Filed Pursuant to Rule 424(b)(3)
Registration No. 333-49076
EC POWER, INC.
2,000,000 Units Consisting of
2,000,000 Shares of Common Stock and
2,000,000 Redeemable Common Stock Purchase Warrants
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We are selling a minimum of 400,000 and a maximum of 2,000,000 Units. Each Unit shall contain one share of common stock and one common stock purchase warrant. The warrants will be exercisable at any time beginning on the date of this prospectus and expiring one year from the date of this prospectus at a price of $3.75 per share. The public offering price of the Units will be $3.00 per Unit.
Until we have sold at least 400,000 Units, we will not accept subscriptions for any Units. All proceeds from the sale of at least the first 400,000 Units will be deposited in an interest-bearing escrow account. If we are unable to sell at least 400,000 Units before the offering period ends, we will return all funds, without deduction, but with interest, to subscribers promptly after the end of this offering. The offering will remain open until all Units offered are sold or until May 28, 2002. We may extend the offering period until August 28, 2002 . We may decide to cease selling efforts prior to such date if we determine that it is no longer beneficial to continue the offering.
We plan to offer the Units through our officers and directors. We do not plan to use underwriters or pay any commissions on sales within the United States. We may utilize the services of one or more broker-dealers outside the United States for sales outside the United States. However, we do not presently have any agreements to do so. We anticipate that we would pay any such broker-dealers a commission of 10% on Units sold by them.
To date, there has been no public market for any of our securities, and our securities are not listed on any stock exchange or on the over-the-counter market.
By separate prospectus, 10,296,911 shares of common stock may be offered for sale from time to time by certain selling shareholders. We will not receive any proceeds from the sale of those shares.
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INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD READ THE "RISK FACTORS" BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS ILLEGAL FOR ANY PERSON TO TELL YOU OTHERWISE.
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| Total Minimum | Total Maximum | |
Public offering price | $3.00 | $ 1,200,000 | $ 6,000,000 |
Commissions(1) | $0.30 | $ 120,000 | $ 600,000 |
Proceeds to Company | $2.70 | $ 1,080,000 | $ 5,400,000 |
(1) Assumes all Units are sold outside the United States through broker-dealers.
The date of this prospectus is February 27, 2002
PROSPECTUS SUMMARY
This summary highlights important information about our business and about the offerings. Because it is a summary, it does not contain all the information you should consider before investing in our securities. Please read the entire prospectus.
About Our Company
Please note that throughout this prospectus the words "we", "our" or "us" refer to EC Power, Inc. and its wholly owned French subsidiary, Sorapec S.A., and not to any of the selling shareholders.
We conduct our operations primarily through Sorapec, which was founded in 1974. We are a Delaware corporation. We are engaged in the development of proton exchange membrane fuel cells and bipolar nickel-zinc batteries using proprietary technology. A fuel cell is a device that combines hydrogen derived from a fuel such as natural gas, propane, methanol or gasoline, and oxygen from the air to produce electric power without combustion. Although fuel cells were invented over 160 years ago, the availability of new materials and manufacturing techniques and concerns over the adverse environmental impact of the use of fossil fuels, have accelerated efforts to commercialize this technology.
A battery is an electrochemical apparatus used to store energy and release it in the form of electricity. Nickel-zinc cells offer greater storage capacity than the commonly used lead-acid and nickel- cadmium systems, and are especially suited to high power applications involving high discharge rates, for instance to provide acceleration to a vehicle. We believe nickel-zinc batteries have the potential to completely displace nickel-cadmium batteries in large markets such as scooters, bicycles, and hand-held power tools, as well as smaller scale applications requiring small, high-performance rechargeable batteries. We intend to target those specialized markets where nickel-zinc batteries have major performance advantages, and where we believe we can build a profitable business without depending on the largest, most competitive segments. Our planned product offering will include small batteries with capacities under 10 amperes/hour for portable electronic devices, for instance cellular ph ones or laptop computers; and larger batteries with capacities over 20 amperes/hour for 2-wheel and 4-wheel electric vehicles.
During the past 25 years we have undertaken over 300 research contracts with corporate accounts such as Renault, Peugeot, Autosil, Electricite de France, the French state-owned utility; Commissariat a L'Energie Atomique, the French atomic energy authority; Delegation Generale pour l'Armement, the French armament agency; and others. During the past ten years, we have intensified our research and development work in proton exchange membrane fuel cells and batteries, and we currently have 4 ongoing contracts supported by the French government. We have entered into two agreements to develop fuel cells for use in marine propulsion and urban mass transit. We are also a member of a consortium that was awarded a 3-year European Union contract to develop a zero emission electric scooter for application in urban centers. We will supply the bipolar nickel-zinc battery for the scooter.
Until recently we have been engaged only in research and development contracts for others, and we have no experience developing our own products. We are working on the completion of development of our own proprietary products, but we have no experience in manufacturing, and we have no contracts to sell any of our products.
Our principal executive offices are currently located in New York, New York, at 236 West 27th Street. Our telephone number at that address is (212) 399-6688 and our facsimile number is (212) 399-6693. In addition to our corporate office, we maintain an office and a manufacturing facility in Fontenay-sous-Bois, France, a suburb of Paris. Our telephone number in France is 01- 48-77-49-59 and our facsimile number is 01-48-77-05-31.
About The Offering
We are offering for sale up to 2,000,000 Units at a price of $3.00 per Unit. We are offering the Units through our officers and directors and will not be using the services of an underwriter. We do not presently plan to pay any commissions on any sales of Units in our offering to broker-dealers in the United States. However, we may pay commissions on sales of the Units outside the United States.
Securities offered | |||||
Minimum | 400,000 Units | ||||
Maximum | 2,000,000 Units | ||||
Offering price | $3.00 per Unit | ||||
Total offering | |||||
Minimum | $1,200,000 | ||||
Maximum | $6,000,000 | ||||
Common stock to be outstanding after this offering (1): | |||||
Minimum | 10,696,911 shares | ||||
Maximum | 12,296,911 shares | ||||
Use of proceeds | Repayment of indebtedness; establishment of a pilot fuel cell stack plant; working capital and general corporate purposes. | ||||
Terms of offering | The offering will begin on the date of this prospectus and will end May 28, 2002, unless all 2,000,000 Units are sold sooner. We may extend the offering periodto August 26, 2002 . | ||||
(1) Based on 10,296,911 shares outstanding on September 30, 2001. Does not include any shares that may
be issued upon exercise of the warrants that will be issued as part of the Units. Also does not include (a)
2,589,815 shares issuable upon conversion of outstanding preferred stock; (b) 2,141,351 shares issuable
upon exercise of outstanding warrants having an average exercise price of $.27 per share; or (c) 555,180
shares issuable upon exercise of outstanding options having an average exercise price of $.24 per share.
Summary Financial Data
The following financial information summarizes the more complete historical financial information enclosed in this prospectus. You should read the information below along with all other financial information and analysis in this prospectus. Please do not assume that the results below indicate results we will achieve in the future.
Statements of Operations Data:
Nine Months Ended | Twelve Months Ended | |||||||
2001 | 2000 | 2000 | 1999 | |||||
Sales revenue | $ | 337,443 | $ | 302,033 | $ | 516,738 | $ | 454,888 |
Gross profit | 87,746 | 143,517 | 325,573 | 258,414 | ||||
Loss from operations | (627,260) | (1,082,424) | (1,368,248) | (1,053,858) | ||||
Net loss | (680,480) | (1,058,238) | (1,338,307) | (1,037,304) | ||||
Basic and diluted loss per share | $ | (0.07) | $ | (0.14) | $ | (0.16) | $ | (0.25) |
Basic and diluted weighted |
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September 30, 2001 | ||||||
Balance Sheet Data: | Actual | Minimum (1)(2) | Maximum (2)(3) | |||
Cash and cash equivalents | $ | 19,400 | $ | 1,029,400 | $ | 5,349,400 |
Working capital (deficit) | (640,733) | 369,267 | 4,689,267 | |||
Property and equipment, net | 89,645 | 89,645 | 89,645 | |||
Total assets | 1,079,526 | 2,089,526 | 6,409,526 | |||
Current liabilities | 1,364,046 | 1,364,046 | 1,364,046 | |||
Stockholders' equity (deficit) | $ | (300,211) | $ | 1,555,683 | $ | 5,875,683 |
(1) | Adjusted to reflect net proceeds of $1,010,000 from our assumed sale in this offering of 400,000 Units at an offering price of $3.00 per Unit. |
(2) | Assumes all Units are sold through brokers and 10% commission paid. |
(3) | Adjusted to reflect net proceeds of $5,330,000 from our assumed sale in this offering of 2,000,000 Units at an offering price of $3.00 per Unit. |
Risk Factors
An investment in our securities is speculative and involves a high degree of risk. Please carefully consider the following risk factors, as well as the possibility of the loss of your entire investment in our securities, before deciding to invest in our securities.
Risks Relating to our Business
Our independent auditors have raised substantial doubt about our ability to continue as a going concern.
We are currently transitioning from a research and development company that has been primarily dependent on government and industry contracts, to a company focusing on commercial products. For the past several years Sorapec has operated under the protection of French bankruptcy laws, and we have not achieved profitability since our fiscal year ended December 31, 1996. We expect to continue to incur net losses until we can produce sufficient revenues to cover our costs. As of September 30, 2001, we had an accumulated deficit of $4,356,445 and a working capital deficit of $640,733. We expect to continue to incur net losses at least through fiscal year 2002 and these losses may be substantial. To implement our business strategy, we will have to incur a high level of fixed operating expenses and we will continue to incur considerable research and development expenses and capital expenditures. Accordingly, if we are unable to generate substantial revenues and positive cash flows we will n ot achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase our profitability on a quarterly or annual basis. Based on historic cash flow and projected expenditures, management believes that proceeds from the sale of the minimum number of shares would enable us to pursue our business plan for only five months.
Our ability to generate future revenues will depend on a number of factors, many of which are beyond our control. These factors include the rate of market acceptance of our products, regulatory developments, and general economic trends. Due to these factors, we cannot anticipate with any degree of certainty what our revenues, if any, will be in future periods. You have limited historical financial data and operating results with which to evaluate our business and our prospects. As a result, you should consider our prospects in light of the early stage of our business in a new and rapidly evolving market.
Our independent auditors have included in their audit report an explanatory paragraph that states that our continuing losses from operations raises substantial doubt about our ability to continue as a going concern. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a further explanation of our financial problems.
If we are not able to raise sufficient funds from this offering, we may be unable to pay our debts, and we may be able to stay in business only for a few months. Even with the minimum proceeds from our offering, we may not be able to proceed with our business plan in the time frame that we believe is necessary.
We are dependent on and intend to use virtually all of the net proceeds of the offering for debt repayment, for working capital, and to complete a pilot plant to manufacture fuel cell stacks. We estimate that we will need approximately $600,000 to provide our working capital and business development needs for the next twelve months; and an additional $2,000,000 to build the pilot plant and upgrade our laboratory facilities. The proceeds received from this offering may not be sufficient to enable us to proceed with our business plan. The proceeds from only the minimum offering would enable us to operate for only five months without additional funds. At September 30, 2001, we also owed in excess of $1,270,679 in short-term debt to various persons, including vendors, our officers and directors, and other related parties. At least $150,000 will be used to pay in part some of our creditors, and it is possible that additional proceeds of this offering will be needed to pay some of those cre ditors, since we have no other assured source of funds. We do not have any commitments for any other funds outside this offering, and there can be no assurance that additional funds will be available on acceptable terms, if at all. We do not have any agreements with those creditors, including our officers and directors, concerning payment of those liabilities, and if we are unable to continue in business, we would be required to pay those obligations before any payment could be made to any shareholder, including investors in this offering. Investors should be aware that there is a substantial risk that they could lose the full amount of their investment in our securities.
If we are unable to raise additional capital to complete our product development and commercialization plans, we may be required to limit operations in a manner inconsistent with those plans.
Our product development and commercialization schedule could be delayed if we are unable to fund our research and development activities or the development of our manufacturing capabilities. If at least $1,900,000 is received from this offering, we expect that the net proceeds and all other existing sources of capital will be sufficient to fund our activities for the next twelve months. Future capital requirements are dependent upon many factors, including, but not limited to, the amount used to fund demonstration projects and field trials, the level of government funding provided to us, the rate at which we expand production volume capabilities, and our investment in research and development. In addition to the proceeds from this offering and expected government funding, we believe it is likely that we will need additional funding to expand our manufacturing capabilities to the level where volume efficiencies can be achieved consistent with our plans to fully commercialize our products . However, additional financing may not be available and, if available, it may not be available on terms favorable to our stockholders or us. If additional funds are raised through the issuance of equity securities, the percentage ownership of our then current stockholders will be reduced. If adequate funds are not available to satisfy either short or long-term capital requirements, we may have to limit our operations and delay our product commercialization schedule.
We have had limited product sales. If we are not able to manufacture and sell our products in a cost-effective manner, it is unlikely that we will ever become profitable.
To date, we have derived revenues principally from research and development contracts. We have not made any sales of fuel cells or batteries except for sales of membrane-electrode assemblies and battery prototypes in limited numbers. We may not be able to manufacture any of our products in a cost-effective manner, and, if produced, we may not be able to successfully market these products.
Our product and technology development efforts are subject to unanticipated and significant delays, expenses and technical or other problems. Our success will depend upon our products and technologies meeting acceptable cost and performance criteria, and upon their timely introduction into the marketplace. None of our proposed products and technologies may ever be successfully developed, and even if developed, they may not actually perform as designed. Failure to develop or significant delays in the development of our products and technology would have a material adverse effect on our ability to sell our products and generate sufficient cash to achieve profitability.
If we are able to create a market for our products, we will need to expand our manufacturing facilities. Locating and establishing new manufacturing facilities will place significant demands on our managerial, technical, financial and other resources. We will be required to make significant investments in our engineering and logistics systems and financial and management information systems and to retain, motivate and effectively manage our employees. There can be no assurance that the management skills and systems we currently have in place will enable us to implement our strategy, or that we will be able to attract and retain additional skilled management and production personnel. Our failure to manage our growth effectively would have a material adverse effect on our ability to produce products and meet our contractual obligations.
We do not have the experience to manufacture large commercial quantities of our products. We may not be able to develop manufacturing technologies and processes and expand our plant facilities to the point where they are capable of satisfying large commercial orders. Development and expansion of these technologies and processes will require extensive lead times and the commitment of significant financial, engineering and human resources. Even if we are successful in achieving our planned increases in production capacity, we cannot be sure that we will do so in time to meet product commercialization schedules or to satisfy the requirements of our customers. Our failure to develop manufacturing capabilities and processes, or meet our cost goals, could have a material adverse effect on our business, prospects, results of operations, and financial condition.
If we are not able to protect important intellectual property, we will not be able to compete against larger companies who have greater resources than we.
Proton exchange membrane fuel cell technology was first developed in the 1950s, and we do not believe we can achieve a significant proprietary position on the underlying technologies used in fuel cell systems. However, we have developed proprietary technology, systems designs, and manufacturing processes. Our ability to compete effectively against other fuel cell companies will depend, in part, on our ability to protect our proprietary technology, systems designs, and manufacturing processes.
We have applied for and received patents on various proprietary designs for our fuel systems and our battery systems. Our success will be largely dependent both on the legal protection that our patents and other proprietary rights may or will afford, and on the knowledge, ability, experience, and technological expertise of our employees. We claim proprietary rights in various unpatented technologies, know how, trade secrets and trademarks relating to our products and manufacturing processes.
We do not know whether any of our pending patent applications will issue or, in the case of patents issued or to be issued, that the claims allowed are or will be sufficiently broad to protect our technology or processes. Even if all our patent applications are issued and are sufficiently broad, they may be challenged or invalidated. We could incur substantial costs in prosecuting or defending patent infringement suits. While we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be completely successful in doing so.
Further, our competitors may independently develop or patent technologies or processes that are substantially equivalent or superior to ours. If we are found to be infringing third party patents, we do not know whether we will be able to obtain licenses to use such patents on acceptable terms, if at all. Failure to obtain needed licenses could delay or prevent the development, manufacture, or sale of our products.
We rely, in part, on contractual provisions to protect our trade secrets and proprietary knowledge. These agreements may be breached, and we may not have adequate remedies for any breach. Our trade secrets may also be known without breach of such agreements or may be independently developed by competitors. Our inability to maintain the proprietary nature of our technology and processes could allow our competitors to limit or eliminate any competitive advantages we may have, thereby harming our business prospects.
If we cannot find a timely replacement for Dr. Bronoel, the effectiveness of our technical staff could be affected and we could incur delays in the execution of our plan.
Dr. Bronoel, our former Scientific Director, is semi-retired; he works for us approximately 50-60% of his time on a consulting basis, and no one in our present organization can replace him. Dr. Bronoel is 68 years old, and although he is presently in good health, there is always a risk that that condition could change. We have identified several candidates for this position, and anticipating hiring one shortly after the completion of this offering. Should we lose the services of Dr. Bronoel prior to being able to hire his replacement, some of our projects may not be completed in a timely manner.
If we are unable to attract and retain additional qualified personnel, our business, prospects, results of operations, and financial condition, will be adversely impacted.
We have a small team of engineers that has been with us for 15 years or longer. Each member of that team has developed special skills that we depend on. The loss of any particular individual would cause detrimental delays in our programs, since finding a replacement and training the replacement would take time.
Since we are attempting to transition from a research and development company to a manufacturing company, we have little experience in manufacturing and commercial development of products. We must locate and hire persons who have experience in manufacturing in order to become profitable. If we are not able to do so in a timely fashion, we may not be able to obtain profitability.
Currency exchange rate fluctuations, tariff regulations, and other risks inherent in international operations may adversely impact our operating results.
We conduct all of our operations primarily through our French subsidiary, Sorapec. Accordingly, we will be subject to the risks associated with fluctuations in currency exchange rates. For example, we expect that many of our customers will seek pricing in currencies other than the Euro. If such other currency increases in value against the Euro prior to payment on the contract, we would receive less on the contract than we had anticipated. Similarly, if we should order components from companies in another country, a fluctuation in the exchange rate could result in our paying more than we had anticipated. Either such event would decrease our profit margins.
Since our financial results will be reported in US Dollar amounts, periodic changes in the exchange rate between the Euro and the US Dollar will cause there to be changes in our operating results from quarter to quarter, in addition to differences in our operating results from quarter to quarter. Investors will have to take such monetary adjustments into account to consistently evaluate our quarter-to-quarter results.
We also may be subject to tariff regulations and requirements for export licenses, particularly with respect to the export of certain technologies, which could cause a potential customer to purchase products from manufacturers in other countries, rather than from us.
Our executive officers and directors have substantial control over our affairs and you will not be able to influence the outcome of any of our important transactions.
After consummation of this offering, executive officers, and directors will have the power, in the aggregate, to direct the vote of approximately 32% of our voting securities, assuming the sale of 2,000,000 Units. Additionally, our executive officers and directors own warrants to purchase an additional 1,487,180 shares of common stock, which, if exercised, would increase their percentage ownership of our voting securities to 38% after the offering. Therefore, these persons will have the power to influence our business policies and affairs and determine the outcome of any matter submitted to a vote of our stockholders, including mergers, sales of substantially all of our assets, and changes in control. Purchasers of Units in this offering will have little ability to influence the decisions our management will make in the future. Accordingly, investors should carefully review the capabilities of the present board of directors, in whose hands our success will be held.
If a market for fuel cells fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred to develop our product, and we may be unable to achieve profitability.
Fuel cell systems represent an emerging market, and we do not know whether end-users will want to use them. The development of a mass market for our systems may be impacted by many factors which are out of our control, including:
* | the cost competitiveness of fuel cell systems; | |
* | the future costs of hydrogen used by our systems; | |
* | consumer reluctance to try a new product; | |
* | consumer perceptions of our systems' safety; | |
* | regulatory requirements; and | |
* | the emergence of newer, more cost-competitive technologies and products. |
If a sufficiently large market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred and will continue to incur in the development of our products and we may never achieve profitability.
We may not be able to sell our fuel cell systems if they are not compatible with the products of third- party manufacturers or our potential customers.
Our success will depend upon our ability to make our fuel cell products compatible with the products of third-party manufacturers. In addition, our mobile and portable fuel cell products will be successful only if our potential customers redesign or modify their existing products to fully incorporate our products and technologies. Our failure to make our products and technologies compatible with the products of third-party manufacturers or the failure of potential customers to redesign or make necessary modifications to their existing products to accommodate our products would cause our products to be significantly less attractive to customers.
If our proposed battery systems, including the system we are designing for electric vehicles, are not accepted by the market, we will not be able to sell such systems.
Because vehicles powered by internal combustion engines cause pollution, public pressure has begun to result in legislative and other mandates in Europe and Asia, and enacted or pending legislation in the United States and Asia, to promote or mandate the use of vehicles with no tailpipe emissions or reduced tailpipe emissions, including two-wheel vehicles in Asia. We believe that in order to create a significant commercial market for electric vehicles in Europe and Asia it will be necessary for such public pressure to continue. In addition, we believe that in the United States government initiatives are important factors in creating an electric vehicle market. We cannot provide assurance that such public pressure will continue or that further legislation or other governmental initiatives will be enacted, or that current legislation will not be repealed, amended or have its implementation delayed, as has recently been the case in California; or that a different form of zero emission or l ow emission vehicle, or other solutions to the problem of containing emissions created by internal combustion engines, will not be invented, developed and produced, and achieve greater market acceptance than electric vehicles. The lack of a significant market for electric vehicles could have a material adverse effect on our ability to commercialize our technology. Even if a significant market for electric vehicles develops, there can be no assurance that our technology will be commercially competitive within such a market.
If we are not able to compete successfully against larger and better capitalized companies in the battery industry, we will not achieve long-term profitability in that business segment.
The battery industry is characterized by intense competition with a large number of companies offering or seeking to develop technology and products similar to ours. We will be subject to competition from manufacturers of traditional rechargeable batteries; such as nickel cadmium batteries, from manufacturers of rechargeable batteries with advanced technologies, as well as from companies engaged in the development of batteries incorporating new technologies. We will also compete with large and small manufacturers of alkaline, lithium, carbon-zinc, seawater, high rate, and primary batteries. There can be no assurance that we will be successful in competing with these manufacturers, many of which have substantially greater financial, technical, manufacturing, distribution, marketing, sales and other resources. A number of companies with resources substantially greater than ours are pursuing the development of a wide variety of battery technologies, including nickel-zinc batteries, which are expected to compete with our technology. If other companies successfully market their batteries prior to our introduction of products, there may be a material adverse effect on our business, financial condition, and results of operations.
If manufacturers to whom we plan to market our batteries are not able to successfully sell their products that incorporate our batteries; we will be unable to sell our batteries.
A substantial portion of our battery business will depend upon the success of products sold by original equipment manufacturers that may use our batteries. For example, one factor determining the quantity of purchase orders we may receive from a scooter manufacturer in the future is the commercial success of that company's electric scooter. Therefore, our success in being able to sell or license our products will be substantially dependent upon the acceptance and marketability of the manufacturer's products in the marketplace. We will be subject to many risks beyond our control that will influence the success or failure of a particular product manufactured by a manufacturer, including among others, competition faced by the manufacturer in its particular industry; market acceptance of the manufacturer's product; the engineering, sales and marketing and management capabilities of the manufacturer; technical challenges unrelated to our technology or problems faced by the manufacturer in de veloping its products; and the financial and other resources of the manufacturer.
Price increases for raw materials may adversely affect our profitability.
The principal raw materials for the production of our battery products are nickel and zinc. Prices for both nickel and zinc are subject to market forces beyond our control. Our future profitability may be materially adversely affected by increased nickel and/or zinc prices to the extent we are unable to pass on higher raw material costs to our customers.
Our products may be subject to technological obsolescence, which could adversely affect our ability to sell such products.
The market for our products, as well as the products that may utilize our batteries and fuel cells, is characterized by changing technology and evolving industry standards, often resulting in product obsolescence or short product lifecycles. Although we believe that competition in fuel cells and Nickel-Zinc batteries is very limited at this time, and we believe that our products will be comprised of state-of-the-art technology, there can be no assurance that competitors will not develop technologies or products that would render our technology and products obsolete or less marketable.
We are dependent on third party suppliers for the supply of parts and material for our fuel cell stacks. If we are not able to obtain such parts and material, we will not be able to manufacture our fuel cell stacks.
We do not know whether we will be able to continue to obtain suppliers to work with us to develop the right materials or components for our fuel cell systems, or whether such relationships will be on terms that will allow us to achieve our objectives. Our business, prospects, results of operations, or financial condition could be harmed if we fail to maintain relationships with entities that will supply the required components for our systems. We do not have any long-term agreement with any supplier. However, we have established relationships with certain companies that supply us with various vital parts. We will continue to rely on them to provide components for our fuel cell systems. A supplier's failure to develop and supply components in a timely manner, or to supply components that meet our quality, quantity, or cost requirements, or our inability to obtain substitute sources of these components on a timely basis or on terms acceptable to us, could harm our ability to manufacture our fuel cell systems. In addition, to the extent the processes that our suppliers use to manufacture components are proprietary, we may be unable to obtain comparable components from alternative suppliers.
Risks Associated with the Offering
Since we have arbitrarily determined the purchase price of the Units with no input from an independent third party, the purchase price might not accurately reflect the value of the Units.
Our board of directors has arbitrarily determined the offering price of the Units. Since no underwriter or independent third party has been involved in pricing the Units, we cannot assure you that this price accurately reflects the value of the Units or that you will be able to resell the shares or warrants contained in the Units at such price. Investors may lose all or part of their investment.
The market price of the common stock and the warrants may decline below the initial public offering price and this decline may be significant. The value of your investment could decline due to the impact of several factors upon the market price of our common stock, including our failure to meet product development and commercialization milestones, or technological innovations by competitors or in competing technologies.
In addition, stock markets have experienced extreme price and volume fluctuations, and the market prices of securities of technology companies have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, investors may not be able to resell their shares or warrants at or above the initial public offering price.
You may lose the use of your funds for up to 180 days if at least 400,000 Units are not sold.
The offering is being made on a 400,000 Unit or none basis. During the offering period, until at least 400,000 Units are sold, proceeds will be held in an interest-bearing escrow account. If the offering is not successful, your funds will be returned to you, with no deduction for expenses, and with your pro rata share of the interest earned on the funds in the account. Since the offering period may be extended to 180 days, if the minimum number of Units is not sold you would lose the use of your investment for that period of time. Any interest you would earn could be significantly less than a return you could earn on the funds in another investment vehicle.
If existing shareholders offer their shares for sale during the pendency of this offering, we might not be able to sell the Units.
Although there is not presently any public trading market for our common stock, shares may be offered and sold by existing shareholders while this offering is being made. The price offered by such shareholders may be less than the offering price of the Units. If that occurs, potential investors in this offering may purchase the shares offered by existing shareholders, which would make it difficult for us to sell the Units offered.
We do not plan to pay dividends in the foreseeable future; investors may never see a return on their investment.
We plan to retain earnings, if any, to provide funds for the operation and expansion of our business, and, accordingly, we have no present intention to pay any dividends on our common stock. Any payment of future cash dividends and the amounts thereof will be dependent upon our earnings, financial requirements, and other factors deemed relevant by our board of directors.
Changing conditions in our business may cause our management to change the use of the proceeds of this offering.
Our board of directors presently plans to use the proceeds from the sale of the Units for the purposes described in the Use of Proceeds section of this prospectus. However, a number and a variety of factors may cause it to vary the use of those proceeds. A substantial amount of the proceeds are allocated to "working capital" and may be used by us in a number of unspecified ways. Our board will have broad discretion over the use of those proceeds, and we cannot assure you that such uses will not vary substantially from our current intentions.
There is no public trading market for our common stock. Unless a trading market develops in the future, you may not be able to sell any of the securities you acquire in this offering.
There currently exists no public trading market for our common stock or the warrants, and there can be no assurance that a public trading market will develop or be sustained in the future. Without an active public trading market, you would not be able to liquidate your investment without considerable delay, if at all. If a market does develop, the price for our securities may be highly volatile and may bear no relationship to our actual financial condition or results of operations. Factors we discuss in this prospectus, including the many risks associated with an investment in us, will have a significant impact on the market price of our securities.
We have not applied to have our shares or the warrants listed on any stock exchange or on the NASDAQ Stock Market, and we do not plan to do so in the foreseeable future. As a result, trading, if any, in our securities will be conducted in the over-the-counter market on an electronic bulletin board established for securities that do not meet NASDAQ listing requirements, or in what are commonly referred to as the "pink sheets." One broker-dealer has agreed to make a market in our securities at the completion of this offering, but there is no assurance that it will continue to do so, or that we will be successful in obtaining any other market makers. As a result, you will find it substantially more difficult to dispose of our securities. You will also find it difficult to obtain accurate information about, and/or quotations as to the price of, our common stock. Finally, depending upon several factors, including the future market price of our common stock, our securities are and may remai n subject to the "penny stock" rules.
The penny stock rules regulate broker dealer practices in connection with transactions in "penny stocks." Those rules applicable to penny stocks require a broker dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the Commission. The broker dealer must also provide the customer with certain other information and must make a special written determination that the stock is a suitable investment for the purchaser, and receive the purchaser's written agreement to the transaction. Further, the rules require that, following the proposed transaction, the broker provide the customer with monthly account statements containing market information about the prices of the securities. As a result of the difficulty in complying with such rules, many broker dealers will not sell such stocks to their customers. For a more complete description of some of the requirements of the penny stock rules, see the sec tion entitled "Information about the Market for Our Securities."
There may be an adverse effect on the market price of our common stock as a result of a significant number of shares being available for future sale by our existing stockholders.
Future sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could adversely affect the market price of our common stock from time to time. These future sales or perceptions could also impair our ability to raise additional capital through the sale of our equity securities after completion of the offering.
All of the 10,296,911 shares of common stock that are currently outstanding have been registered for sale or resale. An additional 2,589,815 shares of common stock that may be issued if shares of preferred stock are converted are available for sale in the public market. If a market for our securities should develop, those shares will act as an "overhang" on the market, and will probably prevent the price of the shares from increasing.
The tangible book value of our common stock will be substantially lower than the offering price; investors will suffer immediate and substantial dilution in the value of their investment.
The initial public offering price is substantially higher than the tangible book value per share of our outstanding common stock. If you purchase Units in this offering, the shares you buy as part of the Units will experience an immediate and substantial dilution in tangible book value. The shares of common stock owned by our existing stockholders will receive a material increase in their tangible book value. The dilution to investors in this offering will be approximately $2.20 per share if all 2,000,000 Units are sold. We also have outstanding warrants to purchase 2,141,351 shares of common stock, including 1,843,254 warrants owned by our Directors, with exercise prices significantly below the initial public offering price of the common stock. To the extent these warrants are exercised, there will be substantial further dilution to you as new investors in our common stock.
Provisions of Delaware law and of our charter laws may make a takeover more difficult, which could impede the ability of public stockholders to benefit from a change in control or change in our management.
Provisions in our Certificate of Incorporation and By-laws and in the Delaware corporate law may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and Board of Directors. Public stockholders who might desire to participate in such a transaction may not have an opportunity to do so.
Future issuance of our common stock could dilute current shareholders and adversely affect the market if it develops.
We have the authority to issue up to 100,000,000 shares of common stock and 50,000,000 shares of preferred stock and to issue options and warrants to purchase shares of our common stock, without shareholder approval. These future issuances could be at values substantially below the price paid for our common stock by our current shareholders. In addition, we could issue large blocks of our common stock to fend off unwanted tender offers or hostile takeovers without further shareholder approval.
We may issue preferred stock that would have rights that are preferential to the rights of the common stock.
An issuance of additional shares of preferred stock could result in a class of outstanding securities that would have preferences with respect to voting rights and dividends and in liquidation over the common stock and could, upon conversion or otherwise, have all of the rights of our common stock. Our Board of Directors' authority to issue preferred stock could discourage potential takeover attempts or could delay or prevent a change in control through merger, tender offer, proxy contest or otherwise by making these attempts more difficult or costly to achieve.
Forward-Looking Statements
This prospectus contains statements that plan for or anticipate the future. Forward-looking statements include statements about the future of the battery and fuel cell industries, statements about our future business plans and strategies, and most other statements that are not historical in nature. In this prospectus, forward-looking statements are generally identified by the words "anticipate," "plan," "believe," "expect," "estimate," and the like. We have based these statements on our current expectations and projections about future events. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. These risks and uncertainties include those set forth under "Risk Factors." For example, a few of the uncertainties that could affect the accuracy of forward-looking statements, besides the specific factors identified a bove in the Risk Factors section of this prospectus, include:
- | the development and commercialization schedule for our fuel cell technology and products; | |
- | future funding under government research and development contracts; | |
- | the expected cost competitiveness of our fuel cell technology and products; | |
- | our intellectual property; | |
- | the timing and availability of our products; | |
- | our business strategy; and | |
- | general economic conditions in our target markets. |
In light of the significant uncertainties inherent in the forward-looking statements made in this prospectus, particularly in view of our early stage of operations, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.
The Private Securities Litigation Reform Act of 1995, which provides a "safe harbor" for similar statements by existing public companies, does not apply to our offering.
Use of Proceeds
The net proceeds to us from the sale of the Units, after deducting offering expenses, are expected to be approximately $1,010,000 if the minimum number of 400,000 Units are sold at an offering price of $3.00 per Unit, or $5,330,000 if the maximum number of 2,000,000 Units are sold, assuming for these purposes only, that all of the Units are sold outside of the United States and a commission of 10% is paid on such sales. These proceeds are intended to be utilized substantially in the dollar amounts and percentage of total proceeds set forth below.
Application of proceeds | Minimum | % | Maximum | % |
Repayment of debt | $ 150,000 | 15% | $ 453,000 | 8% |
Work on pilot plant | 490,000 | 48% | 1,800,000 | 34% |
Upgrading lab facilities | 15,000 | 2% | 300,000 | 6% |
Working capital | 355,000 | 35% | 2,770,000 | 52% |
$1,010,000 | 100.0% | $5,330,000 | 100.0% |
"Repayment of Debt." No proceeds will be used to pay officers, directors, or related parties, except that up to $100,000 may be used to pay accrued salaries if at least $1,500,000 is raised in this offering.
The amounts set forth above represent our best estimate for the use of the net proceeds of this offering in light of current circumstances. However, actual expenditures could vary considerably depending upon many factors, including, without limitation, changes in economic conditions, unanticipated complications, delays and expenses, or problems relating to the development of additional products and/or market acceptance for our products and services. Any reallocation of the net proceeds of the offering will be made at the discretion of our Board of Directors but will be in furtherance of our strategy to achieve growth and profitable operations through the development of our products and commencement of our marketing efforts. Our working capital requirements are a function of our future growth and expansion, neither of which can be predicted with any reasonable degree of certainty. We may need to seek funds through loans or other financing arrangements in the future, and there can be no assurance that we will be able to make these arrangements in the future should the need arise.
Pending our use of the net proceeds of the offering, the funds will be invested temporarily in certificates of deposit, short-term government securities, or similar investments. Any income from these short-term investments will be used for working capital. The net proceeds from this offering, together with internally generated funds and funds on hand at the time of the offering, based on historical experience, are expected to be adequate to fund our working capital needs for at least the next 5 months if only the minimum proceeds are received, or for the next 12 months if the maximum proceeds are received.
Dividend Policy
We have not declared or paid cash dividends on our common stock in the preceding two fiscal years. We currently intend to retain all future earnings, if any, to fund the operation of our business, and, therefore, do not anticipate paying dividends in the foreseeable future. Our Board of Directors will determine whether any cash dividends will be declared in the future.
Capitalization
The following table sets forth our capitalization as of September 30, 2001. This section should be read in conjunction with the consolidated financial statements and related notes contained elsewhere in this prospectus.
Actual | As of September 30, 2001 | ||||||||||
As Adjusted(1) | |||||||||||
Minimum | Maximum | ||||||||||
Stockholders' Equity: | |||||||||||
Common Stock, $.001 par value, | |||||||||||
100,000,000 shares authorized; 10,296,911 shares issued and outstanding at September 30, 2001; 10,696,911 shares issued and outstanding, as adjusted, assuming the minimum number of Units are sold; 12,296,911 shares issued and outstanding, as adjusted, assuming the maximum number of Units are sold(1) | |||||||||||
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Preferred Stock, $.001 par value, | |||||||||||
50,000,000 shares authorized; 2,589,815 issued and outstanding at September 30, 2001. |
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Capital in excess of par value | 4,865,932 | 5,875,532 | 10,193,932 | ||||||||
Accumulated deficit | (4,356,445) | (4,356,445) | ( 4,356,445) | ||||||||
Unearned interest expense | (9,965) | (9,965) | (9,965) | ||||||||
Unearned compensation expense | (771,947) | (771,947) | (771,947) | ||||||||
Accumulated comprehensive income | (63,982) | (63,982) | (63,982) | ||||||||
Stockholders equity (deficit) | $ (300,211) | $ 709,789 | $ 5,029,789 | ||||||||
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(1) | Does not include shares that may be issued upon exercise of warrants to purchase 2,141,351 shares of common stock at an average exercise price of $.27 per share; or options to purchase 555,180 shares of common stock at an average exercise price of $.24 per share. Also does not include shares that may be issued upon exercise of the warrants that will be issued as part of the Units. |
Dilution
For the purpose of the following discussion and the tables that follow the discussion, we assume that none of the warrants that are included in the Units are exercised. Since the exercise price of the warrants exceeds the offering price of the Units, issuance of the warrants will not dilute the sale price of the Units to the investors.
At September 30, 2001, we had a historical net tangible book value deficit of ($1,086,867) or $(0.11) per share, based upon 10,296,911 shares of common stock outstanding. Net tangible book value per share is determined by dividing the number of outstanding shares of common stock into our net tangible book value, meaning total assets less total liabilities, and then subtracting capitalized offering costs and the liquidation preference to the Preferred Stock. If we sell all 2,000,000 Units that we are offering, of which there is no assurance, after deducting $670,000 of estimated offering expenses and commissions, the adjusted net tangible book value as of September 30, 2001, would have been $4,243,133 or $0.35 per share of common stock. This represents an immediate increase in net tangible book value of $0.45 per share to current stockholders and an immediate decrease of $2.65 per share to you as an investor in our offering. To the extent fewer shares are sold in the offering, the dilut ion to investors will be greater.
If we sell the minimum of 400,000 Units, of which there is no assurance, after deducting $190,000 of estimated offering expenses and commissions, the adjusted net tangible book value as of September 30, 2001, would have been ($76,867) or ($0.01) per share of common stock. This represents an immediate increase in net tangible book value of $0.10 per share to current stockholders and an immediate decrease of $3.01 per share to you as an investor in our offering.
The following table illustrates the per share dilution, assuming (i) 400,000 Units are sold in our offering; and (ii) all 2,000,000 Units are sold:
Minimum | Maximum | |||||
Public offering price per share of common stock | $ 3.00 | $ 3.00 | ||||
Net book value deficit per share of common stock |
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Adjusted net book value per share of common stock |
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Increase per share of common stock attributable to |
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Decrease per share of common stock attributable to |
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These numbers do not include (a) 2,696,531 shares of common stock which we may issue under presently outstanding options and warrants; (b) 2,589,815 shares of common stock that we may issue upon exercise of preferred stock that is presently outstanding; or (c) 444,820 shares of common stock that may be issued upon exercise of additional options which may be granted under our Equity Incentive Plan.
The following table sets forth, as of September 30, 2001, the number of shares of common stock that have been purchased, or that may be purchased under outstanding options and warrants by affiliated shareholders only, assuming for this purpose that the shares of preferred stock have been converted and that all such options and warrants have been exercised, the percentage of total consideration paid, and the average price per share paid by (i) our officers, directors, promoters, and affiliated persons (ii) all present shareholders; and (iii) investors purchasing Units in this offering. For the purpose of this table, it is assumed that warrants to purchase a total of 1,898,516 shares of common stock have been exercised and we have received the proceeds of such exercises totaling $407,288. It also assumes that no other warrants or options have been exercised.
Assuming 400,000 Units are sold:
Average | |||||
Shares Purchased | Total Consideration | Price | |||
Number | Percent | Amount | Percent | Per Share | |
Affiliated shareholders | 7,612,400 | 59.5% | $1,714,400 | 38.3% | $ .23 |
All present shareholders | 12,398,408 | 96.9% | $3,274,391 | 73.2% | $ .26 |
New investors | 400,000 | 3.1% | $1,200,000 | 26.8% | $3.00 |
Total | 12,798,408 | 100.0% | $4,474,391 | 100.0% | $ .35 |
Assuming 2,000,000 Units are sold:
Average | |||||
Shares Purchased | Total Consideration | Price | |||
Number | Percent | Amount | Percent | Per Share | |
Affiliated shareholders | 7,612,400 | 52.9% | $1,714,400 | 18.5% | $ .23 |
All present shareholders | 12,398,408 | 86.1% | $3,274,391 | 35.3% | $ .26 |
New investors | 2,000,000 | 13.9% | $6,000,000 | 64.7% | $ 3.00 |
Total | 14,398,408 | 100.0% | $9,274,391 | 100.0% | $ .64 |
Information About the Market for Our Securities
There currently exists no public trading market for our securities. We do not intend to develop a public trading market until our offering has terminated. There can be no assurance that a public trading market will develop at that time or be sustained in the future. Without an active public trading market, you may not be able to liquidate your investment without considerable delay, if at all. If a market does develop, the price for our securities may be highly volatile and may bear no relationship to our actual financial condition or results of operations. Factors we discuss in this prospectus, including the many risks associated with an investment in us, may have a significant impact on the market price of our common stock. Also, because of the relatively low price of our common stock, many brokerage firms may not effect transactions in the common stock.
In addition, it is likely that our common stock will be subject to rules adopted by the Commission regulating broker dealer practices in connection with transactions in "penny stocks." Those disclosure rules applicable to penny stocks require a broker dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the Commission. That disclosure document advises an investor that investment in penny stocks can be very risky and that the investor's salesperson or broker is not an impartial advisor but rather paid to sell the shares. The disclosure contains further warnings for the investor to exercise caution in connection with an investment in penny stocks, to independently investigate the security, as well as the salesperson with whom the investor is working and to understand the risky nature of an investment in this security. The broker dealer must also provide the customer with certain other informa tion and must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Further, the rules require that, following the proposed transaction, the broker provide the customer with monthly account statements containing market information about the prices of the securities.
Selected Financial Information
Set forth below is our selected financial data as of and for our fiscal years ended December 31, 2000, and 1999 and as of and for the nine-month periods ended September 30, 2001 and 2000. This financial information is derived from our consolidated financial statements and related notes included elsewhere in this prospectus and are qualified by reference to these consolidated financial statements and the related notes thereto.
Statements of Operations Data:
September 30 | December 31 | ||||||
2001 | 2000 | 2000 | 1999 | ||||
Sales revenue | $ | 123,718 | $ 91,113 | $ | 516,738 | $ | 454,888 |
Gross profit | 67,000 | 31,841 | 325,573 | 258,414 | |||
Loss from operations | (300,058) | (273,950) | (841,455) | (862,564) | |||
Net loss | (319,131) | (264,321) | (811,514) | (846,010) | |||
Basic and diluted loss per share | $ | (0.03) |
| $ | (0.10) | $ | (0.20) |
Basic and diluted weighted average common shares |
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Balance Sheet Data: | ||||||
September 30, 2001 | December 31, 2000 | |||||
Cash and cash equivalents | $ 19,400 | $ 20,881 | ||||
Working capital (deficit) | (640,733) | (304,908) | ||||
Property and equipment, net | 89,645 | 61,709 | ||||
Total assets | 1,079,526 | 959,021 | ||||
Current liabilities | 1,364,046 | 1,055,158 | ||||
Stockholders' equity (deficit) | $ (300,211) | $ (98,138) | ||||
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with our financial statements, the notes to those financial statements and other financial information appearing elsewhere in this prospectus. In addition to historical information, the following discussion and other parts of this prospectus contain forward-looking statements that reflect our plans, estimates, intentions, expectations, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth in the "Risk Factors" section and contained elsewhere in this prospectus.
EC Power LLC was formed as a Delaware limited liability company. Its members contributed $284,341 in cash into the LLC. In late 1997, the shareholders of Sorapec S.A., a French corporation, agreed to issue and sell to EC Power LLC and/or investors to be brought by EC Power LLC an aggregate number of 35,000 new shares of Sorapec. Subsequently, EC Power LLC acquired directly 22,255 new shares of Sorapec and arranged for a group of French investors to acquire 12,745 Sorapec shares with an agreement from those French investors that they would exchange their 12,745 Sorapec shares for membership interests in EC Power LLC (or its successor) when EC Power would be ready to go public. The combined 35,000 Sorapec shares acquired or to be acquired by EC Power represented approximately 90% of the 38,900 Sorapec shares outstanding.
EC Power LLC incorporated EC Power, Inc. in Delaware on March 25, 1999. On March 29, 1999, EC Power Inc. acquired all of the membership interests of EC Power LLC in exchange for 3,3324,693 shares of EC Power Inc. common stock. EC Power LLC's only asset at that time was the 22,255 shares of Sorapec. For accounting purposes, that transaction has been treated as an acquisition of EC Power Inc. by Sorapec and as a recapitalization of Sorapec. The historical financial statements prior to January 1, 1998, are those of Sorapec, giving effect to the acquisition as if the acquisition took place on January 1, 1997. In March 2000 the exchange with the French Sorapec shareholders was consummated, and 950,467 shares of EC Power Inc. were exchanged for the 12,745 Sorapec shares. EC Power Inc. also purchased additional shares of Sorapec for $25,000 and converted $989,684 of loans to Sorapec into Sorapec shares, which increased our ownership in Sorapec to 94%.
In April 1999 EC Power Inc. merged with Neft Acquisitions, Inc., a shell corporation having no assets or operations, and issued the shareholders of Neft 334,606 shares of common stock. EC Power, Inc. became the surviving entity.
Overview
We are engaged in the development and manufacture of proton exchange membrane fuel cells and bipolar nickel-zinc batteries through our French subsidiary, Sorapec. The technology has been developed over a period of years by Sorapec, which is considered a European leader in applied research and development in electrochemistry. During the past twenty-five years, Sorapec has been a party to over 100 patents and has undertaken over 300 research contracts for corporate accounts and government agencies such as Renault, Peugeot, Autosil, Electricite de France, the French state-owned utility, Commissariat a l'Energie Atomique, the French atomic energy authority, the French armament agency, and others.
In the proton exchange membrane fuel cell arena, we have focused on applications requiring portable power supply up to 2 kW to 5kW. We have identified a number of such applications in the oil & gas, military, back-up power, and outdoor recreation markets. However, we are accelerating our power scale-up to 50kW in consideration of the cooperation agreement we recently entered with Helion S.A. Because Helion's parent company, Technicatome S.A., operates in markets where it has identified a need for fuel cell systems of 50kW and over, this opportunity justifies that we adapt our plan accordingly.
Because of the large variety of end uses, we will focus on stack development and production, while our customers will integrate them into complete fuel cell systems, as Helion plans to do for its selected applications. This approach, and the ability to supply stacks in a broad power range, will allow faster market diversification. Once we establish our presence in a given market, through one or several system integrators serving such market, we will be able to react faster to new market opportunities, for instance in the residential and small commercial sectors.
We are also involved in the development of an advanced battery system because we believe that some applications are more likely to be powered by batteries than other power sources, at least in the foreseeable future. We further believe that nickel-zinc batteries, the technology that we are developing, has the potential to completely displace nickel-cadmium (Ni-Cd) batteries in large markets such as scooters, bicycles, cordless power tools, and other applications requiring small, high-performance, rechargeable batteries. Our immediate focus is to develop such a battery system for an electric scooter program pursued with Peugeot Motocycles (France), PML Flightlink (UK), Citelec (Belgium), and the University of Brussels in a 50% cost-share contract awarded by the EU.
EC Power was formed to acquire a controlling interest in Sorapec and to further the development of Sorapec's advanced technology in fuel cells and nickel-zinc batteries. To date, our existing stockholders in the aggregate have invested $2.7 million in cash and $550,000 in in-kind contributions (services paid in shares). Since inception, we have devoted substantially all of our resources toward the development of our proton exchange membrane fuel cell and nickel-zinc battery systems.
We are a product development company and expect to bring our first commercial products to market in the 2003 to 2004 time frame. We have derived most of our revenues from French and EU government research and development contracts. Substantially all of these government contracts related to proton exchange membrane fuel cell and nickel-zinc battery research and development, and the technology developed under these contracts is directly applicable to our product development goals.
Since inception, we have raised capital through the issuance of equity, formed co-development alliances, entered into several consortium arrangements, and, in the second quarter of 2001, entered into cooperation and license agreements with Helion. We completed our first proton exchange membrane fuel cell stack prototypes in late 2000. We expect to manufacture our first Ni-Zn battery prototypes by the end of the first quarter of 2002. We also expect to start setting up our pilot plant in mid 2002 and have pre-production manufacturing capabilities by late 2002. We do not expect significant product sales until 2003.
From inception through September 30, 2001, we incurred losses of $3,457,597. We expect to continue to incur losses as we expand our product development and commercialization program and prepare for the commencement of manufacturing operations. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial as a result of, among other factors, the number of systems we produce and supply for internal and external testing, the related service requirements necessary to monitor those systems and potential design changes required as a result of tests. There can be no assurance that we will manufacture or sell fuel cell and/or battery systems successfully or ever achieve or sustain product revenues or profitability.
Results of Operations
Comparison of the Twelve Months Ended December 31, 1999 and December 31, 2000
Revenues. We derived our revenues mostly from cost reimbursement government contracts relating to the research and development of proton exchange membrane fuel cell and nickel-zinc battery technology. These contracts provide for the partial recovery of direct and indirect costs from the related government agency, generally requiring us to absorb from 40% to 50% of contract costs incurred.
Contract revenues increased by 13.6% from $454,888 for the twelve months ended December 31, 1999 to $516,738 for the twelve months ended December 31, 2000. If we eliminate the effect of a 15.6% increase of exchange rate, revenues for 2000 were 31% above those for 1999. This relative increase is mostly attributable to the fact that 1999 revenues were adversely affected by government delays in granting certain contracts that we expected to secure in 1999, but that only were granted in 2000.
We started the period beginning January 1, 2000, with four on-going contracts, three of which were completed during the fourth quarter. They were replaced by three new contracts that started in the second and third quarter. We therefore ended the year with a workload of four on-going contracts, including three related to fuel cells and one to Ni-Zn batteries, and one outstanding proposal. The latter, whose grant process also suffered extensive delays, was finally awarded in May 2001.
Our application for a government loan to co-finance the construction of our proton exchange membrane fuel cell pilot plant was also delayed. It was finally awarded in June 2001. Under that contract, the French government will provide 40% financing with a long-term, interest-free loan. The Loan provides for repayment of 1/3 of the principal in 2007 and the other 2/3 in 2010.
We expect to continue to pursue government contracts that relate to the further development and commercialization of proton exchange membrane fuel cells and nickel-zinc batteries. Accordingly, we also expect to continue to incur losses on future government contracts awarded while we develop proprietary information that we expect will enhance our ability to commercialize our proton exchange membrane fuel cell and nickel-zinc battery systems.
We completed our first two self-funded fuel cell stack prototypes in late 2000. Additional prototypes will be produced in 2001, including units to be supplied in connection with our current contracts, units for Helion, and a unit for our internal development needs. Our consortium partners will integrate these stacks in complete systems for their respective applications. They will be expected to participate in field trials and evaluations designed to test system performance, market conditions, and customer preferences according to usage patterns, fuel availability, buying criteria, and regulatory matters. We intend to use this data to achieve optimal product design and speed commercialization and mass-market acceptance.
Cost of revenues. Cost of contract revenues includes compensation and benefits for the engineering and related support staff, fees paid to outside suppliers for subcontracted components and services, fees paid to consultants for services provided, and materials and supplies used; it does not include general overhead costs directly allocable to specific government contracts. Cost of contract revenue was $196,474 for the twelve months ended December 31, 1999 as compared to $191,165 for the twelve months ended December 31, 2000. Accordingly, our gross margins increased from 56.8% to 63.0%. It should be noted, however, that our gross margins are subject to wide fluctuations due to a number of factors. One is the fact that, in research, it is often difficult to accurately predict the time and resources that will be needed to complete certain tasks. Another important factor is the degree of task overlap between various contracts. The more concentrated our development work, th e greater the likelihood that a number of tasks will be common to several contracts. Last, contracts with a higher labor cost relative to total cost generate better margins due to overhead allocation rules that are based on a percentage of direct labor costs.
We expect most of our original equipment manufacturing prototype customers will be willing to pay a premium for early system testing and evaluation. However, the cost to produce our prototype systems is likely to be higher than their sales price. We expect to continue to experience costs in excess of product sales until we achieve higher production levels, which we do not expect to occur until after 2004.
Research and Development. Research and development expense relates to self-funded research and development, excluding our share of the cost in cost-shared government contracts. For self-funded research and development, it includes direct compensation and benefits for the engineering and related staff, expenses for materials to build prototype units, fees paid to outside suppliers for subcontracted components and services, and supplies used; it does not include facility related costs and other general overhead costs.
Research and development expenses increased from $150,111 for the twelve months ended December 31, 1999 to $242,517 for the twelve months ended December 31, 2000. As a percentage of revenues, they increased from 33.0% for the twelve months ended December 31, 1999 to 47% for the twelve months ended December 31, 2000.
General and Administrative. General and administrative expense includes compensation, benefits, and related costs in support of our general corporate functions, including general management, finance and accounting, human resources, business development, information, and legal services. General and administrative expenses increased by 19.8% from $771,808 for the twelve months ended December 31, 1999 to $924,511 for the twelve months ended December 31, 2000. The increase resulted primarily from professional services used in connection with our private placements and the preparation of our initial public offering. We also began to accrue cash compensation for our American executives in the last part of 2000, instead of issuing shares to them as compensation.
Stock Compensation expense. Our total expenses and related net loss for the years ended December 31, 1999, and December 31, 2000, included compensation expense related to the issuance of options and warrants to officers, directors, and employees. Compensation expense related to the issuance of options and warrants was $390,353 for the year ended December 31, 1999 and $526,793 for the year ended December 31, 2000.
Loss from operations. The operating loss increased from $1,053,858 for the twelve months ended December 31, 1999 to $1,368,248 for the twelve months ended December 31, 2000. The increased loss was principally due to the greater stock compensation expense incurred in 2000, which offset the increase in gross profit.
Comparison of the Nine Months Ended September 30, 2001 and September 30, 2000
Revenues. Through September 30, 2001, our revenues were derived from three sources including: cost reimbursement government contracts relating to the research and development of proton exchange membrane fuel cell and nickel- zinc battery technology, limited product sales, and the front fee of a licensing transaction.
Contract revenues increased by 11.6% from $279,835 for the nine months ended September 30, 2000 to $312,367 for the nine months ended September 30, 2001. If we eliminate the effect of a 5.1 % increase of exchange rate, revenues for 2001 are 17.3% above 2000. This relative increase is mostly attributable to the fact that 2000 revenues were adversely affected by government delays in granting certain contracts that we expected to secure in the first half of 2000, but only came to grant later in that year and in 2001.
Product sales remain a small, yet growing, component of total revenues. The main reason is that the products we ship are not accounted for separately when they constitute one of the deliverable items under a government contract. This situation is changing as we start receiving orders for stacks and related test equipment. For the nine months ended September 30, 2001 we collected payments on a 2kW stack and on a test bench for which we recognized revenue of $25,076, an increase of 13% over the same period in 2000. Product sales are expected to increase more substantially in the fourth quarter as we complete the stack and test bench orders.
During the nine months ended September 30, 2001 our revenues also included a non-recurring amount of $442,839 for the front payment of a license sold to Helion S.A. As a result of this, total revenues for the period increased 158% over the same period in 2000.
Cost of Revenues. Cost of revenue, excluding license fee, was $249,697 for the nine months ended September 30, 2000 as compared to $158,516 for the nine months ended September 30, 2001. Accordingly, our gross margin decreased from 47.5% to 26%. The reason for the decrease is mostly attributable to the much higher material cost as a percentage of total contract cost as we cannot allocate any overhead to the material cost component.
Research and Development. Research and development expenses increased from $114,899 for the nine months ended September 30, 2000 to $233,528 for the nine months ended September 30, 2001. As a percentage of revenues, excluding license fee, they increased from 38% for the nine months ended September 30, 2000 to 69% for the nine months ended September 30, 2001.
We expect to further increase our spending on research and development in the future to approximately $400,000 to $500,000 in order to accelerate the prototype production and testing program, to design our pilot-plant facilities, and to commence procurement of custom equipment. Beyond 2001, we plan to continue development activities related to performance improvements of our fuel cells and Nickel Zinc batteries, and to start planning our volume production plant.
General and Administrative. General and administrative expenses of $714,326 for the nine months ended September 30, 2001, excluding approximately $29,000 of non-cash expenses paid to a consultant, remained unchanged as compared to $715,998 for the nine months ended September 30, 2000.
Loss from Operations. Our operating loss decreased from $1,082,474 for the nine months ended September 30, 2000 to $627,260 for the nine months ended September 30, 2001. The decrease was principally due to the license fee earned in 2001, as well as the lower stock compensation expense incurred in 2001.
Stock Compensation:Our total expenses and related net loss include executive cash and non-cash compensation. Executive cash compensation for the nine-months ended September 30, 2001 was $209,991 as compared to $395,094 for the same period in 2000.
Liquidity and Capital Resources
Cash Flow Information. For the nine months ended September 30, 2001 and 2000, net cash used in operations was $572,113 and $526,770, respectively, an increase of 8.6% from 2000 to 2001. Net cash used in investing activities, the purchase of fixed assets, during the nine months ended September 30, 2001, was $74,374, up from $5,683 for the prior period. During the nine months ended September 30, 2001 and 2000, cash from financing activities included borrowings of $420,932 and $0, respectively, before note payable payments of $65,926 for the nine months ended September 30, 2001 and $70,620 for the nine months ended September 30, 2000. Additionally, net cash from financing activities included net proceeds of $820,400 from the sale of common stock during the nine months ended September 30, 2000 and $290,000 during the nine months ended September 30, 2001.
For the year ended December 31, 2000, and 1999, net cash used in operations was $813,994 and $868,964, respectively. Net cash used in investing activities in the year ended December 31, 2000, for the purchase of fixed assets was $13,145 compared to $16,876 in the prior year. In fiscal 1999 we also made a $46,927 investment in Neft Acquisition pursuant to the merger with it. During the years ended December 31, 2000, and 2001, cash from financing activities included borrowings of $56,391 and $356,606, respectively, before note payments of $84,810 for the period ended December 31, 2000. We also received $820,400 in the year ended December 31, 2000, from the sale of common stock, and $632,296 from the sale of common and preferred stock for the year ended December 31, 1999.
Future Liquidity Considerations. At September 30, 2001, we had cash and cash equivalents of $19,400, and a working capital deficit of $640,733. Our independent auditors have included in their audit report an explanatory paragraph that states that our recurring losses from operations raise substantial doubt about its ability to continue as a going concern. We have generated operating cash losses from 1997. Additionally, we require and will continue to require cash to fund the net losses and capital requirements associated with our planned growth. The cash required to fund such activities will be substantial and beyond what we currently hold in cash and cash equivalents. Management believes that approximately $2,600,000 of cash will be required to fund planned operations for the next twelve months.
Our receivables of $621,290 at September 30, 2001, are primarily from major corporations and the French government. Our accounts payable and accrued expenses were $581,342 as of September 30, 2001.
We have financed our operations to date primarily through the private sale of equity securities and borrowings from our shareholders and other parties. During the year ended December 31, 2000, we sold 3,571,672 shares of our common stock for $936,000 in cash and forgiveness of indebtedness.
Since we began operations, we have experienced a shortage of working capital. We need additional working capital in order to support our growth. We are depending upon the proceeds of this offering to supply us with needed working capital. Unfortunately, since we are conducting the offering ourselves, we are uncertain that this offering will be successful in providing us with the needed funds. It is likely that additional financings will be necessary in the future, which may involve either the sale of additional equity or debt. In either case, the terms of future financings could have an adverse effect on the value of our securities.
Our working capital needs continue. In the first quarter of 2001, we sold 300,000 shares of our common stock for $300,000 and borrowed $45,000, primarily from institutional investors. We also owed $253,215 to officers, directors, and other related parties. Management believes that those persons would extend their loans until we are able to pay them if they are not converted. However, approximately $150,000 from the proceeds of this offering may be used to pay accrued compensation, but only from the proceeds of this offering that exceed $1,500,000.
In May 2001 we received a license fee of approximately $500,000 from Helion SA. We used those proceeds to reduce our accounts payable.
In June 2001, we received approval of a loan from the French government pursuant to which it will reimburse us 40% of the cost of building our pilot manufacturing facility for the fuel cell stacks. The loan involved Sorapec, as the prime contractor on the project, Bertin Technologies, and ECA, and provides, among other things, a loan of up to 1,051,648 Euros to Sorapec. 5% of the loan has been made. 75% of the loan will be paid in three progress payments; and the final 20% of the loan will be paid upon completion of the project. Sorapec must repay 1/3 of the loan in 2007 and the other 2/3 in 2010.
Management anticipates that if we receive net proceeds from this offering of at least $1,900,000, together with internally generated funds from operations and the French government loan, we will be able to meet our presently projected cash and working capital requirements for the next 12 months. The minimum offering is $1,200,000. Pending use of the proceeds, we intend to invest the net proceeds of the offering in investment grade, interest-bearing securities. See "Use of Proceeds" for a more detailed discussion of our expected use of proceeds.
Our Background
Sorapec has been a contract research firm since its formation in 1974 as a French corporation. Our customers have included government agencies, military organizations, and major corporations such as battery manufacturers, automobile manufacturers, and other OEM end-users. Our applied research, testing, and problem solving activities supported us over the years and have earned us a strong position in our field in Europe. Contract research and development, however, is a cyclical business and we decided to reduce our dependency on third-party R&D outsourcing budgets by developing and bringing our own proprietary products to market.
In late 1997, the shareholders of Sorapec sold to EC Power, LLC. and a group of investors brought by EC Power, LLC., a 90% interest in Sorapec. Key employees of Sorapec held the balance of the shares. EC Power LLC had been formed to serve as a vehicle to effect this transaction. Subsequently, EC Power was restructured as a corporation in March 1999. In an attempt to obtain liquidity for its shareholders, it then merged with a publicly owned Delaware corporation, with EC Power the surviving corporation. See "Transactions with Management and Others" for a more detailed description of these transactions.
Business
Overview
We are engaged in the development of bipolar nickel-zinc batteries and proton exchange membrane fuel cells. We are completing the commercial development of several proprietary products, including bipolar nickel-zinc batteries for selected applications and small proton exchange membrane fuel cells. We intend to commercialize our nickel-zinc batteries through manufacturing joint ventures or licensing. We intend to manufacture our own fuel cell stacks.
The growth of the battery industry is being fueled by the ever increasing demand for portable power sources, particularly high-performance rechargeable batteries for products such as notebook computers, cellular phones, camcorders and cordless power tools on the one hand, and scooters and bicycles on the other. We believe that the market for electrochemical devices, including batteries and fuel cells, is going to experience an even more dramatic expansion when some of the technologies currently under development finally bring viable solutions to powering electric cars, scooters, and bicycles, providing distributed power to remote sites, and storing photovoltaic and other forms of renewable energy. The market demand for lighter and more compact batteries to power electric scooters and bicycles is expanding rapidly and we believe that a market for our company's bipolar nickel-zinc battery for such applications will develop commercially over the next two to three years. We plan to introduc e a proprietary bipolar nickel-zinc battery system and to license several other technologies that we believe can substantially enhance the performance of other battery systems.
We believe that applications for small-scale fuel cell systems to generate electricity for niche markets such as remote field instrumentation (oil and gas exploration), military battlefield use, fishing boats and yachts, municipal equipment, and others, will materialize as soon as commercially viable fuel cell products are available. We are planning to gradually increase the size class of our fuel cells from 2kW, which we plan to reach by the end of 2001, to 50kW by the end of 2003.
Recognizing the global nature of the business, the diversity of its end-user and geographic markets, and the magnitude of the industrial and marketing investments that would be required to effectively address these markets, we will seek to secure co-development funding from partners and equity interests in manufacturing joint ventures, thereby diversifying the technological risk and minimizing our capital requirements.
We intend to establish our own manufacturing capability to produce fuel cell stacks, that is, groupings of cells to achieve the electrical characteristics required by each application. Towards this goal, we are in the planning stage to build a pilot plan, an intermediate step before going into volume manufacturing.
Our Fuel Cell Business
How Fuel Cells Work
A fuel cell is a device that combines hydrogen derived from a fuel such as natural gas, propane, methanol or gasoline, and oxygen from the air to produce electric power through electrochemical reactions, without combustion. The type of fuel cells that we are developing technology for consists principally of a paper-thin membrane sandwiched between a positive and a negative electrode; this basic assembly is referred to as the membrane-electrode assembly. Each of the electrodes is coated on one side with a platinum-based catalyst. Hydrogen fuel is fed into one electrode and air enters through the other electrode. Induced by the platinum catalyst, the hydrogen molecule splits into two protons and two electrons. The electrons from the hydrogen molecule are conducted around an external circuit, creating an electric current. Protons from the hydrogen molecule are transported through the membrane and combine at the electrode on the opposite side, with the electrons and oxygen from the air t o form water and produce heat.
To obtain the desired level of electric power, individual fuel cells are combined into a fuel cell stack. Increasing the number of fuel cells in a stack increases the voltage. Increasing the surface area of the cells increases the amount of electricity they produce.
Membrane-Electrode Assembly
The membrane-electrode assembly is the most fundamental element of a cell, since it is the site of the reactions that produce electricity. Its design has a major impact on the voltage and amount of electricity it produces, and therefore on the performance and cost of the fuel cell. While the basic principle of operation is straightforward and easy to understand, there are a number of physical mechanisms that must be accommodated and synchronized in order for the cell to work. Optimizing its performance is a complex challenge that involves trade-offs between conflicting requirements.
The membrane-electrode assembly also represents a major cost factor because it contains two expensive materials: the polymer membrane and the platinum catalyst. Efforts to reduce costs are therefore focused on finding new, lower-cost membrane material and at finding substitutes for platinum or reducing the amount of platinum used in the cell.
Our research work has long been dedicated to gaining a better understanding of the different mechanisms and parameters that affect the operation and performance of these assemblies. Our findings have guided us in our search for new formulations, material structures, bonding methods, and assembly techniques. We have already achieved significant improvements in cost and performance. We believe that the innovations for which we have recently applied for patents, will allow us to further increase the power density of our cells by a factor of two to three.
Our participation as co-contractor in government contracts aimed at finding new, improved and/or lower cost membrane materials gives us an opportunity to be on the forefront of membrane work in Europe, to experiment with the most promising innovations in this area, and to augment our skills in membrane-electrode assembly efficiency.
Bipolar Collector
As the name implies, a collector collects the electrons on the surface of one electrode and distributes them to the surface of the other electrode. In a typical stack configuration, collectors are sandwiched between the positive and negative electrodes of adjacent cells. Collectors also provide the serial connections between cells, collecting electrons from one positive electrode to feed them to the negative electrode of the adjacent cell: hence their "bipolar" designation. Collectors are usually made of graphite, but because graphite collectors are thick, heavy, brittle and costly to machine, many attempts have been made to use other materials and/or fabrication methods, but each has shortcomings. In all cases, collectors remain a major factor in the overall cost and weight of the cells.
To address these issues, we have developed new, lower-cost collector designs. One consists in using a plastic plate through which stainless steel needles are inserted, using standard printed circuit board manufacturing methods. The needles are in contact with the electrodes on both sides of the plastic plate, thereby providing means to collect the electrons from the negative electrode and conducting them to the positive electrode of the adjacent cell. This design provides a lighter and less expensive collector with lower electrical resistance amongst other advantages. An even newer design, for which we have recently filed a patent application, has evolved from the needle collector approach. It combines the advantages of discrete collection of charges with those of a moulding manufacturing process.
Our Background in Fuel Cells
We began our involvement in fuel cells in 1984, when the European Space Agency awarded us a contract to study alkaline fuel cells for space applications. Since then, our focus has been on proton exchange membrane fuel cell technology, a field in which we have been granted a number of contracts over the years, under various European programs, by various French government agencies, and by the French Navy. This work has allowed us to gain significant expertise in the core technologies of proton exchange membrane fuel cells and membrane-electrode assemblies and collectors, both of which have a critical impact on performance and costs of fuel cells. We now intend to use this expertise to become a fuel cell stack manufacturer.
We have substantially reduced the cost and weight of our fuel cell stacks, such that we estimate that our current design costs are 20% less than fuel cell stacks made with "standard" industry materials. We believe that we will be able to further substantially reduce costs of our fuel cell stacks.
We completed the assembly of our first stacks in December 2000, with power ranging from 300W to 1kW. In 2001 we designed and constructed a 2kW stack for deep underwater application pursuant to one of our contracts. We also build a 2kW unit for Helion, which was shipped late in 2001. We are negotiating several additional orders.
While our first stacks are built with machined graphite collectors, we are actively working on the fabrication process of our new collector design. We are subcontracting to one of the government labs, whose expertise is in advanced materials, the development of a conductive composite material meeting the requirements of our new collector design. When the latter is completed, we will incorporate the new collectors in our stacks.
We plan to set up a pilot plant to produce stacks in the south of France, in an existing facility to be rented by us, near the facilities of our development partner, Helion, S.A. The plant will have a production capacity of 10,000 kilowatts per annum, which we expect to meet our production volume requirements until the end of 2003. Engineering work, equipment, and facility improvements will cost an estimated $2.8 million. We have received approval of a loan from the French government to finance 40% of this cost through long-term, interest-free loans. The plant design and initial procurement activities are in progress. We expect that the facility will be operational by May 2002. In our migration from a laboratory activity to a full-fledged industrial one, the pilot stage will allow us to finalize the manufacturing processes and specify machinery for volume production. Furthermore, it will support our immediate needs for prototypes and pre-production units for our partners, for evaluat ion by potential original equipment manufacturers, and initial sales in targeted markets. We expect to move to a larger industrial facility in 2005.
The pilot plant project, which benefits from a French government financial assistance program, includes the collaboration of two affiliates of Groupe Finuchem S.A., Bertin S.A. and ECA S.A., which provide various engineering services. Bertin assists us with the design of fuel cell gas, heat, and water management systems, while ECA will work with us on manufacturing processes and equipment.
A complete fuel cell system includes a stack and various peripheral equipment whose functions are to supply hydrogen and air to the stack at the designed pressure and moisture content, and to evacuate the by-products, which include water and heat. Our plan is to supply our fuel cell stacks to systems integrators, who will integrate them into complete fuel cell systems, ready for an original equipment application. In our cooperation agreement with Helion, Helion will act as system integrator for systems aimed at its markets in marine and urban transportation equipment. See "Key Relationships", below, for a more detailed description of our agreement with Helion.
Market Overview
During the past few years, the fuel cell, first invented some 160 years ago, has undergone a resurgence. Until the 1980's, fuel cells, which convert hydrogen and oxygen directly into electricity and heat, were used only in special niches such as space technology. But with easier availability of new materials and manufacturing techniques, combined with global concerns over adverse environmental impacts of continued reliance on fossil fuels, and consequent regulations to phase in ultra low and zero emission vehicles, efforts to commercialize this technology have accelerated on an international scale.
The automobile industry, in particular, expects that a combination of the proton exchange membrane fuel cells and electric drives will provide a more environmentally compatible alternative to the internal combustion engine. Proton exchange membrane fuel cells also have a large market potential in small-scale stationary power applications. The market for small-scale power is being driven by the trend toward distributed generation, where power is generated near or at the end user's location, thereby reducing dependence on the electric transmission and distribution grid. To the extent these end users are located in urban environments, the environmental attributes of the fuel cell are especially desirable.
In addition, proton exchange membrane fuel cells are well suited to a number of applications where batteries are the incumbent technology, particularly where the application is remote or difficult to access. Whereas a battery's ability to produce electricity is limited to the amount of energy stored in it, a fuel cell will operate as long as it has a supply of hydrogen, just as an internal combustion engine keeps running as long as it is supplied with gasoline or diesel fuel.
Target Markets
Following our recent cooperation agreement with Helion, we are expanding to 50kW the power range of our short-term development plan. Accordingly, our objective is to complete our first 50kW unit by the end of 2003. This scale-up program will be done in steps from the 2kW size class that we plan to reach by the end of this year, to 5kW, then 20kW, and finally 50kW. This approach is guided by technical as well as commercial considerations.
We intend to target small-scale units toward military and civilian applications. Military uses include jeep-mounted systems to recharge individual battery packs in field operations. Near-term commercial applications include powering remote instrumentation, such as seismic detector for oil and gas exploration, downhole equipment for offshore platforms, underwater drones and unmanned submarines. We focus on these applications because they are not price-sensitive, the advantages provided by fuel cells being considered of much greater importance than their capital cost. Furthermore, these applications allow, or require, the use of pure hydrogen stored in cylinders, thereby simplifying the fuel supply system. We have also had discussions with municipal users for powering street sweepers and park maintenance vehicles. A successful outcome in one or more of these applications may open opportunities elsewhere, both civilian and military. Of course, there can be no assurance that we will be a ble to make any sales of our small fuel cells.
In the 2 kilowatt to 10-kilowatt range, there is a need to supply electricity to remote residential sites too costly to connect to the electricity grid. This need is obvious in the developing world. For example, the World Bank estimates some 2 billion people are without electricity altogether and another 1.5 billion have access for less than 4 hours per day. Building these larger units will be the next logical development phase, which we intend to address in cooperation with companies involved in fuel reforming technology so as to allow the use of hydrocarbon fuels such as natural gas or propane. The technology to "reform" or produce hydrogen from gas, propane and other fossil fuels for stationary uses is already available but is still quite expensive.
In the 50kW size class, which can address larger power requirements by connecting several 50kW units, we plan to support Helion's needs for applications in the markets that they already serve, in particular, submarine propulsion and urban transportation.
While we will not target the electric vehicle sector for the near term, we intend to continue to work with the French automakers and others to be in a position to enter the market, once issues relating to reforming technology, fuel supply delivery, and fuel storage infrastructure have been resolved by the major energy and automobile companies.
Competition
A number of domestic and foreign companies are engaged in the development of fuel cells, including proton exchange membrane fuel cells, but we believe that none of the proton exchange membrane fuel cell products are yet in commercial production. Ballard Power Systems, Inc. is generally considered to be the world leader in the development of proton exchange membrane fuel cells. Ballard's products are currently being tested by most of the major automakers to develop zero-emission vehicles. During 1999, Ford and DaimlerChrysler invested a total of $1.1 billion into Ballard to spin off a new subsidiary, Xcellsis Fuel Cell Engines, which has the exclusive rights to Ballard's fuel cell technology for the automotive sector. Xcellsis is already providing prototypes for Ford's P2000 and DaimlerChrysler's NECAR 4 hydrogen-powered electric vehicle. Ballard also sells fuel cells to Nissan, GM, Honda, and Toyota - the latter three companies that also have their own fuel cell engine systems.
While Ballard is substantially more advanced than we are in its proton exchange membrane fuel cell system development, the performance of our cells is identical to that of Ballard's, based on comparative tests performed by the French atomic energy agency. For the reasons described above, we believe that our fuel cell design has certain competitive cost advantages relative to Ballard's..
We are aware of several public and private companies in the United States with proton exchange membrane fuel cell product offerings, including International Fuel Cells (a subsidiary of United Technologies, Inc.), Energy Partners, Proton Energy Systems, Plug Power, H Power, Electrochem, Avista Labs, General Motors, DCH Technology, Manhattan Scientifics, and DAIS-Analytics. We have also identified two companies in Europe Siemens A.G. in Germany and DeNora in Italy. In Japan, we believe that Matsushita Electric Industrial Co. Ltd., Honda, and Toyota are involved in proton exchange membrane fuel cell development.
Although there is no shortage of companies, many of them quite large, involved in bringing proton exchange membrane fuel cells to market, their proprietary position is often in areas that differ from ours. For example, in the area of membrane electrode assembly and collector technology, we believe that we hold a highly competitive position, evidenced to an extent by our patent portfolio. Moreover, a number of the participants in the fuel cell market represent potential strategic partners, investors, and customers for our fuel cell stacks.
Research and Development Contracts
We have been consistently invited to participate in French and European proton exchange membrane fuel cell programs, two of which were completed in 2000, one of which was completed in 2001, and four of which are currently in progress. All are French government contracts. They include:
* | A 3-year membrane development program which ended in November 2001; | |
* | Another 3-year membrane development contract that was granted in May 2000; | |
* | An electrode development contract that was granted in August 2000; the first phase was completed in the third quarter of 2001; we expect a second phase to be granted in early 2002; | |
* | A contract granted in May 2001 to develop a fuel cell system for use on the ocean floor and | |
* | The second phase of a program to develop an underwater fuel cell system for application in offshore oil production. The initial feasibility study was satisfactorily completed in late 2000; funding for a second phase of this program, which includes the production of a 2kW prototype, was granted in March 2001. |
In such contracts, which typically involve several co-contractors organized in a consortium, consortium members keep the exclusive ownership of their pre-contract intellectual property and they own the rights to any innovation they make in the performance of the contract. If several members jointly make an innovation, they share the rights to such innovation. The French government reserves the right to use technology developed in connection with this program for defense purposes only.
Key Relationships
We have enjoyed long-standing relationships with companies such as the French automakers, and with government entities such as the French Atomic Energy agency through a number of its laboratories. For many years, when we operated as a contract research firm, they were simply clients of ours, entrusting us with their repeat business. With our new corporate strategy to become a stack manufacturer, these relationships have evolved into co-contracting relationships in consortia formed to bid for, and execute, government contracts. Today, for instance, the automakers are fellow consortium members in 2 of our ongoing contracts, and the Atomic Energy agency in four of them. As we become more established in manufacturing, we believe we will have opportunities to capitalize on these long-term relationships to form alliances or joint ventures.
During the past few years, we have developed close work relationships with some of the companies mentioned earlier, particularly Bertin which is closely involved in some aspects our stack development in a subcontracting capacity. We believe that these relationships have the potential to mature into longer-term business arrangements.
More recently, in April 2001 we entered into a formal cooperation agreement with Helion S.A., a wholly owned subsidiary of Technicatome S.A. Technicatome is a system integrator with activities in a broad range of sophisticated engineered systems and in electronics, measurement and controls. It is active in the defense industry (surface vessels and submarine propulsion), in research operations (including nuclear reactors), in transportation, and in the environmental sector. Technicatome determined that there was a substantial demand for fuel cells in applications related to its markets. Accordingly, it formed Helion to research, design, improve, manufacture, and sell fuel-cell generators. Helion and Sorapec agreed to cooperate with each other to create and perfect a fuel cell incorporating a stack that meets certain technical and operating requirement to be established by the parties.
In May 2001, Sorapec also entered into a licensing arrangement with Helion that gives Helion the exclusive right to exploit 5 of Sorapec's patents to produce stacks for its specified applications, for the life of the patents. The license extends to two markets: the naval market and the urban mass transit market. The license is worldwide, in those two markets. Helion paid Sorapec an initial licensing fee of 500,000 Euros. It will also pay Sorapec royalties based on a percentage of its sales of fuel cell stacks produced under license. The royalty arrangement is subject to a confidentiality agreement between Sorapec and Helion. Helion must achieve minimum production quantities in order to retain the exclusive rights, beginning in 2004. The license also gives Helion the right of first refusal to acquire the patents.
We believe that these agreements constitute an endorsement of our technology by a qualified group, which gives us access to markets in which it has a strong presence. Our relationship will further facilitate our transition from a laboratory-based activity to an industrial one. This led us to decide to locate our pilot plant in the south of France, as mentioned earlier, nearby Helion's own facility, to promote the interactions between our two teams.
Our Battery Business
A battery is an electrochemical apparatus used to store energy and release it in the form of electricity. There are two types of batteries, primary and secondary. A primary, or disposable, battery is used until discharged and then discarded. A secondary, or rechargeable, battery can be recharged and used again. Our nickel-zinc batteries are rechargeable.
The nickel-zinc couple has long been known to offer various advantages over other battery technologies, notably its higher energy density and much lower cost. However, until recently, its very short life has prevented its commercial use. After five years of research, we have succeeded in overcoming this limitation.
Our development work in bipolar battery architecture has been instrumental in eliminating the phenomena that affected the life of these batteries, namely the contamination of its nickel electrodes and the formation of growths, referred to as dendrites, on its zinc electrodes which caused short-circuits. As applied to battery electrodes, the term "bipolar" refers to a design that provides several advantages over traditional "monopolar" electrodes. One is the uniformity of the electric field, which allows: (i) a more uniform consumption of the active materials of the electrodes, thereby extending their life and (ii) charges and discharges under high power. This design also yields substantial gains in weight, size, and manufacturing cost because the connections between electrodes are considerably simplified and the collectors are lighter.
While we have been working on bipolar architectures for several years, we have made several recent innovations, for which we have applied for patents, that we believe will have a substantial impact on cost and will resolve a challenging production problem related to the sealing of the batteries.
We are conducting our development work on 6 volt /12 Ampere-hour prototypes. We are also building 36 volt / 24 Ampere-hour units for our European e-scooter contract. We expect to test these units by March/April 2002. Prototypes using our new "surmoulage" assembly technique are expected to be completed by late June 2002.
Later in 2002, we will set up a battery prototype shop within our current research building. Since cycling batteries is a time consuming process which cannot be compressed, increasing the number of test benches and stations will allow us to run multiple tests simultaneously and therefore to accelerate the overall program. The equipment and facility improvements for the battery prototype shop will allow us to produce samples for evaluation by prospective licensees and joint venture manufacturing partners.
Our plan is to form one or several manufacturing joint ventures with companies already well established in the battery business. While we intend to keep the manufacturing of our proprietary bipolar electrodes in-house, major battery manufacturers are better positioned to produce and sell complete batteries for specific geographic and product application segments. Towards this goal, we will first identify original equipment manufacturers interested in exploring the use of nickel-zinc batteries in their products; we will secure battery specifications from such manufacturers; and we will then produce and deliver samples for their technical evaluations. If entry into a specific market segment proves too costly, we will consider a straight licensing arrangement for such a segment.
Target Markets
There are many types of batteries on the market today, including lead-acid, nickel-metal-hydride, nickel-cadmium, lithium-ion, plus others that are more developmental in nature, including zinc-air and nickel-zinc. Each battery technology has unique characteristics as to cost, performance, life and toxicity.
Nickel-zinc cells offer greater storage capacity than the commonly used lead-acid and nickel-cadmium systems, and are especially suited to high power applications involving high discharge rates, for instance to provide acceleration to a vehicle. Other systems, such as nickel magnesium hydride and lithium-ion, suffer from significantly higher material costs and offer little performance advantage over nickel-zinc. Accordingly, we believe nickel-zinc has the potential to completely displace nickel-cadmium in large markets such as scooters, bicycles and hand-held power tools as well as smaller scale applications requiring small, high-performance rechargeable batteries.
These batteries represent a $6 billion market segment, one third of which is supplied by nickel-cadmium batteries, with an annual growth rate of 7% to 11%. Such growth rate, however, does not account for the emerging electric vehicle market, starting with two-wheel vehicles, whose battery requirements are expected to add $12 billion to the size of a market segment in which bipolar nickel-zinc batteries will be a leading contender.
We intend to target those specialized markets where nickel-zinc has major performance advantages, and where we believe we can build a profitable business without depending on the largest, most competitive segments. Our planned product offering will include:
* | Small batteries with capacities under 10 amperes per hour for portable electronic devices, for instance cellular phones or laptop computers. | |
* | Larger batteries with capacities over 20 amperes per hour for 2-wheel and 4-wheel electric vehicles. There is already an emerging market for electric scooters in Europe (Peugeot and Piaggio produce about 2,000 units per year for instance), and especially in Asia. We intend to initially focus on Asia where efforts to reduce pollution from vehicular traffic in cities is intense. |
Competition
In the United States, we know of only one company that is developing and producing nickel-zinc batteries, namely Evercel, Inc. We believe Evercel is at an advanced stage of development of a monopolar nickel-zinc battery and that some of its products have reached the commercialization stage. We believe, however, that our design and bipolar electrode architecture could provide us with a significant competitive advantage vis-a-vis Evercel.
In Japan, Yuasa, Sanyo Electric Co., Ltd. and Japan Storage Battery are believed to be pursuing nickel-zinc battery technology, but we believe that this work is still at the laboratory stage. In Korea, the Samsung Advanced Institute of Technology is developing nickel-zinc batteries for electric vehicle applications. However, there can be no assurance that other companies, some of which may have significantly greater resources than us, are not developing, or will not engage in the development of nickel-zinc batteries.
Our Company's nickel-zinc batteries will also compete with more established battery technologies, including nickel-cadmium, nickel-magnesium hydride, and others which are produced in large quantities by major companies, and which benefit from cost advantages associated with large volume production.
Research and Development Contracts
We have been pursuing, and will continue to pursue; government contract opportunities whose scope of work relates to furthering the development of nickel-zinc systems or components of strategic value. The most significant program involves the development of an electric scooter.
We are a member of a consortium including Peugeot Motocycles, one of the largest scooter manufacturers in Europe; PML Flightlink, a UK company that manufactures a proprietary drive system for battery-powered vehicles; Vrije Universiteit Brussel, Belgium's premier center for research on electric and hybrid vehicles; and CITILEC, an association of 60 European cities interested in the use of electric vehicles. The consortium was awarded a 3-year European Union contract that was signed during April 2000. Under the contract, the consortium will develop a zero emission electric scooter for application in urban centers. We will supply the bipolar nickel-zinc battery for the scooter.
Each party to the consortium agreement will retain the exclusive rights to the technology it owned at the inception of the contract and to innovations it makes during the course of the contract. Should a patentable innovation be made jointly by several parties, they will share the ownership of such patent in proportion to their estimated percentage of contribution.
Key Relationships
As in our fuel cell business, we have had longstanding client relationships with companies such as Exide and Leclanche, through their respective French subsidiaries, and Autosil in Portugal. We completed a European contract in a consortium with Autosil and others in the last quarter of 2000. We also completed client engagements from Exide and Leclanche a year earlier and we do not have any current on-going project with them. We believe, however, that these former clients or fellow consortium members represent a pool of prospects for future business relationships.
Our fellow consortium members in the European e-scooter program are important relationships to us, particularly Peugeot Motocycles and PLM Flightlink. Peugeot elected to join this consortium with us after it unsuccessfully searched for a battery system meeting its requirements. We believe that if the program is successful, Peugeot will support our search for a manufacturing arrangement.
As stated earlier, we plan to initiate a systematic search for licensing prospects as soon as we have prototypes, costs, and performance data available. Consistent with our marketing plan to initially target the electric scooter and bicycle market, we will focus our search on regions with the largest potential, namely Asia and India. We signed representation agreements with two organizations, for China and India respectively, to assist us in this endeavor.
Environmental, Safety and Regulatory
Nickel-zinc batteries are more environmentally acceptable than other commonly available rechargeable battery systems. Nickel-zinc batteries contain no cadmium, mercury, or other highly toxic materials that are difficult to dispose of under current environmental regulation. We anticipate very little waste generation due to the simple manufacturing technology utilized. There are no effluents in wastewater. Electrode materials can be reprocessed and reutilized in the process, thereby producing low levels of waste. The solvent used in the electrode production process can be reclaimed, purified, and reintroduced into the manufacturing process with low levels of waste.
Patents
We currently have thirteen patents that have been granted and three additional patents that are pending or have been filed in France. We have also made filings for eight of those patents in the United States, Canada, major European countries, South Korea, and Japan. Those patents cover innovations in fuel cells, including a proton electron membrane fuel cell precursor, a bipolar collector for fuel cells, active layer for proton electron membrane fuel cells electrodes, and improvements in membrane electrode assemblies for proton electron membrane fuel cells; and in battery technology, including a method to cool bipolar batteries, improvements in nickel-zinc batteries, a bipolar electrode for alkaline batteries, a method to seal cylindrical nickel-zinc batteries, electrically rechargeable air-zinc batteries, long-life, sealed lead-air batteries, a bipolar collector for lead batteries, and improvements in nickel-zinc cells. Helion has acquired the exclusive right to two of our patents for use in the marine and urban mass transit markets.
Facilities
Our principal executive offices are located in New York, New York, in an office we lease from Ridgewood Group International, Inc. Mr. Potter, our Chairman, controls Ridgewood. We pay Ridgewood $2,000 per month, plus out-of-pocket expenses.
In France we lease a building in Fontenay-sous-Bois, a suburb of Paris, France. This facility houses our offices, labs, and workshop, and consists of a total of 5,950 square feet under a lease that expires in November 2006, but which we can cancel in November 2003. The rental cost for this facility is approximately $20,000 per quarter. We believe that the current facility will accommodate our anticipated growth through at least December 2002.
Employees
As of September 30, 2001, we had a total staff of 19 employees, including Mr. Morin in the United States; and 14 full-time employees in France, consisting of 5 engineers, 6 technicians, and 3 management/administrative. In addition, we have 2 part-time employees in France and 2 part-time employees in the U.S. We consider our relations with our employees to be good.
Legal Proceedings
Sorapec has been operating under a Plan of Reorganization supervised by the French Bankruptcy Court since February 1998. In October 2001, we made the final installment payment to our creditors, and all our commitments under the Plan have now been met.
A softening market for contract research in 1996 and 1997, compounded by the cancellation of a major nickel-zinc research program in early 1997, caused Sorapec to become unable to meet its financial obligations. Accordingly, Sorapec filed a voluntary bankruptcy petition with the Creteil Commercial Court on August 1, 1997. Following a hearing, the court authorized the "Redressement Judiciaire" course of action, which is similar to Chapter 11 in its objective to reorganize the business. Sorapec submitted a plan to the court in early December 1997, and the court confirmed it on February 5, 1998. The reorganization plan provided for the immediate repayment of all privileged creditors and the repayment in full of all other creditors in four equal payments over the following four years. With the last installment payment made in October 2001, Sorapec has now met all of its obligations under the plan.
We may from time to time be involvedin legal proceedings in the ordinary course of our business. Except for the bankruptcy proceeding described above, we are not currently involved in any pending legal proceedings that, either individually or taken as a whole, could harm our business, prospects, results of operation, or financial condition.
Management
Directors, Executive Officers, and Key Employees
The name, age, and position with us of each Director, executive officer and key employee is as follows:
Name | Age | Position | |
William J. Potter | 53 | Chairman, Chief Financial Officer, and Director | |
Michel L. Morin | 59 | President, Chief Executive Officer and Director | |
Bernard Nicolas | 67 | President of Sorapec and Director | |
Peter Schaedeli | 59 | Director | |
Patrick J. Vayn | 57 | Director |
William J. Potter -Chairman, Chief Financial Officer, and Director. Mr. Potter co-founded EC Power in March 1999, and he has been the Chairman of our board of directors and our Chief Financial Officer since then. Mr. Potter has been the President of Ridgewood Group International Ltd., a private investment bank, and the President of its broker-dealer affiliate, Ridgewood Capital Funding, Inc. since 1989 when he founded both firms. Prior to 1989 Mr. Potter was Managing Director International for Prudential Securities and a director of various Prudential affiliates. Mr. Potter serves as Finance Committee Chairman and Director of the National Foreign Trade Council in the U.S. and he is a director of the First Australia Fund and the First Australia Prime Income Fund (AMEX listed), the First Commonwealth Fund (NYSE listed) and First Australia Prime Income Fund (TSE listed). He is an advisor and director of companies affiliated with Guardian Capital Ltd. (TSE listed) an d he is on the board of several other public and private corporations. He holds an MBA from Harvard University and an AB from Colgate University.
Michel L. Morin -President, Chief Executive Officer and Director. Mr. Morin is one of the co-founders of EC Power, Inc. and he has been Chief Executive Officer and one of our directors since March 1999. Mr. Morin has been Managing Director of Ridgewood Group International Ltd. since 1995. Prior to joining Ridgewood, he was Director of Corporate Development of Parsons & Whittemore, Inc., and President and Chief Executive Officer of Cencit, Inc., a high-technology R&D company. Mr. Morin has been engaged in corporate development and cross-border technology deals for over 20 years, in senior management positions, in advisory roles and as management consultant. Mr. Morin earned a French graduate degree in aeronautical engineering from E.N.S.M.A. and a Master of Science degree from M.I.T.
Bernard Nicolas-President of Sorapec and Director. General Nicolas has been Chairman and President of Sorapec since August 1998 and he has been a director of EC Power, Inc. since March 1999. He previously served as Managing Director of GIFAS, the French Aeronautics and Space Industry Association, from 1987 to 1998. Prior to joining GIFAS, he had a distinguished career in the French Air Force from which he retired with the rank of General. General Nicolas was awarded several prestigious military decorations including the Legion of Honor. He earned an engineering degree from "Ecole de l'Air", the French Air Force school, and he graduated from the French Air War College.
Peter Schaedeli -Director. Mr. Schaedeli has been one of our directors since February 2001. He is Chief Executive Officer and senior partner of PSM Management Service Corporation Ltd., a Swiss firm he founded in 1982 and whose activities are in management consulting, corporate finance, mergers and acquisitions, private equity investment and asset management services. He is also the founder and President of the Global Investors Forum in Montreux, Switzerland, and the Chairman and President of Aerogie.Plus AG, a Swiss investment company with interests in the renewable energy sector. From 1997 to 1982 he served on the Management Board of Intergips Holding Ltd., a division of the Schmidheiny Group. Prior to that, he assumed various management positions with Alpina Insurance Company Ltd. and KLM Royal Dutch Airlines. Mr. Schaedeli received his advanced education at the University of Lausanne and the University of St. Gallen in Switzerland.
Patrick Vayn -Director. Mr. Vayn has been one of our directors since 1999. He is President of Persel, a consulting firm based in Paris, France. Prior to joining Persel in July 2000, he had been President, since 1998, of Advans S.A., a management-consulting unit of Electricite de France, the French electric utility. Previously, from 1994 to 1997, Mr. Vayn was Chairman of Interactions S.A., a venture capital firm. Prior to joining Interactions, he headed the French operations of Nife, a battery company. A graduate from ENSIC, a French chemical engineering school, Mr. Vayn also earned a Master of Science degree from MIT and an MBA from the Harvard Business School.
Robert J Mitchell -Controller.Mr. Mitchell has been our controller since October 2000. He is currently licensed and has been in practice as a CPA in New York for the last 5 years in his own firm, PFC Mitchell Tax and Accounting, LLC, in Williston Park, New York. Prior to entering into his own practice, from 1993 to 1996 he was an associate at Wall Street based accounting firms. Prior to 1992, Mr. Mitchell was a career police officer of the Nassau County (NY) Police Department, retiring at the rank of Captain having served as a Deputy Precinct Commander and as Commander of the departments internal audit unit. He has a BBA degree in Accounting from Adelphi University.
Guy Bronoel -Scientific Advisor and Director of Sorapec, S.A.Dr. Bronoel joined Sorapec as Director of Research in 1988 and he served as Scientific Director from 1991 to 1997 when he became our Scientific Advisor on a part-time basis. Prior to joining Sorapec, he had served as Scientific Advisor to the Renault Group, and held executive positions at two CNRS (French National Scientific Research Center) laboratories: the Electrocatalyst and Electromechanical Energy Laboratory at Grenoble (1977-1980), and the Bellevue Laboratories (1961-1977). Prior to that, since 1960, he had been the Head of the Aeronautical Laboratory of the "Ministere de l'Air". Between 1972 and 1981, Dr. Bronoel served as a Member of the Electrochemical and Hydrogen Committees of the General Delegation of the Government Direction of Scientific and Technical Research. Dr. Bronoel also held several academic positions including Professor of Electrochemical Engineering at the Polytechnique Institute of the University of Grenoble (1978-1980) and prior to that at the Universite de Jussieu (1976-1977). He was awarded several Academic Distinctions including the "Prix Ampere". He earned his Doctorate in Electrochemical Engineering and his PhD in Physics from Conservatoire National des Arts et Metiers, Paris, France.
Serge Chavanne -General Manager of Sorapec S.A. Mr. Chavanne joined Sorapec in May 1995 when he took a controlling interest in the company. During the past 5 years, he has been serving as General Manager and Business Development Manager of Sorapec, and he played a leading role in redefining the strategy of Sorapec. Mr. Chavanne is a high-technology entrepreneur with a background in investment banking and management consulting. He holds a graduate degree from Ecole Centrale de Paris,one of the top French engineering schools.
Jean-Francois Fauvarque has been a consultant to Sorapec S.A. since 1995; he is a professor at Conservatoire National des Arts et Metiers and Head of its Electrochemistry Department. Dr. Fauvarque is the author of over 50 peer-reviewed publications and articles, and he has been granted 15 patents. A graduate of Ecole Normale Superieure, he holds a PhD from the University of Paris.
Our executive officers are elected annually at the first meeting of our Board of Directors held after each annual meeting of shareholders. Each executive officer will hold office until his successor is duly elected and qualified, until his resignation or until he shall be removed in the manner provided by our By-Laws.
Currently, we do not have standing Audit, Compensation, or Nominating Committees of the Board of Directors. We plan to form Audit and Compensation Committees when it is necessary to do so to meet listing requirements of a stock exchange or NASDAQ.
There are no family relationships among Directors, nor any arrangements or understandings between any Director and any other person pursuant to which any Director was elected as such. Mr. Schaedeli was appointed a director pursuant Aerogie's agreement to invest $250,000 in our common stock.
Director Compensation
During the fiscal year ended December 31, 1999, directors received no cash compensation. However, each director was granted 24,000 warrants for his service on our Board of Directors. The directors were also reimbursed their expenses associated with attendance at meetings or otherwise incurred in connection with the discharge of their duties. In 2000, we compensated each director for his services by issuing him 6,000 warrants for each quarter he served as a director, and an annual fee of $10,000 in cash. The 1999 and 2000 warrants are identical. They expire five years from the date they were issued, and entitle the owner to purchase one share of common stock. The warrants are immediately exercisable at $.27 per share.
Executive Compensation
Summary Compensation Table:The following table and discussion set forth information with respect to all compensation earned by or paid to our President, Chief Executive Officer, and Chairman/Chief Financial Officer, for all services rendered in all capacities to us and our subsidiaries for each of our last two fiscal years ended December 31, 2000 and 1999. No other executive officer received compensation in excess of $100,000. We do not have any employment agreements with any of our officers. Each of the officers was paid at a base salary rate of $150,000 per year. However, only Mr. Morin spends his full time in our employ. Mr. Potter and Mr. Thompson are compensated on a pro rata portion of their salary, based on the estimated amount of time they spent. In 1999 these officers were paid part of their compensation in the form of common stock and part in the form of warrants. In the first three-quarters of 2000, we paid part of their compensation in cash and part in warrants. All of their compensation in the fourth quarter o f 2000 was paid in cash. We valued the shares and the warrants at $.27 each.
Table 1
|
|
| Other |
|
Michel Morin, CEO | 2000 | $ 150,000 (1) | ||
1999 | $ 150,000 (2) | $4,994 (3) | ||
William Potter, CFO | 2000 | $ 27,719 (4) | $58,640 (5) | |
1999 | $ 45,040 (6) | $28,250 (5) | $4,994 (3) | |
Richard Thompson | 2000 | $ 47,625 (7) | $50,925 (8) | |
1999 | $ 75,020 (9) | $4,994 (3) |
(1) | Consisted of $30,000 in cash payments, $86,250 in cash accruals, and 25,000 vested warrants exercisable at $.27 per share. For accounting purposes, we valued the warrants at $295,970; accordingly, Mr. Morin's total salary for 2000 would have been $412,220. |
(2) | Consisted of 148,148 shares of common stock, valued at $40,000; and 296,519 warrants exercisable at $.27 per share. There are no vesting requirements on the shares or the warrants. For accounting purposes, we valued the warrants at $61,231. Accordingly, Mr. Morin's total salary for 1999 would have been $101,231. |
(3) | Directors fee paid in 24,000 warrants exercisable at $.20 per share until December 31, 2003. There are no restrictions on the vesting of the warrants. For accounting purposes, we valued the warrants at $4,994. |
(4) | Consisted of $23,500 in cash and 15,625 vested warrants exercisable at $.27 per share. For accounting purposes, we valued the warrants at $36,996; accordingly, Mr. Potter's total salary for 2000 would have been $60,496 |
(5) | We paid Ridgewood Group, LLC, advisory fees of this amount. Mr. Potter owns Ridgewood Group. |
(6) | Consisted of 55,556 shares of common stock, valued at $15,000, and 286,311 warrants exercisable at $.27 per share. There are no restrictions on the vesting of the shares or the warrants. For accounting purposes, we valued the warrants at $59,180; accordingly, Mr. Potter's total salary for 1999 would have been $74,180. |
(7) | Consisted of $27,375 in cash and 75,000 vested warrants exercisable at $.27 per share. For accounting purposes, we valued the warrants at $177,583; accordingly, Mr. Thompson's total salary for 2000 would have been $204,958. |
(8) | Advisory fees. |
(9) | Consisted of 92,593 shares of common stock valued at $25,000, and 185,261 warrants exercisable at $.27 per share. There are no restrictions on the vesting of the shares or the warrants. For accounting purposes, we valued the warrants at $38,256; accordingly, Mr. Thompson's total salary for 1999 would have been $63,256. |
Warrant Grants in Last Fiscal Year
The following table sets forth certain information regarding stock purchase warrants granted to the named executive officers during the 12-month period ending December 31, 2000.
Individual Grants | ||||
| Number of Securities Underlying Warrants Granted | Percent of Total Warrants Granted to Employees in Fiscal Year (1) |
|
|
William J. Potter | 39,625 | 10.2% | $.27 | 12/31/05 |
Michel Morin | 149,000 | 38.4% | $.27 | 12/31/05 |
Richard Thompson | 99,000 | 25.5% | $.27 | 12/31/05 |
(1) Based on 387,708 warrants issued.
Year-End Warrant Values
No warrants were exercised by the named executive officers during the 12-month period ended December 31, 2000. The following table sets forth certain information regarding unexercised stock purchase warrants held by the named executive officers as of December 31, 2000. All of the warrants are exercisable.
| Number of Securities Underlying Unexercised Warrants at Fiscal Year-End | Value of Unexercised In-the-Money Warrants at Fiscal Year-End (1) | Value of Unexercised In-the-Money Warrants at Fiscal Year-End (2) |
William Potter | 498,438 | $12,075 | $1,123,592 |
Michel Morin | 597,096 | $10,610 | $1,342,134 |
Richard Thompson | 373,574 | $6,252 | $839,322 |
Bernard Nicolas | 350,146 | $8,824 | $789,650 |
(1) | Based on an assumed fair market value of our common stock of $.27 per share. |
(2) | Based on an assumed fair market value of our common stock of $2.50 per share. |
Equity Incentive Plan
On March 26, 1999, we adopted an Equity Incentive Plan. Pursuant to the Plan, stock options granted to eligible participants may take the form of incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or options which do not qualify as incentive options, known as non-qualified stock options.
As required by Section 422 of the Code, the aggregate fair market value of our common stock with respect to our incentive options granted to an employee exercisable for the first time in any calendar year may not exceed $100,000. The foregoing limitation does not apply to non-qualified options. The exercise price of an incentive option may not be less than 100% of the fair market value of the shares of our common stock on the date of grant. The Plan administrator may set the exercise price of a non-qualified option. An option is not transferable, except by will or the laws of descent and distribution. If the employment of an optionee terminates for any reason (other than for cause, or by reason of death, disability, or retirement), the optionee may exercise his options within a ninety-day period following such termination to the extent he was entitled to exercise such options at the date of termination. Either our Board of Directors (provided that a majority of directors are "disinte rested") can administer the Plan, or our Board of Directors may designate a committee comprised of directors meeting certain requirements to administer the Plan. The Administrator will decide when and to whom to make grants, the number of shares to be covered by the grants, the vesting schedule, the type of award and the terms and provisions relating to the exercise of the awards. An aggregate of 1,000,000 shares of our common stock is reserved for issuance under the Plan.
We issued 300,000 stock options under the plan in 1999. We also issued a total of 255,180 non-plan options to key employees in 1998.
Limitation on Directors' Liability; Indemnification
Our certificate of incorporation limits the liability of a director for monetary damages for his conduct as a director, except for:
* | Any breach of the duty of loyalty to us or our stockholders, | |
* | Acts or omissions not in good faith or that involved intentional misconduct or a knowing violation of law, | |
* | Dividends or other distributions of corporate assets from which the director derives an improper personal benefit. | |
* | Liability under federal securities law |
The effect of these provisions is to eliminate our right and the right of our stockholders (through stockholder's derivative suits on our behalf) to recover monetary damages against a director for breach of his fiduciary duty of care as a director, except for the acts described above. These provisions do not limit or eliminate our right or the right of a stockholder to seek non-monetary relief, such as an injunction or rescission, in the event of a breach of a director's duty of care.
Our certificate of incorporation also provides that we shall indemnify, to the full extent permitted by Delaware law, any of our directors, officers, employees or agents who are made, or threatened to be made, a party to a proceeding by reason of the fact that he or she is or was one of our directors, officers, employees or agents. The indemnification is against judgments, penalties, fines, settlements, and reasonable expenses incurred by the person in connection with the proceeding if certain standards are met. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons in accordance with these provisions, or otherwise, we have been advised that, in the opinion of the SEC, indemnification for liabilities arising under the Securities Act of 1933 is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
Transactions with Management and Others
EC Power, Inc. was incorporated on March 25, 1999. Shortly after formation, it exchanged 3,513,319 shares of its common stock for 100% of the membership interests in EC Power, LLC. EC Power LLC's sole assets were 35,000 of the 38,900 outstanding shares of Sorapec SA, or 90% of such shares; and 11,426,643 shares of Neft Acquisition Corporation, which it had acquired on March 29, 1999. For accounting purposes this transaction and prior transactions were accounted for as an acquisition of EC Power, Inc. by Sorapec. General Nicholas owned approximately 7% of Sorapec. On April 5, 1999, EC Power Inc. merged with Neft Acquisition Corp., a shell corporation, and issued Neft's shareholders, including EC Power, 1,428,571 shares of common stock, of which 1,093,965, the Neft shares owned by EC Power became treasury shares. We valued the shares issued to the former Neft shareholders at $.196 per share, or a total of $65,582. EC Power, Inc. was the surviving corporation in the merger. We merged with Neft in order to increase our shareholder base and in an attempt to provide possible liquidity for our shareholders.
General Nicolas exchanged his Sorapec shares into 227,212 EC Power shares. General Nicolas' son also owned Sorapec shares that he exchanged for 178,626 EC Power shares. Messrs. Potter, Morin, Vayn, and Thompson were members of EC Power LLC, and they exchanged their membership interests into shares of EC Power, Inc. in the transaction described above. Mr. Thompson was, until January 2001, our President and a director. Mr. Potter received 670,103 shares, Mr. Morin 542,002 shares, Mr. Vayn 279,167 shares, and Mr. Thompson 681,331 shares. Messrs Potter, Morin, Vayn, and Thompson had received 542,513, 542,002, 193,937, and 426,151 of these equivalent shares, respectively, for services they had rendered EC Power LLC, which services were valued at $333,931 ($.196 per share).
Mr. Potter, other directors, and certain shareholders have loaned money to us over the past several years for the purpose of providing working capital. The loans are payable on demand and bear interest at a rate of 10% per annum. The interest is payable in shares of our common stock. Mr. Thompson loaned EC Power LLC $10,000 in 1997 and $40,000 in 1998. In 1998 EC Power LLC issued him membership interests, which were subsequently converted into shares of our common stock in lieu of $1,345 of interest, at price equivalent to $.20 per share. In 1999, he converted $40,000 of his loan, and $1,047 in interest, into shares of our common stock at $.27 per share. He loaned an additional $29,379 to us in 2000. We paid Mr. Thompson $50,925 for advisory services in 1999. At September 30, 2001, we owed him $90,305 on those loans and for the unpaid advisory fee. Mr. Potter loaned EC Power LLC $92,141 in 1998, and we issued him membership interests in lieu of $1,094 in interest, which interests were subsequently converted into shares of our common stock, at a price equivalent to $.20 per share. In 1999 Mr. Potter loaned us an additional $66,285; he converted $50,000 of his loan into shares of common stock at $.20 per share; and $25,000 of his loan, and $8,826 in accrued interest, into common stock at $.27 per share. At September 30, 2001, we owed him $33,426 on those loans.
In 1999 we sold 2,589,815 shares of Series A Preferred Stock to investors at a price of $.27 per share in cash and in debt forgiveness, including $40,000 of loans converted by Mr. Thompson into 148,148 shares, and $25,000 of loans converted by Mr. Potter into 92,593 of our preferred shares. We also issued those investors a total of 325,000 shares of our common stock as additional incentive for purchasing the preferred stock, including 12,500 shares to Mr. Potter and 20,000 shares to Mr. Thompson.
Messrs. Potter, Thompson, and Morin served as our Chairman, President, and CEO, respectively, at no salary through 1998. In 1998, they were paid compensation in the form of LLC membership interests that were converted into our common stock on the same basis as the other LLC interests. Mr. Morin was also issued 151,577 warrants. In 1999, they were paid compensation in the form of common shares and warrants, described below. In 1999 we also issued shares of our common stock as compensation to Messrs. Thompson (92,593 shares), Potter (55,556 shares), Morin (148,148 shares) and Nicolas (74,074 shares). The shares were valued at $.27 per share. In 2000, we compensated the three officers in a combination of cash and warrants. The warrants are described below.
Each of our Directors were issued stock purchase warrants in 1998, 1999, and 2000 in consideration for loans they made to us, and/or as compensation. The warrants are identical, except for the expiration date and exercise prices. They all expire five years from the date of their issuance, and entitle the owner to purchase one share of common stock. The 1998 warrants are exercisable at $.20 per share; the 1999 warrants are exercisable at $.27 per share; and the 2000 warrants are exercisable at $.27 per share. The number of each type of warrant is described in the following table:
Director | 2000 Warrants | 1999 Warrants | 1998 Warrants |
Potter | 39,625 | 286,311 | 172,502 |
Thompson | 99,000 | 185,261 | 89,313 |
Morin | 149,000 | 296,519 | 151,577 |
Vayn | 24,000 | 0 | 0 |
Nicolas | 76,083 | 148,004 | 126,059 |
In September 2000, a French shareholder of Sorapec exchanged his Sorapec shares into 178,626 EC Power shares. Mr. Potter purchased those 178,626 shares from the shareholder for $35,000.
During 2000, Mr. Thompson purchased 814,816 shares of common stock for $220,000, or $.27 per share.
We lease our principal executive offices in New York, New York, from Ridgewood Group International, Inc. Mr. Potter, our Chairman, controls Ridgewood. We pay Ridgewood $2,000 per month, plus out-of-pocket expenses. We (or EC Power LLC) accrued or paid Ridgewood Group $48,071 in 1998, $33,000 in 1999, $42,248 in 2000, and $40,642 in the first nine months of 2001. We also paid or accrued consulting fees to Ridgewood of $28,250 in 1999, $58,640 in 2000, and $18,250 in 2001. In 1999 and 2000, Ridgewood converted $109,923 of the accrued payables into 75,402 shares of our common stock at $.20 per share, and into 351,266 shares of our common stock at $.27 per share. At September 30, 2001, we owed Ridgewood $9,000.
In the first quarter of 2001, PSM Management Services, AG, a Swiss company, provided consulting services to us, for which we agreed to pay $15,000 in cash and issued 17,500 warrants. The warrants are exercisable at any time at $1.00 per share for five years. Mr. Schaedeli, one of our directors, is a Principal of PSM. Aerogie.Plus AG, a Swiss investment company of which Mr. Schaedeli is the Chairman of the Board, purchased 250,000 shares of common stock at $1.00 per share.
Most of these transactions were not approved or ratified by a majority of disinterested directors. The Board of Directors has determined that any future transactions with officers, directors, or principal shareholders will be approved by the disinterested directors and will be on terms no less favorable than could be obtained from an unaffiliated third party. The Board of Directors will obtain independent counsel or other independent advice to assist in that determination.
Principal Stockholders
The following table sets forth, as of the date of this prospectus, information regarding the ownership of our common stock by:
- | persons who own more than 5% of our common stock; | ||
- | each of our executive officers and directors; and | ||
- | all of our directors and executive officers as a group. |
Each person has sole voting and investment power with respect to the shares shown, except as noted.
Percent of Class(2) | ||||||
| Amount and Nature of Beneficial Ownership (1) |
|
|
| ||
William J. Potter (3) | 1,821,328 | 16.7% | 16.1% | 14.1% | ||
Richard M.H. Thompson (4) | 2,230,382 | 20.6% | 19.9% | 17.4% | ||
Michel L. Morin (5) | 1,287,246 | 11.8% | 11.4% | 10.0% | ||
Patrick Vayn (6) | 303,167 | 2.9% | 2.8% | 2.5% | ||
Bernard Nicolas (7) | 651,849 | 6.1% | 5.9% | 5.2% | ||
Aerogie Plus AG | 1,175,926 | 11.4% | 11.0% | 9.6% | ||
Peter Schaedeli (8) | 1,193,426 | 11.6% | 11.1% | 9.7% | ||
All officers and directors as a group (5 persons) |
|
|
|
| ||
| (1) | Under SEC Rules, we include in the number of shares owned by each person the number of shares issuable under outstanding options or warrants if those options or warrants are exercisable within 60 days of the date of this prospectus. In calculating percentage ownership, we calculate the ownership of each person who owns exercisable options by adding (i) the number of exercisable options for that person only to (ii) the number of total shares outstanding and dividing that result into (iii) the total number of shares and exercisable options owned by that person. |
(2) | Shares and percentages beneficially owned are based upon 10,296,911 shares outstanding on September 30, 2001. |
(3) | Includes 203,553 shares owned by Ridgewood Group, of which Mr. Potter is the controlling shareholder; 92,593 shares underlying shares of convertible preferred stock; and 498,438 shares underlying presently exercisable warrants. |
(4) | Includes 148,148 shares underlying shares of convertible preferred stock; and 373,574 shares underlying presently exercisable warrants. |
(5) | Includes 597,096 shares underlying presently exercisable warrants. |
(6) | Includes 24,000 shares underlying presently exercisable warrants. |
(7) | Includes 350,146 shares underlying presently exercisable warrants. |
(8) | Mr. Schaedeli is the Chairman of the Board of Aerogie. Includes the shares owned by Aerogie. Also includes warrants to purchase 17,500 shares of common stock owned by PSM Management Services, Inc., of which Mr. Schaedeli is a principal. He does not own any of our common stock personally. |
Description of Securities
We are authorized to issue up to 100,000,000 shares of $.001 par value common stock and 50,000,000 shares of $.01 par value preferred stock. As of September 30, 2001, 10,296,911 shares of Common Stock and 2,589,815 shares of Series A Preferred Stock was issued and outstanding, and there were approximately 1,125 shareholders of record.
Units
Each Unit shall contain one share of our common stock and one warrant. The Units will not trade separately until after the offering has terminated.
Common Stock
Each holder of common stock is entitled to one vote for each share held of record. There is no right to cumulative voting of shares for the election of directors. The shares of common stock are not entitled to pre-emptive rights and are not subject to redemption or assessment. Each share of common stock is entitled to share ratably in distributions to shareholders and to receive ratably such dividends as may be declared by our Board of Directors out of funds legally available therefor. Upon our liquidation, dissolution or winding up, the holders of common stock are entitled to receive, pro-rata, our assets which are legally available for distribution to shareholders. The issued and outstanding shares of common stock are validly issued, fully paid, and non-assessable.
Warrants
Each warrant will entitle the holder to purchase one share of our common stock at a price of $3.75 per share during the one-year period commencing on the date of this prospectus. The warrants will be redeemable upon forty-five (45) days prior written notice at a redemption price of $.05 per warrant if (a) the closing high bid price of the Common Stock has exceeded $5.63 for at least 20 of the 30 trading days immediately preceding the date of mailing of the notice of redemption, and (b) we have in effect a current registration statement with the Commission registering the common stock issuable upon exercise of the warrants. The warrants will contain anti-dilution provisions for stock splits, recombinations, and reorganizations.
Preferred Stock
We are authorized to issue up to 50,000,000 shares of $.01 par value preferred stock. Our preferred stock can be issued in one or more series as may be determined from time-to-time by our Board of Directors. In establishing a series our Board of Directors shall give to it a distinctive designation so as to distinguish it from the shares of all other series and classes, shall fix the number of shares in such series, and the preferences, rights and restrictions thereof. All shares of any one series shall be alike in every particular. Our Board of Directors has the authority, without shareholder approval, to fix the rights, preferences, privileges and restrictions of any series of preferred stock including, without limitation: (1) the rate of distribution, (2) the price at and the terms and conditions on which shares shall be redeemed, (3) the amount payable upon shares for distributions of any kind, (4) sinking fund provisions for the redemption of shares, and (5) the t erms and conditions on which shares may be converted if the shares of any series are issued with the privilege of conversion, and (6) voting rights except as limited by law.
Our Board of Directors has designated one series of Preferred Stock, Series A, and we have issued 2,589,815 shares of such series. The Series A Preferred Stock has a cumulative annual dividend of $.0135 per share and restricts the payment of dividends to holders of common stock if any preferred stock dividends are in arrears. The Series A Preferred Stock has liquidation rights of $.27 per share plus an amount equal to all accrued and unpaid dividends. Each share of Series A Preferred Stock is convertible into one share of common stock, subject to certain adjustments. Each holder of the Series A Preferred Stock is entitled to one vote for each share of Series A Preferred Stock he holds of record.
We could authorize the issuance of additional series of preferred stock which would grant to holders preferred rights to our assets upon liquidation, the right to receive dividend coupons before dividends would be declared to common shareholders, and the right to the redemption of such shares, together with a premium, prior to the redemption to common stock. Our common shareholders have no redemption rights. In addition, our Board could issue large blocks of voting stock to fend off unwanted tender offers or hostile takeovers without further shareholder approval.
Anti-takeover Effects of Certain Provisions of Our Certificate of Incorporation and Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the "business combination" or the transaction in which the person became an "interested stockholder" is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior to the determination of interested stockholder status, did own) 15% or more of the corporation's voting stock. The existence of this provision would be expected to have an anti-takeover effe ct with respect to transactions not approved in advance by the board of directors, including discouraging takeover attempts that might result in a premium over the market price for the shares of common stock held by stockholders.
Transfer Agent, Warrant Agent and Registrar
The transfer agent and registrar for our common stock and warrant agent for the Warrants is Continental Stock Transfer & Trust Company, New York, NY.
Reports to Shareholders
We intend to furnish annual reports to shareholders that will include audited financial statements reported on by our independent certified public accountants. In addition, we will issue unaudited quarterly or other interim reports to shareholders, as we deem appropriate.
Shares Eligible for Future Sale
Prior to the Offering, there has been no public market for our common. Future sales of substantial amounts of common stock in the public market could adversely affect prevailing market prices. Upon completion of the offering, we will have between 10,696,911 and 12,296,911 shares of common stock outstanding, depending on how many Units are sold in the offering. All of these shares will be freely tradable without restriction under the Securities Act, except for any shares owned by our officers, directors, and major shareholders, which will be subject to certain resale limitations of Rule 144 promulgated under the Securities Act. Officers and directors who own in the aggregate a total of 2,501,317 shares have agreed with us not to sell, transfer, assign, or make any other disposition of any shares owned by them for a period of six months after the date of this prospectus.
Further, there are outstanding warrants and options exercisable to purchase an additional 2,696,531 shares of common stock; and shares of preferred stock that are convertible into 2,589,815 shares of common stock. None of the shares of common stock issuable upon exercise of the options or warrants or upon conversion of the preferred stock will be free trading, and will be salable only under Rule 144, unless we file a registration statement to register the sale of such shares.
Plan of Distribution
We are offering on a best efforts basis up to 2,000,000 Units on a 400,000 Unit minimum, 2,000,000 Unit maximum basis at an offering price of $3.00 per Unit. The offering price of the Units being offered hereby was arbitrarily determined by us and is not necessarily related to our assets, book value, or financial condition. In determining the offering price and the number of Units to be offered, we considered such factors as our financial condition, our net tangible book value, limited operating history and general condition of the securities market. Accordingly, the offering price of the Units may not indicate the actual value of our securities.
We are offering the Units to the public through our officers and directors, and will rely primarily on the efforts of Michel Morin, our CEO. No sales commission will be paid to our officers and directors. We do not presently intend to use the services of any broker dealer or investment banking firm in the United States. We may sell some of the Units to persons domiciled outside of the United States.
Until we have sold at least 400,000 Units, we will not accept subscriptions for any Units. None of our officers, directors, or promoters will purchase Units in the offering in order to achieve the minimum offering amount. All proceeds of at least the minimum offering will be deposited in an interest bearing escrow account with Chase Manhattan Bank. If we are unable to sell at least 400,000 Units before the offering period ends, we will return all funds, without deductions, but with accrued interest, to subscribers promptly after the ending of this offering. We have the right to completely or partially accept or reject any subscription for Units offered in this offering, for any reason or for no reason. The offering will remain open until all Units are sold or until May 28, 2002, which date may be extended to August 26, 2002. We may decide to cease selling efforts at any time prior to such date if our board of directors determines that there is a better use of funds and management tim e than the continuation of this offering.
If this offering is not over-subscribed, within a reasonable time after effectiveness, we plan to accept all subscriptions as soon as reasonably practicable. If this offering is over-subscribed or appears likely to be over-subscribed within a reasonable time after effectiveness, we plan to allocate the Units among subscribers in our sole discretion. We anticipate having one or more closings of this offering, the first of which cannot be held until we are able to sell at least 400,000 Units. After that, we could have multiple closings whenever we receive and accept subscriptions.
Prior to effectiveness, no one may purchase any Units in this offering. Following the effectiveness of this offering, in order to purchase Units in this offering, an investor must complete, date, execute, and deliver to our escrow agent, a signed copy of our subscription agreement, together either with a check in the amount corresponding to the cost of the Units to be purchased or a wire transfer of funds for that amount. The address and wire transfer instructions for our escrow agent is indicated in the subscription agreement. Following the effectiveness of this offering, an investor can request a paper copy of the subscription agreement and prospectus by calling us, writing to us, or e-mailing us at the number or address listed in this prospectus.
We will reimburse our officers and directors for expenses incurred in connection with the offer and sale of this Units. Our officers and directors are relying on Rule 3a4-1 of the Securities and Exchange Act of 1934 as a "safe harbor" from registration as a broker-dealer in connection with the offer and sales of the Units. In order to rely on such "safe harbor" provisions provided by Rule 3a4-1, an officer or director must be in compliance with all of the following:
- | He must not be subject to a statutory disqualification; | |
- | He must not be compensated in connection with such selling participation by payment of commission or other payments based either directly or indirectly on such transactions; | |
- | He must not be an associated person of a broker-dealer; | |
- | He must restrict participation to transactions involving offers and sale of the Units; | |
- | He must perform substantial duties for us after the close of the offering not connected with transactions in securities, and not have been associated with a broker or dealer for the preceding 12 months, and not participate in selling an offering of securities for any issuer more than once every 12 months; and | |
- | He must restrict participation to written communications or responses to inquiries of potential purchasers. |
Our officers and directors intend to comply with the guidelines enumerated in Rule 3a4-1. Our officers and directors have no current plans to purchase Units in the offering.
There currently exists no public trading market for our common stock, and we cannot assure you that such a market will develop in the future. In the absence of an active public trading market, an investor may not be able to liquidate his investment without considerable delay, if at all. If a market does develop, the price for our securities may be highly volatile and may bear no relationship to our actual financial condition or results of operation.
Public Securities, Inc. has stated that it intends to maintain a market in those securities. It has indicated that it intends to file to list our common stock on the OTC Electronic Bulletin Board after the effective date of the registration statement of which this prospectus is a part. The listing, if granted, will be effective only after we terminate this offering. If our securities are not quoted on the OTC Electronic Bulletin Board, they may be quoted in the "pink sheets" maintained by the National Quotations Bureau, Inc., which reports quotations by brokers or dealers making a market in particular securities. We have no agreement with any other broker or dealer to act as a market maker for our securities and there is no assurance that we will be successful in obtaining any market makers. The lack of a market maker for our securities could adversely influence the market for and price of our securities, as well as your ability to dispose of, or to obtain accurate quotations as to th e price of, our securities.
Lock-in Agreement
William Potter, Michel Morin, Patrick Vayn, and Bernard Nicolas hold in the aggregate 2,501,317 outstanding shares of our common stock and 92,593 shares of our preferred stock that are subject to a lock-in agreement with us. Under the lock-in agreement, they have agreed not to transfer or pledge their shares of our common stock, although they retain all of their power to vote those shares, until the earlier of (a) the date that is 180 days after the effectiveness of this offering; or (b) the date all funds have been sent to investors if the offering was terminated without selling any of the Units.
Legal Matters
The validity of the issuance of the shares we are offering will be passed upon for us by Neuman & Drennen, LLC, Denver, Colorado.
Experts
The audited consolidated financial statements as of and for the years ended December 31, 2000 and 1999 of EC Power, Inc. and subsidiary included herein and elsewhere in the registration statement have been audited by Kempisty & Company, independent certified public accountants, to the extent forth in their report (which describes an uncertainty as to our ability to continue as a going concern) appearing herein and elsewhere in the registration statement. Such financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in auditing and accounting.
Additional Information
We have filed a registration statement, including exhibits and schedules, with the Commission pursuant to the Securities Act with respect to this offering of our securities. This prospectus, which is a part of the registration statement, does not contain all of the information included in the registration statement. We refer you to the registration statement fur further information about our securities, this offering, and us. Statements in this prospectus about documents filed as exhibits to the registration statement are necessarily summaries of these documents, and each of these statements is qualified in its entirety by reference to the copy of the applicable documents filed with the Commission. You may review a copy of the registration statement, including exhibits, at the Commission's public reference rooms at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the Commis sion at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The registration statement can also be reviewed by accessing the Commission's Internet site at http://www.sec.gov.
