Board services
|
|
|
66,667
|
|
Legal Services Law Firm - (Becker & Poliakoff LLP)
|
|
|
333,333
|
|
Chief Financial Officer services - (MCG Enterprises, Inc.)
|
|
|
333,333
|
|
General Advisory Services Consultant
|
|
|
1,000,000
|
|
Total:
|
|
|
2,400,000
|
|
NOTE 12- PREFERRED
STOCK
The Company has authorized 10,000,000 shares
of preferred stock, par value $0.001 per share. With respect to the preferred stock, the Company designated: 140,000 shares as
Series B Convertible Preferred Stock, of which 133,000 shares are issued and outstanding; 175,000 shares as Series C-1 Convertible
Preferred Stock, of which 34,625 shares are issued and outstanding; 375,000 shares of Series D Convertible Preferred Stock, of
which 304,377 are issued and outstanding. As a result of the Reverse Split (on a 1 for every 15 shares outstanding basis (See Note
13(a) – Subsequent Events) ) completed in January, 2017, all Series E Preferred Stock automatically was deemed converted
into Common Stock and therefore all financial statements reflect the conversion.
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 12- PREFERRED STOCK
(continued)
At September 30, 2016 and December 31,
2015, the Company had:
|
|
|
|
|
|
|
|
ACCRUED DIVIDENDS
|
|
|
|
|
|
|
ISSUED AND
|
|
|
PAYABLE
|
|
|
|
DESIGNATED
|
|
|
OUTSTANDING
|
|
|
SEPTEMBER 30,
|
|
|
DECEMBER 31,
|
|
|
|
SHARES
|
|
|
SHARES
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B
|
|
|
140,000
|
|
|
|
133,000
|
|
|
$
|
2,527,000
|
|
|
$
|
2,128,000
|
|
Series C-1
|
|
|
175,000
|
|
|
|
34,625
|
|
|
|
526,300
|
|
|
|
443,200
|
|
Series D
|
|
|
375,000
|
|
|
|
304,377
|
|
|
|
1,850,600
|
|
|
|
1,558,400
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,903,900
|
|
|
$
|
4,129,600
|
|
The Company has not issued or created any
shares or classes of preferred stock since 2012. No shares of any class of preferred stock were converted into Common Stock during
the year ended December 31, 2015. No shares of preferred stock were issued during the nine or three months ended September 30,
2016 and 2015.
Each share of Series B Preferred Stock
is convertible into 6.66 shares of the Company’s common stock, subject to adjustment under certain circumstances, based upon
a stated value of $50.00 per share. There are 133,000 shares of Series B Preferred Stock issued and outstanding, convertible into
886,666 shares of Common Stock. The Series B Preferred Stock is convertible at the option of the holder at any time. The Series
B Preferred Stock is also subject to mandatory conversion in the event the average closing price of the Company’s common
stock for any ten day period equals or exceeds $15.00 per share, such conversion to be effective on the trading day immediately
following such ten day period. The Series B Preferred Stock has a dividend equal to 8% of the aggregate $7,000,000 stated value
of the Series B Preferred Stock, payable annually in cash or stock, at the discretion of the Company’s board of directors.
Upon any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, before any distribution or payment
is made to the holders of any stock of the Company, the holders of Series B Stock are entitled to be paid out of the assets of
the Company, proportionally with any other series of preferred stock, an amount per share of Series B Stock equal to the stated
value (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares),
plus all accrued but unpaid dividends (whether declared or not) on such shares of Series B Stock for each share of Series B Stock
held by them. With respect to the Series B Preferred Stock, the Company has accrued undeclared and unpaid dividends of $2,527,000
and $2,128,000 at September 30,2016 and December 31,2015, respectively. The dividend per calendar quarter is $133,000.
Each share of Series C-1 Preferred Stock
is convertible into 6.66 shares of the Company’s common stock, subject to adjustment under certain circumstances, based upon
a stated value of $40.00 per share. There are 34,625 shares of Series C-1 Preferred Stock issued and outstanding, convertible into
230,833 shares of Common Stock. The Series C-1 Preferred Stock is convertible at the option of the holder at any time. The Series
C-1 Preferred Stock is also subject to mandatory conversion in the event the average closing price of the Company’s common
stock for any ten day period equals or exceeds $15.00 per share, such conversion to be effective on the trading day immediately
following such ten day period. The Series C-1 Preferred Stock has a dividend rate of 8% payable annually in cash or stock, at the
discretion of the Company’s board of directors. Upon any liquidation, dissolution, or winding up of the Company, whether
voluntary or involuntary, before any distribution or payment is made to the holders of any stock of the Company, the holders of
Series C-1 Stock are entitled to be paid out of the assets of the Company, proportionally with any other series of preferred stock,
an amount per share of Series C-1 Stock equal to the stated value (as adjusted for any stock dividends, combinations, splits, recapitalizations
and the like with respect to such shares), plus all accrued but unpaid dividends (whether declared or not) on such shares of Series
C-1 Stock for each share of Series C-1 Stock held by them. With respect to the Series C-1 Preferred Stock, the Company has accrued
undeclared and unpaid dividends of $526,300 and $443,200 at September 30, 2016 and December 31, 2015, respectively. The dividend
per calendar quarter is $27,700.
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 12- PREFERRED STOCK
(continued)
The Series D preferred stock has an annual
dividend equal to 8% of the aggregate $5,220,000 stated value of the preferred stock ($16.00 per share), payable annually in cash
or stock, at the discretion of the Company’s board of directors. There are 304,377 shares of Series D Preferred Stock issued
and outstanding, convertible into 2,029,180 shares of Common Stock. Upon any liquidation, dissolution, or winding up of the Company,
whether voluntary or involuntary, before any distribution or payment is made to the holders of any stock of the Company, the holders
of Series D preferred stock are entitled to be paid out of the assets of the Company, proportionally with any other series of preferred
stock, an amount per share of Series D preferred stock equal to the stated value (as adjusted for any stock dividends, combinations,
splits, recapitalizations and the like with respect to such shares), plus all accrued but unpaid dividends (whether declared or
not) on such shares of Series D preferred stock for each share of Series D preferred stock held by them.
The conversion price for the Series D preferred
stock is $0.16 per share, and the Series D preferred stock is subject to mandatory conversion of 100 common shares per 1 Series
D preferred share, in the event the average closing price of the Company’s common stock for any ten day period equals or
exceeds $7.50 per share and the average daily trading volume is at least 50,000 shares of common stock per day during such ten-day
period, such conversion to be effective on the trading day immediately following such ten day period. Series D preferred stock
shall vote with the shares of Common Stock on an as converted basis from time to time, and not as a separate class, at any duly
called annual or special meeting of stockholders of the Company. The holders of our Series D preferred stock have no pre-emptive
rights, and the Company cannot amend the Series D preferred stock’s Certificate of Designation without first obtaining the
approval of 75% of the holders of the outstanding Series D preferred stock. With respect to the Series D Preferred Stock, the Company
has accrued undeclared and unpaid dividends of $1,850,600 and $1,558,400 at September 30,2016 and December 31,2015, respectively.
The dividend per calendar quarter is $97,400.
On January 27, 2012 and January 30, 2012,
the Company consummated closings of a private placement offering for an aggregate of 305 shares of Series E Convertible Preferred
Stock, par value of $0.001 per share. The Series E Preferred Stock carried no dividend, and each share of Series E Preferred Stock
was convertible into 66,667 shares of Common Stock and also had voting rights on the same basis. As a result of the Reverse Stock
Split consummated in January 2017, all shares of Series E Preferred Stock have been deemed converted into shares of Common Stock
(an aggregate of 20,333,333 shares).
NOTE 13- SUBSEQUENT
EVENTS
In preparing the
accompanying financial statements, the Company has reviewed events that have occurred after September 30, 2016, through the
date of issuance of the financial statements. No events, other than those described below, have occurred that require disclosure or
adjustments.
(a) On January 11, 2017, the Company filed
an amendment to its Amended and Restated Certificate of Incorporation to effectuate a reverse stock split (“Reverse Split”)
on a basis of each 15 shares of issued and outstanding shares of Common Stock into 1 share. The immediate effect of the Reverse
Split will be to reduce the number of issued and outstanding pre-split shares of Common Stock from 189,052,666 outstanding as of
January 17, 2017 to approximately 12,603,511 shares (subject to rounding fractional shares down to the next whole share). The conversion
ratios of each class of Preferred Stock have been adjusted to reflect the Reverse Split.
As a result of the Reverse Split, our remaining
classes of Preferred Stock would be convertible into an aggregate of approximately 3,146,680 shares of Common Stock after the Reverse
Split, as follows:
Class of Preferred Stock
|
Pre-Split Conversion
|
Post-Split Conversion
|
Series B
|
13,300,000
|
886,667
|
Series C-1
|
3,462,500
|
230,833
|
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 13- SUBSEQUENT EVENTS
(continued)
Series D
|
|
|
30, 437,700
|
|
|
|
2,029,180
|
|
Total:
|
|
|
|
|
|
|
3,146,680
|
|
Our Class E Preferred Stock has been deemed
automatically converted into Common Stock following the Reverse Split; the other classes remain outstanding. The conversion of
the Series E Preferred Stock (305 shares with a conversion ratio of 666,667 shares each) resulted in the issuance of 20,333,333
shares of Common Stock. Giving effect solely to the conversion of the Series E Preferred Stock and no other classes or shares of
Preferred Stock, PEC had approximately 32,936,844 shares of Common Stock issued and outstanding as of the date of the Reverse Split.
The par value of the Common Stock (and all Preferred Stock) remains $0.001 per share and the number of shares of Common Stock authorized
to be issued remain at the number authorized at the time the Reverse Split was effected, currently 350,000,000 shares.
(b) On July 30, 2016, the Company was selected
through a bid auction process an award for two separate bids to supply up to 12 kilowatts of demand energy savings through the
Consolidated Edison Brooklyn Queens Demand Energy Management Program (BQDM). Under this program, Consolidated Edison of New York
is offering incentives for energy management. Consolidated Edison of New York, Inc., provides electric, gas and steam service to
New York City and Westchester County and is regulated by the New York Public Service Commission (NYSPSC). Under the terms of its
original agreement with Consolidated Edison, the Company was required to provide electric usage savings during certain hours for
2017 and 2018 in specified neighborhoods in Brooklyn and Queens, New York and will be required to incur the expense of purchasing
and installing such generator systems or develop other systems in order to meet its requirements. The Company joined with an unaffiliated
third party to enter into the agreements with Consolidated Edison and develop the projects and provide the funds necessary to obtain
issuance of a letter of credit in the amount of $790,392 (each party contributed $395,196 (50%) for the letter of credit). The
letter of credit was delivered in October 2016.
The Company was unable to identify sites
to satisfy the BQDM program requirements for the summer of 2017. The original contract with Consolidated Edison required that PEC
and its partner deliver 4 megawatts of energy savings in the summer of 2017 and an additional 8 megawatts of energy savings in
2018. The Company notified Consolidated Edison in February 2017 that it would be unable to satisfy the 2017 summer program requirements
and Consolidated Edison called upon the letter of credit for program deficiencies in the amount of $393,800 and claimed the Company
was liable for additional penalties for non-performance. Consolidated Edison later notified the Company that it was calling upon
the remainder of the letter of credit and terminating the Company’s participation. The Company disputed Consolidated Edison’s’
rights to terminate and draw upon the remainder of the letter of credit and to assess further damages. In October 2017 the Company
and its third partner project partner executed a settlement agreement with respect to the BQDM participation. Under the settlement,
the parties released each other from all obligations and claims, except that the Company agreed to seek reimbursement or a credit
from Consolidated Edison for the drawn upon letter of credit amounts and to split with the third party any such reimbursed amounts.
The Company does not believe that it will
be able to meet the 2018 requirements, and will focus on 2019 and beyond for other energy management programs. The Company may
be required to forego any remaining letter of credit proceeds with Consolidated Edison, and is evaluating its legal options to
pursue collection of such amounts.
(c) During the years 2010 through
the third quarter of calendar year 2012, the Company had a San Diego, California office presence. Due to its limited
operations during the period the Company had a small number of California based employees and also utilized contractors and
consultants during the period for marketing, research and finance functions. This California facility was closed during 2012.
Subsequent to the closing of the California facility, during October 2013, the State of California Employment Development
Department (EDD) scheduled then initiated and audit of payroll for the Company’s California operations. The period
covered by the audit was the period beginning the fourth quarter of 20 I 0 through the third quarter of 2013. Since a new
business occupied the premises and EDD was not successful in making contact with the Company they developed an audit
liability of $195,762 (including penalties and interest) based upon estimated payroll, and have filed a lien; the Company had
recorded a liability in that amount. In October 2016, the Company finalized an agreement with the State of California
reducing the liability to a total of $6,074, payable at $337 per month over 18 months beginning November 18, 2016.
Accordingly, the reversal of the accrued expenses resulted in the recognition of other income in the amount of $189,688.
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 13- SUBSEQUENT EVENTS
(continued)
(d) In October, 2016, the Company entered
into a formal employment agreement with its Chief Executive Officer (Gary Weiss). Under the original terms of the agreement with
the Company was to pay him a base salary of $150,000 per year. Under the agreement, Mr. Weiss serves as CEO. The term of employment
is (3) years from the commencement date which was June 1, 2016. Under the terms of the agreement, Mr. Weiss and the Company recognized
that the finances of the Company did not allow for payment of base salary at that time. Mr. Weiss agreed and acknowledged that
from the commencement date (June 1, 2016) and until the first to occur of: (i) the date the Company obtains capital (whether debt
or equity) in an amount of at least $2,000,000 of gross proceeds (in any single or series of financing events) which allows for
the use by its terms, of the proceeds for payments of salaries to officers; or (ii) such time as the Company achieves Cash Flow
Breakeven for two consecutive fiscal quarters, up to 100% of such Base Salary may be accrued as determined by the Board of Directors
and thereafter shall be payable upon achievement of such events as set forth in clauses (i) and (ii) above, and provided further,
in no event shall any accrued salary be paid later than ten (10) business days after the Company has obtained capital (whether
debt or equity) of at least $5,000,000 of gross proceeds (in any single or series of financing events). Under the original terms,
at such time Mr. Weiss would have been entitled to payment of up to $60,000 with respect to accrued but unpaid Base Salary [all
remaining accrued salary, above the $60,000, would remain accrued]. The Company also agreed to pay for health and related benefits
on terms similar to those provided to other executives. During the nine and three months ended September 30, 2016, Mr. Weiss did
not receive any payments of base salary under the employment agreement. The Company accrued $50,000 of salary for the period from
June 1, 2016 to September 30, 2016.
In April 2017 the Company agreed to issue
to Mr. Weiss options to purchase 1,500,000 shares with an exercise price of $0.11 per share, with a term of five years in lieu
of salary for the period June 1, 2016 to May 31, 2017 due to the inability of the Company to raise capital to pay this salary under
the terms of the Agreement.
Mr. Weiss (through an entity controlled
by him) received compensation in the amount of $20,235 during the year ended December 31, 2015 and no compensation during the nine
and three months ended September 30, 2016. In December, 2017, the Company and Mr. Weiss amended the terms of the agreement (See
Note 13(j) – Subsequent Events).
(e) In October, 2016, the Company entered
into a formal employment agreement with its Chief Operating Officer and President, R. Scott Caputo. Under the original terms of
the agreement with the Company was to pay him a base salary of $150,000 per year. Under the agreement, Mr. Caputo serves as Chief
Operating Officer and President. The term of employment is (3) years from the commencement date which was June 1, 2016. Under
the terms of the agreement, Mr. Caputo and the Company recognized that the finances of the Company did not allow for payment of
base salary at that time. Mr. Caputo agreed and acknowledged that from the commencement date (June 1, 2016) and until the first
to occur of: (i) the date the Company obtains capital (whether debt or equity) in an amount of at least $2,000,000 of gross proceeds
(in any single or series of financing events) which allows for the use by its terms, of the proceeds for payments of salaries
to officers; or (ii) such time as the Company achieves Cash Flow Breakeven for two consecutive fiscal quarters, up to 100% of
such Base Salary may be accrued as determined by the Board of Directors and thereafter shall be payable upon achievement of such
events as set forth in clauses (i) and (ii) above, and provided further, in no event shall any accrued salary be paid later than
ten (10) business days after the Company has obtained capital (whether debt or equity) of at least $5,000,000 of gross proceeds
(in any single or series of financing events). Under the original terms, at such time Mr. Caputo would have been entitled to payment
of up to $60,000 with respect to accrued but unpaid Base Salary [all remaining accrued salary, above the $60,000, would remain
accrued]. The Company also agreed to pay for health and related benefits on terms similar to those provided to other executives.
During the nine and three months ended September 30, 2016, Mr. Caputo did not receive any payments of base salary under the employment
agreement, the Company accrued $50,000 of salary for the period from June 1, 2016 to September 30, 2016. In April 2017 the Company
agreed to issue to Mr. Caputo options to purchase 1,500,000 shares with an exercise price of $0.10 per share, with a term of five
years in lieu of salary for the period June 1, 2016 to May 31, 2017 due to the inability of the Company to raise capital to pay
this salary under the terms of the Agreement.
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 13- SUBSEQUENT EVENTS
(continued)
Mr. Caputo (through an entity controlled
by him) received compensation in the amount of $37,500 during the year ended December 31, 2015 and $13,100 and $0 during the nine
and three months ended September 30, 2016. In December, 2017, the Company and Mr. Caputo amended the terms of the agreement (See
Note 13(j) – Subsequent Events).
(f) Effective October 13, 2016, the Company
issued and sold, in a private placement offering under Section 4(2) of the Securities Act of 1033, as amended, to 6 accredited
investors, an aggregate of $405,000 of promissory notes bearing interest at 10% per annum. The proceeds from the sale of the notes
were used by the Company to support its share ($395,196) of the issuance of a standby letter of credit as required under the Consolidated
Edison BDQM Program in the amount of $790,392. The standby letter of credit was issued by Wells Fargo Bank to Consolidated Edison
on behalf of the SPV as described in clause (b) above. In addition to the issuance of the notes, investors received an aggregate
of 4,050,000 shares of common stock.
The notes are unsecured obligations of
the Company and are payable upon the earlier of (i) date of payment to the Company of its proportionate share for services or other
payment made pursuant to the Company’s agreements in effect from time to time with Generate NY Grid Services LLC under the
Consolidated Edison BDQM Program for the 2017 and 2018 years, (ii) within 10 business days of the date of any payment by Generate
NY Grid Services LLC intended to be a replacement of funds advanced by the investors for the Company’s portion of the standby
letter of credit issued to Consolidated Edison of New York under the Consolidated Edison BDQM Program for the 2017 and 2018 years
or (iii) December 31, 2019.
The Company also entered into a registration
rights agreement with the investors providing for the registration for resale under the Securities Act of 1933 of the shares of
common stock issued to them. The agreement provides that the Company will file a registration statement with the SEC within 180
days of closing.
Certain members of management participated,
including the Chief Financial Officer and Chief Executive Officer through entities controlled by them, participated in the private
placement. Additionally, the Company’s outside counsel participated in the private placement offering.
The securities issued to such investors
are restricted securities and were offered and sold in private transactions to accredited investors (as such term is defined in
Rule 501(a), as promulgated under the Securities Act of 1933), without registration under the Securities Act and the securities
laws of certain states, in reliance on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended and
similar exemptions under applicable state laws. The securities sold in the foregoing transaction may not be offered or sold in
the United States absent registration or an applicable exemption from registration requirements.
(g) Effective January 25, 2017, Power
Efficiency Corporation (PEC) entered into an advisory agreement with Carnegie Hudson Resources Structured Capital, LLC (CHR) whereby
CHR and its affiliated entities will provide corporate advisory and investment banking services to the Company. Services which
may require a registered broker-dealer will be provided through MCM Securities LLC., an SEC registered broker-dealer. CHR is affiliated
with a director of the Company. Under the terms of the agreement, in consideration for its services, CHR and its affiliates were
to receive up to 4,000,000 warrants for shares of common stock to vest upon certain events, 1,000,000 of the 4,000,000 warrants
have become ineligible for issuance because one of the conditions were not met. The warrants have a five (5) year exercise terms,
provide for an exercise price of $0.01 per share and the holders are entitled to piggyback registration rights with respect to
the underlying shares of Common Stock. As of September 30, 2017, an aggregate of 1,750,000 warrants had vested and 1,000,000 have
not vested and are ineligible for issuance. An officer and controlling shareholder of CHR also serves as a director of the Company.
In November, 2017, the agreement with CHR was amended to provide for the issuance of an additional 250,000 vested warrants with
an exercise price of $0.10 per share; the warrants have five year exercise terms. In December, 2017, the Company and CHR amended
the terms of the agreement to provide for the issuance of an additional 250,000 warrants to CHR. The additional warrants have
a five year exercise term and are exercisable at $0.01 per share.
POWER EFFICIENCY CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
AS
OF AND FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2016
NOTE 13- SUBSEQUENT EVENTS
(continued)
(h) On October 1, 2017, the Company delivered
a credit promissory note to Valeo Partners LLC, an entity controlled by our Chief Executive Officer. Our Chief Executive Officer
has provided funds in the amount of $35,004 as of September 30, 2017 to the Company for working capital needs. Under the credit
note, Valeo Partners agreed to provide funds, in its discretion, up to the sum of $50,000 at the rate of 5% per annum which commenced
accruing December 1, 2016. The note is due on or before the earlier of (i) October 30, 2018 or (ii) within three days of the Company
obtaining capital (in the form of equity or debt) from third parties, in an amount of at least $3,000,000, subject to approval
of payment by the third party financing parties. The note is unsecured.
(i) PEC has executed a non-binding term
sheet for an option to purchase the development rights from New Jersey Energy Storage Project One, LLC for a 20 MW battery energy
storage (BESS) project located in Bloomsbury, NJ. The system will be used to provide frequency regulation services to PJM Interconnection.
Under the option agreement, PEC must enter into a definitive agreement with Project One on or before February 15, 2018, provide
funding of certain start-up costs related to the project of $75,000 and enter into a mutually acceptable lease agreement with the
property owner. As presently contemplated, the project will utilize lithium ion battery technology. The project is anticipated
to start in late 2018 or early 2019 once interconnection and all government approvals are obtained. PEC is presently working with
its financial advisor partners and project partners to fully fund the project. The option expires on February 15, 2018 unless extended
by the parties.
(j) Effective December 20, 2017, the Company
amended the terms of its employment arrangements with its Chief Operating Officer and President (Scott Caputo), Chief Executive
Officer (Gary Weiss) and Jeffrey Lines, its Vice President.
Under these amendments the Company and
these employees, recognizing that the Company has been unable to obtain capital to fund its working capital and other needs, and
to date has not completed and projects to generate revenue, determined to utilize common stock warrants on a monthly basis, in
lieu of cash compensation. The parties agreed that as of June 1, 2017, these individuals would be compensated at the rate of 166,667
common stock warrants at the end of each calendar month, with such warrants having a five-year exercise period. The exercise price
is based on a closing price of the Company’s stock as of the end of each month. The employees will be compensated on such
terms until the Company is able to obtain necessary capital to pay cash compensation.
Additionally, the Company and each employee
also amended the terms of their original agreement to reduce the potential amount of any accrual of unpaid salary to a maximum
of $25,000 (two months’ salary) which might be payable upon completion of a financing in excess of $2,000,000 of gross proceeds.
However, this accrual amount would only be payable if the employee has not elected to accept the 166,667 warrants per month for
any such two months’ period prior to completion of a financing as described above.