<PAGE>
================================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 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) (Zip code)
973-249-5444
(Registrant's telephone number, including area code)
------------------------------------------------------------
(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 |X| No |_|
APPLICABLE ONLY TO REGISTRANTS 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 Sections 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: 53,398,826 shares of
Common Stock, $.001 par value, as of December 29, 2000.
================================================================================
<PAGE>
H POWER CORP.
INDEX
PART I - FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of November 30, 2000
and May 31, 2000. . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statement of Operations for the Three and
Six Months Ended November 30, 2000 and 1999 . . . . . . . 4
Condensed Consolidated Statement of Cash Flows for the Three and
Six-Months Ended November 30, 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 . . . . . . . . . . . . . . . . . . . 10
Results of Operations . . . . . . . . . . . . . . . 11
Liquidity and Capital Resources. . . . . . . . . . . . 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . 13
Risk Factors . . . . . . . . . . . . . . . . . 14
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 15
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
H POWER CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
NOVEMBER 30, 2000 MAY 31, 2000
----------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 42,752,188 $ 11,257,355
Short term investments 62,638,539 0
Accounts receivable, net of allowance for doubtful accounts 520,105 878,310
Unbilled receivables 48,171 214,550
Inventories 2,659,163 1,300,999
Tax credit receivable 912,454 930,117
Prepaid expenses and other current assets 1,033,367 1,604,041
------------- -------------
Total current assets 110,563,987 16,185,372
Plant and equipment, net 2,172,999 1,877,728
Patents, net of accumulated amortization 424,855 438,847
Other assets 192,581 147,646
------------- -------------
Total assets $ 113,354,422 $ 18,649,593
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt 121,875 123,223
Accounts payable 1,526,966 1,197,803
Accrued expenses 1,556,353 1,172,570
Deferred revenue 222,228 478,351
------------- -------------
Total current liabilities 3,427,422 2,971,947
Deferred revenue 2,111,104 2,222,222
Long-term debt 65,104 66,765
------------- -------------
Total liabilities 5,603,630 5,260,934
Minority interest 0 5,000,000
Mandatorily redeemable preferred stock:
Series A Convertible Preferred Stock--$.001 par value; 200,000 shares
authorized; 0 shares issued and outstanding at November 30, 2000; 200,000
shares issued and outstanding at May 31, 2000 0 2,966,471
Series B Convertible Preferred Stock--$.001 par value; 400,000 shares authorized;
0 shares issued and outstanding at November 30, 2000; 400,000 shares issued
and outstanding at May 31, 2000 0 4,944,118
Series C Convertible Preferred Stock--$.001 par value; 1,200,000 shares authorized;
0 shares issued and outstanding at November 30, 2000; 600,000 shares issued and
outstanding at May 31, 2000 0 7,416,177
STOCKHOLDERS' EQUITY
Preferred Stock--$.001 par value:10,000,000 shares authorized at November 30, 2000;
0 shares issued and outstanding at November 30, 2000 0 0
Common stock--$.001 par value; 150,000,000 shares authorized at
November 30, 2000, 20,000,000 shares authorized at May 31, 2000; 53,391,322 shares
issued and outstanding at November 30, 2000; 38,090,195 shares issued and
outstanding at May 31, 2000 53,391 38,091
Additional paid-in capital 160,345,798 38,127,238
Accumulated deficit (52,283,323) (44,746,901)
Accumulated other comprehensive loss (365,074) (356,535)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 107,750,792 (6,938,107)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 113,354,422 $ 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 NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
------------------------------- -----------------------------
REVENUES 2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Contracts $ 302,866 $ 771,461 $ 864,708 $ 1,579.426
Products 473,081 312,301 1,125,417 329,244
------------ ------------ ------------ ------------
775,947 1,083,762 1,990,125 1,908,670
OPERATING EXPENSES
Costs of revenues - contracts 220,865 866,686 677,076 1,558,591
Costs of revenues - products 672,240 277,925 1,737,873 323,293
Research and development 3,101,136 1,044,448 5,791,756 1,644,943
Selling, general and administrative 1,673,974 1,218,537 3,158,737 2,165,107
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 5,668,215 3,407,596 11,365,442 5,691,934
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (4,892,268) (2,323,834) (9,375,317) (3,783,264)
Interest Income 1,486,667 181,532 1,945,251 184,346
Loss on foreign exchange (126,379) (21,606) (106,357) --
Interest expense -- (51,829) -- (77,025)
------------ ------------ ------------ ------------
NET LOSS $ (3,531,980) $ (2,215,737) $ (7,536,423) $ (3,675,943)
============ ============ ============ ============
Loss per share attributable to common
stockholders, basic and diluted $ (0.07) $ (0.07) $ (0.16) $ (0.12)
============ ============ ============ ============
Weighted average shares outstanding, 53,232,853 34,020,140 47,435,870 31,667,927
basic and diluted ============ ============ ============ ============
Comprehensive loss $ (3,565,660) $ (2,164,235) $ (7,544,962) $ (3,550,529)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
H POWER CORP.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED NOVEMBER 30,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,536,423) $ (3,675,944)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 392,925 260,476
Write down of impaired equipment 108,220 --
Warrants issued in payment of services -- 150,000
Changes in assets and liabilities:
Accounts receivable 358,205 (1,222,661)
Unbilled receivables 166,379 (103,539)
Inventories (1,358,164) (70,170)
Prepaid expenses & other assets 570,674 (576,771)
Tax credit receivable 17,663 (244,695)
Deposits and other assets (44,935) --
Accounts payable 329,163 (533,839)
Accrued expenses 383,783 244,921
Deferred revenue (367,241) 2,461,473
------------- -------------
Total adjustments 556,672 365,195
------------- -------------
Net cash used by operating activities (6,979,751) (3,310,749)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (782,477) (200,342)
Purchase of short term investments (62,638,539) --
------------- -------------
Net cash used by investing activities (63,421,016) (200,342)
------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 101,907,094 23,732,284
Proceeds from related party borrowing -- 830,017
Repayments of long-term debt (2,955) (1,166)
------------- -------------
Net cash provided by financing activities 101,904,139 24,561,135
------------- -------------
Net increase in cash and cash equivalents 31,503,372 21,050,044
Effect of exchange rate changes on cash and cash equivalents (8,539) 73,892
------------- -------------
Cash and cash equivalents at beginning of period 11,257,355 242,107
------------- -------------
Cash and cash equivalents at end of period $ 42,752,188 $ 21,366,043
============= =============
</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") designs, develops, markets and
manufactures proton-exchange fuel cells and fuel cell systems
designed to provide electricity for a wide range of stationary,
portable and mobile applications.
2. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of November 30,
2000, the condensed consolidated statements of operations for the
three-month and six-month periods ended November 30, 2000 and 1999
and the condensed consolidated statements of cash flows for the
six month periods ended November 30, 2000 and 1999 have been
prepared by the Company without audit. 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.
SHORT TERM INVESTMENTS: Short term investments consist of
corporate debt securities, primarily commercial paper with
maturities less than one year. These investments are considered
available for sale and are carried at fair value. Changes in fair
value are recorded in other comprehensive income and as a separate
component of stockholders' equity.
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 are
eliminated.
STOCK SPLIT: 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 5:1 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.
RECENT ACCOUNTING PRONOUNCEMENTS:
In December 1999, the SEC issued Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB 101").
SAB 101 summarizes certain of the SEC'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 NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
BASIC AND DILUTED EARNINGS PER SHARE
Net loss $ (3,531,980) $ (2,215,737) $ (7,536,423) $ (3,675,943)
Accrued dividends on Series A Convertible
Preferred Stock 0 (52,500) (40,274) (105,000)
------------------------------ ------------------------------
Net loss available to common shareholders $ (3,531,980) $ (2,268,237) $ (7,576,697) $ (3,780,943)
============================== ==============================
Weighted average number of common shares 53,232,853 34,020,140 47,435,870 31,667,927
============================== ==============================
Basic and diluted loss per share $ (0.07) $ (0.07) $ (0.16) $ (0.12)
============================== ==============================
</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. COMPREHENSIVE INCOME
Reconciliation of net loss to comprehensive loss is as follows:
<TABLE>
<CAPTION>
Three Months Ended November 30, Six Months Ended November 30,
2000 1999 2000 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net loss $(3,531,980) $(2,215,737) $(7,536,423) $(3,675,943)
Foreign currency translation
adjustment 19,683 51,502 44,824 125,414
Unrealized loss on short term
investments (53,363) 0 (53,363) 0
---------------------------- ----------------------------
Comprehensive loss $(3,565,660) $(2,164,235) $(7,544,962) $(3,550,529)
============================ ============================
</TABLE>
5. 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.
Section 382 of the Internal Revenue Code limits the ability of a
corporation that undergoes an "ownership change" to use its net operating losses
to reduce its tax liability. Our recent IPO of common stock did not trigger such
an ownership change, but later transactions may do so. In that event, we would
not be able to use our net operating losses from before our ownership change in
excess of the limitation imposed by Section 382. This limitation generally would
be calculated by multiplying the value of our stock immediately before the
ownership change by the long-term tax-exempt rate as provided in Section 382(f)
of the Internal Revenue Code.
7
<PAGE>
6. STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the six months ended November 30,
2000 are as follows:
<TABLE>
<CAPTION>
Number of Accumulated
Shares Other Total
Issued and Common Capital in Accumulated Comprehensive Stockholders'
Outstanding Stock Excess of Par Deficit Loss Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 2000 38,090,195 $38,091 $38,127,238 $(44,746,901) $(356,535) $ (6,938,107)
Net loss (7,536,423) (7,536,423)
Sale of common stock 7,000,000 7,000 101,605,093 101,612,093
Issuance of common stock
upon exercise of stock options 351,750 352 294,649 295,001
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
Issuance of common stock in
payment of dividends to DQE 282,712 282 (282) 0
Foreign currency translation
adjustments 44,824 44,824
Unrealized loss on investments (53,363) (53,363)
------------- ---------- -------------- --------------- ---------------- --------------
Balance at November 30, 2000 53,391,322 $53,391 $160,345,798 $(52,283,323) $(365,074) $107,750,792
============= ========== ============== =============== ================ ==============
</TABLE>
7. 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 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 $2.6 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.
During the first six months of FY2001, the Company issued 351,750
shares of common stock on the exercise of stock options generating proceeds of
$289,000.
On October 12, 2000 the Company issued 282,712 shares of common stock
to DQE Enterprises, Inc. in payment of cumulative dividends on Series A
convertible preferred stock.
8
<PAGE>
8. SUBSEQUENT EVENTS
In January 2001, H Power signed a ten-year lease for approximately
80,000 square feet of manufacturing and office space near Charlotte, NC. This
lease has two five-year renewal options exercisable at the end of the 10th year.
We expect to occupy the facility in the second calendar quarter of 2001. The
rental rate for this facility will be approximately $425,000 per year, subject
to escalations beginning in the second year of the lease term. In addition to
the base rent, H Power is responsible for cost of maintenance, taxes and
insurance.
9
<PAGE>
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, economically 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 the present, was development of 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.
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. In August 1999, we entered into a
ten-year agreement with ECO Fuel Cells, LLC, a subsidiary of Energy
Co-Opportunity, Inc. (ECO), to market, sell, install and service our stationary
power fuel cell systems. ECO is an association of approximately 300 U.S. rural
electric cooperatives. ECO has agreed to purchase 12,300 of our stationary fuel
cell systems over several years for an aggregate purchase price of approximately
$81 million. As of November 30, 2000, we had delivered 8 initial test units of
our residential electric primary power system to ECO. 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. In December 2000, we shipped our first of several beta units, which will
be tested and evaluated by ECO. The beta units will provide the data required to
finalize the design of our commercial units, which we believe will be produced
and shipped commencing the second half of calendar year 2001.
In addition to shipping these units to ECO, we also shipped initial
test and prototype units of our residential cogeneration units to Gaz de France
and Hydro Quebec in the second fiscal quarter of 2001. These units capture the
waste heat energy generated by the unit for use in the home in addition to
generating electricity for the home.
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 November 30, 2000, we have incurred accumulated losses of
approximately $53 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 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.
10
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED NOVEMBER 30, 2000 AND NOVEMBER 30, 1999
REVENUES. Revenues were $776,000 for the three months ended November
30, 2000 compared to $1,084,000 for the three months ended November 30,1999, a
decrease of $308,000 or 28%. Our revenues for the three months ended November
30, 2000 were derived approximately 39% from contract revenues and 61% from
product revenues. Contract revenues for the three months ended November 30, 2000
were $303,000, a decrease of $468,000 from $771,000 for the three months ended
November 30,1999. Product revenues for the three months ended November 30, 2000
were $473,000, an increase of $161,000 from $312,000 for the three months ended
November 30,1999. The decrease in contract revenues and the 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 November 30, 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 November 30, 2000 were high power, stationary RPAC units to Hydro Quebec
and Gas de France totaling approximately $230,000, low power portable power
systems totaling approximately $188,000, and high power licensing fees of
$55,000.
Product revenues for the second quarter declined when compared with the
first quarter as the company extended delivery of its beta units to ECO due to
enhancements made to the fuel cell system, principally increasing the fuel cell
system capacity by 50% to 4.5 kW, and simultaneously decreasing the system size
by 25%. The shipment of the first beta unit was extended from October to
December and had the effect of shifting beta unit revenue from the second
quarter to the second half of fiscal 2001.
COST OF REVENUE. Cost of revenue was $893,000 for the three months
ended November 30, 2000 compared to $1,145,000 for the three months ended
November 30, 1999, a decrease of $252,000. The decrease in the cost of revenue
is principally due to lower unit sales partially offset by an increased cost of
product revenue resulting from increasing costs associated with adding
additional manufacturing capacity required to produce our products in larger
quantities. Cost of revenue as a percentage of revenue will continue to increase
in the foreseeable future as we continue to add manufacturing capacity,
principally in our new North Carolina facility. We anticipate that our cost of
revenues will exceed our revenues for the foreseeable future as we increase our
capacity. We are aggressively pursuing cost reductions of our fuel cell
subsystem and component costs as the cost of our initial beta units must be
significantly reduced to be attractive to the markets we serve. Although we are
making significant progress on cost reductions of certain components, such as
our bipolar plates, the initial costs for other components are higher than
originally estimated as is common with new products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs were
$3,101,000 for the three months ended November 30, 2000 compared to $1,044,000
for the three months ended November 30,1999, an increase of $2,057,000. 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
November 30, 2000 as compared to 35 as of November 30, 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 $1,674,000 for the three months ended November 30,
2000 compared to $1,219,000 for the three months ended November 30,1999, an
increase of $455,000. 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 $210,000, increased rent, telephone and
other office expenses of $75,000 and increased legal and professional expenses
of $27,000. HPEC's selling, general and administrative expenses increased by
$65,000 for three months ended November 30, 2000 compared to the three months
ended November 30,1999.
INTEREST AND OTHER INCOME, NET. Interest and other income was
$1,360,000 for the three months ended November 30, 2000 compared to $160,000 for
the three months ended November 30,1999, an increase of $1,200,000. 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.
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INTEREST EXPENSE. There was no interest expense incurred for the three
months ended November 30, 2000 compared to $52,000 for the three months ended
November 30, 1999.
COMPARISON OF THE SIX MONTHS ENDED NOVEMBER 30, 2000 AND NOVEMBER 30, 1999
REVENUES. Revenues were $1,990,000 for the six months ended November
30, 2000 compared to $1,909,000 for the six months ended November 30,1999, an
increase of $81,000 or 4%. Our revenues for the six months ended November 30,
2000 were derived approximately 43% from contract revenues and 57% from product
revenues. Contract revenues for the six months ended November 30, 2000 were
$865,000, a decrease of $714,000 from $1,579,000 for the six months ended
November 30,1999. Product revenues for the six months ended November 30, 2000
were $1,125,000, an increase of $796,000 from $329,000 for the six months ended
November 30,1999. The decrease in contract revenues and the increase in product
revenues for the six-month comparative periods is principally due to our
emphasis on commercialization of our fuel cell products. Contract revenue for
the six months ended November 30, 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 six months
ended November 30, 2000 were stationary high power units to ECO Fuel Cell, Hydro
Quebec and Gaz de France and low power portable power systems to various
customers.
COST OF REVENUE. Cost of revenue was $2,415,000 for the six months
ended November 30, 2000 compared to $1,882,000 for the six months ended November
30,1999, an increase of $533,000. The increase in the cost of revenue is
principally due to an increased cost of product revenue resulting from
increasing sales and 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. Cost of revenue as a percentage of revenue will continue to
increase in the foreseeable future as we continue to add manufacturing capacity,
principally in our new North Carolina facility.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs were
$5,792,000 for the six months ended November 30, 2000 compared to $1,645,000 for
the six months ended November 30,1999, an increase of $4,147,000. 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 November 30, 2000 as
compared to 35 as of November 30, 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 $3,159,000 for the six months ended November 30, 2000
compared to $2,165,000 for the six months ended November 30,1999, an increase of
$994,000. This increase was primarily due to an increase in the number of
selling, general and administrative employees resulting in an increase in
salaries, benefits and recruiting expenses of approximately $199,000, increased
travel expenses of $117,000 attributable to the increased activity required to
support the ECO contract, increased rent, telephone and other office expenses of
$234,000, increased legal and professional expenses of $142,000 and a $99,000
increase in depreciation and warranty expense. HPEC's selling, general and
administrative expenses increased by $130,000 for six months ended November 30,
2000 compared to the six months ended November 30,1999.
INTEREST AND OTHER INCOME, NET. Interest and other income was
$1,839,000 for the six months ended November 30, 2000 compared to $184,000 for
the six months ended November 30,1999, an increase of $1,655,000. 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 six
months ended November 30, 2000 compared to $77,000 for the six months ended
November 30, 1999.
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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 November 30, 2000, we had net working capital of approximately
$107,137,000, which consisted primarily of cash, cash equivalents and short-term
investments compared to working capital of $13,213,000 at May 31, 2000. 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 with maturities of less than one year and money market funds through
November 30, 2000.
Cash flows used for operating activities for the six months ended
November 30, 2000 were $6,980,000 as compared to $3,311,000 for the same
comparable period in the prior year. For the six months ended November 30, 2000,
cash was used primarily to fund the net loss of $7,536,000, an increase in
inventories of $1,358,000, a reduction in receivables of $525,000, a reduction
in prepaid expenses of $571,000 and an increase of accounts payable and accrued
expenses of $713,000.
Net cash used by investing activities was $63,421,000 for the six
months ended November 30, 2000, $62,639,000 for the purchase of short-term
investments and $782,000 for capital expenditures. We will be making substantial
investments in capital expenditures for the next 18 months consistent with our
commercialization plans and the start up of our manufacturing operations in
North Carolina.
In January 2001, H Power signed a ten-year lease for approximately
80,000 square feet of manufacturing and office space near Charlotte, NC. This
lease has two five-year renewal options exercisable at the end of the 10th year.
We expect to occupy the facility in the second calendar quarter of 2001.The
rental rate for this facility will be approximately $425,000 per year, subject
to escalations beginning in the second year of the lease term. In addition to
the base rent, H Power is responsible for cost of maintenance, taxes and
insurance.
The Company currently occupies space in New Jersey in three separate
facilities with leases due to expire in July 2001. We are currently attempting
to locate approximately 35,000 square feet in New Jersey to replace this
existing space. If we are unable to locate space on a timely basis, we have the
option to renew our existing leases. In addition, the lease in our primary
facility in Canada expires in September of 2001. We intend to move to another
facility in Canada with approximately 25,000 square feet prior to expiration of
our lease.
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 November 30, 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 November 30, 2000, we had 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.
ITEM 3. 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 November 30,
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.
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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, cash equivalents and short
term investments 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.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 12, 2000 the Company issued 282,712 shares of common stock
to DQE Enterprises, Inc. in payment of cumulative dividends on Series A
convertible preferred stock, which were converted into shares of common stock
immediately prior to consummation of the IPO.
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: January 15, 2001 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, six months ended November 30, 2000.
