Power Efficiency Corp. (PREF)
Interview with: Richard Koch, President and CEO
Business News, Financial News, Stocks, Money & Investment Ideas, CEO Interview
and Information on their
proprietary energy management technology solutions that enables AC induction motors to perform at their optimum efficiency without affecting speed.

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Power Efficiency Corp’s controllers automatically adjust the power to meet the load requirements of electric motors providing energy savings and cooler operating temperatures extending motor life

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Technology
Energy Management
(PREF-OTC)


Power Efficiency Corp.

4220 Varsity Drive-Ste. E
Ann Arbor, MI. 48108
Phone: 734-975-9111


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Richard Koch
President and
Chief Executive Officer

Interview conducted by:
Lynn Fosse
Senior Editor

CEOCFOinterviews.com
August 2003

BIO:
Mr. Koch, age 56, is a director and shareholder in Innov-X Systems (www.Innov-Xsys.com), a Boston start-up that developed and manufactures a portable elemental X-ray analyzer, and at Petroleum Technologies Inc., a Kansas City oil & gas company that focuses on developing and drilling natural gas prospects.

Earlier in his career, he was the Executive in Charge of Operations and a Director for Arrow Truck Sales (www.arrowtruck.com), a wholesale-retail seller of used heavy-duty trucks that grew from eight to 17 locations during his tenure. Additionally, he has 14 years’ experience in publishing with American City Business Journals (www.bizjournal.com) where he was a founder and held various positions before leaving the Company as Senior Vice President.  Mr. Koch is a Missouri Attorney, a former CPA, and used to hold a Series 7 license.  He also co-founded Operation Breakthrough, a Missouri day-care facility that provides services to more than 400 inner-city families and served as a director and supporter for many years while he lived in Kansas City.

Company Profile:
Power Efficiency Corp. (PREF-OTC) is a leader in providing proprietary energy management technology solutions. The Power Efficiency Performance Controller enables AC induction motors to perform at their optimum efficiency without affecting speed. Cost of operation in these motors can be reduced by 10% to 40%. The concept behind the Performance Controller was originally proposed and developed by Frank Nola of the National Aeronautics and Space Administration ("NASA") in the mid to late 1970's as a means of reducing energy waste on AC Induction motors. The technology was designed to monitor the power factor of the motor, and to reduce the voltage and current when the power factor is dropping. In the early part of 1998, NASA announced that Power Efficiency Corporation had been named the exclusive domestic licensee of NASA's patented technology relating to energy saving motor controllers, listed under the "power factor controllers" category of patents.

The single-phase Performance Controller is available up to 15 amps from 120 to 240 volts. The three-phase Performance Controller is available from 1hp to 300hp from 208 to 575 volts, 50 Hz or 60Hz. The Performance Controller is designed to be used in conjunction with a standard across-the-line starter and should be viewed as a new generation of motor controllers that manage energy use according to workload. The Performance Controller controls the AC Induction Motor so it always functions at its optimum efficiency. This increased efficiency extends motor life and reduces stress and strain on the motor and the drive train, both electrically and mechanically.  The Performance Controller also protects the motor against over and under voltage conditions. All of these functions are performed automatically and electronically. State-of-the-art electronic circuits constantly sense the workload of the motor. When the actual workload of the motor is lower than the rated load, the sensing circuits reduce the energy being fed to the motor to the exact level the motor needs. This has the effect of reducing motor energy consumption.

Power Efficiency Corp’s mission statement is to be a world leader in providing proprietary energy management technology solutions to assist their customers in preserving their resources.

CEOCFOinterviews: Mr. Koch, please give us a brief history of Power Efficiency and tell us what attracted you?

Mr. Koch: “What first attracted me to Power Efficiency Corp was its size. I have spent my whole career focusing on small companies coming out of the entrepreneurial start-up stage helping them grow to the next level.  The company has spent its initial years as a research and development company. The founder, Nicholas Anderson, is a classic American entrepreneur. NASA developed the underlying theory and granted licensing rights.  A lot of larger companies tried to turn the theory into a commercial product and they were not successful. Nick refused to give up and kept working to develop a useable product. He took other jobs to support himself but kept working in his garage to make it happen. He successfully developed the product to the stage where he could start getting investors interested. He started the company in the mid 1990s, and for the last five years developed relationships and continued to improve the product. I was attracted by the quality of the customers that purchase the product and the fact that it met the high standards of safety required in order to be installed on escalators and elevators.  The company is the OEM for Otis, KONE and Schindler leading companies in the sale and servicing of escalators and elevators. After years of R&D Nick has developed a line of products that meet the exacting standards of these leading companies.  It is a great product that is now ready to be marketed. Rising energy costs improve the company prospects considerably.   . The main reason a customer buys the Power Efficiency controller is to cut the electrical bill received every month. In many states where energy rebates and low interest loans are available our customers can experience positive cash flow in the first month our controller is installed. The power savings generated exceed the payment on the loan they used to finance the purchase.

My challenge is to build the sales and marketing effort needed to make the public aware of our exciting technology.  Currently the owners of the electric motors that can benefit from our technology don’t know they need to install our controllers. Our challenge is to educate them on the significant savings they can attain by buying our controllers. This challenge will get easier if the forecasts of higher energy costs prove to be accurate.”

CEOCFOinterviews: You are saving wear and tear on the motors, is that correct?

Mr. Koch: “Our technology does save wear and tear on motors. If you have two motors, one without our control and one with, the one without our control is operating at full power all the time, which allows heat to build up. Since our controller reduces the power when the load decreases the motor does not work as hard and the heat build-up is not as great. Industry studies show that if you reduce the average heat by 10 C, you are going to double   the life of the motor.”

CEOCFOinterviews: Why is this the right time for the marketing push?

Mr. Koch: “I feel the time is right for a marketing push because energy prices are rising. Natural gas prices are extremely high as evidenced by the recent suggestion by Federal Reserve Chairman Greenspan that the country might have to consider relaxing some of the environmental restriction to allow exploration in protected areas. Most of the new electricity generating plants use natural gas as the fuel because it is non-polluting, but now it seems the supply projections relied on when these plants were built might have been optimistic. The higher the energy costs, the quicker the payback is to the customer who buys our controller. You do not buy an energy saving device that is going to take you twenty years to save the energy to pay for the product. We will be focusing on those states and countries that have the highest cost of power because then payback and return on the customers’ investment in our product are that much higher.”

CEOCFOinterviews: Are you selling them a piece of equipment?

Mr. Koch: “We sell a piece of equipment that uses like standard electrical rated industrial enclosure.   It looks like an industrial fuse box. They come in all sizes; the bigger the motor, the bigger our controller. We are regulating power so our circuitry needs to be sized to handle the power needed by the motor. Increased power requires thicker wires, and higher rated electrical components.  We recently received a Department of Energy grant to fund R&D for very high voltage and high horsepower motors. We feel that our technology will be applicable for these large motors that consume a lot of power.”

CEOCFOinterviews: Are there any competing technologies or products?

Mr. Koch: “There is always competition. However, we have not found a product that achieves comparable energy saving in the niche in which we find ourselves. There are other solutions to saving energy such as high efficiency motors. Our target market comprises a significant sub-section of all the motors sold, the installed base of single-speed variable load motors. Our strategy as I have indicated is to identify the most promising applications where our technology gets the best savings.”

CEOCFOinterviews: Does your product require any maintenance?

Mr. Koch: “The nice thing about our product is that there are not any moving parts. We have had some of the initial prototypes Nick installed working for close to ten years. It is like the wiring in your house, occasionally you might have to replace a breaker or a component but the basic wiring lasts for a long time. The control board is covered by an improvements patent, to the underlying NASA patents that give us our intellectual property protection. Its solid state components should provide the same long life similar boards have in other applications.”

CEOCFOinterviews: Do you only sell to OEMs or do you have additional marketing to further reach out to customers?

Mr. Koch: “Our strategy to this point has been to focus on OEMs. We do have a few direct sales people and are beginning the process of identifying manufacturer reps and distributors to increase our channels of distribution. Most of the efforts over the past four or five years have been focused on developing all the circuitry and component boards to meet the OEM requirements. Our product needs to be invisible, and that has been a problem with some of the other attempts to commercialize the underlying NASA discovery that allows the load to be sensed. If your controller interferes with the underlying application the motor is installed to handle no amount of energy savings will influence a customer to buy the product. If an escalator jerks or jars, people will fall down and get hurt. We are just beginning the efforts to develop our sales and marketing organization. We have just begun the process required to qualify for the CE Mark, which is required before you can sell an electrical component in Europe. We are starting to identify potential distributors in Europe where average energy costs tend to be higher than in the US.”

CEOCFOinterviews: Are there areas of the world that are more interested in the energy saving than the United States?

Mr. Koch: “The way power is billed in Europe is different than the way they bill power here. You might have two identical applications, one here and one in Europe, and if we get 35% energy savings here, we could get 50% energy savings in Europe because of this difference. It is safe to say that the higher energy costs the higher the interest is in technologies that save energy. Therefore to the extent other countries pay more for electricity they will have a greater interest in our products.  We know it is cheaper to save a kilowatt of electricity than it is to build new generating capacity. This disparity will only increase as the world demand for energy continues to grow.  Part of the reason for my joining the company is my belief that energy prices will continue rise. I believe these higher costs will lead to greater awareness of energy saving products such as the Power Efficiency controller resulting in increased sales. There will be increased pressure on governments to give incentives and even mandate technologies that will lead to more efficient energy utilization.”

CEOCFOinterviews: Who does the manufacturing?

Mr. Koch: “Most of the manufacturing is contracted out. We have an engineer in charge of manufacturing and who does the design work. One of the reasons we are trying to expand our volume is to allow us to get better manufacturing efficiency.”

CEOCFOinterviews: Please tell us about the financial condition of the company.

Mr. Koch: “Our current financing is as one-million-dollar credit line from Summit Energy Ventures. We are also raising additional capital through a Reg S offering.”

CEOCFOinterviews: Why should potential investors be interested and what should people know that they might not realize when they look at the company?

Mr. Koch: “Most investors are not aware of our products because of our focus on OEM relationships with Otis, KONE and Schindler. They are the leading companies in the elevator/escalator field, where safety is a premium. The technology is working in this extremely sensitive environment, if our controller does not work, people could get hurt. Our current expansion into industrial applications will result in much faster sales as the product development cycle is much shorter because the multiple product changes to insure safety are not as complex. The company has focused on R&D rather than marketing and sales. We have now begun the process of building the sales and marketing strengths needed to bring power Efficiency to profitability.”

CEOCFOinterviews: In closing, is the fact that the company has brought someone with your background on board representative of the commitment to successful commercialization?

Mr. Koch: “The company is definitely aware of where they need to go to move forward and the board was attracted to my experience with companies that had to build sales organizations. I spent 15 years with American City Business Journals; where I was one of the initial founders. When we started, we took on the big newspapers, the television stations, and radio stations.  The ad agencies were not ready to place their clients ad dollars in start-up publication.  We had to pound on the doors of the small businesses that we were covering to convince them to try the new kid on the block. More recently, I took over management and grew a truck sales organization, where we built an aggressive proactive sales team.”

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