<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
----------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______TO_______
COMMISSION FILE NUMBER: 0-31195
H POWER CORP.
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3010742
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1373 BROAD STREET, CLIFTON, NEW JERSEY 07013
(Address of principal executive offices including Zip code)
973-249-5444
(Registrant's telephone number, including area code)
N/A
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [ X ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 53,067,360 shares of
common stock, $.001 par value, as of October 1, 2000.
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<PAGE>
H POWER CORP.
INDEX
PART I - FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of August 31, 2000 and
May 31, 2000........................................................ 3
Condensed Consolidated Statements of Operations for the
Three-Months Ended August 31, 2000 and 1999......................... 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended August 31, 2000 and 1999............................... 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview............................................................ 9
Results of Operations............................................... 10
Liquidity and Capital Resources..................................... 11
Quantitative and Qualitative Disclosures About Market Risk.......... 11
Inflation .......................................................... 12
Risk Factors........................................................ 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................... 13
Item 2. Changes in Securities and Use of Proceeds........................... 13
Item 3. Default upon Senior Securities ..................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................. 14
Item 5. Other Information................................................... 14
Item 6. Exhibits and Reports on Form 8-K.................................... 14
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
H POWER CORP
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AUGUST 31, 2000 MAY 31, 2000
--------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 110,694,016 $ 11,257,355
Accounts receivable, net of allowance for doubtful accounts 730,075 878,310
Unbilled receivables 120,904 214,550
Inventories 1,363,942 1,300,999
Tax credit receivable 930,433 930,117
Prepaid expenses and other current assets 250,785 1,604,041
------------- -------------
Total current assets 114,090,155 16,185,372
Plant and equipment, net 2,095,414 1,877,728
Patents, net of accumulated amortization 435,476 438,847
Other assets 150,245 147,646
------------- -------------
Total assets $ 116,771,290 $ 18,649,593
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt 121,875 123,223
Accounts payable 896,317 1,197,803
Accrued expenses 1,809,871 1,172,570
Deferred revenue 355,356 478,351
------------- -------------
Total current liabilities 3,183,419 2,971,947
Deferred revenue 2,166,666 2,222,222
Long-term debt 67,926 66,765
------------- -------------
Total liabilities 5,418,011 5,260,934
Minority interest -- 5,000,000
Mandatorily redeemable preferred stock:
Series A Convertible Preferred Stock--$.001 par value; 200,000 shares
authorized; 0 shares issued and outstanding at August 31, 2000; 200,000
shares issued and outstanding at May 31, 2000 -- 2,966,471
Series B Convertible Preferred Stock--$.001 par value; 400,000 shares
authorized; 0 shares issued and outstanding at August 31, 2000; 400,000
shares issued and outstanding at May 31, 2000 -- 4,944,118
Series C Convertible Preferred Stock--$.001 par value; 1,200,000 shares
authorized; 0 shares issued and outstanding at August 31, 2000; 600,000
issued and outstanding at May 31, 2000 -- 7,416,177
STOCKHOLDERS' EQUITY
Preferred Stock--$.001 par value:10,000,000 shares authorized at August 31,
2000; 0 shares issued and outstanding at August 31, 2000 -- --
Common stock--$.001 par value; 150,000,000 shares authorized at August 31,
2000, 20,000,000 shares authorized at May 31, 2000; 53,066,860 shares issued
and outstanding at August 31, 2000; 38,090,195 shares issued and outstanding
at May 31, 2000 53,067 38,091
Additional paid-in capital 160,399,790 38,127,238
Accumulated deficit (48,751,344) (44,746,901)
Accumulated other comprehensive loss (348,234) (356,535)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 111,353,279 (6,938,107)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 116,771,290 $ 18,649,593
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
H POWER CORP
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES
Contract revenue $ 561,842 $ 807,965
Product revenue 652,336 16,943
------------ ------------
1,214,178 824,908
OPERATING EXPENSES
Costs of revenues - contracts 456,211 691,905
Costs of revenues - products 1,065,633 45,368
Research and development 2,690,620 573,978
Selling, general and administrative 1,484,763 973,087
------------ ------------
Total operating expenses 5,697,227 2,284,338
------------ ------------
Loss from operations (4,483,049) (1,459,430)
Interest and other income, net 478,606 24,420
Interest expense -- (25,196)
------------ ------------
Net loss $ (4,004,443) $ (1,460,206)
============ ============
Loss per share attributable to common stockholders,
basic and diluted $ (0.10) $ (0.05)
============ ============
Weighted average shares outstanding, basic and diluted 41,701,898 29,395,635
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
H POWER CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,004,443) $ (1,460,206)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 164,013 120,531
Provision for impaired equipment 75,000 --
Changes in assets and liabilities:
Accounts receivable 148,235 89,096
Unbilled receivables 93,646 (522,460)
Inventories (62,943) (56,809)
Prepaid expenses & other assets 35,214 (93,380)
Tax credit receivable (316) (150,034)
Accounts payable (301,486) (398,938)
Accrued expenses 637,300 (107,374)
Deferred revenue (178,551) 2,500,000
Current maturities of long-term debt (1,348) --
------------- -------------
Total adjustments 608,764 1,380,632
------------- -------------
Net cash used by operating activities (3,395,679) (79,574)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (455,927) (19,632)
------------- -------------
Net cash used by investing activities (455,927) (19,632)
------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 103,278,805 15,000,000
Proceeds from related party borrowing -- 854,000
Proceeds from long-term debt 1,161 --
Repayments of long-term debt -- (587)
------------- -------------
Net cash provided by financing activities 103,279,966 15,853,413
------------- -------------
Net increase in cash and cash equivalents 99,428,360 15,754,207
Effect of exchange rate changes on cash and cash equivalents 8,301 33,378
------------- -------------
Cash and cash equivalents at beginning of period 11,257,355 242,107
------------- -------------
Cash and cash equivalents at end of period $ 110,694,016 $ 16,029,692
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
H POWER CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
H Power Corp. (the "Company") was organized on June 6, 1989 under the
laws of the State of Delaware. The Company designs, develops, markets and
manufactures proton exchange membrane fuel cells and fuel cell systems designed
to provide electricity for a wide range of stationary and portable and mobile
applications.
2. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of August 31, 2000, the
condensed consolidated statements of operations for the three month periods
ended August 31, 2000 and 1999 and the condensed consolidated statements of cash
flows for the three month periods ended August 31, 2000 and 1999 are unaudited.
In the opinion of management, all adjustments, which consist solely of normal
recurring adjustments, necessary to present fairly in accordance with generally
accepted accounting principles, the financial position, results of operations
and cash flows for all periods presented, have been made. The results of
operations for the interim periods presented are not necessarily indicative of
the results that may be expected for the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the Company's audited
financial statements and notes thereto for the fiscal year ended May 31, 2000
included in the Company's Registration Statement (File No. 333-34234) on Form
S-1.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of the Company and its Canadian subsidiary, H
Power Enterprises of Canada, Inc. ("HPEC"). All significant intercompany
accounts and transactions have been eliminated.
RECENT ACCOUNTING PRONOUNCEMENTS: In March 2000, the Financial
Accounting Standards Board issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No.
25 including the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a non compensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is generally effective July 1, 2000. The Company does not
expect the application of FIN 44 to have a material impact on the Company's
financial position or results of operations.
In December 1999, the Securities and Exchange Commission (the
"Commission") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the
Commission's views in applying generally accepted accounting principles to
revenue recognition. The Company has applied the provisions of SAB 101 in the
financial information presented herein.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The new
standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for all
quarters of fiscal years beginning after June 15, 2000. We do not expect SFAS
No. 133 to have a material effect on our financial condition or results of
operations.
6
<PAGE>
3. LOSS PER SHARE
Loss per share for the Company is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
2000 1999
---------------------------------------
<S> <C> <C>
BASIC AND DILUTED LOSS PER SHARE
Net loss $ (4,004,443) $ (1,460,206)
Accrued dividends on Series A Convertible Preferred Stock (40,274) (52,500)
---------------------------------------
Net loss available to common stockholders $ (4,044,717) $ (1,512,706)
=======================================
Weighted average number of common shares 41,701,898 29,395,635
Basic and diluted loss per share $ (0.10) $ (0.05)
=======================================
</TABLE>
No options or warrants outstanding were included in the calculation of diluted
loss per share because their impact would have been anti-dilutive.
4. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." No benefit for federal or state income taxes has been reported in these
condensed consolidated statements of operations as they have been offset by a
full valuation allowance because it is more likely than not that the tax
benefits of the net operating loss carryforward may not be realized.
5. STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the three months ended August 31,
2000 are as follows:
<TABLE>
<CAPTION>
Number of Common Capital in Accumulated Accumulated Total
Shares Stock Excess of Par Deficit Other Stockholder's
Issued and Comprehensive Equity
Outstanding Loss
------------ ---------- -------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 2000 38,090,195 $38,091 $38,127,238 $(44,746,901) $(356,535) $ (6,938,107)
Net loss (4,004,443) (4,004,443)
Sale of common stock, net 7,000,000 7,000 101,705,762 101,712,762
Issuance of common stock
upon exercise of stock
options 310,000 310 247,690 248,000
Issuance of common stock
upon conversion of
preferred stock 6,000,000 6,000 15,320,766 15,326,766
Issuance of common stock
upon conversion of minority
interest 1,666,665 1,666 4,998,334 5,000,000
Foreign currency
translation adjustments 8,301 8,301
------------ ---------- -------------- -------------- ---------------- ----------------
Balance at August 31, 2000 53,066,860 $53,067 $160,399,790 $(48,751,344) $(348,234) $111,353,279
============ ========== ============== ============== ================ ================
</TABLE>
7
<PAGE>
6. CAPITAL STRUCTURE
On July 7, 2000, the Board of Directors of the Company approved an
increase in the number of authorized preferred and common shares to 10,000,000
and 150,000,000, respectively. The Company declared a 5 for 1 stock split
effective July 24, 2000 for stockholders of record at the close of business on
July 21, 2000. This stock split increased the number of common shares
outstanding by 30,472,156 shares at May 31, 2000. All references in the
consolidated financial statements referring to share prices, conversion rates,
per share amounts, stock option plans and common shares issued and/or
outstanding have been adjusted retroactively for the 5-for-1 stock split.
On July 21, 2000, the Company issued 10,000 shares of common stock on
the exercise of stock options generating proceeds of $8,000.
On July 27, 2000, the Company issued 300,000 shares of common stock on
the exercise of stock options generating proceeds of $240,000.
On August 8, 2000, the Commission declared effective the Company's
Registration Statement (Registration No. 333-34234) on Form S-1 as filed with
the Commission in connection with the Company's initial public offering of
common stock, (the "IPO"). Pursuant to this registration statement, on August
14, 2000 the Company consummated the issuance and sale of an aggregate of
7,000,000 shares of common stock, for a gross aggregate offering price of $112
million. The Company incurred underwriting commissions of approximately $7.8
million and additional expenses aggregating approximately $2.5 million in
connection with the IPO.
Upon the closing date of the Company's IPO, all 1,200,000 shares of
preferred stock outstanding (Series A through C) were converted at various rates
into 6,000,000 shares of common stock and the Company issued 1,666,665 shares of
common stock to outside investors upon conversion of their 50% equity interest
in HPEC.
8
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q and
within the Company's Registration Statement (Registration No. 333-34234) on Form
S-1. When used in the following discussion, the words "believes", "anticipates",
"intends", "expects" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected. These risks include, but are not limited to, those identified under
"Risk Factors" in the Company's Registration Statement (Registration No.
333-34234) on Form S-1. Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date hereof.
OVERVIEW
We design, develop and manufacture proton-exchange membrane, or PEM,
fuel cell systems. Fuel cells are devices that produce electrical energy without
combustion and its associated environmental contaminants. The fuel cell systems
we make and market are designed to complement or replace conventional power
sources, such as batteries and electric power generators. The use of alternative
electric power systems is desirable in situations where conventional power
sources cannot adequately, economical or technologically supply the power
required.
We were incorporated in June 1989 under the laws of the State of
Delaware. A substantial portion of our business activity, from our inception
through our fiscal year ended May 31, 1995, was based on a U.S. Department of
Energy program. As prime contractor under that program, we developed, fabricated
and delivered to the DOE three phosphoric acid fuel cell/battery power sources
for installation in buses. These buses were among the first to operate under a
hybrid fuel cell system. During this early period, we also continued developing
our PEM fuel cell technologies, principally for portable applications. From 1995
through the present, we developed products subject to various government
contracts. The most significant of these contracts were used to develop fuel
cell powered vehicles, stationary power systems, communications backup power
systems and diesel reformers. Although these contracts have historically
accounted for a substantial portion of our revenues, we believe that they will
diminish in importance as a result of our focus on commercialization.
While continuing our commitment to government programs, we accelerated
the development of our core technologies and began applying our technologies to
develop and fabricate different portable PEM fuel cell products. Sales of these
products have been modest and, until June 1998, were comprised mainly of test
and prototype units for evaluation by prospective users. In June 1998, we made
what we believe to be the world's first commercial sale of a PEM fuel cell
product used in the regular course of daily operations. This sale to the New
Jersey Department of Transportation of an initial order of 65 backup power units
for its variable message highway signs was competitively-bid, non-government
subsidized and came with a two-year product and maintenance warranty. As of
August 31, 2000, we had delivered 55 of these units, all of which are in
operation.
After an infusion of capital in 1996 and the establishment of our
Canadian subsidiary, H Power Enterprises of Canada, Inc., or HPEC, in 1997, we
began to use our technologies to develop higher power, stationary PEM fuel cell
products for use as primary and supplemental on-site electric power systems for
residential use. As of August 31, 2000, we had delivered 8 initial test units of
our residential electric primary power system to ECO Fuel Cells, LLC, a
subsidiary of Energy Co-Opportunity, Inc., an association of approximately 275
U.S. rural electric cooperatives. ECO, in turn, sold them to various electric
coops throughout the country for test and evaluation purposes to obtain the data
necessary to complete the pre-production models, or beta units, that are
anticipated to be shipped in the fourth calendar quarter of this year. We
believe we will be producing commercial units for sale commencing the second
half of calendar year 2001.
We have a limited history of generating revenues and many of our
products have only been recently introduced or are in a formative stage of
development. Through August 31, 2000, we have incurred accumulated losses of
approximately $49 million since our inception in 1989 and we anticipate
incurring significant losses in the future. Most of our operating expenses will
be increasing and fixed in the near term. Therefore, if we are unable to
generate significant revenues, our net losses in any given quarter could be
greater
9
<PAGE>
than expected. We intend to significantly increase our capital expenditures and
operating expenses to rapidly expand our manufacturing capabilities and for
general corporate purposes, including product development activities, sales and
marketing, administration and data processing systems. You have limited
historical financial data and operating results with which to evaluate our
business and our prospects. As a result, you should consider our prospects in
light of the early stage of our business in a new and rapidly evolving market.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED AUGUST 31, 2000 AND AUGUST 31, 1999
REVENUES. Revenues were $1,214,000 for the three months ended August
31, 2000 compared to $825,000 for the three months ended August 31,1999, an
increase of $389,000 or 47 %. Our revenues for the three months ended August 31,
2000 were derived approximately 46% from contract revenues and 54% from product
revenues. Contract revenues for the three months ended August 31, 2000 were
$562,000, a decrease of $246,000 from $808,000 for the three months ended August
31,1999. Product revenues for the three months ended August 31, 2000 were
$652,000, an increase of $635,000 from $17,000 for the three months ended August
31,1999. The decrease in contract revenues and the significant increase in
product revenues for the three month comparative periods is principally due to
our emphasis on commercialization of our fuel cell products. Contract revenue
for the three months ended August 31, 2000 was principally derived from
contracts with the Naval Surface Warfare Center to develop and provide a 3 to 5
kilowatt fuel cell system integrated with a fuel reformer for military field
communications and with the National Institute of Standards & Technology to
build and demonstrate a 5 kilowatt fuel cell system for primary and backup power
for telecommunication systems. The principal product sales for the three months
ended August 31, 2000 were high power, stationary RPAC/Alpha units to ECO Fuel
Cells, LLC, approximately $420,000 and low power portable power systems sold to
23 different customers, approximately $142,000.
COST OF REVENUE. Cost of revenue was $1,522,000 for the three months
ended August 31, 2000 compared to $737,000 for the three months ended August
31,1999, an increase of $785,000. The increase in the cost of revenue is
principally due to an increased cost of product revenue and is a result of
increasing costs associated with adding additional manufacturing capacity
required to produce our products in larger quantities. We anticipate that our
cost of revenues will exceed our revenues for the foreseeable future as we
increase our capacity consistent with increasing demand for our products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs were
$2,691,000 for the three months ended August 31, 2000 compared to $574,000 for
the three months ended August 31,1999, an increase of $2,117,000 . The increase
in research and development costs is primarily related to the continuing
development of our 1 to 10 kilowatt stationary power fuel cell systems in
conjunction with the contract we entered into with ECO during the year ended May
31, 2000 and development of our portable and mobile products. We increased the
number of employees in research and development to 46 as of August 31, 2000 as
compared to 35 as of August 31, 1999. In addition, our costs increased for fees
paid to outside contract engineers, materials and supplies to support the
development of our fuel cell systems, increased facility costs and general
overhead.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative costs were $1,485,000 for the three months ended August 31, 2000
compared to $973,000 for the three months ended August 31,1999, an increase of
$512,000 . This increase was primarily due to an increase in the number of
employees resulting in an increase in salaries, benefits and recruiting expenses
of approximately $276,000, increased selling and travel expenses of $102,000
attributable to the increased activity required to support the ECO contract,
increased rent, telephone and other office expenses of $72,000 and increased
legal and professional expenses of $43,000. HPEC's selling, general and
administrative expenses increased by $45,000 for three months ended August 31,
2000 compared the three months ended August 31,1999.
INTEREST AND OTHER INCOME, NET. Interest and other income was $479,000
for the three months ended August 31, 2000 compared to $24,000 for the three
months ended August 31,1999, an increase of $455,000. This increase was
primarily related to interest income resulting from the investment of the net
proceeds of our initial public offering which was concluded in August 2000.
INTEREST EXPENSE. There was no interest expense incurred for the three
months ended August 31, 2000 compared to $25,000 for the three months ended
August 31, 1999.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements depend on numerous factors, including
completion of our product development activities and market acceptance of our
systems. We expect to allocate substantial capital resources to the expansion of
our manufacturing capacity to meet near-term commercial production requirements,
to fund our working capital requirements and to continue development work on our
PEM fuel cell systems. In addition, we will be expanding our sales and marketing
efforts.
At August 31, 2000, we had net working capital of approximately
$110,907,000 million which consisted primarily of cash and cash equivalents
compared to working capital of $13,213,000 million at August 31, 1999. This
increase was primarily due to the completion on August 14, 2000 of our initial
public offering of 7,000,000 common shares, which resulted in proceeds after
underwriting commissions to the company of $104,160,000. The proceeds were
invested in a variety of securities, including both government and corporate
obligations and money market funds through August 31, 2000.
Cash flows used for operating activities for the quarter ended August
31, 2000 were $3,396,000 as compared to $80,000 for the same comparable period
in the prior year. For the three months ended August 31, 2000, cash was used
primarily to fund the net loss of $4,004,000 offset primarily by a reduction in
receivables of $242,000 and an increase of accounts payable and accrued expenses
of $336,000.
Net cash used by investing activities was $456,000 for the quarter
ended August 31, 2000 and was attributable to capital expenditures. We will be
making substantial investments in capital expenditures for the foreseeable
future consistent with our commercialization plans.
We believe that cash from operations, along with the net proceeds of
the sale of our common stock will be adequate to fund our operations for a
minimum of 18 months from August 31, 2000. We expect to spend in excess of
$21,000,000 on property, plant and equipment during this period of time. We
anticipate that we will incur substantial losses over at least the next few
years due to numerous factors, including completion of our product development
activities in our efforts to commercialize our fuel cell systems, increasing our
sales and marketing activities, hiring and training our production staff,
expanding our manufacturing capacity, and acquiring and installing new
management information systems.
As of August 31, 2000, we had notes and notes payable of $190,000. Of
this amount $122,000 is an unsecured payment that was due pending resolution
with the lender. We also have a $68,000 governmental loan that is non-interest
bearing that was used to finance the last phase of a HPEC development project.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial market risk includes risks associated with international
operations and related foreign currencies, as we have a significant operation in
Canada. Expenses in this operation are incurred in Canadian dollars and
therefore are subject to foreign currency exchange risk. Through August 31,
2000, we have not experienced any significant negative impact on our operations
as a result of fluctuations in foreign currency exchange rates. In addition, our
international business is subject to the risks typical of an international
business including, but not limited to, differing economic conditions, changes
in political climate, differing tax structures and other legal regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially and adversely affected by changes in these and other
factors.
The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. We maintain our portfolio of cash and cash equivalents in a
variety of securities, including both government and corporate obligations and
money market funds. We do not utilize any derivative financial instruments,
derivative commodity instruments or other market risk sensitive instruments,
positions or transactions in any material fashion. We believe that the
investment-grade securities we hold are not subject to any material risks
arising from changes in interest rates, however, they may be subject to changes
in the financial standing of the issuer of these securities.
11
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INFLATION
We do not believe that inflation has had a material effect on our
financial position or results of operations during the past three years.
However, we cannot predict the future effects of inflation, including interest
rate fluctuations and market fluctuations.
RISK FACTORS
We hereby incorporate by reference the risk factors included in our
Registration Statement (Registration No. 333-34234) on Form S-1.
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PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 7, 2000, the Board of Directors of the Company approved an
increase to the number of authorized preferred and common shares to 10,000,000
and 150,000,000, respectively. The Company declared a 5 for 1 stock split
effective July 24, 2000 for stockholders of record at the close of business on
July 21, 2000. This stock split increased the number of common shares
outstanding by 30,472,156 shares at May 31, 2000.
On July 21, 2000, the Company issued 10,000 shares of common stock on
the exercise of stock options generating proceeds of $8,000. This issuance of
shares was made pursuant to Rule 701 of the Securities Act of 1933, as amended
(the "Act").
On July 27, 2000, the Company issued 300,000 shares of common stock on
the exercise of stock options generating proceeds of $240,000. This issuance of
shares was made pursuant to Rule 701 of the Act.
On August 8, 2000, the Commission declared effective the Company's
Registration Statement (Registration No. 333-34234) on Form S-1, as filed with
the Commission in connection with the Company's initial public offering of
common stock (the "IPO"), which was managed by Lehman Brothers, Inc., CIBC World
Markets Corp., Deutsche Bank Securities Inc., Josephthal & Co. Inc. and Fidelity
Capital Markets. Pursuant to this Registration Statement, on August 14, 2000 the
Company consummated the issuance and sale of an aggregate of 7,000,000 shares of
common stock, for a gross aggregate offering price of $112 million. The Company
incurred underwriting discounts and commissions of approximately $7.8 million
and additional expenses aggregating approximately $2.5 million paid directly to
others in connection with the IPO. The entire net proceeds of the IPO of $101.7
million were invested in a variety of securities, including both government and
corporate obligations and money market funds through August 31, 2000.
The use of proceeds of the IPO are not expected to be materially
different from the use of proceeds described in the Company's prospectus:
approximately $21 million to locate and acquire new manufacturing facilities and
fund other capital expenditures over the next 18 months; approximately $18
million to fund our continued research and product development; approximately
$10 million to expand our marketing and sales efforts; and approximately $53
million for general corporate purposes. We believe that cash from operations,
together with the net proceeds of the IPO, will be adequate to fund our
operations for the next 18 months.
As a result of the exercise in full of the underwriters' over-allotment
option, on September 13, 2000, four selling stockholders consummated the sale,
pursuant to the Registration Statement referenced above, of an aggregate of
1,050,000 shares of the Company's common stock as follows; 525,000 shares were
sold for the account of Cynthia Rothstein, for a gross aggregate offering price
of $8.4 million, 225,000 shares were sold for the account of Gerald Entman,
trustee for Elise Entman, for a gross aggregate offering price of $3.6 million,
and 150,000 shares were sold for the accounts of each of Scott Entman and Brian
Entman, for a gross aggregate offering price to each of $2.4 million. There were
no additional proceeds to the Company from this transaction.
Upon the closing of the IPO, all 1,200,000 shares of preferred stock
outstanding (Series A through C) were converted at various rates into 6,000,000
shares of common stock and the Company issued 1,666,665 shares of our common
stock to outside investors upon conversion of their 50% equity interest in our
subsidiary, H Power Enterprises of Canada.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 13, 2000 H POWER CORP.
By: /s/ William L. Zang
---------------------------------------------
William L. Zang
CHIEF FINANCIAL OFFICER
(on behalf of the Registrant and as principal
financial officer)
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EXHIBIT INDEX
27.1 Financial Data Schedule, three months ended August 31, 2000.
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