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 September 30, 2000
[ ] 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.
--------------------------------------------------------------------------------
(Exact Name of Company as Specified in its Charter)
Nevada 84-1176494
----------------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
6909 S Holly Circle, #200 Englewood, CO 80112
----------------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Company's telephone Number: (303) 741-5641
--------------
NONE
--------------------------------------------------------------------------------
(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 October 31, 2000
--------------------------------------- -----------------------------------
Common stock, $.0001 par value 21,285,715 Shares
1
<PAGE>
OnLine Power Supply, Inc.
Index
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Balance Sheet September 30, 2000 & December 31,1999......3-4
Condensed Statements of Operations - Three and Nine Months
Ended September 30, 2000 and September 30, 1999......................5
Consolidated Statement of Shareholders' Equity.....................6-7
Condensed Statements of Cash Flows -- Nine Months
Ended September 30, 2000 and September 30, 1999......................8
Notes to Condensed Financial Statements...........................9-14
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................14-17
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds...........................17
ITEM 4. Submission of Matter to a Vote of Shareholders......................17
ITEM 5. Other Information...................................................17
ITEM 6. Exhibits and Reports on Form 8-K....................................17
Signatures..........................................................18
2
<PAGE>
ONLINE POWER SUPPLY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(unaudited)
Assets
Current assets
<S> <C> <C>
Cash $ 2,046,332 $ 1,941,367
Certificates of deposit 2,650,000 3,100,000
Short term investments 4,959,182 --
Accounts receivable, net of allowance for uncollectible
accounts totaling $187 (2000) and $364 (1999) 16,891 6,048
Accrued interest receivable 208,432 --
Receivable from officers 40,050 --
Inventory, at cost 186,566 66,713
Prepaid expenses 165,010 2,780
----------- -----------
Total current assets 10,272,463 5,116,908
Property and other assets
Property and equipment, less
accumulated depreciation of $110,416
(2000) and $66,135 (1999) 422,797 251,114
Equipment under capital leases, less
accumulated depreciation of $22,453
(2000) and $3,771 (1999) 79,510 74,190
Goodwill, less accumulated
amortization of $143,987 (2000) and
$104,718 (1999) 117,807 157,076
Acquired technology costs, less
accumulated amortization of $70,070
(2000) and $50,960 (1999) 57,330 76,440
Patents, less accumulated amortization
of $ 5,156 (2000) and $492 (1999) 57,594 25,039
Other assets 9,378 1,512
----------- -----------
Total property and other assets 744,416 585,371
----------- -----------
Non-Current Assets
Stock Notes Receivable 93,280 --
----------- -----------
Total Non-Current Assets 93,280 --
----------- -----------
Total Assets $ 1,110,159 $ 5,702,279
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ONLINE POWER SUPPLY, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- --------------
(unaudited)
Liabilities and shareholders' equity
Current liabilities
<S> <C> <C>
Accounts payable $ 242,874 $ 245,772
Accounts payable, related parties -- 101,081
Line-of-credit -- 731
Notes payable, current maturity 19,474 --
Capital lease obligations, current maturity 30,073 20,017
Accrued interest payable 19,063 26,012
Bonuses payable, related parties -- 72,000
Retirement liability, related parties, current maturity 148,500 --
Other 15,432 100,772
------------ ------------
Total current liabilities 475,416 566,385
------------ ------------
Long-term liabilities
Capital lease obligations, less current maturities 41,824 48,583
Note payable, less current maturity 28,326 --
Officer's retirement liability, less current maturity -- --
------------ ------------
Total long term liabilities 70,150 48,583
------------ ------------
Total liabilities 545,566 614,968
------------ ------------
Liability for common stock subject to rescission,
0 (2000) and 1,243,151 shares (1999) -- 1,281,815
------------ ------------
Shareholders' equity
Preferred stock, $.0001 par value; 1,000,000 shares
authorized 10,467 (1999) and 2,800 (2000)
shares issued and outstanding -- 1
Common stock; $.0001 par value; 50,000,000 shares
authorized; 21,285,715 (2000) and 16,954,119(1999)
shares issued and outstanding 2,120 1,571
Additional paid-in capital 29,287,886 19,914,828
Retained (deficits) (18,725,414) (16,110,904)
------------ ------------
Total shareholders' equity 10,564,593 3,805,496
------------ ------------
Total liabilities and shareholders' equity $ 11,110,159 $ 5,702,279
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
ONLINE POWER SUPPLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE For the
QUARTER Quarter
ENDED Year to Date Ended Year to Date
SEPTEMBER 30, September 30, September 30, September 30,
2000 2000 1999 1999
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 20,848 $ 48,959 $ 70,389 $ 258,978
Cost of sales 28,634 42,162 52,489 201,737
------------ ------------ ------------ ------------
Gross profit (Loss) (7,786) 6,797 17,900 57,241
------------ ------------ ------------ ------------
Operating cost and expenses
Research and development 317,991 894,670 167,671 315,861
Stock Based Compensation 359,607 363,113 -- --
Selling, general and administrative
expenses 443,349 1,724,815 230,324 641,157
------------ ------------ ------------ ------------
Total costs and expenses 1,120,947 2,982,598 397,995 957,018
------------ ------------ ------------ ------------
Loss from operations (1,128,733) (2,975,801) (380,095) (899,777)
Interest income 165,913 391,460 1,110 1,110
Interest (expense) (6,343) (29,960) (11,621) (41,421)
Net Other income 159,570 361,499 (10,511) (40,311)
Net (loss) Before Income Tax (969,163) (2,614,302) (390,606) (940,088)
Income Taxes -- -- -- --
============ ============ ============ ============
Net (loss) After Income Tax (969,163) (2,614,302) (390,606) (940,088)
Net (loss) available to common
shareholders $ (969,163) $ (2,614,302) $ (390,606) $ (940,088)
Net loss per common share $ (.05) $ (.14) $ (.03) $ (.05)
============ ============ ============ ============
Weighted average shares outstanding 19,808,175 18,404,254 12,178,486 12,168,109
</TABLE>
See notes to consolidated financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
JANUARY 1, 1999 THROUGH SEPTEMBER 30, 2000 (UNAUDITED)
Preferred Stock Preferred Stock Preferred Stock
--------------- --------------- ---------------
Par Stated Stated
Shares Value Shares Value Shares Value
------ ------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 12,467 $ 1 125,000 $ 250,000 -- $ --
Cumulative preferred stock issued in private placement
(Note 12) -- -- 25,600 51,200 272,750 545,501
Common stock issued for services (Note 7) -- -- -- -- -- --
Common stock issued for sales commissions (Note 7) -- -- -- -- -- --
Conversion of non-cumulative preferred stock to common stock
(Note 6) (2,000) -- (125,000) (250,000) -- --
Common stock issued for retirement of debt (Note 6) -- -- -- -- -- --
Common stock issued in private placement (Note 12) -- -- -- -- -- --
Stock offering costs -- -- -- -- -- --
Stock subject to rescission (Note 5) -- -- -- -- -- --
Conversion of cumulative preferred stock to common stock
(Note 6) -- -- (33,460) (66,920) (299,324) (598,649)
Net (loss) for the year ended December 31, 1999 -- -- -- -- -- --
------ ------- --------- ---------- --------- ----------
Balance, January 1, 2000 10,467 $ 1 -- $ -- -- $ --
====== ======= ========= ========== ========= ==========
</TABLE>
See notes to consolidated financial statements.
6a
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
JANUARY 1, 1999 THROUGH SEPTEMBER 30, 2000 (UNAUDITED)
Common Stock
------------ Additional Total
Par Paid in Retiained Shareholders'
Shares Value Capital Deficit Equity
------ --------- ------------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 11,846,826 $ 1,185 $ 8,879,706 $(9,573,142) $ (442,250)
Cumulative preferred stock issued in private placement
(Note 12) -- -- -- -- 596,701
Common stock issued for services (Note 7) 25,000 2 62,835 -- 62,837
Common stock issued for sales commissions (Note 7) 336,350 34 252,229 -- 252,263
Conversion of non-cumulative preferred stock to common
stock (Note 6) 254,000 25 249,975 -- --
Common stock issued for retirement of debt (Note 6) 53,571 5 149,995 -- 150,000
Common stock issued in private placement (Note 12) 3,222,104 322 6,443,891 -- 6,444,213
Stock offering costs -- -- (959,699) -- (959,699)
Stock subject to rescission (Note 5) (1,243,151) (124) (1,281,691) -- (1,281,815)
Conversion of cumulative preferred stock to common stock
(Note 6) 1,216,268 122 6,117,587 -- 5,452,140
Net (loss) for the year ended December 31, 1999 -- -- -- (6,537,762) (6,537,762)
---------- ------- ------------ ------------- ------------
Balance, January 1, 2000 15,710,968 $ 1,571 $ 19,914,828 $(16,110,904) $ 3,805,496
========== ======= ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
6b
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
JANUARY 1, 1999 THROUGH SEPTEMBER 30, 2000 (UNAUDITED)
(CONTINUED)
Preferred Stock Preferred Stock Preferred Stock
--------------- --------------- ----------------
Par Stated Stated
Shares Value Shares Value Shares Value
------ ------- ------ ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000 10,467 $ 1 -- $ -- -- $ --
Conversion of non-cumulative preferred stock to
common stock (7,667) (1) -- -- -- --
Stock offering costs (36,624 shares issued at
$2 per share included) -- -- -- -- -- --
Common stock issued in private placements -- -- -- -- -- --
Reverse rescission liability -- -- -- -- -- --
Stock exchanged for public relations fees -- -- -- -- -- --
Stock exchanged for consulting services -- -- -- -- -- --
Warrants granted for investor relations services -- -- -- -- -- --
Stock issued in exercise of options -- -- -- -- -- --
Options granted (directors) -- -- -- -- -- --
Net loss for the Nine Months Ended September 30, 2000 -- -- -- -- -- --
-------- ------- ------- ---------- -------- ----------
Balance, September 30, 2000 2,800 $ -- -- $ -- -- $ --
======== ======= ======= ========== ======== ==========
</TABLE>
See notes to consolidated financial statements.
7a
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
JANUARY 1, 1999 THROUGH SEPTEMBER 30, 2000 (UNAUDITED)
(CONTINUED)
Common Stock
-------------- Total
Par Additional Retained Shareholders'
Shares Value Paid in Capital Deficit Equity
------ ------- --------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000 15,710,968 $ 1,571 $ 19,914,828 $ (16,110,904) $ 3,805,496
Conversion of non-cumulative preferred stock to
common stock 15,334 1 -- -- --
Stock offering costs (36,624 shares issued at
$2 per share included) 36,624 4 (960,079) -- (960,075)
Common stock issued in private placements 4,148,216 412 8,311,274 -- 8,311,686
Reverse rescission liability 1,243,151 124 1,281,691 -- 1,281,815
Stock exchanged for public relations fees 18,124 1 82,099 -- 82,100
Stock exchanged for consulting services -- -- 2,835 -- 2,835
Warrants granted for investor relations services -- 3 135,062 -- 135,062
Stock issued in exercise of options 113,298 4 456,393 -- 456,393
Options granted (directors) -- -- 63,783 -- 63,783
Net loss for the Nine Months Ended September 30, 2000 -- -- - (2,614,302) (2,614,302)
---------- ------- ------------- --------------- ------------
Balance, September 30, 2000 21,285,715 $ 2,120 $ 29,287,886 $ (18,725,414) $ 10,564,593
========== ======= ============= ============== ============
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
ONLINE POWER SUPPLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-----------------------------
2000 1999
------------- -------------
(unaudited) (unaudited)
Cash flows from operating activities
<S> <C> <C>
Net (loss) $(2,614,302) $ (940,088)
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation and amortization 142,124 80,060
Stock Notes Receivable (93,280) --
Stock based compensation 363,113 --
Options issued for services 63,783 --
Common stock issued for services 219,997 --
Impairment loss on fixed assets 7,331 437
Changes in certain assets and liabilities
Receivables, inventory, and other current assets (549,274) (24,285)
Accounts payable and other current liabilities (119,767) 12,495
----------- -----------
Net cash (used in) operating activities (2,580,275) 871,381
----------- -----------
Cash flows from investing activities
Cash received from maturity of CD 450,000 --
Purchases of equipment (232,080) (14,441)
Payments to acquire patent (37,220) (17,431)
Proceeds from sale of equipment -- 800
Purchase of short term investments (4,959,182) --
----------- -----------
Net cash (used in) investing activities (4,778,482) (31,071)
----------- -----------
Cash flows from financing activities
Proceeds from sale of stock 8,792,417 1,257,213
Payments for offering costs (1,355,059) --
Principal payments on capital leases (20,705) (4,345)
Payments on line of credit (731) --
Proceeds from long term debt 47,800 50,000
Principal debt payment -- (85,694)
----------- -----------
Net cash provided by financing activities 7,463,722 1,217,174
----------- -----------
Net increase in cash 104,965 314,722
Cash - beginning of period 1,941,367 151,341
----------- -----------
Cash - end of period $ 2,046,332 $ 466,063
=========== ===========
</TABLE>
Supplemental disclosure of cash flow information:
Cash paid for interest during the nine months ended September 30, 2000 and
1999 was $29,960 and $20,859, respectively.
See notes to consolidated financial statements.
8
<PAGE>
ONLINE POWER SUPPLY, INC.
FOOTNOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------
Basis of Presentation
---------------------
The financial statements include the accounts of OnLine Power Supply, Inc.
(formerly OnLine Entertainment, Inc.). Two wholly owned subsidiaries,
GlitchMaster Marketing, Inc. and OnLine Entertainment, Inc. (separate domestic
Colorado corporations) were liquidated into the parent corporation on December
31, 1999 and the remaining assets and liabilities are now included with the
accounts of OnLine Power Supply, Inc. (a Nevada domiciled corporation, formerly
named OnLine Entertainment, Inc., which changed its name to OnLine Power Supply,
Inc. in December 1999).
Earnings (Loss) Per Common Share
--------------------------------
SFAS 128 "Earnings per Share" requires a dual presentation of earnings per
share-basic and diluted. Basic earnings per common share has been computed based
on the weighted average number of common shares outstanding. Diluted earnings
per share reflects the increase in weighted average common shares outstanding
that would result from the assumed exercise of all outstanding stock options.
All periods presented have been restated to reflect the adoption of this
standard. All potentially dilutive securities have been excluded as they would
be antidilutive.
Nature of Organization
----------------------
The Company, operating as OnLine Power Supply, Inc., has focused on the ongoing
development of the Company's patent pending new power conversion technology for
release to large OEM manufacturers. These original equipment manufacturers will
incorporate OPS technology into the development of their own product lines.
Additional sales of the products will be generated through a distribution
channel that covers all of the United States. Manufacturing of the units is
out-sourced on a turnkey basis to a well-established manufacturer of electronic
devices.
Recently Issued Accounting Pronouncements
-----------------------------------------
In March 2000, FAB Interpretation N. 44 "Accounting for Certain Transactions
Involving Stock Compensation" (FIN 44) was issued and became effective July 1,
2000. This interpretation clarifies the application of APB Opinion 25 and prior
announcements for certain issues related to stock and options issued to
employees. As part of the Company's incentive stock options program, employees
were able to exercise vested options via cashless exercise method. Under FIN 44,
this cashless feature enacts variable plan accounting for those options so
exercised. The Company must recognize compensation expense on the options equal
to the difference between the exercise price and the market price on the date of
exercise; therefore, the Company recognized $359,607 of stock based compensation
during the quarter ended September 30, 2000. At September 30, 2000, all
necessary stock based compensation expense has been recorded in these financial
statements. Subsequent to September 30, 2000, the options program was amended to
eliminate the cashless exercise method.
9
<PAGE>
NOTE 3 - NOTES PAYABLE & LINE-OF-CREDIT
---------------------------------------
Bank Loan
---------
The Company received a $60,000 installment bank loan during the first quarter of
2000 for equipment and working capital. The note carries an annual interest rate
of 7.3% and matures in January of 2003.
Line-of-Credit
--------------
The Company has a $750,000 revolving bank line-of-credit; however, the line was
not drawn as of September 30, 2000. Advances on the line carry an interest rate
of 8%. It is collateralized by the pledging of a $1,000,000 certificate of
deposit.
NOTE 4 - OTHER LIABILITIES
--------------------------
As part of their executive employment agreements, two executive officers earned
performance bonuses equivalent to 50% of their annual 1999 compensation. One of
these officers left the Company in February 2000. The bonuses totaling $72,000
were accrued at the end of 1999 and paid during the first quarter, 2000.
NOTE 5 - RESCISSION OFFER
-------------------------
In the first quarter of 2000, the Company voluntarily offered certain common
shareholders the right to rescind their purchases that occurred in 1998 and 1999
due to the possible violation of the registration exemption provisions of the
Securities Act of 1933. A total potential rescission liability of $1,281,813 was
included in the December 31, 1999 financial statements. None of the shareholders
accepted the rescission offer and the response period has terminated. The
liability for the rescission at September 30, 2000 has been reduced to zero and
the liability reclassified as common stock equity on the balance sheet.
NOTE 6 - SHAREHOLDERS' EQUITY
-----------------------------
Stock Options
-------------
On May 26, 2000, the Board of Directors granted qualified options for 3,000
shares of common stock to a new employee. The options are exercisable at $10.62
per share and were immediately vested; none of these options has been exercised
at September 30, 2000 and will expire December 2, 2009.
On June 28, 2000, the Board of Directors granted non-qualified options for
10,000 shares of common stock to a new Director for serving as a Board Member.
The options are exercisable at $4.50 a share and were immediately vested. The
fair market value of these options, $63,783, is reflected in the September 30,
2000 financial statements. None of the options was exercised at September 30,
2000 and expire June 28, 2003.
On August 11, 2000, the Board of Directors granted non-qualified options for
10,000 shares of common stock to a new Director for serving as a Board member.
The options are exercisable at $ 8.375 per share and were immediately vested.
None of the options was exercised at September 30, 2000 and expire on August 11,
2003.
On September 1, 2000, non-qualified options for 540,000 shares of common stock
were issued to four executive officers and one manager. The options are
exercisable at $8.125 per share with 25% vesting immediately and the remainder
vesting over a three-year period.
10
<PAGE>
Qualified Stock Option Plan
---------------------------
The Board of Directors adopted a new Qualified Incentive Stock Option Plan on
December 1, 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 them stock options as a means of
incentive.
Directors Non-Qualified Stock Option Plan
-----------------------------------------
The Board of Directors adopted a new Directors Non-Qualified stock plan in
August 2000, to offer options for shares of common stock to new members of the
Board who are not employees of the Company. The plan will be used by the Company
to attract the most qualified candidates by issuing options for an equity
position that hopefully will lead to long-term contributions as members of the
Board. The plan is also designed to provide existing members the opportunity to
be rewarded with stock options for their continuing services to the Company.
NOTE 7 - STOCK BASED PAYMENTS
-----------------------------
During the current quarter, 30,000 warrants exercisable for common stock, at
varying exercise prices above current market prices, were issued to a financial
services company as stock based compensation for furnishing public relations
services over the next twelve months. A total of $135,062 for the cost of the
warrants was recorded as investment relations expense in the current quarter's
financial statements, based on Black-Scholes calculations.
NOTE 8 - RELATED PARTIES
------------------------
During 1999, the Company paid stock offering commissions of $299,919 to a
broker. The broker is an affiliated party only by virtue of his relationship to
a member of the Company's Board of Directors. The broker received 10% commission
on equity funds raised pursuant to a selling agreement signed by the Company.
The former Chief Executive Officer, with an employment agreement, left the
Company in the first quarter of 2000, and by the terms of the agreement, may
continue to receive salary and all other benefits for a period of 18 months from
his separation date. A liability of $148,500 has been accrued for his future
payments as of September 30, 2000. The separation expense of $244,033 is
included in the first quarter of 2000 and will be a non-recurring expense.
11
<PAGE>
NOTE 9 - INCOME TAXES
---------------------
A reconciliation of the US statutory federal income tax rate to the effective
rate follows:
<TABLE>
<CAPTION>
September 30, September 30,
------------- -------------
2000 1999
---- ----
<S> <C> <C>
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%)
------- --------
-- % -- %
=========== ==========
</TABLE>
Deferred taxes consisted of the following:
<TABLE>
<CAPTION>
Sept. 30, 2000 Sept. 30, 1999
-------------- --------------
<S> <C> <C>
Deferred tax assets, net operating
Loss carryforward $ -- $ --
Valuation allowance -- --
------------ -------------
Net deferred taxes $ -- $ --
=========== =============
</TABLE>
The valuation allowance offsets the deferred tax assets for which there is no
assurance of recovery. The change in the valuation allowance for the periods
ended September 30, 2000 and 1999 totaled $0.00 and $0.00, respectively. The net
operating loss carry-forwards expire through the year 2019.
The valuation allowance will be evaluated at the end of each year, considering
positive and negative evidence about whether the deferred tax asset will be
realized. At that time, the allowance will either be increased or decreased;
reduction could result in the complete elimination of the allowance if positive
evidence indicates that the value of the deferred tax assets is no longer
impaired and the allowance is no longer required.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
---------------------------------------
The Company leases office space under a non-cancelable operating lease that
expires on January 31, 2001. Future minimum annual rental payments under the
office lease are as follows:
Through January 31, 2001
(termination date) $ 51,587
As part of the employment agreements, two individuals shall become fully vested
to receive options to purchase 500,000 shares (one million in total) of the
Company's common stock upon the Company achieving the following performance
goals:
12
<PAGE>
1. If the Company's consolidated gross revenues exceed $3,000,000 by December
31, 1999, the executives vest in 35% of the options; this event did not
happen and the options did not vest accordingly.
2. If the Company's consolidated gross revenues exceed $6,000,000 by December
31, 2000 the executives vest in an additional 35% of the options;
3. If the Company's consolidated gross revenues exceed $9,000,000 by December
31, 2001, the executives vest in the remaining 30% of the options.
The Chief Executive Officer left the Company in the first quarter of 2000 and
the separation costs associated with his departure totaled $244,033 ($148,500 is
the remaining total of the monthly severance payments.)
The Company has entered into an arrangement with Saturn Electronics and
Engineering Inc. for the 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 initial production ramp-up
process and be reimbursed out of the proceeds of payments for the orders when
received by the Company.
NOTE 11 - LITIGATION AND SETTLEMENTS
------------------------------------
The Company has settled and satisfied various claims that have arisen in the
normal course of a prior business endeavor that has been terminated. One of
those cases (Max Music) was litigated and a Federal Magistrate's ruling given in
favor of the Company. The ruling is now being reviewed by the Federal District
Court Judge and the final outcome still is not decided. Management expects that
any future adverse impact on the financial position of the Company will be
minimal.
NOTE 12 - PRIVATE STOCK OFFERINGS
---------------------------------
The Company conducted three separate private offerings and a rescission offering
prospectus (see below) relating to other earlier private offering of shares of
common stock, separately circulated during 1999 and 2000. The three private
offerings from mid-1999 to mid-2000 were not rescinded; these offerings were not
registered pursuant to the Securities Act of 1933, as amended (the "Act"), nor
under the securities act of any state. These securities were offered under an
exemption from registration requirements of the Act and exemptions from
registration provided by applicable state securities laws. The securities
dealers were paid a commission up to ten percent of the subscriptions accepted
by the Company. Offering commissions were paid through a combination of cash and
the issuance of restricted common stock. The Company filed a registration
statement prospectus with the SEC in early 2000 to refund $1,281,815 of the
financing provided by the earlier financings. None of the investors chose to
rescind their investments and none of the money was refunded.
13
<PAGE>
Following is a summary of the offerings undertaken in 1999 and of 2000:
<TABLE>
<CAPTION>
Refund Offer Offering #1 New Offering #2 New Offering #3 New
Rescission Offering Funding Funding Funding
------------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Date: February, 2000 August, 1999 November, 1999 April, 2000
Offering: Various $ 2.00/share $ 2.00/share $ 2.00/ share
Minimum: $ 500,000
Maximum: $ 1,281,815 $ 5,000,000 $ 2,500,000 $ 8,500,000
<CAPTION>
Sold in 1999
------------
<S> <C> <C>
Shares 2,473,533 748,571
Proceeds $ 4,947,066 $ 1,497,142
Reinstated in 2000
------------------
<S> <C> <C>
Shares 1,243,151 4,076,750
Proceeds $ 1,281,815 $ 8,153,500
</TABLE>
NOTE 13 - OPERATIONS
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The Company continues to develop an organization for the further support of the
research and development efforts and to commercialize the power supply
technology developed by the Company since 1997. The Company has raised equity
capital by selling stock to support the Company's business plan and to fund cash
flow. Existing financial resources are adequate to allow the Company to complete
the products and release them to the marketplace timely and to complete the
development of the 48-volt line of derivative (follow- along) products.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
reviewed quarterly financial statements filed with this report. Except for the
historical information contained herein, this report may contain forward looking
statements that involve risks and uncertainties, including manufacturing risks
associated with implementing new process technology, achieving commercial-scale
manufacturing levels, achieving consistent yields and quality, uncertainty of
market acceptance and timing of market acceptance, as well as other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission, including the Company's registration statement effective
February 24, 2000 (rescission offer).
GENERAL DISCUSSION OF THE BUSINESS STRATEGY
The Company finalized the improved design for the Power Factor
Corrected Front End Module (PFCFEM) during the third quarter that will lead to
anticipated fourth quarter revenues from sales to a few customers and
distributors. Additional derivative power supply products are now in the
research and development stages and are being finalized for release to the
marketplace in the year 2001. The original patent for the new technology was
filed in October 1999 and has been updated to include this year's improvements
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and is pending issuance. Independent tests of the power correction product
verify that the unit should be more desirable (than existing competitors'
products) to the design engineers in the telecommunications, industrial,
military and computer server markets. The Company believes that its equivalent
PFCFEM is lighter, smaller, more efficient, more reliable and price competitive
when compared to equivalent units applied in a comparable situation.
The objective for the balance of the year 2000 is to begin the ramp-up
for full-scale production of the units for our customers in the fourth quarter.
The focus for the year to date has been the improvement of the initial product
to include a) operating at a higher baseplate temperature level, b) operating at
lower incoming AC currents, c) protection from transient power surges, and d)
reducing the size of the form factor. Our engineers have incorporated all of the
above changes into the unit and prototypes are now in the hands of potential
customers for final evaluation and acceptance.
A full time effort has been underway in the third quarter to complete
the design and development of the manufacturing line process at Saturn
Electronics and a limited number of evaluation units have been shipped to a
customer in the third quarter. Additional orders for product are being processed
to allow the manufacture and delivery of product to other customers and the
Company's distribution channels in the fourth quarter.
The Company is planning to introduce its own 48 volt-500 watt power
supply followed by other products with multiple output capabilities. We expect
the first wide scale use of the products to be in the wireless
telecommunications industry; known applications also exist in the computer
industry and the military. The Company's objective is to become the leader in
innovation for the power supply industry and to revolutionize the way power
supplies are perceived. The goal is to have the power supply viewed as a
strategic component of the next generation of power driven products that gives
designers a competitive edge when producing their final products.
The revised plan was to have a final design of the PFCFEM during the
third quarter and to begin producing the units at Saturn during the fourth
quarter. The PFCFEM has undergone six months of upgrades to meet a specific
customer's specifications. The goal for the third quarter has been accomplished
and management anticipates that the goal of production line deliveries in the
fourth quarter will be achieved. Sales and marketing efforts have produced leads
and interest in the technology for application in a variety of industries.
Orders from customers will be satisfied on a first come first serve basis
starting in the first quarter of 2001. Initial product will also be in the hands
of our distributors and sales representatives during fourth quarter. Beyond the
PFCFEM, the Company will develop derivative proprietary products to include
single and multi-output power supplies for the AC-DC conversion applications in
a wide range of industries and will include the overseas markets as well.
We cannot predict when revenues will be sufficient to produce a
positive cash flow or result in net profits. You should carefully consider the
following discussions of our liquidity and capital resources in relationship to
our cost of operations on a go forward basis.
RESULTS OF OPERATIONS - PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO PERIOD ENDED
SEPTEMBER 30, 2000
Revenues in the current quarter consisted mainly of sales and initial
shipments of the power factor corrected front end modules (new technology) to
customers for evaluation and testing; total sales of $20,848 this quarter
compares to sales of $70,389 of the discontinued GlitchMaster products for the
quarter ended
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September 30, 1999. The plan is to focus on development and sales of the new
product lines from this fiscal year forward. There will be a small amount of
continuing sales of the old circuitry to one significant customer through the
next several months until the existing inventory is used up.
The cost of producing the initial units in this quarter exceeded the
sales prices due to the extraordinary amount of additional work to complete such
a small number of units by our contract manufacturer. The resulting loss on the
sale of these units was $7,786 and was expected at these levels; the cost per
unit will be significantly lower when we begin to produce the units in larger
quantities and with extended production runs.
The cost of research and development for the current quarter was
$317,991 or 190% more than the previous year's quarter (in constant dollars).
The effort to finish the technology and commercialize our first products has
resulted in spending the additional monies for personnel, equipment, laboratory
space and related support costs. The first product was finalized in this
quarter; however, the research and development effort will remain at or above
these spending levels as we complete the 48-volt line of power supply products.
The greatest increase in our cost structure is for selling, general and
administrative expenses which reflects the increase in size of the Company from
quarter over quarter and year over year. The Company employed ten people in
third quarter 1999 and twenty people in third quarter 2000; the space occupied
more than doubled during the year; and the testing equipment in the laboratory
was upgraded to state-of-the-art levels. A major (non-cash) cost of
administrative expense was the stock based compensation charges of $363,113 this
year due to the recent new accounting rules for reporting the cost of cashless
exercise of employee stock options when exercised. This cost is a non-cash
expense but nevertheless a charge to earnings that was not part of the prior
year's cost structure. The selling general and administrative costs for this
quarter was $443,349 versus $230,234 for the same quarter last year, an increase
of 192% illustrating the growth of the Company and the expanded effort to become
revenue producing with the new technology. Significant costs occurred in this
quarter to put the public and investor relations programs in place for the
future, including $135,062 as the stock based cost for the warrants granted to
an investor relations company in exchange for their future services.
The Company has invested its idle cash resources in institutional money
market interest bearing accounts and into A grade commercial paper at average
yields of 6.75%. The net result is investment earnings this quarter of $159,570
versus $1,110 for the same quarter last year.
The Company continues to have a burn rate (average monthly use of cash
for overhead and operations) of approximately $250,000 per month. Additional
cash is budgeted for procuring long lead-time components to support the
anticipated production runs for the fourth quarter and beyond. While we have an
arrangement with our manufacturer, Saturn Electronics and Engineering, Inc., to
purchase parts inventory for our just-in-time production line needs, we will
still purchase hard to find and very long lead time parts to insure adequate
supplies for production line requirements. Therefore, it is critical to keep
ready cash available to meet these needs on a short notice basis as we receive
orders and increase production quantities.
LIQUIDITY AND CAPITAL RESOURCES
The Company had approximately $2,000,000 in liquid money market
accounts and $2,500,000 in short-term certificates of deposit at September 30,
2000 available to support the immediate cash needs of the operation. The term
investments in certificates of deposit all mature within the next six months or
less and will be kept totally liquid for general working capital as production
commences in volume quantities. An additional $5,000,000 of cash is invested in
commercial paper and matures in the next six to nine months.
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After providing the liquidity for operations (if necessary) as discussed above,
these monies may be re-invested in short-term commercial paper to earn the
maximum earnings for a minimum amount of risk.
At the current monthly burn rate for operations, the Company has
approximately two years (i.e. through December, 2002) of operating capital in
the bank and/or invested in short term investments. The anticipated revenue
stream beginning in the fourth quarter 2000 will partially offset the cost of
operations and in effect lengthen the period of time for measuring the number of
months and the adequacy of our cash reserves.
Capital to purchase additional equipment and further protect our
technology with patent processing, both domestically and internationally, will
be supplied with current funds. The estimate for these needs is $250,000 for
equipment and additional office space in early 2001 and $50,000 for patent work.
The Company does not currently anticipate a need for additional debt or equity
capital at this time for operations or growth beyond the total amount of
resources on hand. However, should product demand exceed our current level of
expectations resulting in larger and/or more concentrated production runs, we
may need to secure additional work in process and inventory type financing to
support higher cash flows.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
See the Quarterly Financial Statement Notes for the discussion of the
issuance of employee stock options and Director's options during this quarter.
All exercise of options were covered by a Form S-8 registration statement filed
with the SEC. Certain employees exercised their options by using the cashless
feature of the Incentive Stock Option Plan ("ISOP") and subsequently sold
shares; some employees had to exercise their options to prevent losing them when
they left the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
There was no annual meeting held and no matters submitted to
shareholders for vote.
ITEM 5. OTHER INFORMATION
On September 1, 2000, we signed a 12 month contract with Pfeiffer
Public Relations, Inc. ("PPR") to provide investor public relations services to
us. PPR is paid base compensation of $7,000 per month and has been issued
warrants to purchase 30,000 shares of restricted common stock at $9.50 for
10,000 shares, 10,000 shares at $12.50 and 10,000 shares at $15.50. The warrants
are fully vested. The contract may be canceled by either party on 30 days
notice.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit No. Description Page No.
----------- ----------- --------
27.0 Financial Data Schedule 19
(b) The Company did not file any Form 8-K reports during the quarter ended
September 30, 2000.
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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: November 3, 2000 By: /s/ Kris Budinger
----------------------
KRIS BUDINGER,
CEO and President
Date: November 3, 2000 By: /s/ Richard L. Millspaugh
-------------------------------
RICHARD L. MILLSPAUGH,
Chief Financial Officer
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