**SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

 

**FORM 10-QSB**

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

For the quarterly periodended: March 31, 2005

OR

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

For the transition periodfrom             to               

Commission FileNo.  **0-31805**

 

**POWEREFFICIENCY CORPORATION**(Exact Name of Small Business Issuer as Specified in its Charter)

 

| **Delaware**  (State or Other Jurisdiction of  Incorporation or Organization)                    | ** ** | **22-3337365**  (I.R.S. Employer Identification No.)                       |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|
| ** **                                                                                       | ** ** | ** **                                                                 |
| **3900 Paradise Road, Suite 283  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 registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý No o

The number of shares outstanding of the Issuer’sCommon Stock, $.001 Par Value, as of March 31, 2005 was 5,020,418.

Transitional Small Business Disclosure Format (checkone):  Yes  o No ý

 

 

** **

 

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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, 2005                                          |   |   |
|                                                                                  |   |   |
| Condensed Statements of Operations for the three months ended March 31, 2005 and 2004 |   |   |
|                                                                                  |   |   |
| Condensed Statements of Cash Flows for the three months ended March 31, 2005 and 2004 |   |   |
|                                                                                  |   |   |
| Notes to Condensed Financial Statements                                               |   |   |
|                                                                                  |   |   |
| ITEM 2. Management’s Discussion and Analysis Or Plan of Operation                |   |   |
|                                                                                  |   |   |
| ITEM 3. Controls and Procedures                                                       |   |   |
|                                                                                  |   |   |
| Part II — OTHER INFORMATION                                                      |   |   |
|                                                                                  |   |   |
| ITEM 1. Legal Proceedings                                                             |   |   |
|                                                                                  |   |   |
| ITEM 2. Changes in Securities and Use of Proceeds                                     |   |   |
|                                                                                  |   |   |
| ITEM 3. Defaults Upon Senior Securities                                               |   |   |
|                                                                                  |   |   |
| ITEM 4. Submission of Matters to a Vote of Security Holders                           |   |   |
|                                                                                  |   |   |
| ITEM 5. Other Information                                                             |   |   |
|                                                                                  |   |   |
| ITEM 6. Exhibits and Reports on Form 8-K                                              |   |   |
|                                                                                  |   |   |
| Signatures                                                                            |   |   |
|                                                                                  |   |   |
| Certification  of Chief Executive Officer as Adopted                                  |   |   |
|                                                                                  |   |   |
| Certification of Chief Financial Officer  as Adopted                                  |   |   |

** **

**2**

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**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**POWER EFFICIENCY CORPORATION**CONDENSED BALANCE SHEET

Unaudited

 
| ** **                                                                                                                      | ** ** | **March 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ASSETS                                                                                                                          |       |               |       |
| CURRENT ASSETS:                                                                                                                 |       |               |       |
| Cash                                                                                                                            |       | $                  | 73,544     |   |
| Accounts receivable, net                                                                                                        |       | 30,916             |       |
| Inventory, net of reserve                                                                                                       |       | 187,541            |       |
| Prepaid expenses and other current assets                                                                                       |       | 198,135            |       |
| Total Current Assets                                                                                                            |       | 490,136            |       |
|                                                                                                                            |       |               |       |
| PROPERTY AND EQUIPMENT, Net                                                                                                     |       | 21,209             |       |
|                                                                                                                            |       |               |       |
| OTHER ASSETS:                                                                                                                   |       |               |       |
| Patents, net                                                                                                                    |       | 6,379              |       |
| Goodwill                                                                                                                        |       | 1,929,963          |       |
| Website, net                                                                                                                    |       | 8,146              |       |
| Deferred financing costs, net                                                                                                   |       | 100,025            |       |
| Total Other Assets                                                                                                              |       | 2,044,513          |       |
|                                                                                                                            |       |               |       |
| Total Assets                                                                                                                    |       | $                  | 2,555,858  |   |
|                                                                                                                            |       |               |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                       |       |               |       |
|                                                                                                                            |       |               |       |
| CURRENT LIABILITIES:                                                                                                            |       |               |       |
| Accounts payable and accrued expenses                                                                                           |       | $                  | 545,988    |   |
| Accrued salaries and payroll taxes                                                                                              |       | 65,632             |       |
| Notes payable — former officers                                                                                            |       | 76,870             |       |
| Total Current Liabilities                                                                                                       |       | 688,490            |       |
|                                                                                                                            |       |               |       |
| LONG TERM LIABILITIES                                                                                                           |       |               |       |
| Notes payable — Pali Capital, net                                                                                          |       | 1,150,004          |       |
| Notes payable — former officers                                                                                            |       | 4,471              |       |
| Total Long Term Liabilities                                                                                                     |       | 1,154,475          |       |
|                                                                                                                            |       |               |       |
|                                                                                                                            |       | 1,842,965          |       |
|                                                                                                                            |       |               |       |
| STOCKHOLDERS’ EQUITY:                                                                                                      |       |               |       |
| Series A-1 Convertible Preferred Stock, $.001 par value, 10,000,000  shares authorized, 3,328,737 shares issued and outstanding |       | 3,329              |       |
| Common stock, $.001 par value, 7,142,857 shares authorized, 5,020,418  issued and outstanding                                   |       | 5,020              |       |
| Additional paid-in capital                                                                                                      |       | 16,412,791         |       |
| Accumulated deficit                                                                                                             |       | (15,708,247        | )          |
| Total Stockholders’ Equity                                                                                                 |       | 712,893            |       |
|                                                                                                                            |       |               |       |
| Total Liabilities and Stockholders’ Equity                                                                                 |       | $                  | 2,555,858  |   |
|                                                                                                                                 |            |                    |            |  |  |

 

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

 

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**POWER EFFICIENCY CORPORATION**CONDENSED STATEMENTS OFOPERATIONS

Unaudited

 
| ** **                                             | ** ** | **For the three months ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| REVENUES:                                              |       |                                      |       |   |   |
| Product                                                |       | $                                         | 51,091     |   | $ | 84,288 |   |
| Miscellaneous                                          |       | —                                    |       | 5,250 |   |
| Total Revenues                                         |       | 51,091                                    |       | 89,538 |   |
|                                                   |       |                                      |       |   |   |
| COMPONENTS OF COST OF SALES:                           |       |                                      |       |   |   |
| Material, labor and overhead                           |       | 40,458                                    |       | 65,113 |   |
| Inventory obsolescence and other write-offs            |       | —                                    |       | 29,484 |   |
| Total Cost of Sales                                    |       | 40,458                                    |       | 94,597 |   |
|                                                   |       |                                      |       |   |   |
| GROSS MARGIN (LOSS)                                    |       | 10,633                                    |       | (5,059 | ) |
|                                                   |       |                                      |       |   |   |
| COSTS AND EXPENSES:                                    |       |                                      |       |   |   |
| Research and development                               |       | 55,404                                    |       | 114,194 |   |
| Selling, general and administrative                    |       | 191,542                                   |       | 448,040 |   |
| Depreciation and amortization                          |       | 20,558                                    |       | 18,520 |   |
| Total Costs and Expenses                               |       | 267,504                                   |       | 580,754 |   |
|                                                   |       |                                      |       |   |   |
| LOSS FROM OPERATIONS                                   |       | (256,871                                  | )          | (585,813 | ) |
|                                                   |       |                                      |       |   |   |
| OTHER EXPENSE:                                         |       |                                      |       |   |   |
| Interest expense                                       |       | (124,745                                  | )          | (1,324 | ) |
| Total Other Expenses                                   |       | (124,745                                  | )          | (1,324 | ) |
|                                                   |       |                                      |       |   |   |
| NET LOSS                                               |       | $                                         | (381,616   | ) | $ | (587,137 | ) |
|                                                   |       |                                      |       |   |   |
| BASIC AND FULLY DILUTED LOSS PER COMMON SHARE          |       | $                                         | (0.08      | ) | $ | (0.19 | ) |
|                                                   |       |                                      |       |   |   |
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING OUTSTANDING |       | 5,020,418                                 |       | 3,035,886 |   |

 

**Accompanying notes are an integral part of the financial statements**

** **

 

4

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**POWER EFFICIENCY CORPORATION**

CONDENSEDSTATEMENTS OF CASH FLOWS

Unaudited

 
| ** **                                                                                                                                                                                                                                           | ** ** | **For the three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                           | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                                                                                           | ** ** | **(Restated)**                            | ** ** | **(Restated)** | ** ** |
|                                                                                                                                                                                                                                                 |       |                                      |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                                                                                                                                                |       |                                      |       |   |   |
|                                                                                                                                                                                                                                                 |       |                                      |       |   |   |
| Net loss                                                                                                                                                                                                                                             |       | $                                         | (381,616   | ) | $ | (587,137 | ) |
| Adjustments to reconcile net loss to net cash used for operating  activities:                                                                                                                                                                        |       |                                      |       |   |   |
|                                                                                                                                                                                                                                                 |       |                                      |       |   |   |
| Depreciation and amortization                                                                                                                                                                                                                        |       | 20,558                                    |       | 18,520 |   |
| Bad debt expense                                                                                                                                                                                                                                     |       | —                                    |       | 2,500 |   |
| Inventory obsolescence reserve and other write-offs                                                                                                                                                                                                  |       | —                                    |       | 29,484 |   |
| Debt discount related to issuance of debt securities                                                                                                                                                                                                 |       | 66,998                                    |       | — |   |
| Warrants and options issued in connection with the issuance of debt  securities                                                                                                                                                                      |       | 2,379                                     |       |   |   |
| Changes in assets and liabilities:                                                                                                                                                                                                                   |       |                                      |       |   |   |
| (Increase) Decrease in:                                                                                                                                                                                                                              |       |                                      |       |   |   |
| Accounts receivable                                                                                                                                                                                                                                  |       | 618                                       |       | (15,208 | ) |
| Inventory                                                                                                                                                                                                                                            |       | 276                                       |       | 23,183 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                            |       | 787                                       |       | (2,234 | ) |
| Restricted cash for interest escrow                                                                                                                                                                                                                  |       | 36,180                                    |       | — |   |
| Increase(Decrease) in:                                                                                                                                                                                                                               |       |                                      |       |   |   |
| Accounts payable and accrued expenses                                                                                                                                                                                                                |       | (93,279                                   | )          | 71,046 |   |
| Accrued salaries and payroll taxes                                                                                                                                                                                                                   |       | (62,835                                   | )          | 22,452 |   |
| Net Cash Used for Operating Activities                                                                                                                                                                                                               |       | (409,934                                  | )          | (437,394 | ) |
|                                                                                                                                                                                                                                                 |       |                                      |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                                                                                                                                                                                 |       |                                      |       |   |   |
| Purchase of property and equipment                                                                                                                                                                                                                   |       | —                                    |       | (14,071 | ) |
| Net Cash Used for Investing Activities                                                                                                                                                                                                               |       | —                                    |       | (14,071 | ) |
|                                                                                                                                                                                                                                                 |       |                                      |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                                                                                                                                |       |                                      |       |   |   |
| Deferred financing costs                                                                                                                                                                                                                             |       | (15,000                                   | )          | — |   |
| Proceeds from issuance of equity securities                                                                                                                                                                                                          |       | —                                    |       | 184,800 |   |
| Proceeds from issuance of debt securities                                                                                                                                                                                                            |       | 125,000                                   |       | — |   |
| Payments to stockholders and former officers                                                                                                                                                                                                         |       | (18,993                                   | )          | — |   |
| Net Cash Provided by Financing Activities                                                                                                                                                                                                            |       | 91,007                                    |       | 184,800 |   |
|                                                                                                                                                                                                                                                 |       |                                      |       |   |   |
| Decrease in cash                                                                                                                                                                                                                                     |       | (318,927                                  | )          | (266,665 | ) |
|                                                                                                                                                                                                                                                 |       |                                      |       |   |   |
| Cash at beginning of period                                                                                                                                                                                                                          |       | 392,471                                   |       | 285,508 |   |
|                                                                                                                                                                                                                                                 |       |                                      |       |   |   |
| Cash at end of period                                                                                                                                                                                                                                |       | $                                         | 73,544     |   | $ | 18,843 |   |
| NON-CASH FINANCING TRANSACTIONS — Common stock issued in conjunction  with the settlement of accounts payable and accrued salaries\ payroll\other  expenses settlement of accounts payable and accrued salaries\payroll\other  accrued expenses |       | $                                         | —     |   | $ | 20,000 |   |
|                                                                                                                                                                                                                                                      |            |                                           |            |  |  |  |  |  |

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

 

5

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**NOTE 1 - BASIS OF PRESENTATION**

The accompanying financial statements have beenprepared by the Company, without an audit. In the opinion of management, alladjustments have been made, which include normal recurring adjustmentsnecessary to present fairly the condensed financial statements. Operatingresults for the three months ended March 31, 2005 are not necessarilyindicative of the operating results for the full year. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted. The Company believes that the disclosuresprovided are adequate to make the information presented not misleading. Certainamounts in the financial statements have been reclassified from prior periodpresentations. These unaudited condensed financial statements should be read inconjunction with the audited financial statements and related notes included inthe Company’s Annual Report for the year ended December 31, 2004 on Form 10-KSBand Form 10-KSB/A.

The preparation of condensed financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the dates of the financial statements and thereported amounts of revenue and expenses during the reporting period. Actualresults could differ from those estimates.

**NOTE 2 - GOING CONCERN:**

The accompanying financialstatements have been prepared assuming the Company is a going concern, whichassumption contemplates the realization of assets and satisfaction ofliabilities in the normal course of business. The Company suffered recurring losses from operations, a recurringdeficiency of cash from operations, including a cash deficiency ofapproximately $410,000 from operations for the three months ended March 31,2005, 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.

**NOTE3 - NOTES PAYABLE**

On February 24, 2005, theCompany entered into a financing transaction in which the Company issued$125,000 in Senior Secured Notes under the same offering through which theCompany issued $1,464,806 in Senior Secured Notes in October 2004. Thisoffering was originally intended to close on December 31, 2004 but theplacement agent and the Company agreed to keep the offering open past theoriginal closing date. After the February 24 closing the offering wasterminated.  Under the original terms,all of the 

 

6

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Senior Secured Notes were tobecome due one year after issuance, but on March 28, 2005, the Company receivedconsent, from all of the Senior Secured Note holders of the first and secondaryoffering, to extend the maturity date for an additional year.  These notes will now mature in October 2006and February 2007, respectively.

The holders of the Noteswere issued 144,232 warrants, with an exercise price of $0.65 per share, inconnection with the issuance of $125,000 in Notes.  The value of suchwarrants approximates $24,000 and was reflected as debt discount which is beingamortized to interest expense over the term of the Notes.  The Company paid a placement agent acommission of $12,500 and 14,423 warrants which are being amortized over thelife of the Notes, with the same rights and provisions as the Warrants issuedto the holders of the Notes.

**NOTE4 - STOCKHOLDERS’ EQUITY**

 

In connection with theissuance of $125,000 in Senior Secured Notes, the Company issued 144,232warrants to the Note holders and 14,423 warrants as a fee to the placementagent of the offering.  The warrants havean exercise price of $0.65 per share and expire in five years.  (See Note 3). The total value of warrants issued approximates $25,000.

 

**NOTE5 - SUBSEQUENT EVENTS**

 

On April 11, 2005, the Company began leasing roughly1,500 square feet of office space in Las Vegas, Nevada. The lease is betweenGlenborough IX LLC and a management company owned by the current ChiefExecutive Officer and was signed on February 7, 2005. On February 10, 2005, theCompany’s board of directors voted to assume all payments under this lease andindemnify the Chief Executive Officer’s management company for all payments andobligations for the lease. The lease includes a payment of $2,728 per month,which includes all cleaning and utilities, except phone and internet service.The term of the lease is one year.

 

On April 28, 2005, theCompany issued 1,204,819 shares of series A-1 convertible preferred stock,convertible into 1,000,000 shares of common stock, and warrants to purchase500,000 shares of common stock to Summit for an aggregate purchase price of$200,000 in cash.

On April 28, 2005, theCompany issued 180,723 shares of series A-1 convertible preferred stock,convertible into 150,000 shares of common stock and warrants to purchase 75,000shares of common stock, to Commerce Energy Group, Inc., an affiliate ofCommonwealth Energy Corporation, in consideration of Commerce Energy Group’scancellation of a license agreement with the Company for single-phasetechnology.  As a result, the Companywill receive 100% of the benefits of future sales of the single-phase products.  The patent was originally valued atapproximately $6,000.

** **

**7**

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** **

** **

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOR PLAN OF OPERATION**

 

**OVERVIEW**

 

The Registrant generates revenues from a single business segment: thedesign, development, marketing and sale of proprietary solid state electricalcomponents designed to reduce energy consumption in alternating currentinduction motors.  The Registrant begangenerating revenues from sales of its patented *PowerCommander*® line of motor controllers in late 1995.

 

**RESULTS OF OPERATIONS: FOR THE THREEMONTHS ENDED MARCH 31, 2005 AND 2004.**

 

**REVENUES**

 

Total revenues for the three months ended March 31, 2005, wereapproximately $51,000 compared to $90,000 for the three months ended March 31,2004, a decrease of $39,000 or 43%. This decrease is mainly attributableto a decrease in sales in the elevator and escalator market segment, due todelays in closing several sales.  Also,$5,250 of miscellaneous income was recognized for a government grant receivedassociated with development expenses related to a medium voltageproduct application during the three months ended March 31, 2004. No such income was recognized for thethree months ended March 31, 2005.

 

**COST OFSALES**

 

Total manufacturing cost of product revenues, which includes materialand direct labor, overhead, and inventory obsolescence and other write-offs forthe three months ended March 31, 2005 were approximately $40,000 compared toapproximately  $95,000 for the threemonths ended March 31, 2004, a decrease of $55,000 or 58%.  As a percentage of sales, total cost of salesdecreased to approximately 79% for the three months ended March 31, 2005compared to approximately 112% for the three months ended March 31, 2004.  The decrease in the costs as a percentage ofsales was primarily due to a charge to inventory for obsolescence and otherwrite-offs of approximately $30,000 in 2004. Also, overhead costs were $9,000 for the three months ended March 31,2005 compared to $24,000 for the three months ended March 31, 2004.  Overhead costs as a percentage of salesdecreased due to the Company utilizing a turn-key manufacturer forproduction.  Material and labor costs asa percentage of sales decreased to 43% for the three months ended March 31,2005 compared to 49% for the three months ended March 31, 2004. The decreasewas due to a change in the mix of distributor sales compared to direct end userrevenues.  Generally, distributor salesresult in lower product pricing compared to direct end user sales.

 

 

8

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**OPERATINGEXPENSES**

 

**Researchand Development Expenses**

 

Research and development expenses were approximately $55,000 for thethree months ended March 31, 2005, as compared to approximately $114,000 forthe three months ended March 31, 2004, a $59,000 or a 52% decrease.  Thisdecrease is mainly attributable to the Company’s restructuring and costreduction program implemented in August and September of 2004.

 

**Selling,General and Administrative Expenses**

 

Selling, general and administrative expenses were approximately$192,000 for the three months ended March 31, 2005, as compared to $448,000 forthe three months ended March 31, 2004 a decrease of $256,000 or 57%. The decreasein selling, general and administrative expenses over the prior year was dueprimarily to a decrease in payroll and payroll related costs, as well as theelimination of some fixed costs related to the reduction in workforce and theCompany’s decision to restructure its operations in August and September of2004.

 

**Financial Condition, Liquidity, andCapital Resources: For the Quarter Ended March 31, 2005**

 

Since inception, the Registrant has financed its operations primarilythrough the sale of its equity securities, debt securities and using availablebank lines of credit. As of March 31, 2005, the Registrant had cash of $73,544.

 

Cash used for operating activities for the three months ended March 31,2005 was $409,934, which consisted of: a net loss of $381,616; lessdepreciation and amortization of $20,558, debt discount related to issuance ofdebt securities of $66,998 warrants issued in connection with the issuance ofdebt of $2,379; offset by decreases in accounts receivable of $618, inventoryof $276, prepaid expenses and other current assets of $787, restricted cash of$36,180, accounts payable and accrued expenses of $93,279 and accrued salariesand payroll taxes of $62,835. Cash used for operating activities for the threemonths ended March 31, 2004 was $437,394, which consisted of: a net loss of$587,137; less depreciation and amortization of $18,520, bad debt expense of$2,500, inventory obsolescence reserve of $29,484, a decrease in inventory of$23,183, and an increase in accounts payable and accrued expense of $93,498;offset by increases in accounts receivable of $15,208, prepaid expenses of$2,234. Cash used in investing activities for the first quarter of fiscal 2004was $14,071. The amount consisted of the purchase of fixed assets.  Netcash provided by financing activities for the first quarter of fiscal year 2005was $91,007 which consisted of proceeds from the issuance of debt securities of$125,000; partially offset by repayments of loans to stockholders and formerofficers of $18,993 and deferred financing costs of $15,000. Net cashprovided by financing activities for the first quarter of fiscal year 2004 was$184,800, which consisted of proceeds from the issuance of equity securitiesrelated to the Company’s Regulation “S” stock offering.

 

 

9

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The Registrant expects to experience growth in its operating expenses,particularly in research and development and selling, general andadministrative expenses, for the foreseeable future in order to execute itsbusiness strategy. As a result, the Registrant anticipates that operatingexpenses will constitute a material use of any cash resources.

 

Since capital resources are insufficient to satisfy the Registrant’sliquidity requirements, management intends to sell additional equity or debtsecurities or obtain debt financing.  The Registrant believes it can raise additional funds through privateplacements of equity.  However, there areno assurances that sufficient capital can be raised.

 

**CashRequirements and Need for Additional Funds**

 

The Registrant anticipates a substantial need for cash to fund itsworking capital requirements.  Inaccordance with the Registrant’s prepared expansion plan, it is the opinion ofmanagement that approximately $2.0 million will be required to cover operatingexpenses, including, but not limited to, marketing, sales and operations duringthe 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 nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect these controls subsequent to the date of theirevaluation, nor were there any significant deficiencies or material weaknessesin the Company’s internal controls. Accordingly, no corrective actions were required or undertaken.

 

10

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**PART II —OTHER INFORMATION**

**ITEM1. LEGAL PROCEEDINGS**

The Company is currently inlitigation with the owners of the Livonia, Michigan property that the Companyvacated in 2004.  The Company has accrued a reserve for the estimated lossin relation to the settlement of the litigation.

**ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS**

**RecentSales of Unregistered Securities**

 

SalesMade to Summit Energy Ventures and Commonwealth Energy Corporation andAffiliates

Thefollowing details several recent sales of unregistered securities theRegistrant made to Summit Energy Ventures, LLC, a private equity firmspecializing in energy related technologies (“Summit”) and Commonwealth EnergyCorporation. All of the sales were exempt from the registration requirements ofthe Securities Act pursuant to Section 4(2) of the Securities Act.

On April 28, 2005, theRegistrant issued 1,204,819 shares of Series A-1 Convertible Preferred Stock,convertible into 1,000,000 shares of Common Stock, and Warrants to purchase500,000 shares of Common Stock to Summit for an aggregate purchase price of$200,000 in cash.  The requisitepercentage of current holders consented and waived the anti-dilutionprovisions.

On April 28, 2005, the Registrant issued 180,723 shares of Series A-1stock, convertible into 150,000 shares of Common Stock, and Warrants topurchase 75,000 shares of Common Stock, to Commerce Energy Group, Inc., anaffiliate of Commonwealth Energy Corporation, in consideration of CommerceEnergy Group’s cancellation of a license agreement with the Registrant.  The requisite percentage of current holdersconsented and waived the anti-dilution provisions.

As of April 28, 2005, Summit owned 2,785,969shares of Series A-1 Preferred Stock convertible into 2,315,203 shares ofcommon stock, and Commonwealth owned 1,928,310 shares of Series A-1 PreferredStock convertible into 1,603,645 shares of common stock.

 

11

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**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

None.

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

None

**ITEM 5. OTHER INFORMATION**

 

**Extension of Senior Secured Notes**

 

On March 28, 2005, the company received consent from all of the Senior Secured Note holders to extend the maturity date of the Senior Secured Notes for one year.  Under the original terms, $1,484,806 of the Notes would become due in October 2005, and $125,000 of the Senior Secured Notes would become due in February of 2006.  These notes will now mature in October 2006 and February 2007, respectively.  See Exhibit 10.1.

 

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

 

(a) Exhibits

 
| **Number** | ** ** | **Description of Document**                                                                                                                                                                                         | ** ** | **Location**   |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|
|       |       |                                                                                                                                                                                                                |       |           |
| 10.1       |       | Consent of Senior Secured  Note holder for extension of maturity date of Senior Secured Note.                                                                                                                       |       | Filed herewith |
| 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.

 

On March 3, 2005, the Company filed a current report on Form 8-K reporting an Item 2 and an Item 3 event.  The Item 2 event involved a lien on all of the Company’s assets in connection with the issuance of $125,000 in Senior Secured Notes.  The Item 3 event involved an unregistered sale of equity securities in connection with the issuance of the Senior Secured Notes.

OnApril 4, 2005, the Company filed a current report on Form 8-K reporting an Item1 and an Item 3 event.  The Item 1 eventinvolved a termination of a material definitive agreement in connection with alicensing agreement with a shareholder. The Item 3 event involved an unregistered sale of equity securities.

 

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**SIGNATURES**

 In accordancewith the requirements of the Securities Exchange Act of 1934, the Registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                          | POWER EFFICIENCY CORPORATION                                                       |
|-------------------------------|------------------------------------------------------------------------------------|
|                          | (Registrant)                                                                       |
|                          |                                                                               |
| Date:  May 16, 2005 | By:                                                                                | /s/  Steven Strasser |   |
|                          |                                                                               |   |
| Date:  May 16, 2005 | Chief Executive Officer                                                            |   |
|                          | By:                                                                                | /s/  John Lackland |   |
|                          | Interim Chief Financial Officer (Principal  Financial and Accounting Officer) |

 

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