As the Mega-C bankruptcy slowly winds its way toward completion I thought it might be worthwhile to lay out the critical facts in an easily understood form so that innocent investors in Mega-C Power Corporation ("Mega-C") who are not friends of Chip, Usling and Pardo, who I refer to collectively as "Focups," have a clear understanding of who did what to whom and when. If you happen to be a Focup, you will probably not like what I have to say but the information is too important and too well documented to ignore or suppress.
Technology Rights. Mega-C never owned the battery technology it planned to develop and commercialize. Instead, C&T owned the patents and C&T retained all rights to commercialize those patents for mobile and portable applications. The only rights C&T ever transferred to Mega-C Technologies ("MCT") were a bare license that was limited to stationary applications. By the time the Focups added several layers of direct and indirect profit at the MCT level, Mega-C was required to pay:
- $5,000,000 in license fees to MCT, a Focup controlled company;
- All future costs for research, development and customization of the technology; and
- A 10% royalty on all future sales.
MCT also retained the right to sell products based on the technology directly for its own account, which made the exclusivity of Mega-C's license illusory. The license terms to Mega-C from MCT were unconscionable and could never have formed the basis for a viable business.
The only technology that existed when the license was granted was a small proof of principle prototype that was good enough for Dr. Conway's preliminary cycle-life testing, but couldn't even power a flashlight. It was a crude invention – the equivalent of an advanced science fair project. It was not developed to a point where a $5 million license fee was justified or justifiable. Within MCT, half of the license fee was supposed to be used to build facilities for future R&D on the invention, but the balance was pure profit for the Focups.
If substantial research and development had been done and paid for by Mega-C, the Focups planned to peel off another layer of indirect benefit because the R&D Mega-C paid for would have advanced the technology for uses that Mega-C had no right to commercially exploit. Since the Focups hoped to eventually acquire the remaining rights to the technology from C&T, at least half of Mega-C's R&D expenditures would have been pure personal profit for the Focups if their plan had succeeded.
In the battery industry, manufacturers expect a 20% gross margin on sales and a 5% net profit if they're lucky. So the 10% royalty to MCT effectively stripped out all of the profit potential before the first sale.
The pathetic truth is that the entire MCT – Mega-C structure was a house of cards that relied on smoke and mirrors to create the illusion of value when the Focups had already stripped out all of the potential value for themselves. There was no chance that a person who invested in Mega-C would ever own an interest in a viable business. In other words, Mega-C was a scam from inception and its only business purpose was to line the pockets of the Focups with money that was invested by the unwary and uninformed.
Stock Sales. All of Mega-C's stock sales were illegal because they were not registered under Canadian and US securities laws. They were doubly illegal because none of the investors were given disclosure documents that even came close to providing full and fair disclosure of all material facts. All those wonderful demonstrations investors saw – they were blue smoke and mirrors. This fundamental illegality was compounded by the fact that most sales involved a FOCUP selling shares that he personally owned to an investor who thought he was investing money in Mega-C. So instead of going into Mega-C's accounts, the investor funds went directly into the Focups' personal checking accounts. While the Focups occasionally used a portion of the money they got from illegal stock sales for loans to Mega-C, most of the cash simply disappeared in the Focups personal spending. In other words, the Focups lied to all of their investors and used the substantial bulk of the investors' money for personal purposes.
OSC Investigation. The Ontario Securities Commission opened its investigation of Mega-C in March of 2003. At that point the Focups knew they had been caught with their hands in the cookie jar and the entire scheme began to unravel because the first thing the OSC did was tell Mega-C and the Focups to stop selling stock. Within a couple months, the Focups were at each others throats because they were all desperately looking for a way to avoid prosectution by pointing the finger at somebody else. Things came to a head in June 2003 when Mega-C sent an arbitration demand to MCT and in response MCT terminated Mega-C's license. Since the MCT termination letter was promptly followed by termination letters from C&T and then Mega-C, it was clear that all parties had terminated the legendary Agreement of Association by August of 2003. At that point, the only rights that MCT or Mega-C had were rights to bring a lawsuit against a party that had kept its promises.
In a recent deposition, Skip Taylor testified that MCT's purpose in sending the termination letter was to strip all technology rights out of Mega-C for the sole benefit of the Focups. In his mind, there was no question that Mega-C did not own any ongoing interest in the technology because he believed MCT's termination of the Agreement of Association was absolutely effective against Mega-C. In a curious twist of promoters logic, Mr. Taylor asserted that C&T's termination of the agreement was inconsequential, but any fair reading of the deposition shows that Mr. Taylor believed the Focups owned it all and the investors and C&T owned nothing.
Organization of Axion. After MCT, C&T and Mega-C terminated their agreements, a group of concerned Mega-C investors got together to investigate the facts and see if there was any way to salvage Mega-C. They were horrified when they learned about the wholesale thieving that went on among the Focups before the OSC put a cork in the promotion. They were even more appalled to learn that the Focups had terminated all of the technology agreements and restored unencumbered ownership in C&T. Since Mega-C was beyond salvaging because of the prior illegal activity of the Focups, those stockholders decided to create Axion to serve as a salvage vehicle for the technology and a life-raft for the innocent investors who got caught up in the scam. There was no legal requirement that Axion's founders do anything to protect the victims of the Focups fraud, but Axion's founders believed it was the morally right thing to do. In 20/20 hindsight it would have been far easier and cheaper for Axion to simply let the Mega-C investors sink with the ship they had invested in.
Mega-C Bankruptcy. The Mega-C bankruptcy has been far more time consuming and expensive than it needed to be because the Focups have vigorously contested the mechanisms Axion created to protect Mega-C's innocent investors. Until the Bankruptcy Court confirmed Mega-C's plan of reorganization at the end of 2006, there were legal questions about whether Mega-C might have some kind of residual interest in the technology despite the fact that the underlying contracts had been voluntarily terminated by all parties. The Plan of Reorganization resolved those questions by providing that Axion would be the sole owner of the technology and the Mega-C shareholders would own a substantial interest in Axion. Upon confirmation, 5.7 million Axion shares were turned over to the control of court appointed trustees. Those shares represented approximately one-third of Axion's outstanding stock. The other two-thirds were owned by the people who had invested approximately $24 million in Axion.
Since November 2006, all of the litigation in the Bankruptcy Court has focused on whether the Focups are entitled to claim the lions' share of the Axion shares that are presently sitting in the court supervised trusts. Axion has always believed that those shares properly belong to the people who invested and lost money in Mega-C. The Focups, on the other hand, are taking a "screw the investors we want ours" stance that has not been well-received by the court. The most recent flurry of activity was based on an absurd claim that the Focups who controlled Mega-C and MCT had no idea how much money Mega-C and MCT paid C&T. The goal, of course, was to support the Focups claim that they somehow own a fractional interest in the patents that have always been owned exclusively by C&T. The litigation had nothing to do with protecting the rights of Mega-C investors who are now indirect Axion shareholders. It was merely another attempt to take something away from the Mega-C investors and use it to line the pockets of the Focups. That attempt, like every other claim the Focups have made in the Bankruptcy Court, was rejected at a final hearing on April 23rd.
The Real Tragedy. For the past five years Axion has been working vigorously to develop the C&T invention and turn it into a commercially valuable technology. It has been hampered at every turn by specious claims that it stole something from the Mega-C stockholders instead of providing a huge benefit that was not legally required. The out of pocket costs to Axion have been huge. The out-of-pocket costs that will ultimately be paid from the assets of the court supervised trusts are even larger. So in the final analysis:
- The Focups stole from the Mega-C investors when they sold them shares a doomed company;
- The Focups stole from the Mega-C investors when they cancelled Mega-C's license
- The Focups stole from the Mega-C investors when they fought the bankruptcy process;
- The Focups continue steal from the Mega-C investors with their ongoing lawsuits; and
- Even if the Focups were right, they would not have had any claim to the development work Axion has done over the last five years.
The adverse impacts on Axion's business and its stock market valuation have been incalculable. Mercifully things have now progressed to the point where the market understands that litigation threats are nothing more than sour grapes from Focups who have complained loud and long but accomplished nothing.