UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
(Mark
One)
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x
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Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
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For
the fiscal year ended: December 31, 2007
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o
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
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For
the transition period from ______________to ______________
Commission
file number: 000-
32065
HYDROGEN
CORPORATION
(Name
of
Small Business Issuer in Its Charter)
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Nevada
(State
or Other Jurisdiction of
Incorporation
or Organization)
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86-0965692
(I.R.S.
Employer Identification No.)
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10
East 40
th
Street, New York, New York
(Address
of Principal Executive Offices)
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10016
(Zip
Code)
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(212)
672-0380
(Issuer’s
Telephone Number)
Securities
registered under Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange On Which Registered
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Common
Stock, $0.001 par value per share
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NASDAQ
Capital Market
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Securities
registered under Section 12(g) of the Act:
None
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act
o
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirement for the past 90 days.
Yes
x
No
o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of the registrant’ s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
Issuer’s
revenues for the fiscal year ended December 31, 2007 were
$1,445,196.
As
of
April 10, 2008, the aggregate market value of the common stock held by
non-affiliates of the issuer was approximately $16,641,000.
As
of
April 14, 2008, there were 12,769,904 shares of Common Stock, $0.001 par
value per share, outstanding.
Transitional
Small Business Disclosure Format (check one): Yes
o
No
x
HydroGen
Corporation
Annual
Report on Form 10-KSB
Year
Ended December 31, 2007
Table
of Contents
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Page
No.
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PART
I
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1
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Item
1
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Description
of Business
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1
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Item
2
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Description
of Property
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19
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Item
3
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Legal
Proceedings
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20
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Item
4
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Submission
of Matters to a Vote of Security Holders
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20
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PART
II
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20
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Item
5
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Market
for Common Equity, Related Stockholder Matters and Small Business
Issuer
Purchases of Equity Securities
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20
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Item
6
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Management’s
Discussion and Analysis or Plan of Operation
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22
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Item
7
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Financial
Statements
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32
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Item
8
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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32
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Item
8A
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Controls
and Procedures
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33
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Item
8B
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Other
Information
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34
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PART
III
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34
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Item
9
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Directors,
Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance With Section 16(a) of the Exchange Act
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Item
10
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Executive
Compensation
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40
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Item
11
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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45
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Item
12
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Certain
Relationships and Related Transactions, and Director
Independence
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47
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Item
13
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Exhibits
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47
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Item
14
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Principal
Accountant Fees and Services
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49
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Form
10-KSB (the “Annual Report”) contains “forward-looking statements” regarding
future events and future results of HydroGen Corporation (the “Company”)
and
HydroGen, LLC, the Company's wholly-owned subsidiary,
that are
based on current expectations, estimates, forecasts, and projections and the
beliefs and assumptions of the management of the Company and are made pursuant
to the safe harbor provisions of Section 27A of the Securities Act of 1933,
as
amended (the “Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These statements often can be identified by the
use of terms such as “may”, “will”, “expect”, “believe”, “anticipate”, “plan”,
“intend”, “project”, “estimate”, “approximate”, or “continue”, and other similar
expressions or the negative thereof. The Company wishes to caution readers
not
to place undue reliance on any such forward-looking statements, which speak
only
as of the date made. Any forward-looking statements represent management's
best
judgment as to what may occur in the future. However, forward-looking statements
are subject to risks, uncertainties and important factors beyond the control
of
the Company that could cause actual results and events to differ materially
from
historical results of operations and events and those presently anticipated
or
projected. Factors that might cause or contribute to such differences include,
but are not limited to, those discussed in this Annual Report under “Part 1,
Item 1, Description of Business - Risk Factors.” Except as required by
applicable law or regulation, the Company disclaims any obligation subsequently
to revise any forward-looking statements to reflect events or circumstances
after the date of such statement or to reflect the occurrence of anticipated
or
unanticipated events.
PART
I
Item
1.
Description
of Business
In
this
Annual Report on Form 10-KSB, the words “HydroGen,” the “Company,” “we,” “our”
and “us” refer to HydroGen Corporation, collectively with its wholly-owned
subsidiary, HydroGen, LLC, unless the context indicates otherwise.
Business
Development
HydroGen
Corporation, through its wholly-owned subsidiary, HydroGen, LLC, designs,
manufactures, markets and distributes fuel cell modules and energy systems
(power plants) using phosphoric acid fuel cells (PAFC). HydroGen, LLC commenced
the business of the Company in November 2001. On July 7, 2005, HydroGen, LLC
entered into an exchange agreement with Chiste Corporation, a Nevada
Corporation, pursuant to which the shareholders of HydroGen, LLC became
shareholders of Chiste and HydroGen, LLC became a wholly-owned subsidiary of
Chiste. On August 18, 2005, Chiste’s Articles of Incorporation were amended to
rename the company to “HydroGen Corporation.”
Business
of Issuer
Products
HydroGen’s
core technology is a 400 kilowatt (kW) air-cooled, phosphoric acid fuel cell
(PAFC) module which is comprised of four 100 kW stacks within one pressure
vessel. The fuel cell stack technology and configuration were successfully
tested by Westinghouse in over 125,000 hours of stack testing of different
capacities, and over 2,000,000 hours of smaller scale cell testing.
Additionally, HydroGen has conducted over 400,000 hours of small scale testing
and over 6,000 hours of stack testing. It is anticipated that the fuel cell
stacks will be able to reach a lifetime of 40,000 hours in the application
of
HydroGen’s first 4 to 6 megawatt (MW) modules.
Expected
initial product attributes and performance of HydroGen’s 400 kW fuel cell
technology are summarized below:
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·
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Capacity:
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Approximately
400 kW net AC power output (500 kW gross DC)
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Efficiency:
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Application-dependent.
Net electric efficiency anticipated at approximately 40% (natural
gas-based) and 43% (hydrogen-based). Thermal efficiency anticipated
to be
from 74%
to
82% depending on the specific application and uses of the heat generated
(natural gas-based) and 80% (hydrogen-based). Higher system efficiencies
are anticipated in later generations of the technology.
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Fuels:
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Hydrogen-rich
industrial gases, hydrocarbon gases
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Cogeneration:
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Up
to 70 pounds per square inch absolute (psia) steam at 360°F (fuel cells);
higher pressure steam is probable if a hydrogen plant is used to
generate
the hydrogen (i.e., at a site where hydrogen is not
available)
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·
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Net
water:
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Up
to 1,200 gallons per hour for a 10 MW system: this water is potable
and needs only minor purification
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HydroGen
will initially sell multi-MW turn-key power plants in the 2 to 30 MW range.
These power plants consist of multiple 400kW fuel cell modules as well as
balance-of-plant (BOP) equipment. The Company will offer two classes of
products, one designed to run on available hydrogen-rich gas for the “hydrogen
available” market, and one with an integrated reformer that will generate
electric power and heat for cogeneration from hydrocarbon gases. HydroGen will
initially sell turn-key power plants to end user customers and distribution
partners to penetrate target market application and geographic markets. After
achieving initial turnkey sales, HydroGen anticipates selling only fuel cell
stacks and modules to strategic partners in the engineering, contracting and
distribution markets who will deliver turnkey fuel cell power plants based
on
HydroGen’s BOP system designs or utilize HydroGen’s technology to act as an
independent power producer by directly selling the power generated. HydroGen’s
long-term business model calls for it ultimately only to sell and service fuel
cell stacks and modules to world-class engineering, contracting and distribution
companies, who will supply the PAFC power plants on a turn-key basis to their
end users or for their own use.
Additionally,
HydroGen projects recurring revenues from the sale of operations and maintenance
services for deployed 400 kW fuel cell modules which will include their
replacement after approximately 40,000 hours of operation.
HydroGen’s
Market
HydroGen’s
products are intended to serve industrial and utility markets for distributed
power generation in a size class from approximately 2 to 30 MW. Distributed
generation is the production of energy at or close to where that energy is
consumed. The principal benefits of distributed generation are to reduce the
losses associated with long distance transmission of power over a grid, and
to
permit the capture and use of waste heat from power generation for residential,
commercial, and industrial applications. This use of waste heat can bring
overall system efficiency to 80% or greater, in comparison to the average
(United States) electric grid efficiency of approximately 30% (Source:
International Energy Agency, IEA Annual Energy Outlook 2005).
Worldwide
demand for ultra-clean distributed generation, such as that provided by a fuel
cell, is driven by a mix of energy price increases and volatility, tightening
emissions standards and regulations, availability of credits and incentives,
the
losses and costs associated with the electric power distribution infrastructure,
technical and economic advances in distributed generating equipment, and the
need for high energy reliability.
In
the
United States, there are approximately 25,000 MW of installed distributed
generation units for base load and combined heat and power (CHP) applications
(Source: The Installed Base of U.S. Distributed Generation, 2004 Edition,
Resource Dynamics Corporation, Washington D.C.). Analysts have forecast that
an
additional 20,000 - 40,000 MW of market potential exists for distributed
generation in the United States (Source: High Natural Gas Prices and the Updated
Market For CHP, 2004, Resource Dynamics Corporation, Washington D.C.).
Worldwide, orders for gas turbines for distributed base load applications in
the
2 to 30 MW class totaled approximately 2,500 MW from June 2006 through
May 2007 (Source: 2007 Power Generation Order Survey; Diesel and Gas Turbine
Worldwide). If these were purchased at an average installed cost of $2,000/kW,
the corresponding market value would be approximately $5 billion.
HydroGen
targets two markets for distributed generation in its preferred size class
of 6
to 30 MW, which are differentiated from each other by the manner in which the
fuel for the fuel cell power plant is generated:
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Hydrogen
Available Market: hydrogen or hydrogen-rich gas is a byproduct of
industrial processes and is available for use in the fuel cell power
plant
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Hydrocarbon
Market: hydrogen or hydrogen-rich gas is converted from other fuel
sources
(e.g., from natural gas) utilizing a reformer for use in the fuel
cell
power plant
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Each
of
these markets is addressed in more detail below.
Hydrogen
Available Market
HydroGen
plans to target the existing hydrogen infrastructure of the United States and
other industrialized countries for market entry and early growth in applications
where hydrogen-rich fuel gas is already available. Such applications include
chemical or industrial production facilities where hydrogen or hydrogen-rich
gas
is produced as a byproduct, such as at chlor-alkali and sodium chlorate plants,
coke oven works, and refineries. These facilities are significant generators
of
hydrogen-rich byproduct gases, and large consumers of electric and thermal
energy. As an example, United States chlor-alkali facilities produce as a
byproduct a quantity of hydrogen that if it were used in a HydroGen fuel cell
power plant it would be sufficient to generate up to 20% of these plant’s base
load requirements. We estimate the market size for applications at existing
chlor-alkali facilities in the U.S. to be up to 800 MW. Based on industry survey
data for some of the industries cited above, the Company believes that the
world-wide market opportunity for hydrogen-available applications is on the
order of thousands of megawatts.
HydroGen’s
ideal target customers for this market are facilities that generate large
quantities of hydrogen-rich gases, where other factors favoring the adoption
of
clean distributed generation technology are present. Examples of these factors
include:
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High
electric power costs (or grid sell-back tariffs) relative to the
value of
hydrogen;
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Facility
demand for thermal energy - enabling cogeneration opportunities that
can
double overall system efficiency and generate additional energy cost
savings;
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Tax
credits, tariffs, and other incentives that favor introduction of
clean
energy technology, distributed generation, and / or fuel
cells;
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Air-quality
regulations or other restrictions that favor clean energy technology,
distributed generation, and / or fuel cells; and
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High
quality and reliability requirements for power sensitive
operations.
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HydroGen
plans to sell complete fuel cell systems directly to industrial end-users and
to
distributors or system integrators for siting near the hydrogen infrastructure
when the value proposition justifies an investment in a HydroGen fuel cell
power
plant.
The
total
market size for this market is principally constrained by the value that a
chemical or industrial production facility places on its hydrogen stream, in
comparison with the value of the electric power that is generated with the
fuel
cell. The value of hydrogen as an industrial gas is much higher than its value
as fuel. Therefore, the HydroGen market opportunity for this application is
ideal for facilities that either vent their hydrogen or use it as a fuel to
serve facility thermal demands, rather than selling or utilizing it as a
chemical feedstock.
Hydrocarbon
Market
HydroGen
also expects to target the distributed generation market for utilities and
commercial or industrial facilities in the 2 to 30 MW market class based on
use of gaseous hydrocarbon fuels such as natural gas and landfill gas. The
Company has accelerated its plans to enter this market as a result of its
partnership with Samsung Corporation.
Energy
companies offering distributed generation products and services, such as
utilities and independent power producers, are attractive customers for HydroGen
in this market. These potential customers would benefit from the advantages
of
large-scale cogeneration as noted above, by owning fuel cell systems, situating
the systems at end-user facilities, and selling power and heat to the
end-customer. This type of “community energy system” is becoming increasingly
prevalent in certain markets. Utilities can capture some of the benefits of
on-site generation and still pass the remaining benefits on to their
end-customers.
Marketing
and Distribution
We
are
actively marketing our product in the United States through our internal sales
force and consultants, which include former senior employees from industrial
companies that HydroGen is targeting for early commercial adoption. In addition,
we have entered into a strategic partnership in the hydrogen available market
with Samsung Corporation pursuant to which Samsung will serve as our exclusive
distributor in South Korea, Asia, the Middle East, Australia, New Zealand and
other territories in Eastern Europe. We anticipate entering into similar
strategic partnerships and distribution agreements for specific markets in
other
parts of the world.
On
January 11, 2008 HydroGen and Samsung Corporation entered into a series of
agreements, including a Master Cooperation Agreement (the “Cooperation
Agreement”), a Hydrogen Exclusive Distribution and Marketing Agreement (the
“Hydrogen Distribution Agreement”) and a Letter of Intent for the sale and
purchase of a 5 MW fuel cell power plant (“LOI”).
Pursuant
to the Cooperation Agreement, HydroGen and Samsung have agreed to use their
best
commercial efforts to cooperate with each other with respect to the sale and
marketing of fuel cell power plants using stacks and modules under the
“HydroGen” brand or related or new brands. The Parties have further agreed to
the following:
•
To
use
their commercially reasonable efforts to negotiate and execute a sales agreement
for the sale by HydroGen and purchase by Samsung of an initial fuel cell power
plant fueled by hydrogen rich gas of approximately 5 MW based upon, and
effectuating, the terms of the LOI (the “Hydrogen Fuel Cell Power Plant Sales
Agreement”) by March 31, 2008. At the request of Samsung’s customer, HydroGen
now expects this sales agreement to be finalized after the ASHTA test plant
has
started operations, which is scheduled for the second quarter of 2008. While
a
definitive delivery schedule will be negotiated as part of the sales agreement,
the Company’s nominal delivery time for a power plant project is approximately
18 months.
•
Upon
HydroGen delivering the first fuel cell power plant fueled by hydrogen rich
gas,
the Parties have agreed to enter into a BOP Technology Transfer, Licensing,
and
Technical Support Agreement pursuant to which Samsung shall obtain, in exchange
for a royalty fee, certain rights to deliver to Samsung’s customers, fuel cell
power plants utilizing HydroGen’s plant designs and related proprietary rights
and confidential information. Through this agreement and as described below,
HydroGen will transition into the role of a supplier of fuel cell stacks and
modules to Samsung, who will market, distribute, and deliver complete PAFC
plants to their end customers in their exclusive territories.
•
HydroGen
shall undertake to complete a design for a fuel cell power plant fueled by
methane rich gases to meet design specifications as agreed upon by the Parties
by a target date of July 11, 2008. Upon HydroGen’s producing a design that meets
the design specifications agreed upon by the Parties, the Parties have agreed
to
enter into an exclusive distribution and marketing agreement for fuel cell
power
plants fueled by methane rich gases using stacks and modules manufactured by
HydroGen (the “LNG Distribution Agreement”). Pursuant to that contemplated
agreement, HydroGen anticipates receipt of an order from Samsung in late 2008
or
early 2009 for a multi-megawatt turn key PAFC plant operated on natural gas.
•
Upon
entering into the LNG Distribution Agreement and subject to Samsung obtaining
the requisite internal and regulatory approvals, Samsung has agreed to purchase
shares of the common stock of the Company for an aggregate purchase price of
not
less than $5 million.
•
Within
two years after execution of the LNG Distribution Agreement (or, if the Parties
do not enter into an LNG Distribution Agreement, within two years of June 30,
2008), the Parties shall commence a study of the feasibility and desirability
of
establishing a joint venture company by 2012 to produce stacks and modules
and /
or balance of plant (“BOP”) components and assemblies worldwide.
•
HydroGen
has the option to license any improvements that Samsung makes to Samsung’s
balance of plant designs in exchange for a royalty fee to be negotiated between
the parties.
Pursuant
to the Hydrogen Distribution Agreement, HydroGen appointed Samsung as the
exclusive distributor of HydroGen fuel cell stacks, modules and power plants
in
Asia, the Middle East, Australia, New Zealand and selected countries in Eastern
Europe (the “Territory”). Additionally:
•
HydroGen
has reserved the right to sell to any agency, authority or instrumentality
of
the United States of America including, without limitation, all branches of
its
military, in any place in the world. Samsung is prohibited from directly or
indirectly selling, marketing or distributing (a) any fuel cell products with
an
output capacity of 1.5 megawatts or more in, or into, the Territory, other
than
products from HydroGen and (b) any fuel cell products with an output capacity
of
1.5 megawatts or more outside the Territory. HydroGen shall not sell, or cause
to be sold, directly or indirectly, any HydroGen products with an output
capacity of 1.5 megawatts or more, in, or into the Territory. Further, HydroGen
shall not appoint other distributors or agents to sell HydroGen products of
1.5
megawatts or more in, or into, the Territory.
•
Each
year
Samsung and HydroGen shall set and / or revise performance targets for the
proceeding three years. Samsung shall set its sales performance targets for
each
of the regions in the Territory and cumulatively. HydroGen shall set price
targets, production targets and system performance targets.
Competitive
Business Conditions and Competitive Position
HydroGen
believes it is well positioned with its scalable multi-megawatt technology
to
offer products that will meet increasing global demand for large scale,
ultra-clean distributed energy.
HydroGen
faces competition from a number of different sources. Indirectly, there is
competition from the current producers of electricity, including the major
power
producers, transmission companies and existing co-generation sources. Current
electric producers all have existing facilities, are part of the current power
grid and have an established market presence. In addition, terminating or
modifying power supply relationships with some of their suppliers may require
these potential customers to pay termination fees to end long term contractual
arrangements or pay fees for remaining a user of grid electricity on a back-up
basis.
Directly,
there is competition from other producers of fuel cells, albeit based on
different technologies, and from incumbent distributed generation technologies
in HydroGen’s target size class. Incumbents include internal combustion engines
and combustion turbines. The former are the largest and best-established
distributed generation technology, with most installations using liquid fuels
but a substantial amount using gaseous hydrocarbons as well. However, operating
at low temperature, with little waste heat available for cogeneration, and
with
frequent maintenance intervals, engines are utilized in applications that are
not as directly competitive to HydroGen’s as the turbines. Combustion turbines
have a long operating and service support history, low installed costs, and
currently a substantial market position. HydroGen can compete with these
technologies based on the following anticipated attributes of its technology:
1.
High
net
electric and system efficiency;
2.
Ultra-low
emissions;
3.
High
reliability and availability;
4.
Fuel
and
application diversity; and
5.
Ability
for integration of fuel cell plant into chemical plant.
Despite
these attributes of our technology, incumbent technologies and producers are
strongly entrenched and hold a highly defensible and dominant share of the
market for electricity production. HydroGen will attempt to out-perform its
competition by delivering products that offer a competitive value proposition
against that of the incumbents, and through world class strategic partnerships
that will provide significant market presence, credibility, and technical and
business capability. HydroGen will also focus on and intends to deliver product
cost reductions through aggressive value engineering projects to make HydroGen’s
fuel cell power plants more attractive as an alternative source. Also, HydroGen
can source projects where its fuel cell technology is the more logical solution
such as locations where the electric grid is weak or not readily available,
or
where hydrogen is available.
Among
other types of fuel cells, HydroGen also faces competition from producers of
liquid-cooled PAFCs and molten carbonate fuel cells (MCFCs). Two leading
manufacturers of liquid-cooled PAFCs are United Technologies Corporation and
Fuji Electric. Both of these companies have a proven track record, substantial
resources and a large number of installed power plants using their technology.
Because both companies target natural gas-based applications below 1 MW, the
Company does not anticipate significant direct competition from these providers.
The leading supplier of MCFCs, FuelCell Energy, offers units ranging from 300
kW
to 2.4 MW, and targets hydrocarbon fuel applications. This provider has fielded
numerous early commercial units and is competing in similar geographies as
HydroGen. While the MCFC system operates at a higher electric efficiency than
the PAFC for hydrocarbon applications, MCFCs are principally restricted to
hydrocarbon applications because of the need for internal carbon dioxide
recycling for electrolyte replenishment. Because of the nature of their
technology and the stage of their development, HydroGen does not consider the
manufacturers of solid oxide fuel cells (SOFC) to be directly competing in
the
size range of plants that the Company is considering; however, some
manufacturers of SOFCs are indicating their focus on larger scale applications
as their initial commercial focus.
HydroGen
intends to compete with its fuel cell competitors on the basis of what the
Company believes to be its competitive attributes. The Company believes that
its
highly scalable multi-megawatt plant design flexibility gives it access to
a
wider range and larger total size of market opportunity. By focusing on large
multi-megawatt systems, we anticipate that the installed cost (and associated
price to customer) for our air-cooled PAFC power plants will be very competitive
with other fuel cells, with higher reliability and lower maintenance. By using
mature, “off the shelf” balance of plant (BOP) equipment and reformer
technology, the Company also believes its fuel cell plants will be more reliable
and cost less. The Company also believes that PAFCs have demonstrated the
longest operating lifetime of all fuel cells, reducing the life cycle cost
of
ownership to the customer by extending the time required between fuel cell
stack
replacements. Finally, the Company believes that its application diversity,
including hydrogen-available and hydrocarbon markets, offers a larger
opportunity for its technology.
Customers
HydroGen
anticipates selling its first PAFC power plant(s) in 2008 on the basis of
expectations established in its strategic partnership agreements with
Samsung.
Intellectual
Property
HydroGen
owns certain rights and manufacturing assets for the 400 kW, air-cooled
PAFC technology developed in the 1980s and early 1990s by Westinghouse. As
part
of the Department of Energy (DOE)-Westinghouse program, Westinghouse obtained
a
revocable, non-exclusive license to use all technology developed pursuant to
the
DOE sponsored program. In addition, Westinghouse undertook its own development
of module designs and manufacturing plans, and constructed a manufacturing
facility and working prototype module. During this manufacturing and prototype
program, Westinghouse privately developed recipes, processes and plans for
designing and manufacturing phosphoric acid fuel cells. That intellectual
property, maintained by Westinghouse as trade secrets, has been transferred
to
HydroGen along with all of Westinghouse’s rights to the technology developed
under the DOE research and development program, and has since been maintained
as
closely held trade secrets. HydroGen also employs some of the former
Westinghouse engineers who developed the technology, and has substantially
transferred their knowledge base to a new team of engineers.
Westinghouse,
who originally developed the technology and made the decision to maintain the
core technology in the form of trade secrets, subsequently transferred all
of
its intellectual property related to the PAFC program, including trade secrets,
to Environmental Energy Services, Inc (EESI), the predecessor company to Fuel
Cell Corporation of America (FCA), on or about March 31, 1993 pursuant to a
general assignment set forth in the asset purchase agreement. FCA/EESI
maintained these trade secrets, until ultimately transferring the assets to
HydroGen, LLC in the fall of 2001.
HydroGen
continues the use of trade secrets as its principal mode to protect its
intellectual property. The Company is currently working with its intellectual
property counsel to assist it in formulating strategies designed to protect
most
effectively its existing and future intellectual property.
Although
most of the core technology has been maintained as trade secrets, Westinghouse
applied for and received patents in this technology. All of the patents related
to this technology that were issued to Westinghouse were subsequently assigned
to the DOE. However most of these patents either expired or were allowed to
lapse by the DOE. The DOE maintained four patents, only two of which remain
in
effect today. On August 26, 2005, HydroGen, LLC, entered into a patent license
with the DOE to license two patents for its business operations. The DOE granted
the license to promote both the interests of the federal government and the
public, as well as provide incentives to the Company to bring these inventions
to market. The two remaining DOE patents subject to the license
are:
|
Patent
No.
|
|
Subject
Matter of Patent
|
|
Expiration
Date
|
|
|
|
|
|
|
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4978591
|
|
Corrosion
Free Phosphoric Acid Fuel Cells
|
|
9/2009
|
|
|
|
|
|
|
|
5096786
|
|
Integral
Edge Seal for Phosphoric Acid Fuel Cells
|
|
9/2009
|
The
patent license from the DOE is royalty free, irrevocable and exclusive to
HydroGen, LLC except to the extent the government may require us to issue
sublicense(s) to parties for health and safety needs. We were required to and
did spend not less than $1,000,000 in the development of products using the
licensed patents during the first year. We are also required to maintain the
licensed inventions at the U.S. Patent and Trademark Office. We have also
committed that the products embodying the licensed inventions will be
manufactured substantially in the United States. We are obligated to provide
various reports to the DOE regarding the development of our products. We may
grant sublicenses to third parties with the permission of the DOE. The license
may be terminated in whole or in part if: (i) we do not execute our
development plan as required under the license; (ii) we fail to make any
required reports to the DOE; (iii) we materially breach the agreement or
(iv) the DOE determines that termination is necessary to meet requirements
for public use as specified in federal regulations and those regulatory
requirements are not being met by us. The loss of the exclusive use of the
patents could impair the Company’s ability to realize its business
plan.
Governmental
Regulations
We
presently are, and our fuel cell power plants will be, subject to various
federal, state and local laws and regulations relating to, among other things,
land use, safe working conditions, handling and disposal of hazardous and
potentially hazardous substances and emissions of pollutants into the
atmosphere.
We
are
also subject to federal, state, provincial or local regulation with respect
to,
among other things, emissions and siting. In addition, utility companies and
several states have created and adopted or are in the process of creating
interconnection regulations covering both technical and financial requirements
for interconnection of fuel cell power plants to utility grids.
Regulatory
and other incentives
An
increasing array of federal, state, and foreign country incentives offer further
opportunities for customers to benefit from HydroGen fuel cell systems. At
the
federal level, the Business Energy Tax Credit provides a tax credit equal to
30%
of the purchase cost of a fuel cell system to a corporate customer. Also, under
the Modified Accelerated Cost Recovery System, fuel cells are classified as
5-year property and are depreciated on an accelerated basis over that time
period. Additionally, in 2006 the Department of Energy initiated a Loan
Guarantee Program, under which the federal government has committed to serve
as
guarantor for up to $4 billion to encourage early commercial use in the
United States of new or significantly improved technologies in energy projects,
including hydrogen-related energy projects. Together, these existing incentives
may assist in reducing the cost and risk associated with early adoption of
the
HydroGen product.
Additionally,
numerous states are initiating or increasing commitments to renewable or
“alternative” energy portfolio standards and related mandates, and providing
significant incentives to reduce the cost of such technologies to early
adopters. One major example is the State of California, which currently offers
a
direct purchase incentive of $4,500/kW for fuel cells running on renewable
fuel
and $2,500/kW for all other fuel cells, through the Self-Generation Incentive
Program. In the State of Connecticut, fuel cells qualify as a “renewable”
technology under the state’s renewable portfolio
standard. Additionally, fuel cells qualify as a
Tier 1 alternative energy technology as part of the Commonwealth of
Pennsylvania’s Alternative Energy Portfolio Standard (AEPS). The AEPS, enacted
November 30, 2004, requires each electric distribution company and electric
generation supplier to retail electric customers in Pennsylvania to supply
18%
of its electricity using alternative-energy resources by 2020, of which 8%
must
be derived from Tier 1 sources. Tier 1 generation credits are tradable
instruments that can enable non-utility owner-operators of fuel cell systems
to
sell the credits to electricity suppliers which must comply with the AEPS
requirements.
Other
nations have begun to offer incentives to support development of fuel cell
power
generation systems and the related industry. In South Korea, for example, an
array of incentives and subsidies directly benefit adopters of fuel cell
systems. Under a feed-in tariff program, the federal government purchases the
electric power output from the first 50MW of installed fuel cell systems for
a
price of $0.30/kWh, a premium of approximately over 400% above the cost of
conventional generation in South Korea.
This
discussion is not intended as a comprehensive review of all available
incentives, but a general presentation of some such incentives to illustrate
their widespread and increasing nature, and potential importance in spurring
early adoption.
Research
and Development
We
incurred $10,886,000 and $3,860,000 in research and development activities
for
the periods ended December 31, 2007 and 2006, respectively. None of the amounts
spent on research and development have been borne directly by
customers.
Suppliers
and Raw Materials
We
use
various raw materials and components to construct a fuel cell module, including
platinum which is critical to our manufacturing process. Our BOP components
are
procured from several key suppliers. We continually evaluate new suppliers
and
currently are qualifying several new suppliers.
Environmental
Compliance
We
believe that
we
are, in
all material respects, in compliance with local, state, and federal
environmental laws applicable to our manufacturing and waste disposal
operations, and we have prepared appropriate documentation as to our current
operational procedures, standards, and guidelines in order to comply with
applicable environmental laws. In 2007, we spent approximately $90,000 on
these compliance activities.
Product
Update
On
October 17, 2006, HydroGen announced that it had signed an agreement with
ASHTA Chemicals to install and operate a 400 kW fuel cell demonstration
power plant at ASHTA’s chlor-alkali manufacturing plant in Ashtabula, Ohio. We
have completed construction of this plant and have delivered to it the 400
kW
fuel cell module. We are currently performing start-up testing and anticipate
generating power in the second quarter of 2008.
Employees
As
of
April 1, 2008, HydroGen employed approximately 103 full time employees and
three
part time employees. Of its employees, HydroGen has seven members of executive
management, 83 technical staff and 13 administrators and organizational support
staff. HydroGen believes it has good relations with its employees, and none
are
represented by collective bargaining agreements.
Risk
Factors
Investors
in HydroGen should be mindful of the following risk factors relative to
HydroGen’s business.
HydroGen
has limited revenues to sustain its business.
As
of
December 31, 2007, HydroGen had cash of approximately $8.1 million. HydroGen
is
a development stage Company that cannot rely on revenues from sales. Without
raising additional capital, HydroGen will not be able to sustain its operations
past mid-May 2008.
Our
independent auditors have issued a going concern opinion.
Our
auditors have included an explanatory paragraph in their opinion that
accompanies our audited consolidated financial statements as of and for the
year
ended December 31, 2007, indicating that our recurring losses from
operations, net capital deficiency, and current liquidity position raise
substantial doubt about our ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
HydroGen
has a limited operating history in the fuel cell industry, and therefore
investors may not be able to evaluate an investment in our common
stock.
HydroGen
has a limited history of operations in the fuel cell industry. An investment
in
HydroGen should be viewed in light of the risks and uncertainties inherently
faced by a company in the early stages of development. Due to the nature of
the
emerging industries in which HydroGen competes, some aspects of its business
plan rest on the beliefs formed by its management and have not necessarily
been
supported by independent sources. As a result, there can be no guarantee as
to
the adequacy of HydroGen’s business plan and there is a limited basis for
evaluating HydroGen.
HydroGen
has incurred substantial losses and expects continued losses. There can be
no
assurance that HydroGen can achieve profitability, and even if it does become
profitable, that it can sustain profitability.
HydroGen
has incurred substantial losses since its formation and had an accumulated
deficit of approximately $31.5 million as of December 31, 2007. HydroGen expects
to continue to incur net losses for the next 30 to 40 months as it continues
to
make significant investments in commercialization activities and pursue
cost-reduction activities. HydroGen cannot determine with certainty when or
if
it will achieve profitability, and even if it does achieve profitability,
whether it can sustain or increase profitability.
HydroGen
will require a substantial amount of additional capital to fully execute its
business plan, and we are uncertain about the availability of such additional
funds without which we may not be able to execute our business
plan.
The
business plan calls for the expenditure of substantial capital to finance power
plant development projects, continued financing for its Versailles fuel
cell manufacturing facility, and the construction of an advanced manufacturing
facility with capacity for future large scale serial production of fuel cell
stacks and potentially for other components used in the fuel cell power plants
that HydroGen plans to sell and deliver. HydroGen will require additional
capital to fund its expenditures, including business development, operating
losses, and other cash needs to implement its market entry and cost reduction
phases. HydroGen has made an initial estimate of its capital needs for its
market entry stage and believes it will need a minimum of $75 million in
additional capital. HydroGen plans in the future to seek portions of the
required funding from commercial sales, equity investments from strategic
partners and others, existing state incentive programs for fuel cells, federally
funded fuel cell demonstration programs and low interest incentive based loans
supported by one or more selected states. We currently have no committed sources
of, or other arrangements with respect to, additional financing, and there
can
be no assurance that such additional financing will be available or, if
available, be available on acceptable terms to HydroGen. Without the necessary
funds, our business plan will have to be modified or may not be fully executed.
Additionally, any future financing may significantly impair the Company’s
ability to utilize net operating losses existing at the time of the financing
as
a result of limitations imposed under Internal Revenue Code
Section 382.
Current
shareholders may be diluted as a result of additional
financings.
If
HydroGen raises additional funds through the sale of equity or convertible
debt
securities, current shareholders’ percentage ownership will be reduced. In
addition, these transactions may dilute the value of common stock outstanding.
Moreover, HydroGen may have to issue securities that may have rights,
preferences and privileges senior to its common stock.
HydroGen’s
current cost to produce its fuel cell modules exceeds the amount for which
it
can currently sell such product. While HydroGen has initiated specific work
targeting cost reductions, if HydroGen is unable to reduce the costs of its
fuel
cell modules, it will have a material adverse effect on its business plans,
prospects, results of operations and financial condition.
The
production costs of our initial industrial products are expected to be higher
than their sales prices. HydroGen recognizes that successfully implementing
its
strategy and business plan requires that it offer fuel cell modules at
competitive prices, which can only be accomplished when production costs are
cut
substantially from current levels. HydroGen has multiple value engineering
projects in progress that target the required cost reductions. If HydroGen
is
unable to produce fuel cell modules at competitive prices relative to
alternative technologies and products, HydroGen’s target market customers will
be unlikely to buy its fuel cell modules. The failure to achieve cost reductions
may materially adversely affect HydroGen’s business plans, prospects, results of
operations and financial condition.
HydroGen
received a grant from the State of Ohio that has a number of obligations that
if
they are not met will cause the grant to be withdrawn.
The
State
of Ohio has provided HydroGen a development grant of $1,250,000 on a
reimbursement basis. The grant imposes a number of obligations on HydroGen,
including the implementation of the outlined business plan in the grant
application, relocation of the headquarters and establishment of manufacturing
facilities in the state, creation of jobs and adherence to federal and state
regulations of accountability and business practice. If these are not met,
the
grant may be withdrawn and the proceeds of the grant may have to be repaid
to
the State of Ohio. The loss of the grant funding may limit the ability of
HydroGen to implement its business plan as currently established and require
HydroGen to seek additional funding earlier than anticipated.
HydroGen’s
initial fuel cell modules will be based on technology developed by Westinghouse
Electric Power Division. While this technology has been tested for millions
of
hours at the scale and stack level, it has not been manufactured in volume,
deployed to industrial applications, nor proven for the nominal lifetime of
5
years. As experience with this technology is gained in the factory and in the
field, there will likely be additional funds expended to improve
manufacturability, performance and lifetime.
HydroGen’s
fuel cell modules are based on technology developed in the 1980s and early
1990s
by Westinghouse Electric Power Division. There exist some areas where further
development might be done or required. Certain basic materials and components
may have changed in nature or specifications, and additional associated problems
may materialize during the initial production of the fuel cells and fuel cell
stacks. There is no certainty that fuel cell production in our Versailles
production plant or in the advance manufacturing plant which is planned to
come
on line in 2009 will not have a material impact upon the performance,
profitability, and cash flows from future operations.
HydroGen
has entered into a license with the Department of Energy which has certain
requirements that if not met will cause the license to be
terminable.
HydroGen
has entered into a license of four patents from the Department of Energy (two
of
which have since expired) which requires us to make a yearly report to the
DOE.
If not met, the license will be terminable, the loss of which could impair
HydroGen’s ability to attract additional investment.
HydroGen
relies on trade secret and similar means to protect much of its intellectual
property which may not prove to be effective, with the effect of impairment
in
our rights.
HydroGen
relies on trade secret law, confidentiality agreements and physical security
such as restricted access to protect much of its intellectual property. If
these
means of protection are compromised others may obtain knowledge of our
intellectual property and could potentially develop competing products. For
instance, confidentiality agreements to which HydroGen is a party may be
breached, and HydroGen may not have adequate remedies for any breach. To protect
its rights that others learn illegally may require HydroGen to expend time
and
financial resources pursuing court actions. These actions are typically
expensive and are not always conclusive in favor of the claimant. In addition,
though HydroGen believes doing so would be difficult, it may be possible for
third parties to reverse engineer its fuel cells through inspection and testing.
Finally, it is possible that third party patents may exist on which HydroGen’s
technology may infringe. HydroGen’s financial condition may be impaired in any
such events, and it may lose its competitive position as a result.
Failure
of HydroGen’s field tests could negatively impact demand for its
products.
HydroGen
has a commercial demonstration test facility at ASHTA Chemicals, Inc. in
Ashtabula, Ohio. Demonstrations of HydroGen’s product could encounter problems
and delays for a number of reasons, including the failure of its technology,
operator error, and the failure to properly maintain and service its test
facility plants. Any problem or perceived problem with HydroGen’s field tests
could materially harm its reputation and impair market acceptance of, and demand
for, its products.
HydroGen
has no experience manufacturing fuel cell power plants on a commercial basis
which may result in production delays, associated delays in sales and could
result in additional development costs.
HydroGen
has no experience manufacturing fuel cell modules or in designing and
constructing fuel cell power plants on a commercial basis. HydroGen does not
know whether or when it will be able to develop efficient, low-cost
manufacturing capability and processes that will enable it to meet the
production standards or production volumes necessary to successfully market
its
products. Even if HydroGen is successful in developing its manufacturing
capability and processes, it does not know whether it will do so in time to
meet
its product commercialization schedule. Therefore, investors may lose the
opportunity to profit from the development of HydroGen’s technology and business
plan because there may be delays in sales, and additional development
costs.
A
viable market for HydroGen’s products may never develop or may take longer to
develop than HydroGen anticipates.
HydroGen’s
fuel cell power plants represent an emerging market, and HydroGen does not
know
the extent to which distributors and resellers will want to purchase them and
whether end-users will want to use them. If a viable market fails to develop
or
develops more slowly than HydroGen anticipates, HydroGen may be unable to
recover the losses it has incurred to develop its products and may be unable
to
achieve profitability. The development of a viable market for HydroGen’s
products may be impacted by many factors which are out of its control,
including:
|
|
·
|
the
cost competitiveness of HydroGen’s
products;
|
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·
|
the
future costs of natural gas, hydrogen and other fuels expected to
be used
by our products;
|
|
|
·
|
consumer
reluctance to try a new product;
|
|
|
·
|
consumer
perceptions of HydroGen’s product
safety;
|
|
|
·
|
regulatory
requirements;
|
|
|
·
|
barriers
to entry created by existing energy providers;
and
|
|
|
·
|
the
emergence of newer, more competitive technologies and
products.
|
Utility
companies could place barriers on HydroGen’s entry into the marketplace with the
result that we may not be able to sell sufficient products to sustain operations
and cause unexpected losses.
Electric
utilities commonly charge fees to industrial customers for disconnecting from
the grid, for using less electricity, or for having the capacity to use power
from the grid for back-up purposes. The imposition of such fees could increase
the cost to customers using our systems and could reduce the desirability of
our
systems, thereby harming our potential for successful marketing and therefore
revenues or profitability. Without sufficient sales, we will not gain the
credibility necessary to compete in our industry, and we may not be able to
sustain our operations.
Alternatives
to HydroGen technology could render HydroGen’s systems obsolete prior to
commercialization, and therefore will cause us to curtail our current business
plan and potentially impair an investment in HydroGen.
HydroGen’s
fuel cell power plants are one of a number of alternative energy products being
developed today as supplements to the electric grid that have potential
industrial applications, including microturbines, solar, wind, and other types
of fuel cell technologies and advanced reciprocating engines. Technological
advances in alternative energy products, improvements in reciprocating
engine/generator sets, and other fuel cell technologies may render HydroGen’s
systems obsolete, therefore causing a diminished value of an investment in
HydroGen.
HydroGen
may be unable to sell and deliver or operate fuel cell power plants which will
result in a loss of market opportunity and its ability to generate
income.
HydroGen’s
success will depend on its and its partners’ ability to sell and deliver fuel
cell power plants. Although there is interest indicated in its potential fuel
cell power plants and HydroGen is in the process of negotiating its first sales
contract for the sale and delivery of its air-cooled PAFC power plants, no
definitive contracts have been executed to date. Factors that could adversely
affect HydroGen’s ability to sell and deliver fuel cells include HydroGen’s
ability to manage operations, increased competition and unexpected technological
obsolescence of HydroGen’s air-cooled phosphoric acid fuel cell technology.
Another reason for not being able to deliver the fuel cell power plants is
the
technological risk associated with new applications of technology. The inability
of HydroGen to effectively sell and deliver fuel cell power plants, or to get
the first few plants operational, would have a material adverse effect on
HydroGen’s business, financial condition and results of operations because it
will lose market opportunity and credibility.
HydroGen
may be unable to obtain the necessary governmental approvals, authorizations,
certifications, permits, licenses, and rights-of-way to sell, deliver and/or
operate fuel cell power plants without which HydroGen will not be able to sell
its systems or be able to enter the market.
The
development, sales, and delivery of fuel cell power plants will depend on,
among
other things, HydroGen’s ability to secure and maintain regional governmental
approvals, authorizations, permits and licenses. In certain jurisdictions,
other
legal requirements may delay, stop or impede the sales, delivery and/or
operation of fuel cell power plants. There can be no assurance that HydroGen,
its distributors, its customers, or its contractors will successfully obtain
required approvals, authorizations, permits and licenses or enter into necessary
agreements, as the case may be. If HydroGen, its distributors or any contractor
fails to secure or maintain any necessary approvals, authorizations, permits
or
licenses, or faces delays in respect thereof, HydroGen may be unable to commence
or complete any proposed fuel cell projects, which could materially and
adversely affect HydroGen’s ability to sell, deliver or operate fuel cell power
plants.
If
HydroGen or Samsung fail to perform under their strategic agreements, HydroGen’s
business, prospects, results of operations or financial condition may be
adversely affected.
HydroGen
and Samsung have entered into a Master Cooperation Agreement and a Hydrogen
Distribution and Marketing Agreement pursuant to which Samsung will be the
exclusive distributor of HydroGen’s fuel cell products in Asia, the Middle East,
Australia, New Zealand and certain countries in Eastern Europe. There can be
no
assurance that Samsung will be able to effectively market and sell HydroGen’s
fuel cell products in all or any parts of these regions, or if they are able
to
market and sell HydroGen’s fuel cell products, that they will be able to do so
at the levels targeted by the parties. There can also be no assurance that
HydroGen will be able to meet the sales demands of Samsung or that HydroGen
will
be able to sell at the prices required by Samsung’s customers. Any such failure
by Samsung to market and sell HydroGen’s fuel cell products or HydroGen’s
failure to meet sales demand or price requirements may adversely affect
HydroGen’s business, prospects, results of operations or financial
condition.
The
exclusivity of HydroGen’s agreements with Samsung are subject to early
termination and any such early termination of exclusivity may have a material
adverse effect on HydroGen’s business, prospects, results of operations or
financial condition.
If
by
December 31, 2009 (and on December 31 every two years thereafter) HydroGen
fails
to attain the efficiency, production capacity, or price targets set in the
Hydrogen Distribution and Marketing Agreement, Samsung may in its sole
discretion terminate the exclusivity of such agreement. In addition, on December
31, 2012, Samsung shall have the one-time right to terminate the exclusivity
of
such agreement. If Samsung terminates the exclusivity of the Hydrogen
Distribution and Marketing Agreement, it may have a material adverse effect
on
HydroGen’s business, prospects, results of operations or financial
condition.
HydroGen
faces risks associated with its plans to market, distribute and service its
products internationally.
HydroGen
intends to market, distribute and service its products internationally and
may
establish international operations. HydroGen has limited experience developing
and no experience manufacturing its products to comply with the commercial
and
legal requirements of international markets. HydroGen’s success in international
markets will depend, in part, on our ability and that of our partners to
secure
relationships with foreign sub-distributors, and our ability to manufacture
products that meet foreign regulatory and commercial requirements. Additionally,
HydroGen’s planned international operations are subject to other inherent risks,
including potential difficulties in enforcing contractual obligations,
intellectual property rights in foreign countries, fluctuations in currency
exchange rates, taxations, exchange controls, employment regulations and
repatriation of earnings. Also, to the extent HydroGen’s operations and assets
are located in foreign countries, they are potentially subject to
nationalization actions over which HydroGen will have no control. Additionally,
international transactions may involve increased financial and legal risks
due
to differing legal systems and customs in foreign countries. While these
factors
or the impact of these factors are difficult to predict, any one or more
of them
could adversely affect HydroGen’s business, financial condition or operating
results.
Platinum
is a scarce resource on which HydroGen is dependent.
Platinum
is a key material in HydroGen’s phosphoric acid fuel cells. Platinum is a scarce
natural resource and HydroGen is dependent upon a sufficient supply of this
commodity. Any shortages could adversely affect our ability to produce
commercially viable fuel cell systems and significantly raise HydroGen’s cost of
producing HydroGen’s fuel cell systems. In addition, HydroGen intends to retain
the ownership of the platinum in its fuel cell modules sold to customers and
expects to be able to recover approximately 85% of the economic value of the
platinum subsequent to the fuel cell modules useful life. HydroGen may have
problems recovering the platinum from its customers or the costs of recovery
may
increase or the amount recovered may be less than HydroGen expects. Any one
of
more of these problems may adversely affect HydroGen’s business, financial
condition or operating results.
HydroGen’s
products use flammable fuels that are inherently dangerous
substances.
HydroGen’s
fuel cells use natural gas and hydrogen gas in catalytic reactions, which
produce less heat than a typical gas furnace. While HydroGen’s products do not
use this fuel in combustion process, natural gas and hydrogen gas are flammable
fuels that could leak and combust if ignited by another source. Any such
accidents involving HydroGen’s products or other products using similar
flammable fuels could materially suppress demand for, or heighten regulatory
scrutiny of, HydroGen’s products.
HydroGen
may not be able to implement the business plan as planned, on time and within
budget which may cause a loss or diminution of investment value of the common
stock.
HydroGen’s
ability to achieve its strategic objectives will depend in large part upon
the
successful, timely, and cost-effective completion of the business plan. The
fuel
cell projects will be offered and developed in various states and countries,
and
the success of these projects will rely on contracted construction companies
and
subcontractors in these states and countries. In addition to HydroGen’s
obtaining and maintaining applicable governmental approvals, authorizations,
permits and licenses the successful execution of the business plan is dependent
upon a variety of factors, uncertainties and contingencies, many of which are
beyond HydroGen’s control, such as power plant construction risks, subcontractor
risks, and regulatory risks.
HydroGen
is subject to competition with traditional and other alternative energy systems,
any of which could be determined to be more viable, more reliable or more cost
efficient and any of which could reduce demand for air-cooled phosphoric acid
fuel cell power systems of the type produced by HydroGen.
HydroGen’s
success depends on its ability to compete with other energy systems providers.
HydroGen is likely to face competition from existing energy systems providers,
including combustion turbine manufacturers and renewable energy developers,
who
may decide to sell to the same customers and/or to build expansions of their
own
power generating portfolio, and from equipment manufacturers and local
contractors who typically build energy systems upon a customer’s request and may
decide to build excess power generating capacity which would compete with the
fuel cell power plants built by HydroGen. Further, national and regional energy
utility providers that have established transmission and distribution networks
throughout their home countries and/or territories may decide to enter the
power
plant supply industry, therewith creating more competitors in the market. Due
to
the highly competitive nature of the American, European, Asian and international
energy industries, new companies may emerge in the future offering services
and
products similar to HydroGen’s. This intensifying competition could reduce or
supplant the demand for the use of HydroGen’s fuel cell power plants.
HydroGen
will be competing with a new technology which if not accepted by the marketplace
will impede its ability to sell fuel cells and jeopardizes its business
plan.
There
can
be no assurance that phosphoric acid fuel cells will become the preferred
technology for power production in the future. New technologies may emerge,
that
may become more widely used than phosphoric acid fuel cells, particularly in
view of the now rapid pace of technological development in the energy industry
generally. If phosphoric acid fuel cells do not become the preferred technology
for the production of distributed, as well as premium power, there will be
substantially less demand for phosphoric acid fuel cell power
plants.
Fuel
cells are a new technology, and government regulation involving the use of
fuel
cells is evolving which introduces some uncertainty for customers which might
therefore elect to stay with more traditional sources of energy, thereby
limiting our sales opportunities.
Currently,
power generated by fuel cells is regulated in much the same manner as are
other
sources of power generation. Large scale power generation in the multi-megawatt
range, which is the target market for HydroGen, is generally subject to the
scrutiny of either the Federal Energy Regulatory Commission, if it affects
inter-state commerce or state public service commissions if the market is
wholly
intrastate. While the regulatory law promulgated by these agencies will not
regulate the manufacturing of fuel cells by HydroGen, such laws may affect
the
market for fuel cells. Currently, state and federal government agencies are
pre-disposed to provide regulatory law favorable to the commercial deployment
of
fuel cells. However, there is risk that government agencies will adopt
regulatory law unfavorable to fuel cell commercialization. Similarly, while
government agencies are also pre-disposed to adopt codes and regulations
that
enable hydrogen manufacturing, transportation and storage for use in fuel
cells,
there are risks that such codes and regulations could be adopted that adversely
affect the fuel cell market. Further, laws creating economic incentives to
produce clean power tend to favor the fuel cell market. It is difficult to
assess with certainty the likelihood that government will legislate more
or less
such laws.
HydroGen
may have difficulty in obtaining supplies which could affect its ability
to
produce sellable products.
HydroGen
may be unable to obtain an adequate supply of materials or components to
complete the fuel cell power plants. Certain components may not be widely
available. A failure of any supplier to deliver the necessary materials and/or
components to HydroGen on schedule or at all could delay or interrupt the
manufacturing of fuel cell modules and/or the construction of the fuel cell
power plants. From time to time, there may be high demand in the market for
some
materials or components relative to the supply capacity, which could impede
the
ability of HydroGen to obtain the quantity of those materials and/or components
it needs. Any delay in obtaining an adequate supply of materials and/or
components could lead to construction delays and additional costs.
The
fuel cell power plants could fail or be disrupted due to technological factors
or external damage or could deteriorate more quickly than expected thereby
increasing costs for replacement fuel cell stacks and modules, damaging sales
for this technology and diminishing the business reputation of
HydroGen.
The
success of the fuel cell power plants will depend in part on HydroGen’s ability
to protect the plants, and their materials and/or components from external
damage. There can be no assurance that the availability of the fuel cell
power
plants to customers will not be disrupted due to external damage caused by
construction work, weather, or by events such as fires, earthquakes, floods,
power losses and similar accidents or disasters. Any prolonged difficulty
in
accessing the fuel cell power plants could threaten HydroGen’s relationship with
its customers and have a material adverse effect on HydroGen’s business,
financial condition and results of operations. HydroGen cannot guarantee
the
actual useful life of any part of the fuel cell power plants. Preventive
maintenance programs and standard procedures will be in place, to minimize
adverse consequences, due to faulty operational conditions of the fuel cell
plants for HydroGen, and for its contractors and customers. A number of factors
will affect the useful life of the fuel cell power plants, including, among
other issues, quality of hydrogen, quality of construction, and unexpected
deterioration. Failure of any part of the fuel cell power plants to operate
for
its full design life could have a material adverse effect on HydroGen’s business
because they would not operate as marketed, thereby damaging sales and
reputation.
HydroGen’s
success depends on its ability to hire and retain key personnel without which
its ability to implement its business plan will be slowed.
HydroGen’s
future success depends on the skills, experience and efforts of its officers
and
key technical and sales employees. Its management has significant experience
in
the energy and chemical plant construction industries, and the loss of any
one
of them could materially and adversely affect HydroGen’s ability to execute its
business strategy. HydroGen’s success also depends on its ability to attract,
train and retain qualified engineering, technical, and sales personnel.
Competition for personnel in these areas is intense and HydroGen may not
be able
to hire or retain the required personnel. A failure to do so could have a
material adverse effect on HydroGen’s business, financial condition and results
of operations because without the right persons, HydroGen may not be able
to
fully implement its business plan. HydroGen does not maintain key man insurance
on any of its management or employees.
HydroGen
may be unable to manage its growth effectively which may result in improperly
spent or managed resources or additional costs.
As
a
result of HydroGen’s expected growth and expansion, significant demands have
been, and will continue to be, placed on HydroGen’s management, operational and
financial resources and systems and controls. In order to manage growth
effectively, HydroGen must continue to develop its operational and financial
systems and controls, expand through the acquisition and utilization of
additional facilities, and hire, train, and manage a qualified employee base.
Inaccuracies in HydroGen’s forecasts of market demand could result in
insufficient or excessive capacity or facilities and disproportionate fixed
expenses for its operations. There can be no assurance that HydroGen will
be
able to develop the fuel cell power plants as planned or expand at the rate
anticipated in accordance with its business plan. As HydroGen proceeds with
its
business development and expansion, there will be increased demands on
HydroGen’s customer support, sales and marketing and administrative resources.
There can be no assurance that HydroGen’s engineering, production, operations,
and financial control systems will continue to be adequate to maintain and
effectively manage growth. Failure to continue to upgrade the administrative,
operating and financial control systems or the emergence of unexpected expansion
difficulties could materially and adversely affect HydroGen’s business and
results of operations and cost additional sums. Managing operations in multiple
jurisdictions may place further strain on HydroGen’s ability to manage its
overall growth.
Anticipated
growth in demand for energy systems capacity may not occur which would reduce
the market and the opportunity to sell HydroGen’s fuel cell
systems.
One
of
HydroGen’s primary customers will be operators of fuel cell power plants for
their power (and often co-generated heat) needs. To the extent local and
regional demand for power generating capacity does not exceed the capacity
of
the current energy market suppliers, or technological advances increase the
capacity of existing power generating equipment, HydroGen’s potential customers
may not have a need for additional power generating capacity. Any significant
decline in the local and regional demand for power generating capacity or
downturn in the energy industry could result in unsold capacity of fuel cell
power plants and hence lower revenues. If growth in the demand for power
generating capacity for any of these, or other, reasons is less than that
expected by HydroGen, there will be less demand for the fuel cell power plants,
which would have a material adverse effect on HydroGen’s business, financial
condition and results of operations due to a lack of demand for
systems.
It
is possible there are claims resulting from prior corporate activities of
which
HydroGen is unaware that may come to light in the future and cost HydroGen
considerable time, effort and expense to resolve.
Although
prior to the exchange transaction with HydroGen, LLC, the Company was
operational only as a shell corporation for at least two years, it is possible
that claims may be asserted against HydroGen in the future. There can be
no
assurance given that some person will not devise a claim and attempt to assert
it in the hopes of obtaining some monetary or other benefit. To resolve claims,
including payment, may cost HydroGen considerable time, effort and expense.
Any
of these may impair management’s implementation of the Company’s business plan
with the consequence of a loss of opportunity.
If
the Company is not able to maintain its listing on the NASDAQ Capital Market,
the liquidity of the common stock in the market may be
affected.
On
March 6, 2007, the common stock of the Company was listed on the NASDAQ
Capital Market. If the Company is not able to maintain its listing for any
number of reasons, including the trading price, it may have to remove the
stock
from that market and re-establish trading on the OTC Bulletin Board. If that
were to happen, the liquidity offered by the NASDAQ Capital Market would
be lost
and there may not be as much trading opportunity offered to the stockholders
or
at prices as favorable on other markets.
Even
though our common stock is now listed on the NASDAQ Capital Market, the market
price of the shares may fluctuate greatly, and investors in the Company bear
the
risk that they will not recover their investment.
Trading
in our common stock has been minimal from time to time and subject to large
volume and price fluctuation. Therefore, there is no clearly established
market
for our shares at this time. The public market price is likely to be influenced
by the price at which and the amount of shares the selling stockholders are
attempting to sell at any point in time with the possible effect of limiting
the
trading price or lowering it to their offering price. Shares such as those
of
companies like ours are also subject to the activities of persons engaged
in
short selling the securities which have the effect of driving the price down.
Therefore, the price of our common stock may fluctuate widely. A full and
stable
trading market for our common stock may never develop in which event any
holder
of our shares may not be able to sell at the time he elects or at
all.
|
Item2.
|
Description
of Propert
y
|
HydroGen
does not own any real property or any rights to acquire any real
property.
HydroGen
currently occupies approximately 34,500 square feet of manufacturing and
office
space in Versailles, Pennsylvania. At this location HydroGen maintains its
current principal manufacturing and testing facilities. The Company is the
sole
occupant of this facility. This facility is leased from the National Carbide
Die
Corporation. On August 15, 2005, the Company entered into a 5 year lease
for a
price of $172,480 per year.
HydroGen
has established a small corporate headquarters and advanced manufacturing
development facility of approximately 900 square feet in Cleveland, Ohio
at the
Wright Fuel Cell Group building on the Case Western Reserve campus. In November
2006, the Company executed a 1 year agreement to increase the size of the
office
space rented. The Company is renting the space at a base rent of approximately
$2,700 per month. Since the expiration of the initial term of the lease,
the
Company has continued the lease on a month-to-month basis.
In
addition to the office in Cleveland, the Company has leased office space
of
approximately 1,900 square feet in Ashtabula, Ohio, which facility serves
as the
Company’s field office for building its 400 kW fuel cell demonstration
plant. The Company is paying $1,800 per month for the rent, and the lease
is on
a month-to-month basis.
HydroGen
also has offices of approximately 1,700 square feet at 10 East 40
th
Street
in New York City, from which we conduct corporate governance, legal, investor
relations, funding and related activities. On October 19, 2005, the Company
entered a 61 month lease at an annual cost of $69,700 for the first year,
and
increasing 2.5% in each year thereafter of the lease term.
Each
of
the premises leased by the Company is well-maintained, in good condition,
is
adequate for our current needs and adequately covered by insurance.
HydroGen
is currently in the process of locating space for an advanced manufacturing
facility and believes that it will be able to find adequate space for such
advanced manufacturing facility.
|
Item
3.
|
Legal
Proceedings
|
The
Company is not currently a party to any material legal proceedings.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
During
the fourth quarter of 2007, no matters were submitted to a vote of security
holders.
PART
II
|
Item
5.
|
Market
for Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity
Securities
|
Market
Information
Our
common stock is traded on the NASDAQ Capital Market (symbol HYDG). At
April 14, 2008, there were approximately 271 record holders of the
Company’s common stock.
The
trading volume in our common stock has been and is extremely limited. The
limited nature of the trading market can create the potential for significant
changes in the trading price for the common stock as a result of relatively
minor changes in the supply and demand for our common stock and perhaps without
regard to our business activities.
The
market price of our common stock may be subject to significant fluctuations
in
response to numerous factors, including: variations in our annual or quarterly
financial results or those of our competitors; conditions in the economy
in
general; announcements of key developments by competitors; loss of key
personnel; unfavorable publicity affecting our industry or us; adverse legal
events affecting us; and sales of our common stock by existing
stockholders.
The
Company has not declared or paid any dividends since its inception and does
not
plan to declare or pay any dividends in the foreseeable future. The payment
of
future dividends on the common stock and the rate of such dividends, if any,
and
when not restricted, will be determined by our board of directors in light
of
our earnings, financial condition, capital requirements and other factors.
The
ranges of high and low prices for shares of our common stock as indicated
on the
NASDAQ Capital Market for the periods indicated below were as
follows:
|
QUARTER
ENDED
|
|
HIGH
|
|
LOW
|
|
|
December
31, 2007
|
|
$
|
3.25
|
|
$
|
1.90
|
|
|
September
30, 2007
|
|
|
6.57
|
|
|
2.33
|
|
|
June
30, 2007
|
|
|
5.00
|
|
|
3.72
|
|
|
March
31, 2007
|
|
|
5.22
|
|
|
3.75
|
|
|
December
31, 2006
|
|
|
5.00
|
|
|
2.80
|
|
|
September
30, 2006
|
|
|
6.00
|
|
|
4.50
|
|
|
June
30, 2006
|
|
|
9.00
|
|
|
5.00
|
|
|
March
31, 2006
|
|
|
5.75
|
|
|
3.00
|
|
Transfer
Agent
The
Transfer Agent and Registrar for HydroGen’s common stock is Computershare Trust
Company, Inc., 350 Indiana Street, Suite 800, Golden, CO
80401.
Equity
Compensation Plan Information
The
following table gives information about our common stock that may be issued
upon
the exercise of options, warrants or rights under our existing equity
compensation plans, including our 2005 Performance Equity Plan, as amended,
and
our 2007 Performance Equity Plan. The information in this table is as of
December 31, 2007.
|
Plan Category
|
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
|
|
Weighted-average
exercise price of
outstanding options,
warrants, and rights
|
|
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
|
|
|
Equity
compensation plans approved by security holders
|
|
|
2,226,761
|
|
$
|
3.12
|
|
|
173,239
|
|
|
Equity
compensation plans not approved by security holders
(1)
|
|
|
342,345
|
|
|
4.34
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,569,106
|
|
$
|
3.28
|
|
|
173,239
|
|
|
(1)
|
In
March and April, 2005, the Company issued options to certain employees
and
advisors for an aggregate of 12.22 Membership Units in HydroGen,
LLC. The
options had an exercise price of $121,500 per unit, which reflected
fair
market value at the time of the grant, and vested over a 36 month
period. These agreements were subsequently amended to reflect the
recapitalization of the Company, and are now options on the Company’s
common stock. The exercise price of these options, on a per share
basis,
is $4.34. These options were not issued under any
plan.
|
|
Item
6.
|
Management’s
Discussion and Analysis or Plan of
Operation
|
The
following discussion and analysis provides information that we believe is
relevant to an assessment and understanding of our results of operation and
financial condition. You should read this analysis in conjunction with our
audited consolidated financial statements and related footnotes. This discussion
and analysis contains forward-looking statements relating to future events
and
our future financial performance. These statements involve known and unknown
risks, uncertainties and other factors, including those set forth in this
Annual
Report on Form 10-KSB, which may cause our actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by these
forward-looking statements.
General
HydroGen
is in the development stage and is expected to remain so for at least the
next
several quarters. HydroGen’s business plan calls for it to design, manufacture
and sell multi-megawatt turn-key power plants, based on a series of standardized
product designs incorporating HydroGen’s 400 kW fuel cell modules, and to
sell fuel cell stacks and modules to other system integrators and turn-key
project developers. Additionally, HydroGen’s plan calls for it to generate
recurring revenues from the sale of fuel cell stack and module operations
and
maintenance (“O&M”) services.
The
principal objective of our plan of operation is to achieve levels of market
penetration and product cost that will enable the Company to sell profitably
PAFC stacks and modules, complete PAFC power plants, and related O&M
services. The Company believes that it can ultimately reduce the cost of
its
400kW fuel cell modules to a level that is comparable to the installed cost
of
conventional power generation in the 2 to 30 MW size class, with a product
that
is considerably higher in electrical efficiency than incumbent technology.
These
costs also compare favorably to those of competitors in the stationary fuel
cell
arena.
Plan
of Operation
The
chart
below illustrates the key elements of our plan of operation. The chart depicts
our fuel cell production costs, future cost projections, anticipated ranges
of
sales prices for our fuel cell systems and modules, and projected sales volumes
for the period 2008 through 2011.
As
shown,
our “first article” product costs for fuel cell stacks and modules are
approximately $3,300/kW, and “first article” costs for a complete, installed
PAFC power plant are approximately $6,000/kW (both exclusive of the cost
of
platinum, of which HydroGen retains ownership and recovers at the end of
the
fuel cell’s useful life). Management’s objective is to reduce fuel cell
stack and module costs to a level of approximately $1,500/kW or less by
2010-2011, which management believes is a cost level necessary to achieve
positive gross margins and cash flows. The Company believes that its complete
PAFC systems can be sold to end users for price levels ranging from
approximately $2,000-5,000/kW installed and that PAFC stacks and modules
can be
provided to system integrators for a price of approximately $1,250-3,000/kW.
These sales price ranges are depicted in the two boxes titled “Sales price range
– system” and “Sales price range – modules,” and are based on the Company’s
analysis of pricing levels that can be borne in different market segments.
Finally, the chart presents management’s forecast for fuel cell product sales,
with initial sales of two turnkey PAFC systems totaling approximately 10
MW
projected for 2008-early 2009, then approximately 20 MW projected for 2009,
50
MW for 2010, and 90 MW for 2011. Management believes that the majority of
sales
after the initial 10 MW will be for the Company’s stacks and modules, with more
limited turnkey plant sales in the 2009-2010 time frame in
particular.
Chart:
Plan of Operation Metrics
Management
has developed the following plan of operation in order to achieve the necessary
market penetration levels, cost reductions, and manufacturing capacities
to
support the Company’s transition to profitable operation, while minimizing
overall financial needs. The key elements of HydroGen’s plan of operation
include:
|
|
1.
|
Demonstration
and validation of HydroGen’s PAFC technology at customer field sites;
|
|
|
2.
|
Early
“turnkey” sales of complete PAFC power plants to support initial market
penetration;
|
|
|
3.
|
Limited
manufacturing of fuel cell modules in our Versailles, PA manufacturing
facility to support initial sales;
|
|
|
4.
|
Next-generation
PAFC product and high volume advanced manufacturing development
to deliver
necessary cost reductions; and
|
|
|
5.
|
Transition
to role of supplier / servicer of PAFC stacks and modules through
partnerships with system integrators and distributors. Execution
of
additional strategic agreements with system integrators and
distributors.
|
In
order
to support the plan of operation, the Company intends to increase staffing
levels by a total of approximately 55 individuals from April 1,
2008 through December 31, 2008 and up to 120 in 2009. The majority of these
new employees will be technical and production staff to support the Company’s
manufacturing, system engineering, and cost reduction initiatives. The Company
anticipates that it will have to raise additional funds in the next 12 months
to
meet the objectives of our plan of operation.
Demonstration
and Validation of HydroGen’s PAFC Technology at Customer Field
Sites
In
order
to support initial market penetration, HydroGen is undertaking commercial
scale
technology demonstration and validation activities. The principal purpose
of
these activities is to obtain a successful validation and performance history
for the core 400 kW module and, in certain markets, demonstrate the
Company’s ability to process hydrogen-rich waste gas streams to specifications
required for fuel cell operation. Once successful validation is obtained,
we
anticipate that the Company will be able to obtain commercial orders for
full-scale PAFC power plants consistent with HydroGen’s sales objectives as
described below.
On
October 17, 2006, HydroGen announced that it had signed an agreement with
ASHTA
Chemicals to install and operate a 400kW fuel cell demonstration power plant
at
ASHTA’s chlor-alkali manufacturing plant in Ashtabula, Ohio. This effort
is being partially funded by a $1,250,000 award that the Company received
from
the State of Ohio Department of Development. The Company completed construction
and check-out of the demonstration power plant in 2007, in preparation for
delivery of the Company’s first newly-produced 400kW PAFC module. The Company
delivered the PAFC module on February 22, 2008 and is currently engaged in
start up and testing activities. The Company expects the plant to be operational
in the second quarter of 2008, and plans to perform various tests and
performance demonstrations during the course of 2008.
In
Fall
2006, HydroGen also initiated a project to design and build a pilot scale
system
to clean coke oven gas to meet the input feed requirements of the HydroGen
PAFC
system. The overall goal of this project is to support market penetration
efforts into the coke oven gas market for HydroGen’s PAFC systems. The principal
project objective is to build and demonstrate a complete prototype coke oven
gas
cleanup system that will perform acceptably in a commercial scale plant.
The
project is being undertaken at the United States Steel Clairton Works coke
oven
facility, the largest such facility in the United States, located near the
Company’s manufacturing plant in Versailles, Pennsylvania. The Company has
designed and, in concert with United States Steel, has almost completed
construction of, the pilot scale gas treatment facility. HydroGen plans to
have
this pilot plant on-line in the second quarter of 2008. The test plant will
generate data to directly support power plant design and sales efforts into
this
market.
Early
“Turnkey” Sales of Complete PAFC Power Plants to Support Initial Market
Penetration
The
Company’s plan of operation calls for us to execute sales contracts for initial
sales of at least 10MW of turnkey projects in 2008 through early 2009. The
Company anticipates orders for two turnkey PAFC systems, each of approximately
5MW in capacity from Samsung Corporation. These turnkey power plants may
be
either hydrogen-available plants or a combination of hydrogen-available and
hydrocarbon fueled power plants. These anticipated orders are pursuant to
a
series of strategic agreements signed January 11, 2008 between HydroGen and
Samsung Corporation. The Company expects to execute the first of these orders
in
the second quarter of 2008.
In
addition to the two anticipated sales to Samsung pursuant to the agreements
described above, HydroGen intends to sell additional turn-key power plants
in
North America and elsewhere in order to achieve our stated sales goals and
gain
penetration into targeted markets. HydroGen has been developing a pipeline
of
projects with several large generators of by-product hydrogen and other
potential customers who have expressed interest in acquiring fuel cell power
plants. The total number of turn-key sales targeted for the period will be
set
annually by the Company, and will be a function of the quality/attractiveness
of
the market opportunities, the sales prices that can be borne in those
opportunities, and the product cost levels achieved during this period through
the Company’s cost reduction programs.
To
support these sales efforts, HydroGen will invest working capital to complete
the design, component selection, and full costing of at least two full-scale
PAFC plants: 1) a 5MW PAFC plant to be operated on available hydrogen gas,
and
2) a multi-megawatt plant to be operated on gaseous hydrocarbon fuels.
Limited
manufacturing of fuel cell modules in our Versailles, Pennsylvania manufacturing
facility to support initial sales
HydroGen
has principally completed the initial ramp up of its manufacturing facilities
to
achieve pilot production capacity of up to 2 MW (five 400 kW modules) per
annum
on single shift, and to recapture the performance and operation of the original
Westinghouse design of the module.
HydroGen
intends to produce a sufficient number of new fuel cell modules at its
Versailles facility in 2008 and 2009 in order to support new design test
objectives and the delivery requirements associated with the Company’s first
anticipated sale to Samsung.
Next-generation
PAFC product and high volume advanced manufacturing development to deliver
necessary cost reductions
The
present “first article” cost to produce the Company’s fuel cell modules is
approximately $3,300/kW (exclusive of platinum). The Company will aggressively
pursue opportunities for performance improvements and cost reductions that
can
be implemented immediately. These efforts will include:
|
|
v
|
design
modifications to, and new sourcing options for, the fuel cell module
pressure vessel;
|
|
|
v
|
new
catalyst substrate materials;
|
|
|
v
|
manufacturing
process improvements;
|
|
|
v
|
design
modifications to certain non-repeating hardware
components;
|
|
|
v
|
modifications
in fuel cell stack acceptance test procedures;
and
|
|
|
v
|
leveraging
the procurement infrastructure of the Company’s strategic partners for
cheaper materials and subcomponent
sourcing.
|
To
support the cost reductions and performance improvements that are required
in
the Company’s business plan, management has planned and is initiating an
integrated effort to develop the next generation of its PAFC product, and
to
manufacture that product at the high volumes required to support growth and
profitability. This integrated project prioritizes efforts to drive down
the
highest sources of cost in the manufacture of the PAFC module and BOP, improve
fuel cell stack and system performance, and significantly increase fuel cell
manufacturing capacity through process improvement, automation and outsourcing.
The highest priority areas for cost reduction include graphite plates, catalyst
layers, non-repeating hardware, fuel cell module pressure vessel, specialty
backing papers, and labor costs. The Company’s objective is to complete the key
cost reduction initiatives and implement them in an advanced manufacturing
facility that the Company intends to bring on line in the second half of
2009.
This facility is anticipated to have initial PAFC production capacity of
approximately 25 MW/annum, and be capable of expansion to approximately 100
MW/annum. The Company estimates that the development, equipment procurement,
and
ramp up for the advanced manufacturing facility will require approximately
$20
million
in
capital spending
,
and
intends to finance the facility principally through a package of state loans,
grants, and similar incentives.
To
support these initiatives, the Company has initiated collaborative relationships
with certain industry and academic partners, and is evaluating additional
collaboration opportunities with a variety of entities. In addition, the
Company has received grant funding to support these initiatives (including
grants of $1,000,000 from the state of Ohio Third Frontier Fuel Cell Program
to
support the development of our planned advanced manufacturing facility, and
approximately $230,000 from the Pennsylvania Nano Materials Commercialization
Center to support our advanced electrode development work), and will continue
to
seek out and apply for additional developmental funding.
HydroGen
has completed construction of an initial series of test facilities at its
Versailles, Pennsylvania manufacturing facilities, and plans to expand its
testing capabilities, to support the testing and validation requirements
associated with these cost reduction and process development initiatives.
Management intends to expand its testing capabilities in Versailles and to
augment these testing capabilities at our Ohio-based development facilities.
Transition
to role of supplier / servicer of PAFC stacks and modules through partnerships
with system integrators and distributors
The
Company believes that the sale and servicing of fuel cell stacks and modules
to
system integrators and distributors, who have turn-key responsibility for
fuel cell plant delivery and installation at the end customer site, offers
a
higher margin business opportunity than the delivery of turn-key fuel cell
plants, and a faster path for the Company to achieve gross margin and cash
flow
positive operations. The Company’s overall strategy is to deploy and demonstrate
multi-megawatt fuel cell plants on a turn-key basis for our earliest sales
into
key markets, and enter into strategic agreements with leading global system
integrators and distributors with core capabilities in system engineering
and plant construction, which can effectively penetrate those markets.
The
agreements between HydroGen and Samsung Corporation described in Item 1
represent the implementation of this strategy for the Asian and Middle
Eastern markets. The Company anticipates selling on a turnkey basis in 2008
to
early 2009 two multi-megawatt PAFC plants to Samsung. The turnkey power plants
may be either hydrogen-available plants or a combination of hydrogen-available
and hydrocarbon fueled power plants. The Company will also design a
multi-megawatt power plant to be fueled by hydrocarbon gas, after which the
Company and Samsung anticipate entering into an Exclusive Distribution and
Marketing Agreement for that market. The Company anticipates that subsequent
sales to Samsung will be of fuel cell stacks and modules, with Samsung having
responsibility for turn-key plant delivery. To achieve this objective, HydroGen
and Samsung plan to enter into a BOP Technology Transfer, Licensing, and
Technical Support Agreement pursuant to which Samsung shall obtain (in exchange
for a royalty fee) certain rights to deliver to Samsung’s customers, fuel cell
power plants utilizing HydroGen’s plant designs and related proprietary rights
and confidential information. Through this agreement, HydroGen will transition
into the role of a supplier of fuel cell stacks and modules to Samsung, who
will
market, distribute, and deliver complete PAFC plants in their territory.
Although
during 2009-2010 the Company will target higher-margin stack and module sales
to
Samsung Corporation for the majority of its product sales, as discussed above
it
will also engage in the sale of a limited number of additional turn-key PAFC
systems during this time frame. These turn-key sales will support market
penetration into new markets (geographic and application), and in parallel,
the
consummation of agreements, similar to those in place with Samsung Corporation,
with other system integrators/ distributors focused on those market segments.
HydroGen will focus on the following market segments, among others: chlor-alkali
/ sodium chlorate; coke-oven gas; and hydrocarbon-based applications in states
that offer significant incentives for adoption of stationary fuel cell systems,
such as California.
The
Company will support both turn-key and fuel cell stack/module sales with
fuel
cell module Operations and Maintenance (“Module O&M”) agreements. Module
O&M services will include dedicated monitoring and trending of fuel cell
operating parameters, fuel cell plant operational support, and stack or module
replacements as necessary. The Company believes that Module O&M services may
generate high margins and significant cash flow to the business as the number
of
units in the field increases, particularly as fuel cell module lifetime,
and
fuel cell plant operating techniques, improve.
Critical
Accounting Policies and Estimates
The
preparation of our consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and the related disclosures. A summary of those
accounting policies can be found in the notes to the consolidated financial
statements included elsewhere in this Annual Report on Form 10-KSB. Certain
of
our accounting policies are considered critical as they are both important
to
the portrayal of our financial condition and results of operations and require
judgments on the part of management about matters that are uncertain. We
have
identified the following accounting policies that are important to the
presentation of our financial condition and results of operations.
Revenue
Recognition
Grant
revenue is recognized as the Company incurs reimbursable costs or achieves
designated milestones as set forth under its contracts. All of the Company’s
revenue in 2007 and 2006 is from grants from government agencies of the State
of
Ohio and the Commonwealth of Pennsylvania.
The
Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 104, “Revenue Recognition”. Revenue is recognized when persuasive
evidence of a sale exists, the product has been delivered, the rights and
risks
of ownership have passed to the customer, the price is fixed and determinable,
and collection of the resulting receivable is reasonably assured. For
arrangements which include customer acceptance provisions, revenue is not
recognized until the terms of acceptance are met. Reserves for sales returns
and
allowances are estimated and provided for at the time of shipment.
Research
and Development Expenses
Research
and development expenditures are expensed as incurred. Research and development
expenditures include the costs associated with the ramp-up in HydroGen’s
technology recapture activities and power plant design, as well as other
development activities.
Equity-Based
Compensation
Effective
January 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment”, (“SFAS 123(R)”), which requires the measurement and recognition of
compensation expense for all share-based payment awards to employees and
directors based on estimated fair values. The Company adopted SFAS 123(R)
using
the modified prospective transition method. Under this transition method,
share-based compensation expense recognized during the year ended December
31,
2006 included: (a) compensation expense for all share-based awards granted
prior to, but not yet vested, as of January 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions of SFAS 123,
and
(b) compensation expense for all share-based awards granted on or after
January 1, 2006, based on the grant date fair value estimated in accordance
with
the provisions of SFAS 123(R). In accordance with the modified prospective
transition method, our consolidated financial statements for prior periods
have
not been restated to reflect the impact of SFAS 123(R).
As
a
result of adopting SFAS 123R, the Company recorded pretax compensation expense
of $584,964 and $561,331 for the years ended December 31, 2007 and 2006,
respectively. Stock-based compensation is included in each expense category
that
includes salary expense. The Company has recorded a full valuation allowance
on
the deferred tax asset related to stock-based compensation and therefore,
no tax
benefit is recognized for the years ended December 31, 2007 and
2006.
Impact
of
Recently Issued Accounting Pronouncements
SFAS
No. 157, “Fair Value Measurements”
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”, which establishes a framework for reporting fair value and
expands disclosures about fair value measurements. SFAS No. 157 is
effective for the Company January 1, 2008. The Company is currently
evaluating the impact of this new standard on its consolidated financial
statements.
SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities”
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – including an amendment of FASB
Statement No. 115.”
SFAS
No.
159 provides companies with an option to report selected financial assets
and
financial liabilities at fair value. Unrealized gains and losses on items
for
which the fair value option has been
elected
are
reported in earnings at each subsequent reporting date. Upfront costs and
fees
related to items for which the fair value option is elected are recognized
in
earnings
as
incurred. SFAS No.159 is effective for the Company beginning January 1, 2008.
The
Company is currently evaluating the impact of this new standard on its
consolidated financial statements.
SFAS
No. 141 (R), “Business Combinations”
In
December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations.”
SFAS No. 141(R) establishes principles and requirements for how an acquirer
in a business combination recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any controlling
interest in the acquiree, and the goodwill acquired. SFAS No. 141(R)
also establishes disclosure requirements to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) applies to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company
does not expect the adoption of SFAS No. 141 (R) to have a significant impact
on
its consolidated financial statements
SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial
Statements”
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment to Accounting Research Bulletin
No. 51.” SFAS No. 160 establishes accounting and reporting standards that
require the ownership interest in subsidiaries held by parties other than
the
parent be clearly identified and presented in the Consolidated Balance Sheets
within equity, but separate from the parent’s equity; the amount of consolidated
net income attributable to the parent and the noncontrolling interest be
clearly
identified and presented on the face of the Consolidated Statement of Earnings;
and changes in a parent’s ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for
consistently. SFAS No. 160 is effective for the Company beginning January
1, 2009. We do not expect the adoption of SFAS No. 160 to have a significant
impact on our financial statements.
Liquidity
and Financing Activities
At
December 31, 2007, the Company had $8.1 million in cash. The Company
expects such cash balance to be sufficient to fund its operations through
mid-May 2008.
The
Company is in the development stage, and as such, has historically reported
net
losses. The Company anticipates it will continue to incur losses in the future
as it enters commercialization for its products. Commercialization activities
will require significant operating and capital expenditures related to the
manufacture of the Company’s fuel cell modules, purchase of equipment, and
build-out of its advanced manufacturing facility. In order to fund the costs
associated with such development, the Company will require additional financing
in the next 12 months.
If
the
Company is unable to raise sufficient capital, liquidity problems will cause
the
Company to curtail operations, liquidate assets, seek additional capital
on less
favorable terms and/or pursue other such actions that could adversely affect
future operations. These factors raise substantial doubt as to the Company’s
ability to continue operations as a going concern. The financial statements
included in this report do not include any adjustments relating to the
recoverability and classification of assets or the amounts and classification
of
liabilities that might be necessary should the Company be unable to continue
as
a going concern.
Private
Placement of Equity Securities
On
May 2,
2006, the Company sold in a private placement an aggregate of 5,155,000 shares
of its common stock, and warrants to purchase up to an aggregate of 1,288,750
shares of common stock for aggregate gross proceeds of $25,775,000. The Company
paid approximately $1,705,000 in commissions and expenses. The Company issued
to
its placement agent a warrant to purchase up to 128,875 shares of common
stock
as additional compensation.
The
warrants issued to investors and the placement agent are exercisable at $6.60
per share at any time until May 2, 2011. On July 19, 2006, a registration
statement that the Company filed covering the re-offer and re-sale of the
common
stock issued in the private offering and the Common Stock underlying the
warrants was declared effective by the Securities and Exchange Commission.
The
Company has used the proceeds of the private placement for commercial
demonstration of the Company’s products, advanced manufacturing development
efforts, sales and marketing efforts and general working capital
purposes.
State
of Ohio and Commonwealth of Pennsylvania Financings
On
August
26, 2005, the State of Ohio Department of Development provided to HydroGen
Corporation $1,250,000 as a development grant for a three phase program to
deploy, demonstrate, and commercialize the Company’s 400 kW phosphoric acid
fuel cell system. The grant is under an Ohio Fuel Cell Initiative Demonstration
Program, and is to be used towards the costs associated with the commercial
demonstration and validation of the Company’s air-cooled phosphoric acid fuel
cell module technology and for the procurement and preparation of the plant
equipment, system engineering, plant construction, and initial operations.
The
grant was given on the understanding that the Company will establish its
corporate headquarters in Ohio, locate manufacturing facilities to Ohio by
the
end of 2008, and create new full-time jobs at both the skilled and unskilled
level in Ohio. The establishment of a corporate headquarters in Ohio was
achieved in 2006. The development work which commenced in 2005 is expected
to
continue through the end of 2008. The grant was also contingent on the Company
raising its own capital, which was achieved in July 2005.
The
grant
of the funds is on a reimbursement basis, provided the Company meets the
objectives of the grant and is carrying out the terms of the defined project
as
represented to the state. The grant reimbursement period ran from
September 1, 2005 to July 31, 2007. The grant is a deployment of
federal development funds and as such, the Company will be required to adhere
to
various federal regulations on their use and accountability for
deployment.
The
grant
may be terminated if the State of Ohio determines that the Company is not
in
compliance with certain federal regulations governing the grant or federal
employment laws, the requirements of any other applicable program statute
or
rule or with the terms of the grant agreement after suitable notice and the
passage of cure periods. If there is a termination, the Company may not continue
to incur expenses under the grant. It may be directed by the State of Ohio
to
dispose of various property, data, studies, and reports, and the Company
may be
liable for damages to the State of Ohio.
As
of
December 31, 2007, the Company has submitted requests and has been reimbursed
for the entire grant award totaling $1,250,000.
On
March 7, 2006, the Company was notified that it would be awarded $1,000,000
(the “Grant”) by the State of Ohio Third Frontier Fuel Cell Program (TFFCP) to
support the Company’s advanced manufacturing development program. On June
8, 2006, the Company entered into a Grant Agreement with the State of Ohio
pursuant to which the Grant funds are to be awarded. Under the terms of the
Grant Agreement, the Company may recoup from the State the full $1,000,000
as
Grant activities take place, and as the costs are incurred and reported.
The
Company has pledged a total of $555,000 in cost share for the program. The
Company will use the funds to dedicate appropriate personnel, consultants,
and
infrastructure to optimize decisions and resource allocations for its planned
advanced manufacturing facility. The proposed facility will be where the
Company
will mass produce its standard 400 kilowatt (kW) air-cooled PAFC modules,
which
will serve as the building block of its core product, a 2-2.5 megawatt (MW)
power island. Initial production capacity will be 25 MW per year of
the Company’s 400 kW modules, and is expected to be subsequently expanded
to 100 MW per year capacity.
All
disbursements from the Grant are on a reimbursement basis, after documentation
has been provided evidencing that expenses were incurred in furtherance of
the
Grant. The term of the Grant Agreement, including reimbursement period,
runs until April 10, 2009. At the close of the Grant term, the Company will
own
all equipment valued over $5,000 purchased with Grant money.
The
Grant
may be terminated if the State of Ohio determines that the Company is not
in
compliance with the applicable program rules, State of Ohio law, or with
the
terms of the Grant Agreement, after suitable notice and the passage of cure
periods. Performance by the State is also subject to the availability of
funds.
If there is a termination, the Company may not continue to incur expenses
under
the Grant, and it may be directed by the State of Ohio to dispose of various
property, data, studies and reports. The Company may further be liable for
damages to the State of Ohio in the event of default. The Company may also
request a termination of the Grant if it is unable or unwilling to comply
with
the conditions of the Grant.
Work
under the Grant commenced in June of 2006. The Company submitted requests
for
payment under this grant totaling approximately $550,000 through December
31,
2007, $409,000 of which has been collected as of that date.
On
May
16, 2007, the Company was notified that it was awarded a grant in the amount
of
$250,000 by the Pennsylvania Energy Development Authority (PEDA) to support
the
construction of a small scale, air-cooled phosphoric acid fuel cell test
facility. The project period, as outlined within the grant agreement, is
from
October 5, 2006 through October 4, 2008. All reimbursements for the project
must
be submitted during the project period. The Company has submitted requests
for
payment under this grant totaling approximately $250,000, $225,000 of which
has
been collected through December 31, 2007.
On
October 12, 2007, the Company entered into a grant agreement (the “Grant
Agreement”) with the Pennsylvania NanoMaterials Commercialization Center (PNCC)
pursuant to which the PNCC will grant the Company approximately $230,000
to
support the development of advanced fuel cell catalyst systems. The Company
has
pledged a total of $131,545 in cost share for this program. The Company
will be
working in cooperation with the University of Pittsburgh’s Peterson Institute of
Nano Science and Engineering on this project. The Company has submitted
requests
for payment under this grant totaling approximately $46,000, all of which
has
been collected through December 31, 2007.
On
October 17, 2007, the Company was notified that it was awarded a grant in
the
amount of $500,000 by the Pennsylvania Energy Development Authority (PEDA)
to
support clean-up of coke oven gas for fuel cell operations. The Company is
in
the process of establishing the terms and conditions of the Grant Agreement
with
PEDA.
Results
of Operations
Comparison
of the Years Ended December 31, 2007 and 2006
The
following table sets forth certain of HydroGen’s operating data for the years
ended December 31, 2007 and 2006; certain reclassifications have been made
to the 2006 financial information to conform to the 2007
presentation:
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
Increase
(Decrease)
|
|
|
Research
& development
|
|
$
|
10,886,000
|
|
$
|
3,860,000
|
|
$
|
7,026,000
|
|
|
Payroll
and related costs
|
|
|
3,125,000
|
|
|
2,035,000
|
|
|
1,090,000
|
|
|
Stock
based compensation
|
|
|
585,000
|
|
|
561,000
|
|
|
24,000
|
|
|
Professional
fees
|
|
|
573,000
|
|
|
770,000
|
|
|
(197,000
|
)
|
|
Travel
& entertainment
|
|
|
511,000
|
|
|
362,000
|
|
|
149,000
|
|
|
Other
|
|
|
2,758,000
|
|
|
1,398,000
|
|
|
1,360,000
|
|
|
Totals
|
|
$
|
18,438,000
|
|
$
|
8,986,000
|
|
$
|
9,452,000
|
|
The
increase in research and development expenses was due to the acceleration
of the
Company’s efforts related to the commercial demonstration of its air-cooled
phosphoric acid fuel cell module technology. Costs associated with manufacturing
the balance of plant at the demonstration site, purchasing module materials,
retaining consultants to assist with the plant design and construction, and
the
performance of outside processing on module materials all contributed to
this
increase.
The
increase in payroll and related costs was due to an increased staff required
to
manage the Company’s expanding operations and severance expense of $406,000
related to the resignation of the Company’s CEO.
The
increase in the stock based compensation expense relates to stock options
issued
to the Board of Directors, the Company’s executive management team, and the
initial stock option grant to the Company’s new CEO as part of his compensation
package.
The
decrease in professional fees resulted from the growing staff’s ability to
perform work internally that was previously performed by consultants.
The
increase in travel and entertainment costs resulted from an increase
in commercial activities.
The
increase in other expenses was due to the Company’s ramp-up in manufacturing
activities and increased staffing, which led to significant increases in
depreciation on new equipment, increased utilities expense, an increase in
computer expense for new employees, and increased premium costs for workers
compensation insurance. Further, slight increases in rent, Board of Director
fees, and fees associated with the Company’s public filings contributed to this
increase.
|
Item
7.
|
Financial
Statements
|
The
information required by this Item is incorporated herein by reference to
the
financial statements beginning on page F-1.
|
Item
8.
|
Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
|
As
we
have previously disclosed, certain of the partners of Goldstein Golub Kessler
LLP (GGK) became partners of McGladrey & Pullen, LLP (M&P) in a limited
asset purchase agreement effective October 3, 2007. As a result, GGK resigned
as
auditors of the Company effective November 15, 2007 and M&P was appointed as
auditors for the Company’s annual financial statements for the year ended
December 31, 2007.
During
the two most recent fiscal years, the Company did not consult with either
GGK or
M&P regarding either: (i) the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company’s financial statements; or (ii)
any matter that was either the subject of a disagreement or reportable event
identified in paragraph (a)(1)(iv) of Item 304 of Regulation S-B.
Prior to
the Company’s appointment of both M&P and GGK as its independent auditor,
the Company had not consulted GGK or M&P regarding any accounting or
auditing matters.
Item
8A.
Controls
and Procedures
Disclosure
controls and procedures are controls and other procedures that are designed
to
ensure that information required to be disclosed in company reports filed
or
submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission’s rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed
to
ensure that information required to be disclosed in the HydroGen reports
filed
under the Exchange Act is accumulated and communicated to management, including
the
Chief
Executive Officer
and
Chief Financial Officer
,
as
appropriate to allow timely decisions regarding required disclosure.
The
Company’s principal executive officers (“CEO” and “President”) and principal
financial officer (“CFO”) evaluated, together with other members of senior
management, the effectiveness of the Company’s disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as
of
December 31, 2007; and, based on this review, the Company’s CEO, President and
CFO concluded that, as of December 31, 2007, the Company’s disclosure controls
and procedures were effective to ensure that information required to be
disclosed by it in the reports that it files or submits under the Securities
Exchange Act of 1934 (i) is recorded, processed, summarized and reported
within
the time periods specified in the SEC’s rules and forms and (ii) is accumulated
and communicated to the Company’s management, including the Company’s CEO,
President, and CFO, as appropriate, to allow timely decisions regarding required
disclosure.
HydroGen’s
internal control over financial reporting is a process designed by, or under
the
supervision of, the CEO, President and CFO and effected by the Board of
Directors, management and other personnel,
to
provide reasonable assurance
regarding
the reliability of HydroGen’s financial reporting and the preparation of the
HydroGen financial statements for external purposes in accordance with generally
accepted accounting principles. Internal control over financial reporting
includes policies and procedures that pertain to the maintenance of records
that
in reasonable detail accurately and fairly reflect the transactions and
dispositions of the Company’s assets; provide reasonable assurance that
transactions are recorded as necessary to permit preparation of the HydroGen
financial statements in accordance with generally accepted accounting
principles, and that the receipts and expenditures are being made only in
accordance with the authorization of the Board of Directors and management;
and
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company assets that could
have a material effect on its financial statements.
There
were no changes in the Company’s internal control over financial reporting
during the Company’s most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting
is a
process designed by, or under the supervision of, the Chief Executive Officer,
President and Chief Financial Officer and effected by our Board of Directors,
management and other personnel, to provide reasonable assurance regarding
the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
Our
evaluation of internal control over financial reporting includes using the
COSO
framework, an integrated framework for the evaluation of internal controls
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
to identify the risks and control objectives related to the evaluation of
our
control environment.
Based
on
our evaluation under the framework described above, our management has concluded
that our internal control over financial reporting was effective as of
December 31, 2007.
This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation requirements by the Company’s
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management’s
report in this Annual Report.
|
Item
8B.
|
Other
Information
|
None.
PART
III
|
Item
9.
|
Directors,
Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the Exchange Act
|
The
following table sets forth certain information as of April 1, 2008 about
each of
the members of the Board of Directors and each executive officer:
|
Name
|
|
Age
|
|
Positions
|
|
Director
Since
(1)
|
|
John
Freeh
|
|
56
|
|
Chief
Executive Officer and Director
|
|
2005
(5)
|
|
Joshua
Tosteson
|
|
36
|
|
President
and Director
|
|
2005
|
|
Dr.
Howard Shapiro
(2)
|
|
60
|
|
Director
|
|
2005
|
|
Brian
Bailys
|
|
48
|
|
Director
|
|
2005
|
|
Michael
Basham
(3)(4)
|
|
58
|
|
Director
|
|
2006
|
|
Dr.
Leo Blomen
|
|
53
|
|
Director,
Chairman of the Board
|
|
2005
|
|
Philip
Jack Kranenburg
(3)
|
|
47
|
|
Director
|
|
2006
|
|
Brian
T. McGee
(2)(3)(4)
|
|
48
|
|
Director
|
|
2006
|
|
Dr.
Alton D. Romig, Jr.
(2)
|
|
54
|
|
Director
|
|
2007
|
|
|
|
|
|
|
|
|
|
Executive
Officers
|
|
Age
|
|
Positions
|
|
Officer
Since
|
|
Scott
M. Schecter
|
|
51
|
|
Chief
Financial Officer
|
|
2005
|
|
Scott
Wilshire
|
|
45
|
|
Chief
Operating Officer
|
|
2005
|
|
Gregory
Morris
|
|
61
|
|
Sr.
Vice President / Sales and Projects
|
|
2005
|
(1)
Each
Director (except Dr. Romig) was elected to a one-year term that expires at
the
next annual meeting. Dr. Romig was appointed in December 2007 and his term
will
also expire at the next annual meeting.
(2)
Member
of
the Compensation
Committee
(3)
Member
of
the Audit Committee
(4)
Member
of
the Nominating Committee
(5)
Chief
Executive Officer since November 2007
Directors
Dr.
Leo
Blomen is Chairman of the Board of HydroGen, and has been active in fuel
cells
and energy related management for almost 23 years. From the Company’s inception
until November 2007, Dr. Blomen served as the Chief Executive Officer of
HydroGen. Since November 2007 he has served as a technical consultant to
HydroGen. From 1996 to 2000, Dr. Blomen served as Executive Director and
Head of the International Division of NUON, the largest electric, gas, water
and
telecom utility company in the Netherlands serving millions of customers
and
with over $4 billion in revenues. Dr. Blomen was responsible for starting
and
building a portfolio of over 20 companies in countries such as USA, UK, China,
Czech Republic, and Romania. He served on the Boards of most of those companies,
and invested several $100’s million successfully. Among his responsibilities
were a number of fuel cell projects, including the installation and operation
of
the world’s first 100 kW solid oxide fuel cell (SOFC) system, supplied by
Westinghouse to a consortium led by NUON. Prior to his NUON assignment, he
worked on several energy companies through his own consulting company Blomenco
B.V., including the Dutch company Heron, which has built a compact 1.4 MW
gas turbine with 43% net electrical efficiency. Dr. Blomen was also responsible
for making the first designs of fuel cell/gas turbine combination systems
under
contract from Westinghouse. He was the primary editor of a book on Fuel Cell
Systems (Plenum Press, 1993). From 1983 to 1992, Dr. Blomen served in several
capacities for the engineering contractor KTI (Kinetics Technology
International), a world leader in hydrogen plant construction, most of the
time
on its Board and as Group VP. He initiated and managed over 40 research,
development and demonstration projects in Europe and the USA, including the
construction of the first two PAFC power plants in Europe, as well as several
steam reformer developments. Dr. Blomen is a co-founder of the EFCG (European
Fuel Cell Group) and has served as its Treasurer throughout its existence.
EFCG
merged with FuelCell Europe in 2004. He holds a doctorate of medicine from
Leiden University and an engineering degree in chemical technology from Delft
University.
Mr.
John
J. Freeh, Director and Chief Executive Officer of HydroGen, served as director
since 2005 and as Lead Independent Director from August 2007 until November
2007. In November 2007 Mr. Freeh was appointed Chief Executive Officer.
Mr. Freeh was previously employed by Lockheed Martin and the General
Electric Company for approximately 33 years. At Lockheed Martin, he served
as
president of LM Systems Management from July 2001 until his retirement in
February 2007. In this position, Mr. Freeh was responsible for Lockheed Martin’s
Defense, Energy and National Security Services businesses. In January of
1993
the General Electric Company appointed Mr. Freeh President and General Manager
of KAPL, Inc. Mr. Freeh held this position during transition to Martin
Marietta and subsequently Lockheed Martin. He left KAPL in July of 2001.
KAPL,
Inc. designs, develops and tests nuclear reactors and propulsion systems
and
operates land-based nuclear power plants to test reactor and propulsion system
designs for the United States Naval Nuclear Propulsion Program. From 1974
to
1993, Mr. Freeh held other positions with KAPL, Inc., including Manager -
Computer Information Systems; Manager - Special Projects; Manager – Power Plant
Systems and Design; and Manager - Prototype Engineering.
Mr.
Joshua Tosteson is a Director and President of HydroGen, has served as
director
since 2005 and as president since 2002. He is a co-founder of HydroGen,
LLC and
of FullCircle LLC, a company that deployed facilities to remediate organic
waste
streams and produce high-value organic soil amendments, and which consulted
to
international development and aid organizations. Over 2000-2001, Mr. Tosteson
served as Eco-Industrial Development Manager for the redevelopment of a
deactivated army ammunition site in Louisiana. In this capacity on behalf
of the
Operations Support Command of the US Army, Mr. Tosteson and colleagues
attracted
over $20 million in private and federal investment to establish two new
commercial manufacturing operations. From 1994 to 1997, Mr. Tosteson served
in
various capacities as a management consultant for the Biosphere 2 facility
in
Oracle, Arizona, supporting a reorganization of the project that culminated
in a
long-term facility management contract with Columbia University. Concurrently
to
that assignment he served as an Adjunct Fellow and researcher at the Kennedy
School of Government, Harvard University. He holds degrees in environmental
science and public policy (BA, Harvard University) and atmospheric science
(MA,
Columbia University). He also serves on the Board of Organic Recovery,
LLC, a
Florida-based company that converts food waste into organic liquid fertilizer
and biodiesel.
Mr.
Brian
D. Bailys, Director of HydroGen, has been the principal of The Bailys Group,
a
consulting and strategic and financial planning company that he formed in
January 1993. Mr. Bailys is also a certified public accountant. The consulting
firm has been involved in strategic planning with numerous early stage companies
and their funding requirements and works with high net worth individuals
in many
different capacities. From June 1981 to 1993, Mr. Bailys was with Plant &
Moran, an accounting and consulting firm where he acted as a tax accountant,
personal financial planner and business planner. Mr. Bailys is a director
of
Life
Settlement Insights, a life settlement company, and Life-X, an on-line exchange
for the sale of life insurance policies.
Dr.
Howard-Yana Shapiro, Director of HydroGen, was appointed Director of External
Research of Mars, Incorporated in 2005, and has served as its Director of
Plant
Science since 2000. Mars, Incorporated operates in over 65 countries, with
business units in snack food, pet care, main meal food, drinks, and electronics.
Within Mars, Dr. Shapiro is responsible for plant genetics, integrated pest
management/biological control of diseases, water conservation and the
sustainability/production models for agroecology, agro-forestry and
agro-economics of cacao. Additionally, he is the Director of the
Multi-Disciplinary Research Unit, a collaboration between Mars, Incorporated,
and the University of California, Davis. In 1991, Dr. Shapiro joined Seeds
of
Change, a leading supplier of organic seeds, garden products, and specialty
foods, as its Vice-President for Agriculture, and later served as its
Vice-President of Research and Development/Agriculture before leading the
company’s acquisition by Mars, Incorporated in 1997. Dr. Shapiro has twice been
named a Fulbright Scholar, twice a Ford Foundation Fellow, and was winner
of the
National Endowment for the Humanities Award.
Mr.
Brian
T. McGee, Director of HydroGen, serves as Senior Vice President and Chief
Financial Officer for Intellon Corporation, a designer and seller of integrated
circuits for powerline communications for home networking, networked
entertainment, commercial and broadband over powerline applications. From
May
2003 to January 2006, Mr. McGee served as Chief Financial Officer and Vice
President, Finance of Lexar Media, Inc., a developer, manufacturer and marketer
of high-performance digital media. From May 2000 to May 2003, Mr. McGee was
Chief Financial Officer of Equator Technologies, Inc., a fabless semiconductor
company that designs, develops, and markets programmable system-on-a-chip
processors for video applications. From August 1999 to May 2000, Mr. McGee
was Vice President, Finance of SmartAge.com, an internet provider of
business-to-business products and services. From November 1998 to August
1999,
Mr. McGee was Vice President, Finance and Chief Financial Officer of
Academic Systems Corporation, a provider of education software products.
From
January 1987 to November 1998, he served in a variety of finance positions
at
Raychem Corporation, a material science company. Mr. McGee holds a B.S. in
business administration from California Polytechnic State University, San
Luis
Obispo and a Certificate in Management Accounting.
Mr.
Michael E. Basham, Director of HydroGen, has over 30 years of experience in
the energy and finance industries. Mr. Basham currently serves as executive
vice president for finance and planning for Howard Energy & Co., Inc., a
privately held energy company with a diversified portfolio of both domestic
and
international energy investments in the oil and gas exploration, natural
gas
marketing and storage, energy services, hydroelectric power generation, and
drilling services industries. Prior to joining Howard Energy in 1999,
Mr. Basham served as a principal in the consulting practice of Ernst
&Young from 1996 to 1999. From 1994 to 1996, Mr. Basham served as an
executive vice president with First Fidelity Bank. From 1991 to 1994,
Mr. Basham was a managing director at Shearson Smith Barney, now owned by
Citigroup, where he headed up the Privatization investment banking group
and the
International division. From 1989 to 1991, Mr. Basham served as Deputy
Assistant Secretary and Acting Assistant Secretary of the United States
Treasury. From 1987 to 1989, Mr. Basham worked as a senior professional at
Wertheim Schroder, an investment bank. From 1982 to 1986, Mr. Basham
founded and served as chief executive officer of Norden Capital, an investment
management firm. From 1972 to 1982, Mr. Basham served in various roles,
including vice president of the investment division and manager of fixed
income,
trading, and sales, for South Carolina National Bank. Mr. Basham attended
the United States Air Force Academy, received a Bachelor of Science degree
from
the University of Southern Mississippi, and received an MBA from the University
of South Carolina.
Mr.
Philip J. Kranenburg, Director of HydroGen, has served as Managing Director
of Kranenburg Capital Management and as a Partner in Kranenburg Certified
Public
Accountants since 2002. In 2001, Mr. Kranenburg served as Vice President of
Marketing at Virtual Purchase Card, Inc.; and from 1999 to 2000 served as
Director of Marketing at Xcert International, a provider of electronic security
solutions.
Mr.
Kranenburg also held management positions at Gemplus International, Framdrive
Corp., and Shearson Lehman Hutton. He earned his CPA while with Price Waterhouse
and is a graduate of Stanford University.
Dr.
Alton
D. Romig, Jr., Director of HydroGen, has been with Sandia National Laboratories
since 1979 and is currently Senior Vice President and Deputy Laboratories
Director for Integrated Technologies and Systems located in Albuquerque,
New
Mexico. Sandia National Laboratories is operated by Sandia Corporation, a
Lockheed Martin Company, for the US Department of Energy. His responsibilities
include the leadership and management of development and engineering activities
that provide science, technology, systems, and expertise in support of US
Programs in military technology; proliferation prevention; technology
assessments; counterintelligence; energy science, resources, conservation,
and
infrastructure assurance; and homeland security. In 1979, he joined Sandia
National Laboratories as a member of the technical staff. After a variety
of
management assignments, he was named Director, Materials and Process Sciences
in
1992. From 1995 to 1999, he was Director of Microsystems Science, Technology,
and Components. From 1999 to 2003, he was named Chief Technology Officer
and
Vice President for Science, Technology, and Partnerships. In that role, he
was
Chief Scientific Officer for the Nuclear Weapons program, accountable for
Sandia’s interactions with industry and academia. In addition, he was
responsible for the Laboratory Directed Research & Development program. In
2003, he was named Vice President, Nonproliferation and Assessments. He served
in this capacity until attaining his present position in 2005. He received
his
B.S., M.S., and Ph.D. degrees in materials science and engineering from Lehigh
University in 1975, 1977, and 1979, respectively.
Executive
Officers
Other
than Mr. Freeh and Mr. Tosteson the Company has the following three named
executive officers.
Mr.
Scott
Schecter was the interim Chief Financial Officer of HydroGen from June 2004
to
April 2005, when he became the Chief Financial Officer on a full time basis.
From 1994 to 2004, Mr. Schecter, a CPA, served as Vice President, Chief
Financial Officer and Treasurer of Fuel-Tech N.V., a publicly-traded technology
company in the air pollution control, fuel treatment and software businesses.
He
also served as Chief Financial Officer of Clean Diesel Technologies, Inc.,
a
publicly-traded development stage company in the specialty chemical business
from 1995 through 1999. In 1990, Mr. Schecter participated in a management
buyout of American Vision Centers, Inc., a retail optical chain, and served
as
that company’s Senior Vice President and Chief Financial Officer through January
1994. After graduating with his MBA from the Wharton School of the University
of
Pennsylvania, Mr. Schecter served as a corporate development officer for
W. R.
Grace & Co. from 1986 to 1990, focusing on acquisitions, strategic
investments and divestitures. After receiving his B.S. in Accounting from
the
State University of New York at Albany, Mr. Schecter practiced for 6 years
as a
CPA, the last 4 of which were with Goldstein Golub Kessler & Co. Mr.
Schecter was previously a member of the Board of Directors of Fuel Tech,
Inc.
(the operating subsidiary of Fuel-Tech N.V.) and American Vision Centers,
Inc.
Mr. Schecter currently serves as a Director and Chairman of the Audit Committee
of DayStar Technologies, Inc. (NASDAQ: DSTI), a manufacturer and developer
of
photovoltaic products, and as a director of bieMEDIA LLC, a media design,
production, distribution and technology company.
Mr.
Scott
Wilshire has been HydroGen’s Chief Operating Officer since March 2005. From
November 2000 to March 2005, Mr. Wilshire was Director of Marketing Engagement
of Plug Power Inc., a development stage company that designs, develops and
manufactures on-site electric power generation systems using proton exchange
membrane fuel cells for stationary applications. From March 1999 to November
2000, Mr. Wilshire was the Director of Large Stationary Systems/GE Interface
of
Plug Power Inc., responsible for a joint venture with General Electric Company
working in the development of a residential fuel cell product and directing
marketing and product development for Plug Power’s first successful large-scale
fuel cell system. From April 1986 to March 1999, Mr. Wilshire was employed
at
KAPL Inc, a Lockheed Martin Company, in various capacities, including Principal
Field Engineer from 1986 to 1993, Lead Engineer, Materials and Maintenance
from
1993 to 1995 relating to engineering, planning and execution of an inactivation
of a nuclear reactor test facility, Manager of S9G Servicing Development
from
1995 to 1997 responsible for design and development of major systems and
equipment support for the installation and servicing of advanced submarine
power
plants, and Manager of Pressure Vessel Removal from 1997 to 1999 responsible
for
removal and disposal of three expended naval nuclear power plant reactor
vessels. Mr. Wilshire was employed by GE Nuclear Energy as a nuclear field
engineer from 1984 to 1986. He received a Bachelor of Science degree in Marine
Engineering/Nuclear Engineering from the United States Merchant Marine Academy,
a Master of Business Administration from Rensselaer Polytechnic Institute,
and
completed the U.S. Navy Nuclear Power Engineering School.
Mr.
Gregory Morris has been HydroGen’s Senior Vice President of Sales and Projects
since 2005. He leads the Company’s sales and marketing efforts and supports the
Company’s project development activities. Mr. Morris brings over 30 years
of experience in the chlorine and related industries, mostly with Dow Chemical,
where he worked from 1970-1998. During his tenure with Dow, Mr. Morris was
a worldwide production engineer and project manager, designing, building,
operating and managing chlorine plants in Korea, Italy, France, Pakistan,
India
and Iran. Mr. Morris also led numerous R&D and commercialization
efforts, particularly for development of chlorine membrane cell and water
membrane filtration technology, and served as Dow’s Pacific area GasSpec
marketing president. Mr. Morris more recently served as President and CEO
of the North American division of DeNora (2001-2003), an Italian multinational
that is a leading supplier of diverse technologies for the production of
chlorine, and is the largest worldwide supplier of noble metal-coated catalysts
for the chlor-alkali industry. DeNora has built over 500 chlor-alkali plants
worldwide. Mr. Morris received a Bachelor of Science Degree in Mechanical
Engineering from the University of Oklahoma and is a Licensed Engineer in
the
State of Texas.
2005
Performance Equity Plan
The
2005
Performance Equity Plan was adopted on July 6, 2005 by the board of directors
and approved by the shareholders on August 16, 2005. The plan provides for
the
issuance of up to 1,100,000 shares of common stock under various awards,
including incentive and non-incentive options, stock appreciation rights,
restricted stock, deferred stock and other stock based grants. The plan is
administered by the Board of Directors. The Board of Directors, at the time
of
an award, will determine the type of award, the exercise price, vesting
schedule, and expiration date, as well as any other terms of the award. The
minimum price of an award cannot be less than the market price on the date
of
the award. Incentive options may be granted only to employees, otherwise
awards
may be granted to officers, directors, employees and consultants who are
individuals. The plan provides for acceleration of vesting of outstanding
awards
in the event of a non-approved acquisition of more than 35% of the combined
voting power of HydroGen. The vesting may also be accelerated in the event
of
certain approved transactions. Currently, there are 1,098,617 shares subject
to
stock option awards under the plan at a weighted average exercise price of
$3.76
and there are 1,383 shares available for future grants of awards.
2007
Performance Equity Plan
The
2007
Performance Equity Plan was adopted on April 13, 2007 by the board of directors
and approved by the shareholders on June 22, 2007. The plan provides for
the
issuance of up to 1,300,000 shares of common stock under various awards,
including incentive and non-incentive options, stock appreciation rights,
restricted stock, deferred stock and other stock based grants. The plan is
administered by the Board of Directors. The Board of Directors, at the time
of
an award, will determine the type of award, the exercise price, vesting
schedule, and expiration date, as well as any other terms of the award. The
minimum price of an award cannot be less than the market price on the date
of
the award. Incentive options may be granted only to employees, otherwise
awards
may be granted to officers, directors, employees and consultants who are
individuals. The plan provides for acceleration of vesting of outstanding
awards
in the event of a non-approved acquisition of more than 35% of the combined
voting power of HydroGen. The vesting may also be accelerated in the event
of
certain approved transactions. Currently, there are 1,128,144 shares subject
to
stock option awards under the plan at a weighted average exercise price of
$2.49
and there are 171,856 shares available for future grants of awards.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires HydroGen’s officers and
directors, and persons who own more than ten percent of a registered class
of
HydroGen’s equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (the “Commission”).
Officers, directors and greater than ten percent beneficial owners are required
by Commission regulations to furnish the Company with copies of all forms
they
file pursuant to Section 16(a). Based solely on the Company’s review of the
copies of such forms it received and written representations from reporting
persons required to file reports under Section 16(a), to HydroGen’s knowledge
all of the Section 16(a) filing requirements applicable to such persons with
respect to fiscal 2007 were complied with.
Code
of Ethics
HydroGen
adopted a formal code of ethics statement that is designed to deter wrong
doing
and to promote ethical conduct and full, fair, accurate, timely and
understandable reports that HydroGen files or submits to the SEC and others.
HydroGen’s code of ethics applies to all of its employees, including the chief
executive officer, chief financial officer and controller. A copy of the
code of
ethics is filed as an exhibit to this Form 10-KSB and may be obtained free
of
charge from the Company by calling (412) 405-1000 ext.
244.
Nominating
Committee
The
Board
of Directors has a Nominating Committee comprised of Messrs. McGee and
Basham. The Committee held two meetings during fiscal year 2007. The members
of
the Committee are all independent directors under applicable NASDAQ rules.
Members of the Nominating Committee are appointed by the Board of Directors.
The
principal duty of the Nominating Committee, in its capacity as a committee
of
the Board of Directors, is to identify individuals qualified to become members
of the Board of Directors and recommend the persons to be nominated by the
Board
of Directors for election as directors at the annual meeting of
stockholders.
The
Nominating Committee will consider nominees for the Board of Directors
recommended by stockholders. Nominations by stockholders must be in writing,
and
must include the full name of the proposed nominee, a brief description of
the
proposed nominee’s business experience for at least the previous five years, and
a representation that the nominating stockholder is a beneficial or record
owner
of the Company’s common stock. Any such submission must also be accompanied by
the written consent of the proposed nominee to be named as a nominee and
to
serve as director if elected. Nominations must be delivered to the Nominating
Committee at the following address:
Nominating
Committee
HydroGen
Corporation
10
East
40
th
Street,
Suite 3405
New
York,
NY 10016
The
Nominating Committee is required to review the qualifications and backgrounds
of
all directors and nominees (without regard to whether a nominee has been
recommended by stockholders), and recommend a slate of directors to be nominated
for election at the annual meeting of stockholders, or in the case of a vacancy
on the Board of Directors, recommend a director to be elected by the Board
to
fill such vacancy.
Audit
Committee and Financial Expert
The
Audit
Committee of our Board of Directors is comprised of three non-employee directors
who meet the independence standards of the NASDAQ Stock Market. The members
of
the Audit Committee are Messrs. Basham, McGee and Kranenburg. Mr. Basham
has been selected as the Chairman of the Audit Committee. Our Board has
determined that each member of the Audit Committee qualifies as an “audit
committee financial expert” under federal securities laws, by virtue of his
relevant experience.
|
Item
10.
|
Executive
Compensation
|
The
table
below sets forth for the calendar years ending December 31, 2006 and
December 31, 2007, the compensation of HydroGen’s Chief Executive Officer
and the two other most highly compensated executive officers of HydroGen
during
the calendar year 2006 and 2007.
Summary
Compensation Table
|
Name and Principal
Position
|
|
Year
|
|
Salary ($)
|
|
Bonus ($)
|
|
Option
Awards
($)
|
|
All
Other
Compensation
($)
|
|
Total
($)
|
|
|
John
Freeh,
Chief
Executive Officer
|
|
|
2007
2006
|
|
|
41,373
-
|
(1)
|
|
-
-
|
|
|
944,264
-
|
|
|
19,460
-
|
(2)
|
|
1,005,097
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leo
Blomen,
Chairman
and Chief Executive Officer
|
|
|
2007
2006
|
(3)
|
|
358,000
233,949
|
(4)
(4)
|
|
168,000
115,239
|
(4)
(4)
|
|
-
125,015
|
|
|
411,000
-
|
(5)
|
|
937,000
125,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joshua
Tosteson,
President
|
|
|
2007
2006
|
|
|
238,500
215,295
|
|
|
99,200
89,696
|
|
|
124,400
107,967
|
|
|
14,042
13,951
|
|
|
467,442
426,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
M. Schecter,
Chief
Financial Officer
|
|
|
2007
2006
|
|
|
260,000
243,000
|
|
|
73,800
55,450
|
|
|
155,500
54,552
|
|
|
20,533
27,642
|
|
|
500,233
380,644
|
|
|
(1)
|
Mr. Freeh
became Chief Executive Officer on November 10, 2007. His annual
salary as Chief Executive Officer in 2007 was
$300,000.
|
|
(2)
|
Mr.
Freeh’s other compensation represents $19,460 in fees he earned as a
Director in 2007.
|
|
(3)
|
Dr. Blomen
served as Chief Executive Officer in 2007 from January 1, 2007 until
November 10, 2007.
|
|
(4)
|
Dr. Blomen’s
services as Chief Executive Officer were provided through Blomenco
B.V., a
Dutch management services company controlled by Dr. Blomen.
Accordingly, compensation for Dr. Blomen’s services was paid directly
to Blomenco.
|
|
(5)
|
Dr.
Blomen’s other compensation amount for 2007 is comprised of severance
payments of $406,000 and Board of Director fees of $5,000.
|
Employment
and Other Agreements
Each
officer serves at the discretion of our Board of Directors. We have entered
into
employment agreements with John Freeh, Chief Executive Officer and Director,
Joshua Tosteson, President and Director, Scott Schecter, Chief Financial
Officer, Scott Wilshire, Chief Operating Officer and Gregory Morris, Senior
Vice
President of Sales and Projects. Under each such employment agreement, the
executive is entitled to participate in an annual bonus program, which program
must be adopted by the Board on an annual basis. Each executive’s receipt of
bonus compensation is within the sole discretion of the Compensation Committee
of the board of directors, which consists entirely of non-employee Directors.
The Compensation Committee has the right to alter, amend or eliminate all
or any
part of any bonus or incentive plans at any time, without compensation. Each
executive is also entitled to participate in all of our employee benefit
plans.
As part of each agreement, each executive has signed a general employment
agreement, which inter alia contain nondisclosure, development and
nonsolicitation provisions, in which he has agreed, among other things, to
protect HydroGen’s confidential information, not to solicit Company employees,
and not to breach any agreements with third parties.
John
Freeh, Director and Chief Executive Officer of HydroGen and HydroGen have
entered into an employment agreement dated November 10, 2007. The agreement
may
be terminated for cause at any time by HydroGen. If the Company terminates
Mr.
Freeh without cause or Mr. Freeh terminates his employment for good reason,
the
Company will be obligated to pay Mr. Freeh one year’s salary, plus the
acceleration of certain rights to options that would not have been otherwise
earned. In addition, if Mr. Freeh is terminated in connection with a change
of
control of the Company, the Company will be obligated to pay Mr. Freeh one
and a
half times his annual salary. Mr. Freeh earns an annual salary of $300,000,
and is entitled to a yearly bonus of up to 70% of his annual salary based
upon
the performance of HydroGen and Mr. Freeh, as determined by the
Compensation Committee. Mr. Freeh is eligible to participate in the standard
benefits offered to all employees of HydroGen, including coverage under the
Company medical and disability plans.
Joshua
Tosteson and HydroGen have entered into an employment agreement with Mr.
Tosteson serving as the President of HydroGen for a period of three years
commencing April 1, 2005. Mr. Tosteson and the Company have entered into an
extension of his employment agreement which shall terminate on the earlier
of
May 1, 2008 and the date on which Mr. Tosteson and the Company enters
into a new employment agreement. The agreement may be terminated at any time
for
cause, however if Mr. Tosteson is terminated without cause or if he terminates
his employment for good reason, he is entitled to one year severance pay
from
HydroGen, plus the acceleration of certain rights to options that would have
been otherwise earned. In addition, Mr. Tosteson earns an annual salary of
$238,500 and is entitled to bonuses based upon his performance and the
performance of HydroGen, as determined by the Compensation Committee. Mr.
Tosteson is eligible to participate in the standard benefits offered to all
employees of HydroGen, including coverage under the company medical and
disability plans.
Scott
Schecter and HydroGen have entered into an employment agreement with Mr.
Schecter as the Chief Financial Officer of HydroGen for a period of three
years
commencing April 1, 2005. Mr. Schecter and the Company have entered
into an extension of his employment agreement which shall terminate on the
earlier of May 1, 2008 and the date on which Mr. Schecter and the
Company enters into a new employment agreement. The agreement may be terminated
at any time for cause, however if Mr. Schecter is terminated without cause
or if
Mr. Schecter terminates for good reason, he is entitled to one year severance
pay from HydroGen, plus the acceleration of certain rights to options that
would
have been otherwise earned. In addition, Mr. Schecter earns an annual salary
of
$260,000 and is entitled to bonuses based upon his performance and the
performance of HydroGen, as determined by the Compensation Committee. Mr.
Schecter has been granted an option commencing April 2005 to acquire 114,115
shares of HydroGen common stock, exercisable until April 2015 at approximately
$4.34 per share. These options vest ratably each month until April 2008.
He also
will be eligible to receive awards of additional options to acquire future
awards of common stock of HydroGen. Mr. Schecter will be eligible to participate
in the standard benefits offered to all employees of HydroGen, including
coverage under the company medical and disability plans.
Scott
Wilshire, the Chief Operating Officer of HydroGen, entered into an employment
agreement with HydroGen in March of 2005 for a period of three years.
Mr. Wilshire and the Company have entered into an extension of his
employment agreement which shall terminate on the earlier of May 1, 2008
and the date on which Mr. Wilshire and the Company enters into a new
employment agreement. Mr. Wilshire earns an annual salary of $201,600, and
is entitled to bonuses based upon his performance and the performance of
HydroGen, as determined by the Compensation Committee. Mr. Wilshire can be
terminated at any time for cause. If Mr. Wilshire is terminated without cause
or
if he terminates his employment for good reason, he is entitled to receive
one
year severance pay. Mr. Wilshire has been granted an option to acquire 85,768
shares of HydroGen common stock at an exercise price of approximately $4.34
per
share, exercisable until January 31, 2015. These options are fully vested.
He
also will be eligible to receive awards of additional options to acquire
future
awards of common stock of HydroGen. Mr. Wilshire will be eligible to participate
in the standard benefits offered to all employees of HydroGen, including
coverage under the company medical and disability plans.
Gregory
Morris, the Sr. Vice President of Sales and Projects of HydroGen, entered
into
an employment agreement with HydroGen in April of 2005 for a period of three
years. Mr. Morris and the Company have entered into an extension of his
employment agreement which shall terminate on the earlier of May 1, 2008
and the date on which Mr. Morris and the Company enters into a new
employment agreement. Mr. Morris earns an annual salary of $190,800, and is
entitled to bonuses based upon his performance and the performance of HydroGen,
as determined by the Compensation Committee. Mr. Morris can be terminated
at any time for cause. If Mr. Morris is terminated without cause or if he
terminates his employment for good reason, he is entitled to receive one
year
severance pay. He also will be eligible to receive awards of additional options
to acquire future awards of common stock of HydroGen. Mr. Morris will be
eligible to participate in the standard benefits offered to all employees
of
HydroGen, including coverage under the company medical and disability plans.
Dr.
Blomen, HydroGen, LLC, and Blomenco, B.V., a Dutch consulting firm controlled
by
Dr. Blomen, have entered into a Consulting Services Agreement on November
10, 2007 through which Dr. Blomen will provide consulting services to the
Company and Hydrogen, LLC at the rate of €175 per hour for a minimum of 1000
hours in the first twelve months following the effective date of the
agreement. Either party may terminate the agreement at any time after
twelve months from the effective date of the agreement with six months’ notice
to the other party. The Company shall also pay Blomenco in equal monthly
payments at a yearly rate of €25,000 for Dr. Blomen’s service as Chairman
of the Board of Directors of the Company.
Dr.
Blomen, HydroGen, LLC, and Blomenco, B.V. entered into a Separation Agreement
on
November 10, 2007 pursuant to which HydroGen would pay Blomenco in connection
with Dr. Blomen’s separation from HydroGen as Chief Executive Officer a
severance payment of $406,000 to be paid out over twelve months.
The
following table sets forth information concerning the outstanding equity
awards
granted to the named executive officers as of December 31,
2007.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
OPTION
AWARDS
|
Name
|
|
Number of Securities
Underlying
Unexercised Options
(#) Exercisable
|
|
Number of Securities
Underlying
Unexercised Options
(#) Unexercisable
|
|
Equity Incentive Plan
Awards: Number of
Securities Underlying
Unexercised Unearned
Options (#)
|
|
Option
Exercise
Price ($)
|
|
Option
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leo
Blomen
|
|
|
36,667
|
|
|
18,333
|
(1)
|
|
18,333
|
|
|
4.50
|
|
|
12/11/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Freeh
|
|
|
7,500
4,000
-
|
|
|
-
-
607,244
|
(2)
|
|
-
-
607,244
|
|
|
6.05
4.50
2.43
|
|
|
05/22/2011
12/11/2011
11/10/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joshua
Tosteson
|
|
|
31,667
-
|
|
|
15,833
80,000
|
(3)
(4)
|
|
15,833
80,000
|
|
|
4.50
2.43
|
|
|
12/11/2011
11/10/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
M. Schecter
|
|
|
107,775
16,000
-
|
|
|
6,340
8,000
100,000
|
(5)
(6)
(4)
|
|
6,340
8,000
100,000
|
|
|
4.34
4.50
2.43
|
|
|
04/01/2015
12/11/2011
11/10/2017
|
|
(1)
These
options will vest on December 11, 2008.
(2)
These
options will vest in one-third increments on November 10, 2008, November
10,
2009, and November 10, 2010.
(3)
These
options will vest in equal portions every three months beginning on February
10,
2009 and ending on November 10, 2010.
(4)
One-third
of these options will vest on November 10, 2008. Beginning after November
10,
2008 and ending on November 10, 2010, the remaining unvested shares will
vest in
approximately equal amounts on each of the first day of every calendar quarter
and November 10, 2010 (with the last amount vesting on November 10, 2010).
(5)
These
options will vest monthly on January 31, 2008 and February 29, 2008.
(6)
These
options will vest on December 11, 2008.
Director
Compensation
The
following Director Compensation Table summarizes the compensation of our
non-employee directors for services rendered by HydroGen during the year
ended
December 31, 2007.
DIRECTOR
COMPENSATION TABLE
|
Name
|
|
Fees Earned
or Paid in Cash ($)
|
|
Option Awards
($)
|
|
Total ($)
|
|
|
Brian
Bailys
|
|
|
18,000
|
|
|
75,100
|
(1)
|
|
93,100
|
|
|
Howard
Yana-Shapiro
|
|
|
17,500
|
|
|
75,100
|
|
|
92,600
|
|
|
Michael
Basham
|
|
|
27,793
|
|
|
89,900
|
|
|
117,693
|
|
|
Philip
Kranenburg
|
|
|
19,000
|
|
|
|
|
|
108,900
|
|
|
Brian
McGee
|
|
|
19,500
|
|
|
|
|
|
109,400
|
|
|
Alton
Romig
(3)
|
|
|
2,441
|
|
|
11,942
|
|
|
14,383
|
|
(1)
This represents
stock option awards totaling 61,500 shares.
(2)
This represents stock option awards totaling 57,500
shares
.
(3)
D
r.
Romig
became a Director on December 7, 2007.
(4)
This
represents stock option awards totaling 7,500 shares
.
The
Chairman of the Board of Directors, Dr. Blomen, is paid an annual retainer
of
€25,000. All other non-employee directors are paid an annual retainer of
$10,000. In addition to their annual retainers, all non-employee directors
(excluding Dr. Blomen) are paid $1,000 for each meeting they attend in person
and $500 for each meeting they attend via telephone. The Chairman of the
Audit
Committee is paid an additional retainer of $1,500 quarterly and an additional
$500 for each Audit Committee meeting. The Chairman of the Compensation
Committee is paid an additional retainer of $1,000 per quarter and an additional
$300 for each Compensation Committee Meeting. In addition, all non-employee
directors (excluding Dr. Blomen) are paid $500 for each committee meeting
they
attend.
Non-employee
directors are also granted options to purchase 7,500 shares of common stock
on
their initial appointment or election to the Board of Directors and each
year
thereafter they will be granted options to purchase 4,000 shares of common
stock
so long as they continue as directors of HydroGen. Any options will vest
immediately on grant and be exercisable for a period of up to ten years.
Alternatively, HydroGen may issue restricted securities or deferred securities
under the stock option plan with a restricted period or deferred period to
be
determined.
During
2007, the non-employee directors were provided with a special grant of 50,000
shares of common stock.
|
Item
11.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The
following table sets forth certain information regarding our common stock
beneficially owned on April 1, 2008 for (i) each shareholder known to
be the beneficial owner of 5% or more of outstanding common stock,
(ii) each executive officer and director, and (iii) all executive officers
and directors as a group. The table assumes a total of 12,769,904 shares
of
common stock outstanding.
|
Name
of Beneficial Owner
|
|
Amount
of
Beneficial
Ownership*
|
|
Percent
of
Class
|
|
|
Leo
Blomen
(1)(2)
|
|
|
448,253
|
|
|
3.51
|
%
|
|
John
J. Freeh
(1)(3)
|
|
|
43,500
|
|
|
0.34
|
%
|
|
Joshua
Tosteson
(1)(4)
|
|
|
575,764
|
|
|
4.51
|
%
|
|
Scott
Schecter
(1)(5)
|
|
|
227,946
|
|
|
1.79
|
%
|
|
Scott
Wilshire
(1)(6)
|
|
|
111,050
|
|
|
0.87
|
%
|
|
Gregory
Morris
(1)(7)
|
|
|
66,688
|
|
|
0,52
|
%
|
|
Brian
Bailys
(1)(8)
|
|
|
66,925
|
|
|
0.52
|
%
|
|
Howard-Yana
Shapiro
(1)(9)
|
|
|
11,500
|
|
|
—
|
|
|
Michael
E. Basham
(1)(10)
|
|
|
16,000
|
|
|
0.13
|
%
|
|
Philip
J. Kranenburg
(1)(11)
|
|
|
107,500
|
|
|
0.84
|
%
|
|
Brian
T. McGee
(1)(10)
|
|
|
7,500
|
|
|
|
|
|
Alton
D. Romig
(1)(12)
|
|
|
7,500
|
|
|
|
|
|
FuelCell
Holdings, LLC
(13)
|
|
|
757,445
|
|
|
5.93
|
%
|
|
Alysheba
Funds
(14)
|
|
|
875,000
|
|
|
6.85
|
%
|
|
Federated
Investors, Inc.
(15)
|
|
|
1,250,000
|
|
|
9.79
|
%
|
|
Pequot
Capital Management, Inc.
(16)
|
|
|
1,116,313
|
|
|
8.74
|
%
|
|
Security
Investors, LLC
(17)
|
|
|
1,952,646
|
|
|
15.29
|
%
|
|
All
Executive Officers and Directors as a group (twelve persons)
(18)
|
|
|
1,690,126
|
|
|
13.24
|
%
|
|
*
|
Beneficial
ownership is determined in accordance with the rules of the Securities
and
Exchange Commission and generally includes voting or investment
power with
respect to securities. Shares of common stock issuable upon the
exercise
of options or warrants currently exercisable or convertible within
60
days, are deemed outstanding for computing the percentage ownership
of the
person holding such options or warrants but are not deemed outstanding
for
computing the percentage ownership of any other
person.
|
|
(1)
|
c/o
2 Juniper Street, Versailles, PA
15132.
|
|
(2)
|
Includes
36,667 shares of common stock subject to options that vest as of
June 1, 2008, but does not include 18,333 shares of common stock that
are subject to options that may vest in the future.
|
|
(3)
|
Includes
11,500 shares of common stock subject to options that vest as of
June 1, 2008, but does not include 607,244 shares of common stock
subject to options that may vest in the
future.
|
|
(4)
|
Includes
31,667 shares of common stock subject to options that vest as of
June 1, 2008, but does not include 95,833 shares of common stock that
are subject to options that may vest in the future.
|
|
(5)
|
Includes
130,115 shares of common stock subject to options that vest as
of
June 1, 2008, but does not include 108,000 shares of common stock
that are subject to options that may vest in the
future.
|
|
(6)
|
Includes
108,550 shares of common stock subject to options that vest as
of
June 1, 2008, but does not include 145,565 shares of common stock
subject to options that may vest in the
future.
|
|
(7)
|
Includes
10,667 shares of common stock subject to options that vest as of
June 1, 2008, but does not include 125,333 shares of common stock
subject to options that may vest in the
future.
|
|
(8)
|
Includes
11,500 shares of common stock subject to options that vest as of
June 1, 2008, but does not include 50,000 shares of common stock
subject to options that may vest in the
future.
|
|
(9)
|
Includes
11,500 shares of common stock subject to options that vest as of
June 1, 2008, but does not include 50,000 shares of common stock
subject to options that may vest in the future. Mr. Shapiro has
gifted these securities to his daughter and thus disclaims all
beneficial
ownership.
|
|
(10)
|
Includes
7,500 shares of common stock subject to options that vest as of
June 1, 2008, but does not include 50,000 shares of common stock
subject to options that may vest in the
future.
|
|
(11)
|
Includes
7,500 shares of common stock subject to options that vest as of
June 1, 2008, but does not include 50,000 shares of common stock
subject to options that may vest in the future. Also includes 100,000
shares of common stock held by Kranenburg Fund LP of which Mr.
Kranenburg
is a partial beneficial owner.
|
|
(12)
|
Includes
7,500 fully vested stock options that were received upon joining
the Board
of Directors.
|
|
(13)
|
FuelCell
Holdings, LLC has an address at 3201 Enterprise Parkway, Suite
460,
Beachwood, Ohio 44122. Mr. Saul Siegel has investment authority over
these shares.
|
|
(14)
|
Each
of Alysheba QP Fund L.P., Alysheba Fund L.P. and Alysheba Fund
Ltd. are
registered companies pursuant to the Investment Company Act of
1940.
John A. Murphy, manager of the funds and Philip C. Furse,
co-manager of the funds, have dispositive and voting authority
of all the
shares held by the aforementioned investors. Amount includes 175,000
shares of common stock subject to
warrants.
|
|
(15)
|
Federated
Kaufman Fund, a Portfolio of Federated Equity Funds, is a registered
company pursuant to the Investment Company Act of 1940. The fund
is an
affiliate of Federated Securities Corp., a NASD or a broker-dealer
registered pursuant to Section 15 of the Exchange Act through common
ownership by the parent corporation of each Federated Investors.
Amount
includes 250,000 shares of common stock subject to warrants.
|
|
(16)
|
Shares
beneficially owned by Pequot Capital Management, Inc. represent
490,442
shares of common stock held of record by Pequot Scout Fund, L.P.
and
275,871 shares of common stock held of record by Pequot Mariner
Master
Fund, L.P. Pequot Capital Management, Inc., which is the investment
manager to the above named funds exercises sole dispositive, voting
and
investment power for all the shares. Arthur J. Samberg is the sole
shareholder of Pequot Capital Management, Inc. and disclaims beneficial
ownership of the shares except for his pecuniary
interest.
|
|
(17)
|
Security
Investors, LLC is the investment advisor to (a) SBL Fund, Series
J, (b)
Security Mid Cap Growth Fund, (c) Security Equity Fund, Mid Cap
Values
Series, and (d) SBL Fund, Series V (collectively, the “Funds”). Each of
the Funds is an investment company registered under the Investment
Company
Act of 1940, as amended. The securities listed in the table above
are
owned by the Funds. As investment advisor, Security Investors,
LLC may be
deemed to be the beneficial owner of such
securities.
|
|
(18)
|
Includes
374,666 shares of common stock subject options that vest as of
June 1,
2008, but does not include 1,300,308 shares of common stock that
are
subject to options that may vest in the
future.
|
|
Item
12.
|
Certain
Relationships and Related Transactions
and Director Independence
|
Dr. Blomen,
Chairman of our Board of Directors, is retained as Chairman of the Board
of
Directors and as a consultant to the Company through Blomenco, B.V., a Dutch
management services
company
controlled by Dr. Blomen. Prior to November 10, 2007, Dr. Blomen was
retained through Blomenco as the Chief Executive Officer of
HydroGen.
In
2007,
Blomenco earned fees for the services of Dr. Blomen totaling $937,000,
which includes management fees of $358,000, a bonus of $168,000, a severance
payment of $406,000 being paid out over twelve months, and Board of Directors
fees of $5,000.
Pursuant
to a Consulting Services Agreement, Dr. Blomen will provide consulting
services to the Company and HydroGen, LLC at the rate of €175 per hour for a
minimum of 1000 hours until November 2008 to be paid to Blomenco. After such
time, either party may terminate the agreement with six months’ notice to the
other party.
Director
Independence
The
following directors are “independent” pursuant to the independent standards of
NASDAQ: Michael Basham, Philip Kranenburg, Howard Yana-Shapiro, Alton Romig,
Brian McGee.
a.
The
following
Exhibits
are filed as part of this Report:
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
3.1
|
|
Articles
of Incorporation – under the name TSI Holdings*
|
|
|
|
|
|
3.2
|
|
Certificate
of Amendment to the Articles of Incorporation*
|
|
|
|
|
|
3.3
|
|
Certificate
of Designation - Series A 10% Cumulative Convertible Preferred
Stock*
|
|
|
|
|
|
3.4
|
|
Certificate
of Designations, Preferences, Rights and Limitations of Series
B
Convertible Preferred Stock of Chiste Corporation (Incorporated
by
reference from Form 8-K dated July 7, 2005, Exhibit
4.1)
|
|
|
|
|
|
3.5
|
|
Amendment
to Articles of Incorporation – Change of Name to HydroGen Corp.
(Incorporated by reference from Form 10-KSB for fiscal year ended
December 31, 2005)
|
|
|
|
|
|
3.6
|
|
Amendment
to Articles of Incorporation – Withdrawal of Certificate of Designations –
Series B Preferred Stock (Incorporated by reference from Form
10-KSB for
fiscal year ended December 31,
2005)
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
3.7
|
|
By-laws
– under the name TSI Holdings*
|
|
|
|
|
|
3.8
|
|
By-laws
Amendment (Incorporated by reference from Form 8-K dated November
10,
2007, Exhibit 3.1)
|
|
|
|
|
|
10.2
|
|
Exchange
Agreement between Chiste Corporation and HydroGen LLC (Incorporated
by
reference from Exhibit 2.2 of Form 8-K filed May 18,
2005)
|
|
|
|
|
|
10.3
|
|
Letter
Agreement – John J. Freeh (Incorporated by reference from Form 8-K dated
November 10, 2007, Exhibit 10.4)
|
|
|
|
|
|
10.4
|
|
Employment
Agreement – Joshua Tosteson (Incorporated by reference from Form 8-K dated
July 7, 2005, Exhibit 10.4)
|
|
|
|
|
|
10.5
|
|
Amendment
to Joshua Tosteson Employment Agreement*
|
|
|
|
|
|
10.6
|
|
Employment
Agreement – Scott Schecter (Incorporated by reference from Form 8-K dated
July 7, 2005, Exhibit 10.5)
|
|
|
|
|
|
10.7
|
|
Amendment
to Scott Schecter Employment Agreement*
|
|
|
|
|
|
10.8
|
|
Employment
Agreement – Scott Wilshire (Incorporated by reference from Form 8-K dated
July 7, 2005, Exhibit 10.6)
|
|
|
|
|
|
10.9
|
|
Amendment
to Scott Wilshire Employment Agreement*
|
|
|
|
|
|
10.10
|
|
Employment
Agreement – Greg Morris (Incorporated by reference from Form 8-K dated
July 7, 2005, Exhibit 10.7)
|
|
|
|
|
|
10.11
|
|
Amendment
to Gregory Morris Employment Agreement*
|
|
|
|
|
|
10.12
|
|
Option
Agreement – Scott Schecter (Incorporated by reference from Form 8-K dated
July 7, 2005, Exhibit 10.8)
|
|
|
|
|
|
10.13
|
|
Option
Agreement – Scott Wilshire (Incorporated by reference from Form 8-K dated
July 7, 2005, Exhibit 10.9)
|
|
|
|
|
|
10.14
|
|
Option
Agreement – Greg Morris*
|
|
|
|
|
|
10.15
|
|
Form
of General Investor Stock Purchase Agreement, including voting
agreement
(Incorporated by reference from Form 8-K dated July 7, 2005,
Exhibit
10.11)
|
|
|
|
|
|
10.16
|
|
Form
of Preferred Shares Investor Stock Purchase Agreement for institutional
investors (Incorporated by reference from Form 8-K dated July
7, 2005,
Exhibit 10.12)
|
|
|
|
|
|
10.17
|
|
Preferred
Shares Investor Registration Rights Agreement for institutional
investors
(Incorporated by reference from Form 8-K dated July 7, 2005,
Exhibit
10.13)
|
|
|
|
|
|
10.18
|
|
2005
Performance Equity Plan (Incorporated by reference from Form
8-K dated
July 7, 2005, Exhibit 10.15)
|
|
|
|
|
|
10.19
|
|
2007
Performance Equity Plan (Incorporation by reference from Form
S-8 dated
July 23, 2007, Exhibit 4.2)
|
|
|
|
|
|
10.20
|
|
Agreement
Department of Development of the State of Ohio dated August 26,
2005
(Incorporated by reference from Form 8-K dated August 26, 2005,
Exhibit
10.1)
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
10.21
|
|
Patent
License from US Department of Energy dated August 26, 2005 (Incorporated
by reference from Form 8-K dated August 26, 2005, Exhibit
10.2)
|
|
|
|
|
|
14.1
|
|
Code
of Ethics (Incorporated by reference from Form 10-KSB for fiscal
year
ended December 31, 2005, Exhibit 14.1)
|
|
|
|
|
|
21.1
|
|
Subsidiaries
of HydroGen Corp.
(Incorporated
by reference from Form 10-KSB for fiscal year ended December 31,
2005, Exhibit 21.1)
|
|
|
|
|
|
31.1
|
|
Certificate
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – John J.
Freeh*
|
|
|
|
|
|
31.2
|
|
Certificate
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Joshua
Tosteson*
|
|
|
|
|
|
31.3
|
|
Certificate
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Scott
Schecter*
|
|
|
|
|
|
32.1
|
|
Certificate
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – John J.
Freeh*
|
|
|
|
|
|
32.2
|
|
Certificate
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Joshua
Tosteson*
|
|
|
|
|
|
32.3
|
|
Certificate
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Scott
Schecter*
|
|
|
|
|
|
99.1
|
|
Year
end release (Incorporated by reference from Form 8-K dated March 31,
2008).
|
*
Filed
herewith
|
Item
14.
|
Principal
Accountant Fees and
Services
|
As
we
have previously disclosed, certain of the partners of GGK became partners
of
M&P in a limited asset purchase agreement effective October 3, 2007. As a
result, GGK resigned as auditors of the Company effective November 15, 2007
and
M&P was appointed as auditors for the Company’s annual financial statements
for the year ended December 31, 2007.
Through
November 15, 2007, GGK had a continuing relationship with RSM McGladrey,
Inc.
(“RSM”) from which it leased auditing staff who were full time, permanent
employees of RSM and through which its partners provide non-audit services.
Subsequent to November 15, 2007, this relationship ceased and M&P
established, and maintains, a similar relationship with RSM. M&P
has no full time employees and, therefore, none of the audit services performed
were provided by permanent full-time employees of M&P. M&P manages
and supervises the audit and audit staff and is exclusively responsible for
the
opinion rendered in connection with its examination.
The
following table shows the fees paid or accrued for the audit and other services
provided for the years ended December 31, 2007 and 2006:
|
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
Audit
Fees
|
|
$
|
85,000
|
|
$
|
92,000
|
|
|
Audit
Related Fees
|
|
|
-
|
|
|
-
|
|
|
Tax
Fees
|
|
|
-
|
|
|
-
|
|
|
All
Other Fees
|
|
|
-
|
|
|
-
|
|
|
|
|
$
|
85,000
|
|
$
|
92,000
|
|
Audit
services for the years 2007 and 2006 consisted of the audit of the year end
financial statements, the review of the quarterly financial statements, and
the
review of registration statements and other SEC filings.
The
services and engagements performed during 2007 were approved by the Audit
Committee. Because the board of directors of HydroGen did not have an audit
committee prior to 2007, the Chairman of the board of directors approved
the
services and engagements performed during 2006.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized on April 14, 2008.
|
|
HYDROGEN
CORPORATION
|
|
|
|
|
|
By:
|
/s/
John J. Freeh
|
|
|
|
John
J. Freeh
|
|
|
|
Chief
Executive Officer and Director
|
In
accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated,
on April 14, 2008.
|
Signature
|
|
Capacities
|
|
Date
|
|
|
|
|
|
|
|
/s/
John J. Freeh
|
|
Chief
Executive Officer (Principal
|
|
April 14,
2008
|
|
John
J. Freeh
|
|
Executive
Officer) and Director
|
|
|
|
|
|
|
|
|
|
/s/
Joshua L. Tosteson
|
|
President
and Director
|
|
April 14,
2008
|
|
Joshua
L. Tosteson
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Scott M. Schecter
|
|
Chief
Financial Officer (Principal
|
|
April 14,
2008
|
|
Scott
M. Schecter
|
|
Financial
and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/
Leo Blomen
|
|
Chairman
of the Board of Directors
|
|
April 14,
2008
|
|
Leo
Blomen
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Brian Bailys
|
|
Director
|
|
April 14,
2008
|
|
Brian
Bailys
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Michael E. Basham
|
|
Director
|
|
April 14,
2008
|
|
Michael E.
Basham
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Philip J. Kranenburg
|
|
Director
|
|
April 14,
2008
|
|
Philip J.
Kranenburg
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Brian T. McGee
|
|
Director
|
|
April 14,
2008
|
|
Brian
T. McGee
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Alton D. Romig, Jr.
|
|
Director
|
|
April 14,
2008
|
|
Alton
D. Romig, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Howard Yana-Shapiro
|
|
Director
|
|
April 14,
2008
|
|
Howard
Yana-Shapiro
|
|
|
|
|
Financial
Statements
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
PAGE
|
|
|
|
|
Reports
of Independent Registered Public Accounting Firms
|
F-2
|
|
|
|
|
Consolidated
Balance Sheet
– December
31, 2007
|
F-4
|
|
|
|
|
Consolidated
Statements of Operations
– For
the Years Ended December 31,
2007 and 2006, and from November 11, 2001
(inception) through
December 31, 2007
|
F-5
|
|
|
|
|
Consolidated
Statements of Shareholders’ Equity (Deficiency)
– From
November 11, 2001
(inception) through December 31, 2007
|
F-6
|
|
|
|
|
Consolidated
Statements of Cash Flows
– For
the Years Ended December 31,
2007 and 2006, and from November 11, 2001
(inception) through
December 31, 2007
|
F-8
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-9
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders
HydroGen
Corporation
We
have
audited the accompanying consolidated balance sheet of HydroGen Corporation
(development stage company) as of December 31, 2007 and the related consolidated
statements of operations, cash flows and shareholders’ equity (deficiency) for
the year ended December 31, 2007 and the 2007 amounts included in the
cumulative columns in the statements of operations and cash flows for the year
then ended. These consolidated financial statements are the responsibility
of
the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of HydroGen Corporation as
of
December 31, 2007 and the results of its operations and its cash flows for
the year then ended and the 2007 amounts included in the cumalitive columns
in
the statements of operations and cash flows for the year then ended in
conformity with U.S. generally accepted accounting principles.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has had losses from operations
and net losses from inception and has an accumulated deficit. This matter raises
substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty.
We
were
not engaged to examine management’s assertion about the effectiveness of
HydroGen Corporation’s internal control over financial reporting as of December
31, 2007 included in the accompanying Management’s Annual Report on Internal
Control over Financial Reporting and, accordingly, we do not express an opinion
thereon.
/s/
MCGLADREY &
PULLEN, LLP
New
York,
New York
April
10,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
HydroGen
Corporation
We
have
audited the accompanying consolidated statements of operations, shareholders’
equity (deficiency) and cash flows of HydroGen Corporation (a development stage
company) for the year ended December 31, 2006 and for the period from
November 11, 2001 (inception) through December 31, 2006. These consolidated
financial statements are the responsibility of HydroGen Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows of HydroGen
Corporation for the year ended December 31, 2006, and for the period from
November 11, 2001 (inception) through December 31, 2006, in conformity
with United States generally accepted accounting principles.
The
Company changed its method of accounting for stock-based compensation effective
January 1, 2006.
/s/
GOLDSTEIN GOLUB KESSLER LLP
New
York,
New York
February
16, 2007
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
CONSOLIDATED
BALANCE SHEET
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
8,065,758
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
165,628
|
|
|
|
|
|
|
|
|
Other
current assets
|
|
|
1,837,657
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
10,069,043
|
|
|
Property
and equipment, net
|
|
|
4,799,588
|
|
|
Other
assets
|
|
|
66,433
|
|
|
TOTAL
ASSETS
|
|
$
|
14,935,064
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
3,094,511
|
|
|
|
|
|
|
|
|
Capital
lease obligations, current portion
|
|
|
102,804
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
3,197,315
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
|
74,813
|
|
|
TOTAL
LIABILITIES
|
|
$
|
3,272,128
|
|
|
|
|
|
|
|
|
Commitments
(Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.001 per share, authorized 65,000,000
shares,
12,769,904 issued and outstanding at December 31, 2007
|
|
|
12,770
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
43,180,779
|
|
|
|
|
|
|
|
|
Deficit
accumulated during the development stage
|
|
|
(31,530,613
|
)
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
11,662,936
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
14,935,064
|
|
See
accompanying notes to the financial statements
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
For the Years Ended
December 31,
|
|
November 11,
2001 (Inception)
through December 31,
2007
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Grant
Revenue
|
|
$
|
1,445,196
|
|
$
|
610,721
|
|
$
|
2,192,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
10,886,210
|
|
|
3,859,950
|
|
|
15,014,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses (including stock-based compensation expense of $584,964,
$561,331, and $2,411,145, respectively)
|
|
|
7,552,140
|
|
|
5,125,618
|
|
|
18,942,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(16,993,154
|
)
|
|
(8,374,847
|
)
|
|
(31,763,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
811,331
|
|
|
1,046,602
|
|
|
2,055,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other financing charges
|
|
|
(27,782
|
)
|
|
(95,055
|
)
|
|
(798,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge
for repricing conversion price of convertible debt
|
|
|
-
|
|
|
-
|
|
|
(875,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(16,209,605
|
)
|
$
|
(7,423,300
|
)
|
$
|
(31,381,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding (basic and diluted)
|
|
|
12,769,904
|
|
|
11,060,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share (basic and diluted)
|
|
$
|
(1.27
|
)
|
$
|
(0.67
|
)
|
|
|
|
See
accompanying notes to the financial statements
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIENCY)
|
|
|
Common Stock
|
|
Series B Preferred Stock
|
|
Additional
Paid-in
|
|
Deficit
Accumulated
During the Development
|
|
Total
Shareholders’
Equity
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Stage
|
|
(Deficiency)
|
|
|
Balance,
November 11, 2001 (Inception)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Capital
contributed on November 11, 2001
|
|
|
-
|
|
|
-
|
|
|
377,704
|
|
$
|
378
|
|
$
|
476
|
|
$
|
-
|
|
$
|
854
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,564
|
)
|
|
(5,564
|
)
|
|
Balance,
December 31, 2001
|
|
|
-
|
|
$
|
-
|
|
$
|
377,704
|
|
$
|
378
|
|
$
|
476
|
|
$
|
(5,564
|
)
|
$
|
(4,710
|
)
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(104,354
|
)
|
|
(104,354
|
)
|
|
Balance,
December 31, 2002
|
|
|
-
|
|
$
|
-
|
|
$
|
377,704
|
|
$
|
378
|
|
$
|
476
|
|
$
|
(109,918
|
)
|
$
|
(109,064
|
)
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(163,128
|
)
|
|
(163,128
|
)
|
|
Balance,
December 31, 2003
|
|
|
-
|
|
$
|
-
|
|
$
|
377,704
|
|
$
|
378
|
|
$
|
476
|
|
$
|
(273,046
|
)
|
$
|
(272,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
issued for compensation in January and June, at $22.81 per preferred
share
|
|
|
-
|
|
|
-
|
|
|
28,012
|
|
|
28
|
|
|
638,802
|
|
|
-
|
|
|
638,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of equity in connection with issuance of convertible notes from
November
24 – December 20, at $16.36 per preferred share
|
|
|
-
|
|
|
-
|
|
|
27,850
|
|
|
28
|
|
|
455,480
|
|
|
-
|
|
|
455,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,734,654
|
)
|
|
(1,734,654
|
)
|
|
Balance,
December 31, 2004
|
|
|
-
|
|
$
|
-
|
|
$
|
433,566
|
|
$
|
434
|
|
$
|
1,094,758
|
|
$
|
(2,007,700
|
)
|
$
|
(912,508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting
of equity issued for compensation in January and June, 2004 at
$22.81 per
preferred share
|
|
|
-
|
|
|
-
|
|
|
21,731
|
|
|
22
|
|
|
513,319
|
|
|
-
|
|
|
513,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
issued on March 8 to existing shareholders electing antidilution
protection, at $23.18 per preferred share
|
|
|
-
|
|
|
-
|
|
|
4,862
|
|
|
5
|
|
|
112,674
|
|
|
-
|
|
|
112,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of equity in connection with issuance of convertible notes from
January
4 – February 23, at $16.82 per preferred share
|
|
|
-
|
|
|
-
|
|
|
6,147
|
|
|
6
|
|
|
103,397
|
|
|
-
|
|
|
103,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of convertible notes on July 7, 2005
|
|
|
-
|
|
|
-
|
|
|
60,446
|
|
|
60
|
|
|
1,999,940
|
|
|
-
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repricing
of convertible notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
875,000
|
|
|
-
|
|
|
875,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness
of debt by significant shareholder on July 7, 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
150,000
|
|
|
-
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chiste
shareholders’ interest on July 7, 2005, post-reverse
merger
|
|
|
375,865
|
|
|
376
|
|
|
-
|
|
|
-
|
|
|
(376
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the financial
statements
|
|
|
|
Common Stock
|
|
|
Series B Preferred Stock
|
|
|
Additional
Paid-in
|
|
|
Deficit
Accumulated
During the Development
|
|
|
Total
Shareholders’
Equity
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stage
|
|
|
(Deficiency)
|
|
|
Sale
of equity securities on July 7, 2005 at $31.70 per preferred
share
|
|
|
-
|
|
|
-
|
|
|
427,072
|
|
|
427
|
|
|
12,394,137
|
|
|
-
|
|
|
12,394,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred securities into common stock on August 29, 2005, valued
at
$4.46 per common share
|
|
|
7,071,735
|
|
|
7,072
|
|
|
(953,824
|
)
|
|
(954
|
)
|
|
(6,118
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
- round up of odd-lot shareholders on August 29, September 14 and
November
1, valued at $4.53 per share
|
|
|
32,865
|
|
|
33
|
|
|
-
|
|
|
-
|
|
|
148,778
|
|
|
(148,811
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of common shares on September 29, 2005 for $4.46 per share
|
|
|
134,439
|
|
|
134
|
|
|
-
|
|
|
-
|
|
|
584,746
|
|
|
-
|
|
|
584,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,741,197
|
)
|
|
(5,741,197
|
)
|
|
Balance,
December 31, 2005
|
|
|
7,614,904
|
|
$
|
7,615
|
|
$
|
-
|
|
$
|
-
|
|
$
|
17,970,255
|
|
$
|
(7,897,708
|
)
|
$
|
10,080,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of common shares on May 2, 2006 for $5.00 per share
|
|
|
5,155,000
|
|
|
5,155
|
|
|
-
|
|
|
-
|
|
|
24,064,229
|
|
|
-
|
|
|
24,069,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,423,300
|
)
|
|
(7,423,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
561,331
|
|
|
-
|
|
|
561,331
|
|
|
Balance,
December 31, 2006
|
|
|
12,769,904
|
|
$
|
12,770
|
|
$
|
-
|
|
$
|
-
|
|
$
|
42,595,815
|
|
$
|
(15,321,008
|
)
|
$
|
27,287,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(16,209,605
|
)
|
|
(16,209,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
584,964
|
|
|
-
|
|
|
584,964
|
|
|
Balance,
December 31, 2007
|
|
|
12,769,904
|
|
$
|
12,770
|
|
$
|
-
|
|
$
|
-
|
|
$
|
43,180,779
|
|
$
|
(31,530,613
|
)
|
$
|
11,662,936
|
|
See
accompanying notes to the financial statements
|
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
November 11, 2001
|
|
|
|
|
For the Year Ended
|
|
(Inception) through
|
|
|
|
|
December
31,
|
|
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(16,209,605
|
)
|
$
|
(7,423,300
|
)
|
$
|
(31,381,802
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
625,352
|
|
|
230,956
|
|
|
871,142
|
|
|
Amortization
of discount on convertible notes
|
|
|
-
|
|
|
-
|
|
|
558,911
|
|
|
Stock-based
compensation
|
|
|
584,964
|
|
|
561,331
|
|
|
2,411,145
|
|
|
Financing
cost recognized upon change in terms of convertible debt
|
|
|
-
|
|
|
-
|
|
|
875,000
|
|
|
Loss
on disposal of property and equipment
|
|
|
-
|
|
|
35,416
|
|
|
35,416
|
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
(Increase) in accounts receivable
|
|
|
96,780
|
|
|
(222,366
|
)
|
|
(165,628
|
)
|
|
Increase
in other current assets
|
|
|
(547,662
|
)
|
|
(973,361
|
)
|
|
(1,837,657
|
)
|
|
Increase
in other assets
|
|
|
(9,416
|
)
|
|
(42,644
|
)
|
|
(66,433
|
)
|
|
Increase
in accounts payable and accrued expenses
|
|
|
1,435,070
|
|
|
1,046,480
|
|
|
3,094,511
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
$
|
(14,024,517
|
)
|
$
|
(6,787,488
|
)
|
$
|
(25,605,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of short-term investments
|
|
|
(6,010,397
|
)
|
|
(24,691,930
|
)
|
|
(37,195,809
|
)
|
|
Maturity
of short-term investments
|
|
|
15,900,000
|
|
|
21,295,809
|
|
|
37,195,809
|
|
|
Purchase
of property and equipment
|
|
|
(1,882,763
|
)
|
|
(2,475,467
|
)
|
|
(5,405,332
|
)
|
|
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
$
|
8,006,840
|
|
$
|
(5,871,588
|
)
|
$
|
(5,405,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash, net of expenses, including the exchange
of
member’s units and preferred stock
|
|
|
-
|
|
|
24,069,384
|
|
|
37,049,682
|
|
|
Proceeds
from notes payable, related parties
|
|
|
-
|
|
|
-
|
|
|
150,000
|
|
|
Principal
payments on capital lease obligations
|
|
|
(87,095
|
)
|
|
(36,102
|
)
|
|
(123,197
|
)
|
|
Proceeds
from issuance of convertible notes payable including amount allocated
to
equity component
|
|
|
-
|
|
|
-
|
|
|
2,000,000
|
|
|
NET
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
|
|
$
|
(87,095
|
)
|
$
|
24,033,282
|
|
$
|
39,076,485
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(6,104,772
|
)
|
|
11,374,206
|
|
|
8,065,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
14,170,530
|
|
|
2,796,324
|
|
|
-
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
8,065,758
|
|
$
|
14,170,530
|
|
$
|
8,065,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
27,541
|
|
$
|
11,038
|
|
$
|
155,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for taxes
|
|
$
|
-
|
|
$
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
acquired under capital lease
|
|
$
|
72,644
|
|
$
|
228,170
|
|
$
|
300,814
|
|
|
Preferred
stock issued upon conversion of convertible notes
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2,000,000
|
|
|
Reduction
in note payable to related party
|
|
$
|
-
|
|
$
|
-
|
|
$
|
150,000
|
|
|
Issuance
of equity in connection with issuance of convertible notes
|
|
$
|
-
|
|
$
|
-
|
|
$
|
103,403
|
|
|
Dividend – roundup
of odd-lot shareholders
|
|
$
|
-
|
|
$
|
-
|
|
$
|
148,811
|
|
See
accompanying notes to the financial statements
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
NOTE
1 -
|
DESCRIPTION
OF THE COMPANY
|
The
business of
HydroGen
Corporation (the “Company”)
commenced
under the entity HydroGen, L.L.C. in November 2001
to
conduct the business of designing and manufacturing air-cooled Phosphoric Acid
Fuel Cell (“PAFC”) power generation systems
.
The
Company is a manufacturer of multi-megawatt fuel cell systems utilizing
proprietary 400-kilowatt (kW) phosphoric acid fuel cell (PAFC) technology.
The
technology was developed by Westinghouse Electric Corporation, and was acquired
in 1993 by Fuel Cell Corporation of America (“FCA”), the Company’s predecessor.
In 2001, FCA assigned all of its ownership rights to the technology to the
Company.
Effective
February 23, 2005, the Company entered into a Non-Binding Letter of Intent
(“LOI”) with Chiste Corporation, a Nevada corporation (“Chiste”), setting forth
the preliminary terms by which Chiste acquired the Company. Chiste was a
reporting company under the Securities and Exchange Act of 1934, and its shares
of common stock were traded on the OTC Bulletin Board. On July 7, 2005, the
Company and Chiste consummated a definitive exchange agreement (“Exchange
Agreement”) whereby Chiste acquired all the membership interests of the Company
(“LLC Units”) outstanding as of the closing date by an exchange of 742,255
shares of Series B Preferred Stock for LLC Units. The Preferred Stock had
voting rights equivalent to its voting rights on an as converted basis. On
July
7, 2005, HydroGen, L.L.C. became a wholly-owned subsidiary of Chiste
Corporation. On August 16, 2005, the Company’s shareholders voted to change
its name from Chiste to HydroGen Corporation.
HydroGen,
L.L.C. remains a wholly-owned limited liability company of HydroGen Corporation,
and continues to be the operating entity through which the Company principally
conducts its business operations.
Prior
to
the closing of the Exchange Agreement, HydroGen raised gross proceeds of
approximately $6,500,000 through the sale of membership units. In addition,
in
connection with the exchange, Chiste sold 211,569 preferred shares to an
institutional investor for $7,000,000. The shareholders of Chiste prior to
this
transaction owned, immediately after the transaction on a fully diluted basis,
common shares amounting to approximately 5% of the common stock of Chiste,
and
the holders of Company LLC Units and new investors held approximately 95% of
the
outstanding common stock on a fully diluted basis. In September, 2005, the
Company registered for resale shares of common stock of certain holders into
which the Series B Preferred Stock was converted. The above described
exchange transaction is being treated as a recapitalization of HydroGen, and
the
accompanying financial statements reflect the impact of the recapitalization
for
all periods presented.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
NOTE
2 -
|
LIQUIDITY
AND FUTURE OPERATIONS
|
The
Company’s consolidated financial statements for the year ended December 31,
2007 have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in
the
normal course of business. The Company has historically reported net losses,
including a net loss of $16.2 million for the year ended December 31, 2007,
and anticipates incurring losses in the future, due to the investment in
research and development and product and technology testing, validation and
commercialization of the Company’s technologies.
The
Company is in the development stage. Its current business plans include
expenditures to continue the development of the current manufacturing production
capability and to expand development efforts for next generation production
processes. These activities require the Company to add employees, purchase
production equipment, build-out additional manufacturing facilities, manufacture
400kW modules, and construct and operate test facilities. The Company does
not
believe that it can achieve profitability until it has completed its market
entry and cost reduction stages. In order to fund the costs associated with
these stages, the Company will require additional financing. Without additional
financing, the Company would need to delay certain of these activities.
The
Company plans to seek required financing from the following: (1) obtaining
private equity funding, (2) completing a secondary public offering,
(3) obtaining debt financing and (4) increasing government grant and
other contract revenue. Such financing may not be available to the Company
on
terms that are acceptable to it, if at all, and any new equity financing may
be
dilutive to its shareholders.
If
the
Company is unable to raise sufficient capital, liquidity problems will cause
the
Company to curtail operations, liquidate assets, seek additional capital on
less
favorable terms and/or pursue other such actions that could adversely affect
future operations. These factors raise substantial doubt as to the Company’s
ability to continue operations as a going concern. These financial statements
do
not include any adjustments relating to the recoverability and classification
of
assets or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
|
NOTE
3 -
|
PRIVATE
PLACEMENT OF EQUITY
SECURITIES
|
On
May 2,
2006, the Company sold in a private placement an aggregate of 5,155,000 shares
of its common stock, and warrants to purchase up to an aggregate of 1,288,750
shares of common stock for aggregate gross proceeds of $25,775,000. The Company
paid approximately $1,705,000 in commissions and expenses. The Company issued
to
its placement agent a warrant to purchase up to 128,875 shares of common stock
as additional compensation.
The
warrants issued to investors and the placement agent are exercisable at $6.60
per share at any time until May 2, 2011. On July 19, 2006, a registration
statement that the Company filed covering the re-offer and re-sale of the common
stock issued in the private offering and the Common Stock underlying the
warrants was declared effective by the Securities and Exchange Commission.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
NOTE
3 -
|
PRIVATE
PLACEMENT OF EQUITY SECURITIES -
Continued
|
The
Company has used the proceeds of the private placement for commercial
demonstration of the Company’s products, advanced manufacturing development
efforts, sales and marketing efforts and general working capital
purposes.
|
NOTE
4 -
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, HydroGen LLC. All significant intercompany balances
have been eliminated in consolidation.
Revenue
Recognition
Grant
revenue is recognized as the Company incurs reimbursable costs or achieves
designated milestones as set forth under its contracts. All of the Company’s
revenue in 2007 and 2006 and from inception is from grants from government
agencies of the State of Ohio and Commonwealth of Pennsylvania.
The
Company will recognize revenue in accordance with SEC Staff Accounting Bulletin
No. 104, “Revenue Recognition” (SAB 104). Revenue is recognized when
persuasive evidence of a sale exists, the product has been delivered, the rights
and risks of ownership have passed to the customer, the price is fixed and
determinable, and collection of the resulting receivable is reasonably assured.
For arrangements which include customer acceptance provisions, revenue is not
recognized until the terms of acceptance are met. Reserves for sales returns
and
allowances are estimated and provided for at the time of shipment.
Accounts
Receivable
Accounts
receivable consist of obligations due from the State of Ohio
and Commonwealth of Pennsylvania government agencies. Management reviews
trade receivables periodically and reduces the carrying amount by a valuation
allowance that reflects management’s best estimate of the amount that may not be
collectible. At December 31, 2007 the Company had outstanding accounts
receivable of $166,000. The Company recorded no bad debt expense during the
years ended December 31, 2007 and 2006.
Credit
Risk
From
time
to time the Company maintains cash deposits with its principal bank in excess
of
FDIC insured limits. The Company has not experienced any losses in these
accounts. The Company’s cash was on deposit with three financial institutions at
December 31, 2007.
Statements
of Cash Flows
For
purposes of the statements of cash flows, the Company considers its short-term
cash investments which have an original maturity of three months or less to
be
cash equivalents.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
NOTE
4 -
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
Continued
|
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of related assets as
follows:
Computer
equipment and software – three to seven years
Machinery
and equipment – three to fifteen years
Leasehold
improvements – the shorter of the lease term or the asset’s useful life
Office
equipment – three to seven years
Research
and Development Expenses
Research
and development expenditures are charged to operations as incurred. Research
and
development expense for the years ended December 31, 2007 and 2006 and the
period from November 11, 2001 (inception) to December 31, 2007, was
approximately $10,886,000, $3,860,000 and $15,014,000,
respectively.
Loss
Per Share
Loss
per
common share is computed by dividing the net loss by the weighted-average number
of common shares outstanding during the period. Shares to be issued upon the
exercise of options and warrants aggregating 3,986,731 and 2,472,627,
respectively, as of December 31, 2007 and 2006 are not included in the
computation of loss per share as their effect is antidilutive.
Equity-Based
Compensation
Effective
January 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123(R)”), which requires the measurement and recognition of
compensation expense for all share-based payment awards to employees and
directors based on estimated fair values. The Company adopted SFAS 123(R) using
the modified prospective transition method. Under this transition method,
share-based compensation expense recognized during the year ended December
31,
2006 included: (a) compensation expense for all share-based awards granted
prior to, but not yet vested, as of January 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions of SFAS 123,
and
(b) compensation expense for all share-based awards granted on or after
January 1, 2006, based on the grant date fair value estimated in accordance
with
the provisions of SFAS 123(R). In accordance with the modified prospective
transition method, the consolidated financial statements for prior periods
have
not been restated to reflect the impact of SFAS 123(R).
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
NOTE
4 -
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
Continued
|
As
a
result of adopting SFAS 123R, the Company recorded pretax compensation expense
of $584,964 and $561,331 for the years ended December 31, 2007 and 2006,
respectively. Stock-based compensation is included in each expense category
that
includes salary expense. The Company has recorded a full valuation allowance
on
the deferred tax asset related to stock-based compensation and, therefore,
no
tax benefit related to stock-based compensation is recognized for the years
ended December 31, 2007 and 2006.
Investments
The
Company follows Statement of Financial Accounting Standards (SFAS) No. 115,
“Accounting for Debt and Equity Securities.” The Company invests its excess cash
in short-term debt obligations of various agencies of the United States
Government, and has classified each security purchased as “held to maturity,” as
it has the positive intent and ability to hold these instruments to maturity.
As
per SFAS 115, securities so classified are appropriately carried at
amortized cost in the financial statements. Therefore, the Company does not
recognize unrealized gains and losses on such investments in its financial
statements.
Recently
Issued Accounting Standards
SFAS
No. 157, “Fair Value Measurements”
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”, which establishes a framework for reporting fair value and
expands disclosures about fair value measurements. SFAS No. 157 is
effective for the Company on January 1, 2008. The Company is currently
evaluating the impact of this new standard on its consolidated financial
statements.
SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities”
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – including an amendment of FASB
Statement No. 115.”
SFAS
No.
159 provides companies with an option to report selected financial assets and
financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings at each
subsequent reporting date. Upfront costs and fees related to items for which
the
fair value option is elected are recognized in
earnings
as
incurred. SFAS No.159 is effective for the Company beginning January 1, 2008.
The
Company is currently evaluating the impact of this new standard on its
consolidated financial statements.
SFAS
No. 141 (R), “Business Combinations”
In
December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations.”
SFAS No. 141(R) establishes principles and requirements for how an acquirer
in a business combination recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any controlling
interest in the acquiree, and the goodwill acquired. SFAS No. 141(R)
also establishes disclosure requirements to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) applies to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company
does not expect the adoption of SFAS No. 141 (R) to have a significant impact
on
its consolidated financial statements.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
NOTE
4 -
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
Continued
|
SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial
Statements”
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an Amendment to Accounting Research Bulletin
No. 51.” SFAS No. 160 establishes accounting and reporting standards that
require the ownership interest in subsidiaries held by parties other than the
parent be clearly identified and presented in the Consolidated Balance Sheets
within equity, but separate from the parent’s equity; the amount of consolidated
net income attributable to the parent and the noncontrolling interest be clearly
identified and presented on the face of the Consolidated Statement of Earnings;
and changes in a parent’s ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for
consistently. SFAS No. 160 is effective for the Company beginning January
1, 2009. The Company does not expect the adoption of SFAS No. 160 to have a
significant impact on its consolidated statements.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results may differ from those
estimates.
Reclassifications
Certain
reclassifications have been made to the 2006 financial statements to conform
to
the 2007 presentation.
|
NOTE
5 –
|
OTHER
CURRENT ASSETS
|
Other
current assets consisted of the following at December 31, 2007:
|
Raw
material supplies
|
|
$
|
1,335,597
|
|
|
Prepaid
expenses
|
|
|
502,060
|
|
|
Total
other current assets
|
|
$
|
1,837,657
|
|
Raw
material supplies, at cost, consist of raw materials that have not yet been
introduced to the manufacturing process.
Prepaid
expenses include items for which payment has been made for goods or services
not
yet received or incurred.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
NOTE
6 –
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment consisted of the following at December 31, 2007.
|
Computer
equipment and software
|
|
$
|
191,124
|
|
|
Machinery
and equipment
|
|
|
4,131,725
|
|
|
Leasehold
improvements
|
|
|
1,299,781
|
|
|
Office
equipment
|
|
|
73,505
|
|
|
Assets
under construction
|
|
|
264,187
|
|
|
|
|
|
5,960,322
|
|
|
Less
accumulated depreciation
|
|
|
1,160,734
|
|
|
|
|
$
|
4,799,588
|
|
Property
and equipment includes amounts acquired under capital leases of approximately
$551,000 at December 31, 2007, with related accumulated depreciation of
approximately $81,000. Depreciation is included in costs and expenses in the
accompanying consolidated statements of operations.
Assets
under construction consist entirely of manufacturing equipment. Depreciation
of
these assets will begin when they are placed in service.
Depreciation
expense of property and equipment for the years ended December 31, 2007 and
2006
and for the period November 11, 2001 (inception) to December 31, 2007 was
approximately $625,000, $231,000, and $871,000, respectively.
|
NOTE
7 –
|
ACCOUNTS
PAYABLE AND ACCRUED
EXPENSES
|
At
December 31, 2007, accounts payable and accrued expenses include the
following:
|
Accounts
payable
|
|
$
|
1,734,690
|
|
|
Accrued
payroll & bonuses
|
|
|
764,976
|
|
|
Other
|
|
|
594,845
|
|
|
|
|
$
|
3,094,511
|
|
Subsequent
to the consummation of the Exchange Agreement in July 2005, HydroGen, LLC became
a wholly-owned subsidiary of HydroGen Corporation and, for tax purposes,
HydroGen, LLC is being treated as a C-corporation rather than a limited
liability company. At that time, HydroGen, LLC began accounting for income
taxes
in accordance with SFAS No. 109, “Accounting for Income Taxes”. SFAS
No. 109 requires the use of an asset and liability approach in accounting
for income taxes. Deferred tax assets and liabilities are recorded based on
the
differences between the financial statement and tax bases of assets and
liabilities and the tax rates in effect when these differences are expected
to
reverse. SFAS No. 109 requires the reduction of deferred tax assets by a
valuation allowance, if, based on the weight of available evidence, it is more
likely than not that such portion of the deferred tax asset will not be
realized.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
NOTE
8 –
|
INCOME
TAXES – Continued
|
Significant
components of deferred tax assets and liabilities are as follows:
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
Deferred
tax assets
|
|
|
|
|
Net
operating losses
|
|
$
|
11,246,000
|
|
|
Compensation
and Benefits
|
|
|
670,000
|
|
|
Other
|
|
|
199,000
|
|
|
Total
deferred tax assets
|
|
|
12,115,000
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
Depreciation
|
|
|
459,000
|
|
|
Total
deferred tax liabilities
|
|
|
459,000
|
|
|
Net
deferred tax asset
|
|
$
|
11,656,000
|
|
|
Valuation
allowance
|
|
|
11,656,000
|
|
|
Net
deferred tax asset
|
|
$
|
-
|
|
A
reconciliation between the statutory and effective tax rates
follows:
|
|
|
Years
ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Statutory
tax rate
|
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
|
Increases
(decreases) resulting from
|
|
|
|
|
|
|
|
|
State
taxes, net of federal benefit
|
|
|
(8.4
|
)
|
|
(6.6
|
)
|
|
Permanent
differences
|
|
|
.4
|
|
|
1.1
|
|
|
Other
|
|
|
(
.2
|
)
|
|
-
|
|
|
Increase
in valuation allowance
|
|
|
42.2
|
|
|
39.5
|
|
|
Effective
Tax Rate
|
|
|
-
|
%
|
|
-
|
%
|
The
Company has accumulated federal operating losses of approximately
$27 million and $11.2 million as of December 31, 2007 and
December 31, 2006 respectively, which will expire between 2012 and 2027, if
not fully utilized. The Company has accumulated state net operating losses
of
approximately $33.6 million and $9.8 million as of December 31,
2007 and December 31, 2006 respectively, which will expire between 2015 and
2017, if not utilized. The Company’s recapitalization, described in Note 1,
may have significantly impaired the Company’s ability to utilize
pre-recapitalization net operating losses as a result of limitations imposed
under Internal Revenue Code Section 382. As of December 31, 2007, the
Company has weighed the available evidence and determined that it is appropriate
to carry a full valuation allowance against its net deferred tax asset until
such time as management is reasonably certain that these assets will be
realized.
On
January 1, 2007, the Company adopted the provisions of FIN 48,
“Accounting for Uncertain Tax Positions - an interpretation of FASB
No. 109”. The Company has determined that it does not have any uncertain
tax positions.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
NOTE
8 –
|
INCOME
TAXES – Continued
|
The
Company does not expect its unrecognized tax benefit to change during the next
12 months. The Company will record interest and penalties associated with
unrecognized tax benefits as income tax expense/benefit.
The
Company’s US and state income tax returns are subject to examination for the
years ended December 31, 2004 through December 31, 2007. The Company
is not currently under examination by any taxing authority.
|
NOTE
9 –
|
SHARE-BASED
COMPENSATION
|
The
Company has granted stock options under its 2005 Performance Equity Plan, as
amended, (“2005 Plan”) and under its 2007 Performance Equity Plan (“2007 Plan”
and, together with the 2005 Plan, the “Plans”.) Prior to the adoption of the
2005 Plan, HydroGen, L.L.C.’s members voted to issue options for membership
units to key employees and advisors. Upon HydroGen, LLC becoming a wholly-owned
subsidiary of Chiste (the prior name of the Company), these options became
options to purchase 342,345 shares of common stock of Chiste. These options
today represent options to purchase 342,345 shares of common stock of the
Company.
Subject
to the provisions of the Plans, awards may be granted to employees, officers,
directors, advisors, and consultants who are deemed to have rendered or are
able
to render significant services to the Company or its subsidiaries, and who
are
deemed to have contributed or to have the potential to contribute to the
Company’s success. Incentive stock options may only be awarded to individuals
who are employees at the time of the grant. The amount of shares that may be
issued or reserved for awards to participants under the 2005 Plan and the 2007
Plan, which was approved by shareholders at the Company’s Annual Meeting on June
22, 2007, and the amount of options issued and outstanding to purchase shares
as
of December 31, 2007 are listed in the table below.
|
|
|
Authorized for Issuance
|
|
Issued and Outstanding
|
|
|
2005
Plan
|
|
|
1,100,000
|
|
|
1,098,617
|
|
|
2007
Plan
|
|
|
1,300,000
|
|
|
1,128,144
|
|
|
Total:
|
|
|
2,400,000
|
|
|
2,226,761
|
|
As
discussed in Note 4, Basis of Presentation and Summary of Significant Accounting
Policies – Equity-Based Compensation, effective January 1, 2006, the Company
adopted the fair value recognition provisions of SFAS 123(R) using the modified
prospective transition method. The adoption of SFAS 123 (R) resulted in
share-based compensation expense of $584,964 and $561,331 for the years ended
December 31, 2007 and 2006, respectively. These expenses increased basic and
diluted loss per share by $0.05 for each of the years ended December 31, 2007
and 2006.
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model that uses the assumptions noted in the
following table. As the Company’s common stock has only traded publicly since
July 7, 2005, expected volatility has been estimated according to the following
methods to allow for an adequate trading history for the Company’s common stock
to be developed for use in this estimation:
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
NOTE
9 –
|
SHARE-BASED
COMPENSATION
-
Continued
|
|
|
1)
|
Prior
to July 7, 2005
:
As the Company’s shares were not publically traded, 0% volatility was used
in accordance with SFAS 123 for options issued to employees and
consultants prior to becoming a public
company.
|
|
|
2)
|
July
8, 2005 – September 30, 2007
:
Expected volatility was based on an arithmetic average of the volatility
of 5 publicly-traded companies that operate in the Company’s industry or
sell into similar markets. To calculate the estimated life for grants
of
“plain vanilla” stock options, the Company used a formula proscribed by
the Securities and Exchange Commission’s Staff Accounting Bulletin No.
107.
|
|
|
3)
|
October
1, 2007 and thereafter
:
Using the trading history of the Company’s common stock beginning with
July 1, 2006. Management believes that this time period adequately
captures a representative history and will continue to use July 1,
2006 as
the beginning date of the measurement period until the Company fully
develops a 5 year trading history from that
date.
|
Because
the Company’s employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its options.
The
following table summarizes the assumptions used for options granted during
the
years ended December 31, 2007 and 2006.
|
|
|
2007
|
|
2006
|
|
|
Expected
life (in years)
|
|
|
3.5 – 6.0
|
|
|
3.5 – 5.0
|
|
|
Risk-free
interest rate
|
|
|
3.51% - 4.68
%
|
|
|
3.67% - 5.04%
|
|
|
Volatility
|
|
|
64% - 68
%
|
|
|
66% - 74
%
|
|
|
Dividend
yield
|
|
|
—
|
|
|
—
|
|
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
NOTE
9 –
|
SHARE-BASED
COMPENSATION –
Continued
|
The
following table summarizes the Company’s stock option activity for the years
ended December 31, 2007 and 2006:
|
|
|
Number
of
Options
|
|
Weighted
Average
Option
Price
|
|
Aggregate
Intrinsic
Value
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Outstanding
at January 1, 2006
|
|
|
420,880
|
|
$
|
4.48
|
|
|
|
|
|
|
|
|
Granted
|
|
|
783,422
|
|
$
|
4.96
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(149,300
|
)
|
|
5.32
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,055,002
|
|
$
|
4.73
|
|
$
|
297,020
|
|
|
|
|
|
Exercisable
at December 31, 2006
|
|
|
397,912
|
|
$
|
4.55
|
|
$
|
184,947
|
|
|
|
|
|
Vested
and expected to vest at December 31, 2006
|
|
|
895,348
|
|
$
|
4.71
|
|
$
|
278,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2007
|
|
|
1,055,002
|
|
$
|
4.73
|
|
|
297,020
|
|
|
|
|
|
Granted
|
|
|
1,712,944
|
|
$
|
2.57
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(198,840
|
)
|
$
|
4.89
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
2,569,106
|
|
$
|
3.28
|
|
$
|
752,826
|
|
|
8.18
|
|
|
Exercisable
at December 31, 2007
|
|
|
642,781
|
|
$
|
4.58
|
|
$
|
3,375
|
|
|
5.97
|
|
|
Vested
and expected to vest at December 31, 2007
|
|
|
2,440,651
|
|
$
|
3.28
|
|
$
|
715,185
|
|
|
8.18
|
|
A
summary
of the status of the Company’s non-vested stock options as of December 31, 2007,
and of changes during the year ended December 31, 2007, is presented
below:
|
|
|
Number
of
Options
|
|
Weighted
Average
Option
Price
|
|
|
Non-vested
at December 31, 2006
|
|
|
657,090
|
|
$
|
4.84
|
|
|
Granted
|
|
|
1,712,944
|
|
|
2.57
|
|
|
Vested
|
|
|
(244,869
|
)
|
|
4.63
|
|
|
Forfeited/Cancelled
|
|
|
(198,840
|
)
|
|
4.89
|
|
|
Non-Vested
at December 31, 2007
|
|
|
1,926,325
|
|
$
|
2.84
|
|
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
NOTE
9 –
|
SHARE-BASED
COMPENSATION –
Continued
|
As
of
December 31, 2007, there was $2,877,000 of total unrecognized compensation
cost
related to non-vested stock options which is expected to be recognized over
a
remaining weighted average life of 8.92 years.
The
weighted average grant-date fair value of options granted during the years
ended
December 31, 2007 and 2006 was $1.59 and $2.52, respectively.
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2007:
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
Exercise prices
|
|
Number
outstanding
|
|
Weighted
average
remaining
contractual
life
|
|
Weighted
average
exercise
price
|
|
Number
exercisable
|
|
Weighted
average
exercise
price
|
|
|
$2.00
- $3.00
|
|
|
1,616,844
|
|
|
9.75
|
|
$
|
2.84
|
|
|
7,500
|
|
$
|
2.43
|
|
|
$3.01
- $4.00
|
|
|
42,600
|
|
|
4.61
|
|
|
3.50
|
|
|
—
|
|
|
—
|
|
|
$4.01
- $5.00
|
|
|
678,645
|
|
|
5.57
|
|
|
4.47
|
|
|
513,390
|
|
|
4.43
|
|
|
$5.01
- $6.00
|
|
|
206,917
|
|
|
5.85
|
|
|
5.19
|
|
|
98,857
|
|
|
5.17
|
|
|
$6.01
- $7.00
|
|
|
24,100
|
|
|
3.39
|
|
|
6.06
|
|
|
23,034
|
|
|
6.05
|
|
|
|
|
|
2,569,106
|
|
|
8.18
|
|
$
|
3.28
|
|
|
642,781
|
|
$
|
4.58
|
|
State
of Ohio Development Grant
On
August
26, 2005, the State of Ohio Department of Development provided to HydroGen
Corporation $1,250,000 as a development grant for a three phase program to
deploy, demonstrate, and commercialize the Company’s 400 kW phosphoric acid
fuel cell system. The grant is under an Ohio Fuel Cell Initiative Demonstration
Program, and is to be used towards the costs associated with the commercial
demonstration and validation of the Company’s air-cooled phosphoric acid fuel
cell module technology and for the procurement and preparation of the plant
equipment, system engineering, plant construction, and initial operations.
The
grant was given on the understanding that the Company will establish its
corporate headquarters in Ohio, locate manufacturing facilities to Ohio by
the
end of 2008, and create new full-time jobs at both the skilled and unskilled
level in Ohio. The establishment of a corporate headquarters in Ohio was
achieved in 2006. The development work which commenced in 2005 is expected
to
continue through the end of 2008. The grant was also contingent on the Company
raising its own capital, which was achieved in July 2005.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
NOTE
10 –
|
STATE
GRANTS –
Continued
|
The
grant
of the funds is on a reimbursement basis, provided the Company meets the
objectives of the grant and is carrying out the terms of the defined project
as
represented to the state. The grant reimbursement period ran from
September 1, 2005 to July 31, 2007. The grant is a deployment of
federal
development
funds and as such, the Company will be required to adhere to various federal
regulations on their use and accountability for deployment.
The
grant
may be terminated if the State of Ohio determines that the Company is not in
compliance with certain federal regulations governing the grant or federal
employment laws, the requirements of any other applicable program statute or
rule or with the terms of the grant agreement after suitable notice and the
passage of cure periods. Performance under the agreement is subject to a force
majeure limitation. If there is a termination, the Company may not continue
to
incur expenses under the grant. It may be directed by the State of Ohio to
dispose of various property, data, studies, and reports, and the Company may
be
liable for damages to the State of Ohio. The Company may also request a
termination of the grant if it is unable or unwilling to comply with the
conditions of the grant.
As
of
December 31, 2007, the Company has submitted requests and has been reimbursed
for the entire grant award totaling $1,250,000.
State
of Ohio Third Frontier Fuel Cell Program
On
March 7, 2006, the Company was notified that it would be awarded $1,000,000
(the “Grant”) by the State of Ohio Third Frontier Fuel Cell Program (TFFCP) to
support the Company’s advanced manufacturing development program. On June
8, 2006, the Company entered into a Grant Agreement with the State of Ohio
pursuant to which the Grant funds are to be awarded. Under the terms of the
Grant Agreement, the Company may recoup from the State the full $1,000,000
as
Grant activities take place, and as the costs are incurred and reported. The
Company has pledged a total of $555,000 in cost share for the program. The
Company will use the funds to dedicate appropriate personnel, consultants,
and
infrastructure to optimize decisions and resource allocations for its planned
advanced manufacturing facility. The proposed facility will be where the Company
will mass produce its standard 400 kilowatt (kW) air-cooled PAFC modules, which
will serve as the building block of its core product, a 2-2.5 megawatt (MW)
power island. Initial production capacity will be 25 MW per year of
the Company’s 400 kW modules, and is expected to be subsequently expanded
to 100 MW per year capacity.
All
disbursements from the Grant are on a reimbursement basis, after documentation
has been provided evidencing that expenses were incurred in furtherance of
the
Grant. The term of the Grant Agreement, including reimbursement period,
runs until April 10, 2009. At the close of the Grant term, the Company will
own
all equipment valued over $5,000 purchased with Grant money.
The
Grant
may be terminated if the State of Ohio determines that the Company is not in
compliance with the applicable program rules, State of Ohio law, or with the
terms of the Grant Agreement, after suitable notice and the passage of cure
periods. Performance by the State is also subject to the availability of funds.
If there is a termination, the Company may not continue to incur expenses under
the Grant, and it may be directed by the State of Ohio to dispose of various
property, data, studies and reports. The Company may further be liable for
damages to the State of Ohio in the event of default. The Company may also
request a termination of the Grant if it is unable or unwilling to comply with
the conditions of the Grant.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
NOTE
10 –
|
STATE
GRANTS -
Continued
|
Work
under the Grant commenced in June of 2006. The Company submitted requests for
payment under this grant totaling approximately $550,000 through December 31,
2007, $409,000 of which has been collected as of that date.
Pennsylvania
Energy Development Authority Grant – Fuel Cell Test
Facility
On
May
16, 2007, the Company was notified that it was awarded a grant in the amount
of
$250,000 by the Pennsylvania Energy Development Authority (PEDA) to support
the
construction of a small scale, air-cooled phosphoric acid fuel cell test
facility. The project period, as outlined within the grant agreement, is from
October 5, 2006 through October 4, 2008. All reimbursements for the project
must
be submitted during the project period.
All
disbursements from the grant are on a reimbursement basis. Reimbursement is
made
after documentation has been provided evidencing that expenses were incurred
in
furtherance of the grant. The grant may be terminated in whole, or in part,
at
any time if PEDA determines that the terms and conditions of the Agreement
have
not been met.
The
Company has submitted requests for payment under this grant totaling
approximately $250,000, $225,000 of which has been collected through December
31, 2007.
Pennsylvania
Energy Development Authority Grant – Clean-Up of Coke Oven
Gas
On
October 17, 2007, the Company was notified that it was awarded a grant in the
amount of $500,000 by the Pennsylvania Energy Development Authority (PEDA)
to
support clean-up of coke oven gas for fuel cell operations. The Company is
in
the process of establishing the terms and conditions of the Grant Agreement
with
PEDA.
Pennsylvania
NanoMaterials Commercialization Center Grant
On
October 12, 2007, the Company entered into a grant agreement (the “Grant
Agreement”) with the Pennsylvania NanoMaterials Commercialization Center (PNCC)
pursuant to which the PNCC will grant the Company approximately $230,000 to
support the development of advanced fuel cell catalyst systems. Under the terms
of the Grant Agreement, the Company will be reimbursed by the PNCC as grant
activities take place and as the costs are incurred and reported. The Company
has pledged a total of $131,545 in cost share for this program. The Company
will
be working in cooperation with the University of Pittsburgh’s Peterson Institute
of Nano Science and Engineering on this project. The grant may be terminated
in
whole, or in part, at any time if PNCC determines that the terms and conditions
of the Grant Agreement have not been met.
The
Company has submitted requests for payment under this grant totaling
approximately $46,000, all of which has been collected through December 31,
2007.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
Operating
Leases
On
August 15, 2005, the Company executed a 5 year agreement to lease
approximately 34,500 square feet of industrial space in Versailles, PA, to
house
its manufacturing operations and certain administrative functions. Terms of
the
lease provide for minimum lease payments of $14,373 per month, plus increases
in
real estate taxes and insurance costs over 2005 “Base Year” costs. The Company
took occupancy of the space in October 2005, after the landlord made certain
improvements to the property. The Company has the option to extend the lease
for
an additional 5 years, with certain adjustments made to the base rent.
On
October 19, 2005, the Company entered into an agreement to lease
approximately 1,700 square feet of office space in New York City for 61 months
at a base rent of approximately $69,700 in the first year, increasing by 2.5%
in
each subsequent year. The lease includes provisions for additional payments
related to the Company’s pro rata share of annual increases in real estate
taxes. The Company’s occupancy of this space commenced on December 1, 2005.
In
November 2006, the Company executed a 1 year agreement to lease office space
in
Cleveland, Ohio, which will serve as the Company’s headquarters, consistent with
the terms of the development grant provided to the Company by the State of
Ohio
(see Note 10). The Company is renting the space at a base rent of
approximately $2,700 per month. Since the expiration of the initial term of
the
lease, the Company has continued the lease on a month-to-month
basis.
In
addition to the office in Cleveland, the Company has leased office space of
approximately 1,900 square feet in Ashtabula, Ohio, which facility serves as
the
Company’s field office for building its 400 kW fuel cell demonstration plant.
The Company is paying $1,800 per month for rent, and the lease is on a
month-to-month basis.
Rent
expense for the years ended December 31, 2007 and 2006, and for the period
from November 11, 2001 (inception) to December 31, 2007 was
approximately $298,000, $246,000 and $826,000, respectively.
Future
minimum lease payments for capital leases, operating leases, and financing
contracts comprised of insurance policy premiums during the year are as follows:
|
Years Ending
December 31,
|
|
Capital
Lease Amount
|
|
Operating
Lease Amount
|
|
Financing
Contracts
|
|
|
2008
|
|
$
|
102,804
|
|
$
|
246,014
|
|
$
|
195,654
|
|
|
2009
|
|
|
65,579
|
|
|
247,852
|
|
|
-
|
|
|
2010
|
|
|
9,234
|
|
|
178,485
|
|
|
-
|
|
|
Total
|
|
$
|
177,617
|
|
$
|
672,351
|
|
$
|
195,654
|
|
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
NOTE
12 –
|
DEFINED
CONTRIBUTION PLAN
|
The
Company initiated a defined contribution plan in January of 2006. The retirement
savings plan was made available to all U.S. employees who have met minimum
length-of-service requirements. The Company matches employees’ contributions at
the rate of 50% of the first 8% contributed. Pension expense for the years
ended
December 31, 2007 and 2006 and the period from November 11, 2001
(inception) to December 31, 2007, was approximately $126,000, $76,000 and
$202,000, respectively.
|
NOTE
13 -
|
RELATED
PARTY TRANSACTIONS
|
During
November 2007, the Company executed a consulting agreement with Blomenco B.V.
and Dr. Leo Blomen, the Chairman of the Company’s Board of Directors and its
former CEO. This contract carries an initial term of 12 months and
establishes that the Company incurs a minimum level of service of 1,000 service
hours at €175 per hour from Blomenco B.V. After the initial term, either
party may terminate the agreement with six months’ written notice to the other
party. The contract also establishes a yearly rate of €25,000 for Dr.
Blomen’s services as Chairman of the Board of Directors.
In
2007,
Blomenco B.V. earned fees totaling $937,000, which includes management fees
of
$358,000, a bonus of $168,000, and a severance payment of $406,000 to be paid
out over twelve months, and Board of Director fees of $5,000.
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