**SECURITIES AND EXCHANGE COMMISSION**

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** **

** **

**Washington, D.C. 20549**

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**FORM 10-QSB**

 

**xQUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

For the quarterlyperiod ended: **March 31, 2007**

 

OR

 

**oTRANSITION REPORT UNDER SECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934**

For the transition period from ___________ to___________

Commission File No.  **0-31805**

**POWER EFFICIENCY CORPORATION**

(Exact Name of Small Business Issuer as Specified inits Charter)

 

| **Delaware**(State or Other Jurisdiction of  Incorporation or Organization)                          |   | **22-3337365**(I.R.S. Employer Identification No.)                        |
|------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|
| ** **                                                                                           |   | ** **                                                                |
| **3960  Howard Hughes Pkwy, Suite 460  Las Vegas, NV 89109**(Address of Principal Executive Offices) |   | **(702)  697-0377**(Issuer’s Telephone Number,  Including Area Code) |

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the past 12 months (or for such shorter period that the Company wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes   x  No   o   

Indicateby check mark whether the Company is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes   o  No   x   

The number of shares outstanding of the Issuer’sCommon Stock, $.001 Par Value, as of April 30, 2007 was 38,516,676.

TransitionalSmall Business Disclosure Format (check one):   Yes   o  No   x   

 

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**POWER EFFICIENCY CORPORATIONFORM 10-QSB INDEX**

 
| PART I — FINANCIAL  INFORMATION                                                   |   |   |
|----------------------------------------------------------------------------------------|--------|--------|
| ITEM  1. Financial Statements                                                          |   |   |
| Condensed Balance Sheet as of March 31, 2007                                           |   | 3      |
| Condensed Statements of Operations for the three  months ended March 31, 2007 and 2006 |   | 4      |
| Condensed Statements of Cash Flows for the three  months ended March 31, 2007 and 2006 |   | 5      |
| Notes  to Condensed Financial Statements                                               |   | 6-9    |
| ITEM 2. Management’s Discussion and Analysis Or Plan  of Operation           |   | 10-12  |
| ITEM 3. Controls and Procedures                                                        |   | 12     |
| Part  II — OTHER INFORMATION                                                      |   |   |
| ITEM  1. Legal Proceedings                                                             |   | 13     |
| ITEM 2. Changes in Securities and Use of Proceeds                                      |   | 13     |
| ITEM 3. Defaults Upon Senior Securities                                                |   | 13     |
| ITEM 4. Submission of Matters to a Vote of Security  Holders                           |   | 13     |
| ITEM  5. Other Information                                                             |   | 13     |
| ITEM 6. Exhibits and Reports on Form 8-K                                               |   | 13     |
| Signatures                                                                             |   | 15     |
| Certification  of Chief Executive Officer as Adopted                                   |   |   |
| Certification  of Chief Financial Officer as Adopted                                   |   |   |

 

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**PARTI. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**POWER EFFICIENCY CORPORATION**CONDENSED BALANCE SHEET

Unaudited
| ** **                                                                                                          | ** ** | **March 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ASSETS                                                                                                              |       |               |       |
| CURRENT ASSETS:                                                                                                     |       |               |       |
| Cash                                                                                                                |       | $                  | 1,917,501  |   |
| Accounts receivable,  net                                                                                           |       | 35,239             |       |
| Inventory, net of  reserve                                                                                          |       | 114,841            |       |
| Prepaid expenses and  other current assets                                                                          |       | 105,715            |       |
| Total Current Assets                                                                                                |       | 2,173,296          |       |
|                                                                                                                |       |               |       |
| PROPERTY AND EQUIPMENT, Net                                                                                         |       | 104,109            |       |
| OTHER ASSETS:                                                                                                       |       |               |       |
| Patents, net                                                                                                        |       | 34,349             |       |
| Deposits                                                                                                            |       | 33,875             |       |
| Goodwill                                                                                                            |       | 1,929,963          |       |
| Inventory — long term,  net                                                                                    |       | 39,213             |       |
| Deferred financing  costs, net                                                                                      |       | 7,860              |       |
| Total Other Assets                                                                                                  |       | 2,045,260          |       |
|                                                                                                                |       |               |       |
| Total Assets                                                                                                        |       | $                  | 4,322,665  |   |
|                                                                                                                |       |               |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                           |       |               |       |
| CURRENT LIABILITIES:                                                                                                |       |               |       |
| Accounts payable and  accrued expenses                                                                              |       | $                  | 468,259    |   |
| Accrued salaries and  payroll taxes                                                                                 |       | 47,970             |       |
| Notes payable — Arens  Investment Company, net                                                                 |       | 2,778              |       |
| Total Current  Liabilities                                                                                          |       | 519,007            |       |
|                                                                                                                |       |               |       |
| LONG TERM LIABILITIES                                                                                               |       |               |       |
| Notes payable — 2008,  net                                                                                     |       | 1,476,458          |       |
|                                                                                                                |       |               |       |
| Total Liabilities                                                                                                   |       | 1,995,465          |       |
|                                                                                                                |       |               |       |
| STOCKHOLDERS’ EQUITY:                                                                                          |       |               |       |
| Series A-1 Convertible  Preferred Stock, $.001 par value, 10,000,000 shares authorized, none issued  or outstanding |       | —             |       |
| Common stock, $.001 par  value, 100,000,000 shares authorized, 38,516,676 issued and outstanding                    |       | 38,517             |       |
| Additional paid-in  capital                                                                                         |       | 26,128,395         |       |
| Accumulated deficit                                                                                                 |       | (23,839,712        | )          |
| Total Stockholders’  Equity                                                                                    |       | 2,327,200          |       |
|                                                                                                                |       |               |       |
| Total Liabilities and Stockholders’ Equity                                                                     |       | $                  | 4,322,665  |   |

** **

**Accompanying notes are an integral part of thefinancial statements**

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**POWER EFFICIENCY CORPORATION**CONDENSED STATEMENTS OF OPERATIONS

Unaudited

 
| ****                                                             | ** ** | **For the three months ended   March 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
|                                                             |       |                                       |       |   |   |
| REVENUES                                                         |       | $                                          | 36,615     |   | $ | 24,344 |   |
|                                                             |       |                                       |       |   |   |
| COST OF SALES                                                    |       | 34,639                                     |       | 28,004 |   |
|                                                             |       |                                       |       |   |   |
| GROSS MARGIN (LOSS)                                              |       | 1,976                                      |       | (3,660 | ) |
|                                                             |       |                                       |       |   |   |
| COSTS AND EXPENSES:                                              |       |                                       |       |   |   |
| Research and development                                         |       | 94,712                                     |       | 96,625 |   |
| Selling, general and  administrative                             |       | 675,455                                    |       | 889,125 |   |
| Depreciation and  amortization                                   |       | 8,975                                      |       | 6,471 |   |
| Total Costs and  Expenses                                        |       | 779,142                                    |       | 992,221 |   |
|                                                             |       |                                       |       |   |   |
| LOSS FROM OPERATIONS                                             |       | (777,166                                   | )          | (995,881 | ) |
|                                                             |       |                                       |       |   |   |
| OTHER INCOME (EXPENSE):                                          |       |                                       |       |   |   |
| Interest income                                                  |       | 12,320                                     |       | 3,718 |   |
| Interest expense                                                 |       | (156,897                                   | )          | (136,486 | ) |
| Total Other Expenses,  net                                       |       | (144,577                                   | )          | (132,768 | ) |
|                                                             |       |                                       |       |   |   |
| NET LOSS                                                         |       | $                                          | (921,743   | ) | $ | (1,128,649 | ) |
|                                                             |       |                                       |       |   |   |
| BASIC AND FULLY DILUTED  LOSS   PER COMMON SHARE                 |       | $                                          | (0.03      | ) | $ | (0.05 | ) |
|                                                             |       |                                       |       |   |   |
| WEIGHTED AVERAGE COMMON  SHARES   OUTSTANDING OUTSTANDING, BASIC |       | 36,765,138                                 |       | 23,640,933 |   |

** **

**Accompanying notes are anintegral part of the financial statements**

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**POWEREFFICIENCY CORPORATION**

CONDENSEDSTATEMENTS OF CASH FLOWS

Unaudited
| ** **                                                                    | ** ** | **For the three months ended March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                 | ** ** | **2006** | ** ** |
|                                                                          |       |                                     |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                         |       |                                     |       |   |   |
|                                                                          |       |                                     |       |   |   |
| Net loss                                                                      |       | $                                        | (921,743   | ) | $ | (1,128,649 | ) |
| Adjustments to reconcile net loss to net cash used for operating  activities: |       |                                     |       |   |   |
|                                                                          |       |                                     |       |   |   |
| Depreciation and  amortization                                                |       | 8,975                                    |       | 6,471 |   |
| Debt discount related  to issuance of debt securities                         |       | 79,555                                   |       | 70,288 |   |
| Warrants and options  issued to employees and consultants                     |       | 179,030                                  |       | 360,490 |   |
| Common stock issued for  consulting services                                  |       | —                                   |       | 90,000 |   |
| Amortization of  deferred financing costs                                     |       | 3,368                                    |       | 18,312 |   |
| Changes in assets and  liabilities:                                           |       |                                     |       |   |   |
| Accounts receivable,  trade                                                   |       | (3,047                                   | )          | 32,617 |   |
| Accounts receivable,  other                                                   |       | —                                   |       | (17,930 | ) |
| Inventory                                                                     |       | 2,798                                    |       | 2,741 |   |
| Prepaid expenses and  other current assets                                    |       | (36,032                                  | )          | (49,573 | ) |
| Accounts payable and  accrued expenses                                        |       | (68,875                                  | )          | 3,162 |   |
| Accrued salaries and  payroll taxes                                           |       | —                                   |       | (11,252 | ) |
| Net Cash Used for Operating Activities                                        |       | (755,971                                 | )          | (623,323 | ) |
|                                                                          |       |                                     |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                          |       |                                     |       |   |   |
| Purchase of property  and equipment                                           |       | (36,780                                  | )          | (65,263 | ) |
| Net Cash Used for Investing Activities                                        |       | (36,780                                  | )          | (65,263 | ) |
|                                                                          |       |                                     |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                         |       |                                     |       |   |   |
| Proceeds from issuance  of equity securities                                  |       | 1,025,000                                |       | — |   |
| Payments on notes  payable                                                    |       | (8,332                                   | )          | (8,333 | ) |
| Payments to  stockholders and former officers                                 |       | —                                   |       | (15,526 | ) |
| Net Cash Provided (Used for) by Financing Activities                          |       | 1,016,668                                |       | (23,859 | ) |
|                                                                          |       |                                     |       |   |   |
| Increase (Decrease) in cash                                                   |       | 223,917                                  |       | (712,445 | ) |
|                                                                          |       |                                     |       |   |   |
| Cash at beginning of period                                                   |       | 1,693,584                                |       | 1,009,120 |   |
|                                                                          |       |                                     |       |   |   |
| Cash at end of period                                                         |       | $                                        | 1,917,501  |   | $ | 296,675 |   |
|                                                                               |            |                                          |            |  |  |  |  |  |  |

** **

** **

**Accompanyingnotes are an integral part of the financial statements**

 

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**NOTE 1 - BASIS OF PRESENTATION**

The accompanyingfinancial statements have been prepared by the Company, without an audit. Inthe opinion of management, all adjustments have been made, which include normalrecurring adjustments necessary to present fairly the condensed financialstatements. Operating results for the three months ended March 31, 2007 are notnecessarily indicative of the operating results for the full year. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted. The Company believesthat the disclosures provided are adequate to make the information presentednot misleading. These unaudited condensed financial statements should be readin conjunction with the audited financial statements and related notes includedin the Company’s Annual Report for the year ended December 31, 2006 on Form10-KSB, Form SB-2 and Post Effective Amendment No. 2 to Form SB-2.

The preparation ofcondensed financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the dates ofthe financial statements and the reported amounts of revenue and expensesduring the reporting period. Actual results could differ from those estimates.

**NOTE 2 - GOING CONCERN:**

The accompanyingfinancial statements have been prepared assuming the Company is a goingconcern, which assumption contemplates the realization of assets andsatisfaction of liabilities in the normal course of business.  The Company suffered recurring losses fromoperations, a recurring deficiency of cash from operations, including a cashdeficiency of approximately $756,000 from operations for the three months endedMarch 31, 2007, and lacks sufficient liquidity to continue its operations.

These factors raisesubstantial doubt about the Company’s ability to continue as a goingconcern.  The financial statements do notinclude any adjustments relating to the recoverability and classification ofrecorded asset amounts or the amount of liabilities that might be necessaryshould the Company be unable to continue in existence.  Continuation of the Company as a goingconcern is dependent upon achieving profitable operations in the long-term andraising additional capital to support existing operations for at least the nexttwelve months.  Management’s plans toachieve profitability include developing new products, obtaining new customersand increasing sales to existing customers.

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**NOTE 3 — NOTES PAYABLE**

On November 30, 2006, theCompany entered into a financing transaction in which the Company issued$2,000,000, before discount, of its two year, senior, secured promissory notes(collectively the “Notes”, individually a “Note”).   The Notes bear interest of 15% perannum.  Interest due under the Notes ispayable quarterly, with the principal and final quarterly interest paymentbecoming due November 30, 2008.  TheNotes have a first priority security interest in all of the assets of theCompany.  Upon the occurrence of an “Eventof Default” (as defined in the Note, included herein as an exhibit) the holdermay, upon written notice to the Company, elect to declare the entire principalamount of the Note then outstanding together with accrued unpaid interestthereon due and payable.  Upon receipt ofsuch notice, the Company shall have seven business days to cure the Event ofDefault, and if uncured on the eighth business day, all principal and interestshall become immediately due and payable. The Company also issued with 2,500,000 warrants (the “Debt Warrants”) topurchase common stock of the Company to the holders of the Notes.  The Debt Warrants have a per share exerciseprice of $0.40 and expire November 29, 2011. 1,250,000 of the Debt Warrants are exercisable immediately, with theremaining 1,250,000 Debt Warrants becoming exercisable in equal amounts over 24months beginning December 29, 2006.  Thecommon stock issuable upon exercise of the Debt Warrants has piggybackregistration rights, and can be included in the Company’s next registrationstatement.  The Debt Warrants have acashless exercise provision, but only if the registration statement on whichthe common stock issuable upon exercise of the Debt Warrants is not theneffective.

The $2,000,000 loanconsisted of $550,000 from Steven Strasser, the Company’s Chairman, ChiefExecutive Officer and the Company’s largest beneficial shareholder, $200,000from Commerce Energy Group, Inc, the Company’s second largest shareholder priorto the Offering, and $1,250,000 from individual investors.  $1,450,000 of these Notes came from theexchange of existing promissory notes of the Company.

The Company’s previouslyissued notes, including $1,464,306 issued on October 27, 2004, $125,000 issuedon February 24, 2005 (collectively the “Pali Notes”) and $1,500,000 issued toEMTUCK, were paid off and such paid off note holders no longer hold a securityinterest in the Company’s assets.

**NOTE 4 —CONSULTING AGREEMENTS**

On March 1, 2007, theCompany entered into a consulting agreement with a sales and marketingadvisor.  The term of this agreement isfor 12 months and calls for the advisor to assist the Company in sales andmarketing strategies and business development. For his services, the Company agreed to issue the advisor 100,000 warrants,vesting quarterly form the date of the agreement.  In addition, the Company will reimburse allreasonable and necessary expenses incurred by the consultant.  The agreement contains confidentiality andnon-competition provisions.  Each partyhas the right to cancel this agreement with no less than 10 days notice inwriting.

On March 21, 2007, theCompany entered into a consulting agreement with a product manager.  The term of this agreement is for two yearsand calls for the product manager to assist the company in product developmentand marketing.  For his services, theCompany agreed to pay the product manager $6,250 per month, due on the 1st of each 

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month, as well as 400,000stock options, which vest over the term of the agreement.  In addition, the Company will reimburse allreasonable and necessary expenses incurred by the product manager.  The agreement contains confidentiality andnon-competition provisions.  Each partyhas the right to cancel this agreement upon 30 days written notice.  On April 11, 2007, the Company and the productmanager mutually agreed to terminate this agreement.  All options issued in connection with thisagreement to the product manager were cancelled as of April 11, 2007.

**NOTE 5 — STOCKHOLDERS’EQUITY**

On January 19, 2007, theCompany issued and sold 666,668 shares of its common stock and 333,334 warrantsto purchase common stock (the “Equity Warrants”), in a private offering ofcommon stock and Equity Warrants (the “Offering”) for $200,000 in cash.  The per share purchase price of the commonstock was $0.30.  The Equity Warrantshave a per share exercise price of $0.40, are exercisable immediately andexpire January 18, 2012.  The Companymust use its best efforts to file a registration statement to register thecommon stock issued, together with those issuable upon exercise of the EquityWarrants, not later than 60 days from the termination of the Offering, and mustuse its best efforts to have the Registration Statement declared effective notlater than 120 days from the termination of the Offering.  Shouldthe Company not be able to meet these registration requirements, the Companymay be assessed liquidating damages.  TheOffering terminated on March 31, 2007. The Equity Warrants have a cashless exercise provision, but only if theRegistration Statement is not effective at the time of exercise.

On March 2, 2007, theCompany issued and sold 1,583,336 shares of its common stock and 791,668 EquityWarrants, in the Offering for $475,000 in cash, under the same terms asdescribed above.

On March 7, 2007, the Companyissued and sold 333,334 shares of its common stock and 166,667 Equity Warrants,in the Offering, for $100,000 in cash, under the same terms as described above.

On March 30, 2007, theCompany issued and sold 500,000 shares of its common stock and 250,000 EquityWarrants, in the Offering, for $150,000 in cash, under the same terms asdescribed above.

On March 31, 2007, theCompany issued and sold 333,334 shares of its common stock and 166,667 EquityWarrants in the Offering, for $100,000 in cash, under the same terms asdescribed above.

**NOTE 6 — ACCOUNTING FORSHARE BASED PAYMENTS**

Beginning in 2006, the Company is accounting foremployee stock options as compensation expense, in accordance with SFAS No.123R, “Share Based Payments.”  SFAS No.123R requires companies to expense the value of employee stock options andsimilar awards, and applies to all outstanding and vested stock-basedawards.  Shown in the table at the end ofthis note are the Company’s operations on an unaudited, pro forma basis withnon-cash compensation and non-cash interest expense stated separately.

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The assumptions used in calculating the fair value ofshare-based payment awards represent management’s best estimates, but theseestimates involve inherent uncertainties and the application of managementjudgment.  As a result, if factors changeand the Company uses different assumptions, the Company’s stock-basedcompensation expense could be materially different in the future. The impact ofapplying SFAS No. 123R approximated $179,000 in additional compensation expenseduring the first quarter of 2007 and $360,000 during the first quarter of2006.  Such amount is included inselling, general and administrative expense and research and development expenseson the statement of operations.
| ** **                                                     | ** ** | **For the three months ended March 31 (Unaudited)** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
|                                                           |       |                                                |       |   |   |
| Total Revenues                                                 |       | $                                                   | 36,615     |   | $ | 24,344 |   |
| Total Cost of Product Revenues                                 |       | 34,639                                              |       | 28,004 |   |
|                                                           |       |                                                |       |   |   |
| Gross Margin                                                   |       | 1,976                                               |       | (3,660 | ) |
|                                                           |       |                                                |       |   |   |
| Costs and Expenses:                                            |       |                                                |       |   |   |
|  Research and development                                 |       | 86,705                                              |       | 96,625 |   |
|  Selling, general and  administration                     |       | 503,798                                             |       | 438,635 |   |
|  SFAS 123 stock option expense*                           |       | 179,030                                             |       | 360,490 |   |
|  Other non-cash consideration*                            |       | —                                              |       | 90,000 |   |
|  Depreciation and amortization                            |       | 8,975                                               |       | 6,471 |   |
|                                                           |       |                                                |       |   |   |
| Total Costs and Expenses                                       |       | 778,508                                             |       | 992,221 |   |
|                                                           |       |                                                |       |   |   |
| Loss From Operations                                           |       | (776,532                                            | )          | (995,881 | ) |
|                                                           |       |                                                |       |   |   |
| Other (Expense) Income:                                        |       |                                                |       |   |   |
| Cash interest (expense) income, net                            |       | (65,022                                             | )          | (62,480 | ) |
| Non-cash interest (expense) income,net*                        |       | (79,555                                             | )          | (70,288 | ) |
|                                                           |       |                                                |       |   |   |
| Total Other (Expense) Income                                   |       | (144,577                                            | )          | (132,768 | ) |
|                                                           |       |                                                |       |   |   |
| Net Loss                                                       |       | $                                                   | (921,109   | ) | $ | (1,128,649 | ) |
|                                                           |       |                                                |       |   |   |
| *Sum of non-cash compensation and non-cash interest expense    |       | 258,585                                             |       | 520,778 |   |
|                                                           |       |                                                |       |   |   |
| Net Loss excluding non-cash compensation and non-cash interest |       | $                                                   | (662,524   | ) | $ | (607,871 | ) |
|                                                                |            |                                                     |            |  |  |  |  |  |  |  |  |

 

**NOTE 7 — OTHER EVENTS**

On March 19, 2007, theCompany reached an agreement with GE Fanuc Automation North America, Inc. (“GE”)to cease using its Power Genius name for its products.  As consideration, GE will pay the Company atotal of $20,000 in cash.

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATION**

**OVERVIEW**

The Companygenerates revenues from a single business segment: the design, development,marketing and sale of proprietary solid state electrical components designed toreduce energy consumption in alternating current induction motors.

The Company begangenerating revenues from sales of its patented *EcoPro*line of motor controllers in late 1995. As of March 31, 2007, the Company hadtotal stockholders’ equity of $2,327,834 primarily due to (i) the Company’ssale of 12,950,016 shares of common stock in a private stock offering fromNovember of 2006 through March of 2007, (ii) the Company’s sale of 14,500,000shares of common stock in a private stock offering in July and August of 2005,(iii) the Company’s sale of 2,346,233 shares of Series A-1 ConvertiblePreferred stock to Summit Energy Ventures, LLC in June of 2002 and (iv) theconversion of notes payable of approximately $1,047,000 into 982,504 shares ofSeries A-1 Convertible Preferred stock in October of 2003.

**RESULTSOF OPERATIONS: FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006.**

**REVENUES**

Total revenues forthe three months ended March 31, 2007, were approximately $37,000 compared to$24,000 for the three months ended March 31, 2006, an increase of $13,000 or54%. This increase is mainly attributable to an increase in sales in theelevator and escalator market segment.

**COSTOF SALES**

Totalmanufacturing cost of product revenues, which includes material and directlabor and overhead for the three months ended March 31, 2007 were approximately$35,000 compared to approximately $28,000 for the three months ended March 31,2006, an increase of $7,000 or 25%.  As apercentage of sales, total cost of sales decreased to approximately 95% for thethree months ended March 31, 2007 compared to approximately 117% for the threemonths ended March 31, 2006.  Thedecrease in the costs as a percentage of sales was primarily due to lower coststo modify existing stock units for sale, partially offset by an increase indirect labor costs per unit.  Also,overhead costs were $2,900 for the three months ended March 31, 2007 comparedto $2,000 for the three months ended March 31, 2006.  Overhead costs as a percentage of salesdecreased due to higher sales volumes in the first three months of 2007.

**OPERATINGEXPENSES**

**Researchand Development Expenses**

Research anddevelopment expenses were approximately $95,000 for the three months endedMarch 31, 2007, as compared to approximately $97,000 for the three months endedMarch 31, 2006, a $2,000 or a 2% decrease.  This decrease is mainlyattributable to 

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fewer personnel inthe Company’s research and development department, which resulted in lowersalaries and related payroll costs, partially offset by increased developmentcosts for the Company’s next generation three phase and single phasecontrollers.

**Selling,General and Administrative Expenses**

Selling, generaland administrative expenses were approximately $675,000 for the three monthsended March 31, 2007, as compared to $890,000 for the three months ended March31, 2006 a decrease of $215,000 or 24%. The decrease in selling, general andadministrative expenses compared to the prior year was primarily due to adecrease in payroll and payroll related costs related to SFAS 123R (see Note 6to the condensed financial statements).

Interest expensewas approximately $157,000 for the three months ended March 31, 2007, ascompared to $136,000 for the three months ended March 31, 2006, an increase of$21,000 or 15%.  The increase in interestexpense is primarily related to a non-cash finance charge related to the valueof stock warrants issued in connection with the secured notes issued onNovember 30, 2006.  Total non-cashinterest expense for the three months ended March 31, 2007 and 2006 wasapproximately $80,000 and $70,000, respectively.

**FinancialCondition, Liquidity, and Capital Resources**

Since inception,the Company has financed its operations primarily through the sale of itsequity securities, debt securities and using available bank lines of credit. Asof March 31, 2007, the Company had cash of $1,917,501.

Cash used foroperating activities for the three months ended March 31, 2007 was $755,971,which consisted of: a net loss of $921,743; less depreciation and amortizationof $8,975, debt discount related to the issuance of debt securities of $79,555,warrants and options issued to employees and consultants of $179,030,amortization of deferred financing costs of $3,368, and a decrease in inventoryof $2,798; offset by increases in accounts receivable of $3,047, and prepaidexpenses and other current assets of $36,032, and a decrease in accountspayable and accrued expenses of $68,875.

Cash used foroperating activities for the three months ended March 31, 2006 was $623,323,which consisted of: a net loss of $1,128,649; less depreciation andamortization of $6,471, debt discount related to the issuance of debtsecurities of $70,288, warrants and options issued to employees and consultantsof $360,490, common stock issued in connection with consulting services of$90,000, and amortization of deferred financing costs of $18,312, decreases intrade accounts receivable of $32,617, inventory of $2,741, and an increase inaccounts payable of $3,162; offset by increases in other accounts receivable of$17,930, prepaid expenses and other current assets of $49,573, and a decreasein accrued salaries and payroll taxes of $11,252 .

Net cash used forinvesting activities for the three months ended March 31, 2007 was $36,780, comparedto $65,263 for the three months ended March 31, 2006. The amounts for bothperiods consisted of the purchase of fixed assets.

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Net cash providedby financing activities for the three months ended March 31, 2007 was$1,016,668, which consisted of the proceeds from the issuance of equitysecurities of $1,025,000, offset by repayments of notes payable of $8,332.  Net cash used for financing activities forthe first quarter of fiscal year 2006 was $23,859, which consisted ofrepayments of notes payable of $8,333 and repayments of loans to stockholdersand former officers of $15,526.

The Companyexpects to experience growth in its operating expenses, particularly inresearch and development and selling, general and administrative expenses, forthe foreseeable future in order to execute its business strategy. As a result,the Company anticipates that operating expenses will constitute a material useof any cash resources.

Since capitalresources are insufficient to satisfy the Company’s liquidity requirements,management intends to sell additional equity or debt securities.   The Company believes it can raise additionalfunds through private placements of equity or debt.  However, there are no assurances thatsufficient capital can be raised.

**CashRequirements and Need for Additional Funds**

The Companyanticipates a substantial need for cash to fund its working capitalrequirements.  In accordance with theCompany’s prepared expansion plan, it is the opinion of management thatapproximately $3.0 - $3.6 million will be required to cover operating expenses,including, but not limited to, the development of the Company’s next generationproducts, marketing, sales and operations during the next twelve months.  In addition, the Company has debt securitiesmaturing in the next twelve months.

**ITEM 3.CONTROLS AND PROCEDURES**

**(a)Evaluation of Disclosure Controls and Procedures.**  Under the supervision and with theparticipation of its Chief Executive Officer and Chief Financial Officer,management has evaluated the effectiveness of the Company’s disclosure controlsand procedures as of the end of the period covered by this report pursuant toRule 13a-15(b) under the Securities Exchange Act of 1934 (the ExchangeAct).  Based on that evaluation, theChief Executive Officer and Chief Financial Officer have concluded that, as ofthe end of the period covered by this report, the Company’s disclosure controlsand procedures are effective in ensuring that information required to bedisclosed in the Company’s Exchange Act reports is (1) recorded, processed,summarized and reported in a timely manner, and (2) accumulated andcommunicated to the Company’s management, including its Chief Executive Officerand Chief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosure.

**(b) Changes in Internal Controls.**There were no significant changes in the Company’s internal controls or inother factors that could significantly affect these controls subsequent to thedate of their evaluation, nor were there any significant deficiencies ormaterial weaknesses in the Company’s internal controls. Accordingly, nocorrective actions were required or undertaken.

 

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**PART II — OTHER INFORMATION**

**ITEM 1.LEGAL PROCEEDINGS**

None.

**ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None.

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

None

**ITEM 5. OTHER INFORMATION**

None

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

(a) Exhibits
| Number | ** ** | **Description  of Document**                                                                                                                                                                                        | ** ** | **Location**   |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|
|   |       |                                                                                                                                                                                                                |       |           |
|   |       |                                                                                                                                                                                                                |       |           |
| 31.1   |       | Certification by the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                            |       | Filed herewith |
| 31.2   |       | Certification by the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                            |       | Filed herewith |
| 32.1   |       | Certification by the Chief Executive Officer  pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code  (18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002. |       | Filed herewith |
| 32.2   |       | Certification by the Chief Financial Officer  pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18  U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |       | Filed herewith |

 

(b) Reports on Form 8-K.

OnJanuary 11, 2007, the Company filed a current report on Form 8-K reporting anItem 5 event.  The Item 5 event involvedthe resignation of the Company’s Chief Operating Officer, who also served as adirector of the Company.  That form isincorporated herein by reference.

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OnJanuary 24, 2007, the Company filed a current report on Form 8-K reporting anItem 1, Item 3, and an Item 5 event.  TheItem 1 and the Item 3 event involved the sale and issuance of 666,668 shares ofthe Company’s common stock and 333,334 warrants, for $200,000, in connectionwith a private equity offering.  The Item5 event involved the election of a new director to the Company’s Board ofDirectors.  That form is incorporatedherein by reference.

OnMarch 8, 2007, the Company filed a current report on Form 8-K reporting an Item1, and an Item 3 event.  The Item 1 andthe Item 3 event involved the sale and issuance of 1,916,670 shares of theCompany’s common stock and 958,335 warrants for $575,000, in connection with aprivate equity offering.  That form isincorporated herein by reference.

OnMarch 23, 2007, the Company filed a current report on Form 8-K reporting anItem 8 event.  The Item 8 event involvedthe Company announcing its record date and meeting date for its 2007 AnnualMeeting of Stockholders.  That form isincorporated herein by reference.

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**SIGNATURES**

 In accordance with the requirements of the SecuritiesExchange Act of 1934, the Company caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 

 
|                               |   |   | POWER EFFICIENCY CORPORATION   (Company) |
|-------------------------------|--------|--------|------------------------------------------|
|                          |   |   |                                     |   |
|                          |   |   |                                     |   |
| Date:  May 15, 2007 |   |   | By:                                      | /s/  Steven Strasser |   |   |
|                          |   |   |                                     | Chief Executive Officer |   |   |
|                          |   |   |                                     |   |   |   |
|                          |   |   |                                     |   |   |   |
| Date:  May 15, 2007 |   |   | By:                                      | /s/  John Lackland |   |   |
|                          |   |   |                                     | Chief Financial Officer (Principal  Financial and Accounting Officer) |   |   |

 

 

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