NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
NOTE
1 -
DESCRIPTION
OF THE COMPANY
HydroGen
Corporation (“HydroGen”) and its wholly-owned subsidiary HydroGen, LLC, an Ohio
limited liability company, (“HydroGen, LLC” and together with HydroGen, the
“Company”) are manufacturers of multi-megawatt fuel cell systems utilizing
proprietary 400-kilowatt (kW) phosphoric acid fuel cell (“PAFC”) technology. The
technology was developed by Westinghouse Electric Corporation, and was acquired
in 1993 by Fuel Cell Corporation of America. In 2001, HydroGen, LLC acquired
all
of the rights to this technology and commenced the business of the Company.
On
July 7, 2005, HydroGen, LLC became a wholly-owned subsidiary of Chiste
Corporation, a Nevada Corporation, (“Chiste”) pursuant to an exchange agreement
in which Chiste acquired all of the outstanding membership interests of
HydroGen, LLC. On August 18, 2005, Chiste was renamed “HydroGen Corporation.”
NOTE
2 -
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The
financial statements represent the consolidated accounts of HydroGen Corporation
and HydroGen, LLC, its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
accompanying unaudited condensed financial statements of the Company do not
include all of the disclosures required by generally accepted accounting
principles. In the opinion of management, all adjustments (all of which were
of
a normal recurring nature) considered necessary to fairly present the financial
position, results of operations, and cash flows of the Company on a consistent
basis have been made.
These
results have been determined on the basis of generally accepted accounting
principles and practices applied consistently with those used in the preparation
of the Company's Annual Financial Statements for the year ended December 31,
2006. Operating results for the nine months ending September 30, 2007 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2007. The balance sheet for December 31, 2006 was derived from
the
audited balance sheet included in the consolidated financial statements. For
further information, refer to HydroGen’s consolidated financial statements and
footnotes for the year ended December 31, 2006 included in HydroGen’s Form
10-KSB.
Revenue
Recognition
The
Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 104, “Revenue Recognition” (SAB 104). Revenue is recognized when
persuasive evidence of a sale exists, the product has been delivered, the rights
and risks of ownership have passed to the customer, the price is fixed and
determinable, and collection of the resulting receivable is reasonably assured.
For arrangements which include customer acceptance provisions, revenue is not
recognized until the terms of acceptance are met. Reserves for sales returns
and
allowances are estimated and provided for at the time of shipment. Demonstration
grant revenue is recognized as the Company incurs reimbursable costs as set
forth under the contract. The Company’s revenue for the nine months ended
September 30, 2007 is from three grants: a grant from the Department of
Development of the State of Ohio, a grant from the State of Ohio Third Frontier
Fuel Cell Program, and a grant from the Pennsylvania Energy Development
Authority.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September
30, 2007
(Unaudited)
NOTE
2 -
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
Research
and Development Expenses
Research
and development expenditures are charged to operations as incurred. These costs
include the payroll and related costs of the Company’s technical personnel, who
are running test programs on our technology as well as developing manufacturing
programs and procedures.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates.
Net
Loss Per Share
Loss
per
common share is computed by dividing the loss by the weighted-average number
of
common shares outstanding during the period. Shares to be issued upon the
exercise of options and warrants aggregating 2,411,187 and 2,134,187 as of
September 30, 2007 and September 30, 2006
respectively,
are not
included in the computation of loss per share as their effect is antidilutive.
Equity-Based
Compensation
Prior
to
January 1, 2006, the Company accounted for stock option awards granted
under the Company’s 2005 Performance Equity Plan in accordance with the
recognition and measurement provisions of Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees”, (“APB 25”) and related
Interpretations, as permitted by Statement of Financial Accounting Standards
No. 123, “Accounting for Stock-Based Compensation”, (“SFAS 123”).
Share-based employee compensation expense was not recognized in the Company’s
consolidated statements of operations prior to January 1, 2006, as all
stock option awards granted had an exercise price equal to or greater than
the
market value of the common stock on the grant date. As permitted by SFAS 123,
the Company reported pro-forma disclosures presenting results and earnings
per
share as if the Company had used the fair value recognition provisions of SFAS
123 in the Notes to Consolidated Financial Statements. Share-based
compensation related to non-employees and modifications of options granted
were
accounted for based on the fair value of the related stock or options in
accordance with SFAS 123 and its interpretations. Effective January 1,
2006, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payment”, (“SFAS 123(R)”),
which requires the measurement and recognition of compensation expense for
all
share-based payment awards to employees, consultants, and directors based on
estimated fair values. The Company adopted SFAS 123(R) using the modified
prospective transition method. Under this transition method, share-based
compensation expense recognized during the nine months ended September 30,
2007
and September 30, 2006 included: (a) compensation expense for
all share-based awards granted prior to, but not yet vested, as of January
1,
2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123, and (b) compensation expense for all
share-based awards granted on or after January 1, 2006, based on the grant
date
fair value estimated in accordance with the provisions of SFAS 123(R). In
accordance
with
the
modified prospective transition method, our consolidated financial statements
for prior periods have not been restated to reflect the impact of SFAS
123(R).
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
NOTE
2 -
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
As
a
result of adopting SFAS 123R, the Company recorded pretax compensation expense
of $41,922 and $317,654 for the three and nine month periods ended September
30,
2007 respectively. Stock-based compensation is included in each expense
category that includes salary expense. The Company has recorded a full
valuation allowance on the deferred tax asset related to stock-based
compensation and therefore, no tax benefit is recognized for the three and
nine
month periods ended September 30, 2007.
Impact
of Recently Issued Accounting Pronouncements
Management
does not believe there are any recently issued but not yet effective accounting
pronouncements that will have a material effect on the Company’s financial
statements.
Investments
The
Company follows Statement of Financial Accounting Standards No. 115, “Accounting
for Debt and Equity Securities,” (“SFAS 115”). The Company invests its excess
cash in short-term debt obligations of various agencies of the United States
Government, and has classified each security purchased as “held to maturity,” as
it has the positive intent and ability to hold these instruments to maturity.
As
per SFAS 115, securities so classified are appropriately carried at amortized
cost in the financial statements. Therefore, the Company does not recognize
unrealized gains and losses on such investments in its financial statements.
Reclassifications
Certain
reclassifications have been made to the 2006 information contained within the
Results of Operation tables within the Management’s Discussion and Analysis
section to conform to the 2006 presentation.
NOTE
3 -
PRIVATE
PLACEMENT OF EQUITY SECURITIES
On
May 2,
2006, the Company sold in a private placement an aggregate of 5,155,000 shares
of its common stock, and warrants to purchase up to an aggregate of 1,288,750
shares of common stock for aggregate gross proceeds of $25,775,000. The Company
paid approximately $1,705,000 in commissions and expenses. The Company issued
to
its placement agent a warrant to purchase up to 128,875 shares of common stock
as additional compensation.
The
warrants issued to investors and the placement agent are exercisable at $6.60
per share at any time until May 2, 2011. On July 19, 2006, a registration
statement that the Company filed for the re-offer and re-sale of the common
stock issued in the private offering and the Common Stock underlying the
warrants was declared effective by the Securities and Exchange Commission.
The
Company is using the proceeds of the private placement for commercial
demonstration of the Company’s products, advanced manufacturing development
efforts, sales and marketing efforts and general working capital
purposes.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
NOTE
4 –
SHARE-BASED
COMPENSATION
HydroGen
has granted stock options under its 2005 Performance Equity Plan, as amended,
(“2005 Plan”). Additionally, at HydroGen’s Annual Meeting on June 22, 2007,
shareholders approved the Company’s 2007 Performance Equity Plan (“2007 Plan”
and, together with the 2005 Plan, the “Plans”.)
Under
both Plans, awards may be granted to participants in the form of Non-Qualified
Stock Options, Incentive Stock Options, Restricted Stock, Deferred Stock, Stock
Reload Options, and other stock-based awards. Subject to the provisions of
the
Plans, awards may be granted to employees, officers, directors, advisors, and
consultants who are deemed to have rendered or are able to render significant
services to us or our subsidiaries, and who are deemed to have contributed
or to
have the potential to contribute to our success. Incentive stock options may
only be awarded to individuals who are our employees at the time of grant.
The
amount of shares that may be issued or reserved for awards to participants
is
1,300,000 under the 2007 Plan and 1,100,000 under the 2005 Plan. As of September
30, 2007, no grants were issued under the 2007 Plan, and options to purchase
651,217 shares of our common stock have been granted under the 2005
Plan.
Prior
to
the adoption of the 2005 Plan, HydroGen, LLC’s members voted to issue options
for membership units to key employees and advisors. Upon HydroGen, LLC becoming
a wholly-owned subsidiary of Chiste (the prior name of HydroGen Corporation),
these options became options to purchase 342,345 shares of common stock of
Chiste. These options today represent options to purchase 342,345 shares of
common stock of HydroGen Corporation.
As
discussed in Note 2, Basis of Presentation and Summary of Significant Accounting
Policies – Equity-Based Compensation, effective January 1, 2006, the
Company adopted the fair value recognition provisions of SFAS 123(R) using
the
modified prospective transition method. The adoption of SFAS 123(R) resulted
in
share-based compensation expense for the nine month periods ended September
30,
2007 and September 30, 2006 of approximately $317,654 and $259,744 respectively.
These expenses increased basic and diluted loss per share by $0.02 for each
of
the nine month periods ended September 30, 2007 and September 30,
2006.
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model that uses the assumptions noted in the
following table. Because the Company’s common shares have only traded publicly
since July 7, 2005, expected volatility for the nine months ended September
30,
2007 and September 30, 2006 is estimated based on an arithmetic average of
the
volatility of 5 publicly-traded companies that operate in HydroGen’s space or
sell into similar markets. As the Company was not a publicly traded company
before July 7, 2005, 0% volatility was used in accordance with
SFAS 123 for options issued to employees and consultants prior to becoming
a public company. We have insufficient history by which to estimate the expected
term of the options, but used an estimate for grants of “plain vanilla” stock
options based on a formula proscribed by the Securities and Exchange
Commission’s Staff Accounting Bulletin No. 107. Because HydroGen’s employee
stock options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management’s opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock
options.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
NOTE
4 –
SHARE-BASED
COMPENSATION - Continued
The
following table summarizes the assumptions used for options granted during
the
three and nine months ended September 30, 2007 and September 30,
2006:
|
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Expected
life (in years)
|
|
|
3.5
|
|
|
3.5
|
|
|
2.5-3.5
|
|
|
3.5-5.0
|
|
|
Risk-free
interest rate
|
|
|
4.23
%
|
|
|
5.04
%
|
|
|
4.23%-4.68
%
|
|
|
4.68%-5.04
%
|
|
|
Volatility
|
|
|
64
%
|
|
|
66
%
|
|
|
64%-66
%
|
|
|
66%-74
%
|
|
|
Dividend
yield
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
The
following table summarizes the Company’s stock option activity for the nine
months ended September 30, 2007:
|
|
|
Number
of
Options
|
|
Weighted
Average
Option
Price
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,055,002
|
|
$
|
4.73
|
|
|
|
|
|
Granted
|
|
|
136,600
|
|
|
3.75
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(198,040
|
)
|
|
4.89
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
993,562
|
|
$
|
4.56
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2007
|
|
|
527,398
|
|
$
|
4.59
|
|
$
|
—
|
|
|
Vested
and expected to vest at
September
30, 2007
|
|
|
962,893
|
|
$
|
4.56
|
|
$
|
—
|
|
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
NOTE
4 –
SHARE-BASED
COMPENSATION – Continued
A
summary
of the status of the Company’s non-vested stock options as of September 30,
2007, and of changes during the nine months ended September 30, 2007, is
presented below:
|
|
|
Number
of
Options
|
|
Weighted
Average
Option
Price
|
|
|
Non-vested
at December 31, 2006
|
|
|
657,090
|
|
$
|
4.84
|
|
|
Granted
|
|
|
136,600
|
|
|
3.75
|
|
|
Vested
|
|
|
(129,486
|
)
|
|
4.74
|
|
|
Forfeited/Cancelled
|
|
|
(198,040
|
)
|
|
4.89
|
|
|
Outstanding
at September 30, 2007
|
|
|
466,164
|
|
$
|
4.51
|
|
As
of
September 30, 2007, there was $815,000 of total unrecognized compensation cost
related to non-vested stock options, which is expected to be recognized over
a
remaining weighted average life of 1.81 years.
The
weighted average grant-date fair value of options granted during the nine month
periods ended September 30, 2007 and September 30, 2006 was $3.75 and $3.18
respectively.
The
following table summarizes information about stock options outstanding and
exercisable at September 30, 2007:
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
Exercise price
|
|
Number
outstanding
|
|
Weighted
average
remaining
contractual
life
(in years)
|
|
Weighted
average
exercise
price
|
|
Number
exercisable
|
|
Weighted
average
exercise
price
|
|
|
$
|
2.95
|
|
|
40,500
|
|
|
5.00
|
|
$
|
2.95
|
|
|
-
|
|
$
|
-
|
|
|
|
3.50
|
|
|
42,600
|
|
|
4.86
|
|
|
3.50
|
|
|
-
|
|
|
-
|
|
|
|
4.34
|
|
|
342,345
|
|
|
7.38
|
|
|
4.34
|
|
|
311,414
|
|
|
4.34
|
|
|
|
4.50
|
|
|
200,260
|
|
|
4.19
|
|
|
4.50
|
|
|
69,500
|
|
|
4.50
|
|
|
|
4.55
|
|
|
52,700
|
|
|
4.54
|
|
|
4.55
|
|
|
22,500
|
|
|
4.55
|
|
|
|
4.90
|
|
|
83,340
|
|
|
4.06
|
|
|
4.90
|
|
|
20,000
|
|
|
4.90
|
|
|
|
5.10
|
|
|
67,935
|
|
|
8.22
|
|
|
5.10
|
|
|
33,668
|
|
|
5.10
|
|
|
|
5.15
|
|
|
85,247
|
|
|
3.79
|
|
|
5.15
|
|
|
28,416
|
|
|
5.15
|
|
|
|
5.25
|
|
|
38,000
|
|
|
8.53
|
|
|
5.25
|
|
|
12,667
|
|
|
5.25
|
|
|
|
5.56
|
|
|
16,535
|
|
|
2.50
|
|
|
5.56
|
|
|
6,200
|
|
|
5.56
|
|
|
|
6.05
|
|
|
22,500
|
|
|
3.63
|
|
|
6.05
|
|
|
22,500
|
|
|
6.05
|
|
|
|
6.20
|
|
|
1,600
|
|
|
3.63
|
|
|
6.20
|
|
|
533
|
|
|
6.20
|
|
|
|
|
|
|
993,562
|
|
|
5.72
|
|
$
|
4.56
|
|
|
527,398
|
|
$
|
4.59
|
|
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
NOTE
5 –
INCOME
TAXES
The
Company adopted the standards of Financial Accounting Standards Board
Interpretation 48 (“FIN48”) as of January 1, 2007. As of January 1, 2007, the
Company had no unrecognized tax benefits and no uncertain tax positions that
would impact the financial statements if recognized. The Company continues
to
have no unrecognized tax benefits and no uncertain tax positions as of September
30, 2007. Based on this, the Company has not recorded a cumulative effect
adjustment upon adoption. The Company would recognize interest and penalties
as
income tax expense in financial statements if it were required to record such
expenses. As of January 1, 2007 and September 30, 2007, there are no interest
and/or penalties recorded related to uncertain tax positions. The tax years
2003
through 2006 remain subject to examination by the major taxing jurisdictions
in
which we operate.
NOTE
6 –
PROPERTY
AND EQUIPMENT
Property
and equipment consisted of the following at September 30, 2007:
|
|
|
September 30, 2007
|
|
|
Machinery
and equipment
|
|
$
|
3,325,236
|
|
|
Leasehold
improvements
|
|
|
1,299,781
|
|
|
Computer
equipment and software
|
|
|
153,815
|
|
|
Office
equipment
|
|
|
73,505
|
|
|
Assets
under construction
|
|
|
626,031
|
|
|
|
|
|
5,478,368
|
|
|
Less
accumulated depreciation
|
|
|
990,243
|
|
|
|
|
$
|
4,488,125
|
|
Assets
under construction include manufacturing equipment not yet placed in service.
Depreciation of these assets will begin when they are placed in
service.
NOTE
7 –
STATE GRANTS
State
of Ohio Development Grant
On
August
26, 2005, the State of Ohio Department of Development provided to HydroGen
Corporation $1,250,000 as a development grant for a three phase program to
deploy, demonstrate, and commercialize the Company’s 400 kW phosphoric acid
fuel cell system. The grant is under an Ohio Fuel Cell Initiative Demonstration
Program, and is to be used towards the costs associated with the commercial
demonstration and validation of the Company’s air-cooled phosphoric acid fuel
cell module technology and for the procurement and preparation of the plant
equipment, system engineering, plant construction, and initial operations.
The
grant was given on the understanding that the Company will establish its
corporate headquarters in Ohio, locate manufacturing facilities to Ohio by
the
end of 2008, and create new full-time jobs at both the skilled and unskilled
level in Ohio. The development work which commenced in 2005 is expected to
continue through the end of 2008. The grant was also contingent on the Company
raising its own capital, which was achieved in July 2005.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
NOTE
7 –
STATE GRANTS - Continued
The
grant
of the funds is on a reimbursement basis, provided the Company meets the
objectives of the grant and is carrying out the terms of the defined project
as
represented to the state. The grant reimbursement period ran from
September 1, 2005 to July 31, 2007. The grant is a deployment of
federal development funds and as such, the Company will be required to adhere
to
various federal regulations on their use and accountability for
deployment.
The
grant
may be terminated if the State of Ohio determines that the Company is not in
compliance with certain federal regulations governing the grant or federal
employment laws, the requirements of any other applicable program statute or
rule or with the terms of the grant agreement after suitable notice and the
passage of cure periods. Performance under the agreement is subject to a force
majeure limitation. If there is a termination, the Company may not continue
to
incur expenses under the grant. It may be directed by the State of Ohio to
dispose of various property, data, studies, and reports, and the Company may
be
liable for damages to the State of Ohio. The Company may also request a
termination of the grant if it is unable or unwilling to comply with the
conditions of the grant.
As
of
September 30, 2007, the Company has submitted requests and has been reimbursed
for the entire grant award totaling $1,250,000.
State
of Ohio Third Frontier Fuel Cell Program
On
March 7, 2006, the Company was notified that it would be awarded $1,000,000
(the “Grant”) by the State of Ohio Third Frontier Fuel Cell Program (TFFCP) to
support the Company’s advanced manufacturing development program. On June
8, 2006, the Company entered into a Grant Agreement with the State of Ohio
pursuant to which the Grant funds are to be awarded. Under the terms of the
Grant Agreement, the Company may recoup from the State the full $1,000,000
as
Grant activities take place, and as the costs are incurred and reported. The
Company has pledged a total of $555,000 in cost share for the program. The
Company will use the funds to dedicate appropriate personnel, consultants,
and
infrastructure to optimize decisions and resource allocations for its planned
advanced manufacturing facility to be located in Ohio. The proposed facility
will be where the Company will mass produce its standard 400 kilowatt (kW)
air-cooled PAFC modules, which will serve as the building block of its core
product, a 2-2.5 megawatt (MW) power island. Initial production capacity
will be 25 MW per year of the Company’s 400 kW modules, and is
expected to be subsequently expanded to 100 MW per year capacity.
All
disbursements from the Grant are on a reimbursement basis, after documentation
has been provided evidencing that expenses were incurred in furtherance of
the
Grant. The period for which Grant activities shall take place runs from
April 10, 2006 until April 10, 2008; however, the term of the Grant Agreement,
including reimbursement period, runs until April 10, 2009. At the close of
the
Grant term, the Company will own all equipment valued over $5,000 purchased
with
Grant money.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
NOTE
7 –
STATE GRANTS - Continued
The
Grant
may be terminated if the State of Ohio determines that the Company is not in
compliance with the applicable program rules, State of Ohio law, or with the
terms of the Grant Agreement, after suitable notice and the passage of cure
periods. Performance by the State is also subject to the availability of funds.
If there is a termination, the Company may not continue to incur expenses under
the Grant, and it may be directed by the State of Ohio to dispose of various
property, data, studies and reports. The Company may further be liable for
damages to the State of Ohio in the event of default. The Company may also
request a termination of the Grant if it is unable or unwilling to comply with
the conditions of the Grant.
Work
under the Grant commenced in June of 2006. The Company has submitted requests
for payment under this grant totaling approximately $449,000, $187,000 of which
has been paid through September 30, 2007.
Pennsylvania
Energy Development Authority Grant
On
May
16, 2007, the Company was notified that it was awarded a grant in the amount
of
$250,000 by the Pennsylvania Energy Development Authority (PEDA) to support
the
construction of a small scale, air-cooled phosphoric acid fuel cell test
facility. The project period, as outlined within the grant agreement, is from
October 5, 2006 through October 4, 2008. All reimbursements for the project
must
be submitted during the project period.
All
disbursements from the grant are on a reimbursement basis. Reimbursement is
made
after documentation has been provided evidencing that expenses were incurred
in
furtherance of the grant. The grant may be terminated in whole, or in part,
at
any time if PEDA determines that the terms and conditions of the Agreement
have
not been met.
The
Company has submitted requests for payment under this grant totaling
approximately $250,000, none of which was paid through September 30,
2007.
NOTE
8 –
SUBSEQUENT EVENTS
On
October 12, 2007, the Company entered into a grant agreement (the “Grant
Agreement”) with the Pennsylvania NanoMaterials Commercialization Center (PNCC)
pursuant to which the PNCC will grant the Company approximately $230,000 to
support the development of advanced fuel cell catalyst systems. Under the terms
of the Grant Agreement, the Company will be reimbursed by the PNCC as grant
activities take place and as the costs are incurred and reported. The Company
has pledged a total of $131,545 in cost share for this program. The Company
will
be working in cooperation with the University of Pittsburgh’s Peterson Institute
of Nano Science and Engineering on this project. The grant may be terminated
in
whole, or in part, at any time if PNCC determines that the terms and conditions
of the Grant Agreement have not been met.
HYDROGEN
CORPORATION AND SUBSIDIARY
(A
Development Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007
(Unaudited)
NOTE
8 –
SUBSEQUENT EVENTS - Continued
On
October 17, 2007, the Company announced that PEDA granted the Company $500,000
to fund the design, manufacture, and installation of commercial scale gas
clean-up modules to validate the use of surplus hydrogen-rich coke oven gas
for
commercial scale fuel cell power plants to produce electricity. The Company
will
be working in cooperation with U.S. Steel’s Mon Valley Works plant in Mon
Valley, Pennsylvania. The terms and conditions of the grant agreement have
not
yet been finalized.
Item
2.
Management's
Discussion and Analysis or Plan of Operation
The
following discussion and analysis provides information that we believe is
relevant to an assessment and understanding of our results of operation and
financial condition. You should read this analysis in conjunction with our
audited consolidated financial statements and related footnotes. This discussion
and analysis contains forward-looking statements relating to future events
and
our future financial performance. These statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements, including, but not limited to,
those discussed
in
our
Annual Report
on
Form
10-KSB for the year ended December 31, 2006 under the Section entitled “Risk
Factors.”
General
HydroGen
is a development stage company and is expected to remain so for at least the
next several quarters. HydroGen, together with its wholly-owned subsidiary,
HydroGen, LLC, an Ohio limited liability company (“HydroGen, LLC” and together
with HydroGen, the “Company”) are manufacturers of multi-megawatt fuel cell
systems utilizing proprietary 400-kilowatt (kW) phosphoric acid fuel cell
technology. HydroGen and HydroGen, LLC are collectively referred to herein
as
“we” and “our.”
We
anticipate that our working capital as of September 30, 2007 will be sufficient
to meet our capital needs through the first quarter of 2008, and consequently,
we will need to raise additional capital as of that time from among several
financing options.
The
initial phases of our business plan call for us to design, manufacture, and
sell
multi-mega watt turn-key power plants based on a standardized 2-2.5 MW
power island consisting of five or six of our 400 kW modules. In the future
we intend to design, manufacture, and sell larger multi-mega watt power islands.
Additionally, we plan to attempt to generate recurring revenues from the sale
of
operations and maintenance services for the 400 kW modules, which must be
replaced after approximately 40,000 hours of operation.
We
expect
our cost to compare favorably with our competition for water cooled PAFCs,
molten carbonate fuel cells, and solid oxide fuel cells due to the relative
simplicity of air cooled PAFCs and the economies of scale associated with the
multi-mega watt capacity of fuel cell power plants.
At
September 30, 2007, we employed 85 employees in addition to numerous contractors
and consultants. Within the next 12 months we anticipate increasing our work
force significantly, primarily in the areas of manufacturing and plant design,
engineering, and construction. In addition, once our second manufacturing
facility in the state of Ohio is completed, we anticipate incrementally adding
an additional 100 to 200 employees.
Plan
of Operation
Our
business plan is divided into three stages: market entry, cost reduction, and
growth. We anticipate that the market entry stage will last through the first
half of 2008. During this period, we are focusing our efforts on the
following activities:
1.
Ramp
up fuel cell manufacturing operations to achieve 2 MW per year single-shift
production capacity.
We have
invested nearly $2,500,000 to ramp up our manufacturing facilities to achieve
initial pilot production capacity of 2 MW (five 400 kW modules) per annum
on single shift or 4MW or more per year on multiple shift basis, and to
recapture the performance and operation of the original Westinghouse design
of
the module. These funds have been used to acquire certain additional
production equipment, to implement certain facilities upgrades and to prepare
and train a new team of production staff in the fuel cell production processes.
Performance and operation of the original Westinghouse design of the module
has
been recaptured and continues to be improved upon.
2.
Manufacture
400 kW modules.
We have
started production of three or more new 400 kW air-cooled phosphoric acid fuel
cell modules in our manufacturing facilities for use during the market entry
phase. The modules will be tested at our facilities, and then delivered to
customer demonstration sites. Management has allocated $2,000,000 to
$3,500,000 to manufacturing activities.
3.
Product
and technology testing and validation
.
We have completed construction of the initial test facilities that are
operational at our Versailles, Pennsylvania manufacturing facilities.
Management has allocated and spent most of the intended initial $1,500,000
to
$2,000,000 for initial product and technology testing and validation
activities. The test facilities include:
(a)
400 kW
module test facility to test finished product at full rated capacity prior
to
field delivery, which was fully operational in June 2007.
(b)
10-cell
stack pressurized test facility to validate design and material changes to
the
fuel cells as a final step before incorporating such changes into the full
400 kW module. This test facility has been in continuous operation
since December 2006.
(c)
2”x2”
small scale test facility to test new electrode materials prior to selection
for
10-cell stack testing and validation. This facility is being utilized to
directly support manufacturing operations through validation and
qualification.
Management
has allocated additional funds for the construction and operation of additional
test facilities to expand product and technology testing and validation
activities. These include:
(a)
An
additional transportable 10-cell stack pressurized test facility (2.5 kW),
which will allow us to expand our longevity testing capabilities and permit
us
to undertake operational field tests at customer sites with different gas
compositions. This facility, which will be funded in part by a $250,000 state
grant awarded by the Pennsylvania Energy Development Authority, is in the
pre-commissioning phase.
(b)
A
series
of two atmospheric 3-cell test facilities, which will be used to test
differences and changes in cell-design, component materials, and geometry in
full-scale cells prior to pressurized testing in the 2.5 kW test stand.
These 3-cell test facilities will be constructed at the Company’s Wright Fuel
Cell Group facility in Cleveland, Ohio. These facilities are in the design
and
engineering phase.
4.
Finish
2-2.5 MW power plant design and initiate advanced manufacturing
development.
We are
in the process of investing working capital proceeds to complete the design,
component selection, and full costing of the standard 2-2.5 megawatt (MW)
power plant product, and are executing our plan to achieve full targeted fuel
cell production capacity of 25 MW per year in 2009 with intended future
expansion to 100 MW per year scheduled for the 2010 time frame under the
current business plan. The advanced manufacturing development program
consists of a staged series of projects to implement design and material changes
to the technology, develop and implement advanced high volume manufacturing
processes, and to develop suppliers of key components of the fuel cells.
We have initiated collaborative relationships with certain outsourced suppliers
of key components of the fuel cells, and are evaluating additional collaboration
opportunities with a variety of entities. We will also seek additional
financing in the form of grants from state and/or federal government sources
for
some aspects of this phase of the business plan, and are currently performing
work under a state grant, a $1,000,000 award by the State of Ohio Third Frontier
Fuel Cell Program to support the Company’s advanced manufacturing development
program. Overall progress on advanced manufacturing development is proceeding
according to schedule.
5.
Sales
and marketing
.
The
initial sales goal is to achieve firm orders for two 2-2.5 MW of fuel cell
power plants on a semi-commercial basis, and contingent orders for full-scale
commercial fuel cell power plants in the range of 25-50 MW aggregate
capacity. Alternatively, the Company may meet this contingent order objective
through formation of strategic partnership or marketing agreements. A principal
purpose of our initial sales plan for the sale of smaller fuel cell power
plants, such as the already-contracted 400 kW commercial demonstration
power plant and 2-2.5 MW semi-commercial power plants is to obtain
successful validation, performance history, and reference customers for the
Company’s product to position better the Company to sell our multi-mega watt
power plants. Once successful validation of the core module is obtained in
the
400 kW demonstration plant, we anticipate that the contingency related to
commercial orders received for full-scale fuel cell power plants will be
removed, or that a strategic marketing partnership will be executable. To
achieve our sales and marketing objectives, we are developing a pipeline of
projects, with several large generators of by-product hydrogen and other
potential customers who have expressed interest in acquiring fuel cell power
plants, and management believes that it could conclude agreements with one
or
more of these entities in the near term.
On
October 17, 2006, we announced that we had signed an agreement with ASHTA
Chemicals Inc. to install and operate a 400kW fuel cell demonstration power
plant at ASHTA’s chlor-alkali manufacturing plant in Ashtabula, Ohio. This
effort is being supported by a $1,250,000 award that we received from the State
of Ohio Department of Development, and we expect to install the fuel cell module
by the end of 2007. We may also decide to develop one or more projects of
similar capacity at another customer’s site.
Sales
and
marketing will take place concurrently with the previously described phases
of
the business plan during the development stage. Marketing the kind of
disruptive product that we offer involves a multifaceted decision process,
and
it typically takes multiple contacts and a substantial customer educative
endeavor to achieve firm commitments and orders.
Concurrently
with the later period of the market entry stage, we have initiated the beginning
phases of the cost reduction stage of our business plan. This stage is expected
to last through the end of 2008 or first half of 2009.
Management
estimates that approximately $35-45 million in additional equity capital,
plus approximately $15-20 million in debt, will be required to execute this
phase of the business plan. We have no agreements or arrangements for such
funding at this time. The principal goals of this stage of development will
be
to:
1.
Complete
the manufacturing and technology roadmap, design, and process development for
advanced manufacturing.
2.
Secure
strategic supply chain relationships and construct an advanced manufacturing
facility capable of producing 25 MW per year of fuel cell modules by the end
of
2008 / beginning of 2009, while reducing module production costs through
high volume manufacturing and assembly.
3.
Manufacture
and deliver to customers up to 10 MW of commercial fuel cell power
plants.
After
successful completion of the objectives of the cost reduction phase of the
business plan, we will enter the growth phase period. During this phase, we
plan
to expand the automated production facility to 100 MW per year capacity or
greater, expand sales and production capacity further through strategic
alliances with overseas manufacturers and distributors, and further drive down
costs through maturation of our outsourcing activities. We may require
additional capital at this stage to strengthen the Company’s balance sheet and
support the Company’s expansion and growth.
Critical
Accounting Policies and Estimates
The
preparation of our consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and the related disclosures. A summary of those
accounting policies can be found in the notes to the consolidated financial
statements set forth in the Annual Report on Form 10-KSB for the year ended
December 31, 2006. Certain of our accounting policies are considered
critical as they are both important to the portrayal of our financial condition
and results of operations and require judgments on the part of management about
matters that are uncertain. We have identified the following accounting policies
that are important to the presentation of our financial condition and results
of
operations.
Revenue
Recognition
The
Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 104, “Revenue Recognition” (SAB 104). Revenue is recognized when
persuasive evidence of a sale exists, the product has been delivered, the rights
and risks of ownership have passed to the customer, the price is fixed and
determinable, and collection of the resulting receivable is reasonably assured.
For arrangements which include customer acceptance provisions, revenue is not
recognized until the terms of acceptance are met. Reserve for sales returns
and
allowances are estimated and provided for at the time of shipment.
Demonstration
grant revenue is recognized as the Company incurs reimbursable costs as set
forth under the contract. All of the Company’s revenue in 2007 and 2006 is from
grant agreements with state government agencies.
Research
and Development Expenses
Research
and development expenditures are expensed as incurred. Research and development
expenditures include the costs associated with the ramp-up in the Company’s
technology recapture activities and power plant design, as well as other
development activities.
Equity-Based
Compensation
Prior
to
January 1, 2006, the Company accounted for stock option awards granted
under the Company’s 2005 Performance Equity Plan in accordance with the
recognition and measurement provisions of Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees”, (“APB 25”) and related
Interpretations, as permitted by Statement of Financial Accounting Standards
No. 123, “Accounting for Stock-Based Compensation”, (“SFAS 123”).
Share-based employee compensation expense was not recognized in the Company’s
consolidated statements of operations prior to January 1, 2006, as all
stock option awards granted had an exercise price equal to or greater than
the
market value of the common stock on the grant date. As permitted by SFAS 123,
the Company reported pro-forma disclosures presenting results and earnings
per
share as if the Company had used the fair value recognition provisions of SFAS
123 in the Notes to Consolidated Financial Statements. Share-based compensation
related to non-employees and modifications of options granted were accounted
for
based on the fair value of the related stock or options in accordance with
SFAS
123 and its interpretations.
Effective
January 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment”, (“SFAS 123(R)”), which requires the measurement and recognition of
compensation expense for all share-based payment awards to employees,
consultants and directors based on estimated fair values. The Company adopted
SFAS 123(R) using the modified prospective transition method. Under this
transition method, share-based compensation expense recognized during the nine
months ended September 30, 2007 included: (a) compensation expense for all
share-based awards granted prior to, but not yet vested, as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original
provisions of SFAS 123, and (b) compensation expense for all share-based
awards granted on or after January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). In accordance with
the modified prospective transition method, our consolidated financial
statements for prior periods have not been restated to reflect the impact of
SFAS 123(R).
Income
Taxes
We
adopted the standards of Financial Accounting Standards Board Interpretation
48
(“FIN48”) as of January 1, 2007. As of January 1, 2007, the Company had no
unrecognized tax benefits and no uncertain tax positions that would impact
the
financial statements if recognized. The Company continues to have no
unrecognized tax benefits and no certain tax positions as of September 30,
2007.
Based on this, the Company has not recorded a cumulative effect adjustment
upon
adoption. The Company would recognize interest and penalties as income tax
expense in financial statements if it were required to record such expenses.
As
of January 1, 2007 and September 30, 2007, there are no interest and/or
penalties recorded related to uncertain tax positions. The tax years 2003
through 2006 remain subject to examination by the major taxing jurisdictions
in
which we operate.
Investments
The
Company follows Statement of Financial Accounting Standards No. 115,
“Accounting for Debt and Equity Securities” (“SFAS 115”). The Company invests
its excess cash in short-term debt obligations of various agencies of the United
States Government, and has classified each security purchased as “held to
maturity,” as it has the positive intent and ability to hold these instruments
to maturity. As per SFAS 115, securities so classified are appropriately
carried at amortized cost in the financial statements. Therefore, the Company
does not recognize unrealized gains and losses on such investments in its
financial statements.
Financing
Activities
From
inception of our wholly-owned subsidiary, Hydrogen, LLC, in late 2001 until
the
completion of a bridge financing (described below) in early 2005, HydroGen,
LLC
was financed by working capital loans provided by Fuel Cell Corporation of
America (“FCA”), the predecessor owner of HydroGen, LLC’s intellectual property
assets and a significant shareholder of HydroGen. At June 30, 2005, these loans
had an aggregate balance of $267,360, and were evidenced by promissory notes.
Additionally, FCA provided an interest free line of credit to HydroGen, LLC
of
$350,000, all of which was borrowed and was also outstanding at June 30, 2005.
FCA agreed that, upon repayment of the $350,000 non-interest bearing note,
it
would forgive the principal balance of the interest-bearing loans by $150,000.
These loans, plus accrued interest, were payable upon the occurrence of certain
events, but in no case later than July 31, 2005. HydroGen paid $467,360, plus
accrued interest in full satisfaction of amounts owed to FCA out of the proceeds
of the offerings completed in connection with the Exchange Agreement described
below.
During
late 2004 and early 2005, HydroGen, LLC sold in a private placement $2 million
of bridge units, each unit consisting of a $10,000 convertible note and .045
membership unit in HydroGen, LLC. The bridge notes were due on the earlier
of
June 30, 2005 and the occurrence of certain events. The bridge notes were
initially convertible into an additional .045 membership unit at an effective
conversion price of $220,772. However, to encourage the conversion of these
notes, the conversion price was lowered to $125,000 per membership unit, the
same terms being offered to investors in HydroGen LLC’s private placement
completed in connection with the Exchange Agreement described below. Holders
of
all $2,000,000 of convertible notes elected to convert the principal amount
of
their notes as part of the private placement into 16.0 membership units in
HydroGen, LLC, which membership units were immediately exchanged for 60,446
Preferred Shares of Chiste Corporation. HydroGen, LLC recorded a non-cash charge
of $875,000 in July, 2005, related to the lowering of the conversion price
of
these notes.
On
May
13, 2005, Chiste Corporation, a Nevada corporation (“Chiste”), entered into an
Exchange Agreement (“Exchange Agreement”) with HydroGen, LLC, certain members of
HydroGen, LLC representing approximately 69.7% of the outstanding membership
interests, and Keating Reverse Merger Fund, LLC (“KRM Fund”). The closing of the
transactions contemplated by the Exchange Agreement occurred on July 7, 2005.
At
the closing, pursuant to the terms of the Exchange Agreement, Chiste acquired
all of the outstanding membership interests of HydroGen, LLC (the “Interests”)
from all the HydroGen, LLC members, and the HydroGen, LLC members contributed
all of their Interests to Chiste. All the HydroGen, LLC members either executed
or joined the Exchange Agreement prior to the closing, including persons
investing in membership units as part of a private placement by HydroGen, LLC.
The completion of the HydroGen, LLC private placement of membership units for
minimum gross proceeds of $5,000,000 and a maximum of $10,000,000 was a
condition to the closing. HydroGen, LLC raised $6,536,283 in gross proceeds
from
the private placement, and the holders of $2,000,000 of notes converted the
principal amount of their notes into membership units in the private placement.
In the exchange transaction, Chiste issued to the HydroGen, LLC members,
including the new investors and converting note holders, an aggregate of 742,255
shares of Series B Convertible Preferred Shares, par value $0.001 per share
(“Preferred Shares”), which converted into shares of Chiste’s common stock on
August 19, 2005. In addition, immediately following the closing of the exchange
transaction, Chiste sold to four institutional investors, 211,569 Preferred
Shares for an aggregate purchase price of $7,000,000, which also converted
into
common stock on August 19, 2005. At the closing, HydroGen, LLC became a
wholly-owned subsidiary of Chiste and continues as HydroGen Corporation’s
principal operating entity. On August 18, 2005, the name of Chiste Corporation
was changed to “HydroGen Corporation.”
In
August
2005, the State of Ohio Department of Development provided HydroGen with a
$1,250,000 grant on a reimbursement basis to fund development costs of its
products. The grant is subject to certain conditions and permitted reimbursement
through July 31, 2007.
In
September 2005, Hydrogen raised an additional $600,000 in gross proceeds, before
expenses, in a private placement of 134,439 shares of common stock to two
institutional investors.
On
March
7, 2006, the Company was notified that it was awarded $1,000,000 by the State
of
Ohio Third Frontier Fuel Cell Program (TFFCP) to support the Company’s advanced
manufacturing development program. The Company will use the funds to optimize
decisions and resource allocations for its planned advanced manufacturing
facility to be located in Ohio. The facility is where the Company will mass
produce its standard 400-kilowatt (kW) air-cooled PAFC modules, which serve
as
the building block of its core product, a 2-2.5 MW power island. Initial
production capacity is expected to be 25 MW per year of the company’s
400 kW modules, and is subsequently expected to be expanded to 100 MW
per year capacity.
On
May 2,
2006, the Company sold in a private placement an aggregate of 5,155,000 shares
of its common stock, and warrants to purchase up to an aggregate of 1,288,750
shares of common stock for aggregate gross proceeds of $25,775,000. The Company
paid approximately $1,660,937 in commissions and expenses. The Company issued
to
its placement agent a warrant to purchase up to 128,875 shares of common stock
as additional compensation.
The
warrants issued to investors and the placement agent are exercisable at $6.60
per share at any time until May 2, 2011. On July 19, 2006, a registration
statement that the Company filed for the re-offer and re-sale of the common
stock issued in the private offering and the common stock underlying the
warrants was declared effective by the Securities and Exchange
Commission.
The
Company is using the proceeds of the private placement for commercial
demonstration of the Company’s products, advanced manufacturing development
efforts, sales and marketing activities, and general working capital purposes.
On
May
16, 2007, the Company was notified that it was awarded a grant in the amount
of
$250,000 by the Pennsylvania Energy Development Authority (PEDA) to support
the
construction of a small scale, air-cooled phosphoric acid fuel cell test
facility. The project period, as outlined within the grant agreement, is from
October 5, 2006 through October 4, 2008.
On
October 12, 2007, the Company entered into a grant agreement (the “Grant
Agreement”) with the Pennsylvania NanoMaterials Commercialization Center (PNCC)
pursuant to which the PNCC will grant the Company approximately $230,000 to
support the development of advanced fuel cell catalyst systems. Under the terms
of the Grant Agreement, the Company will be reimbursed by the PNCC as grant
activities take place and as the costs are incurred and reported. The Company
has pledged a total of $131,545 in cost share for this program. The Company
will
be working in cooperation with the University of Pittsburgh’s Peterson Institute
of Nano Science and Engineering on this project. The grant may be terminated
in
whole, or in part, at any time if PNCC determines that the terms and conditions
of the Grant Agreement have not been met.
On
October 17, 2007, the Company announced that PEDA granted the Company $500,000
to fund the design, manufacture, and installation of commercial scale gas
clean-up modules to validate the use of surplus hydrogen-rich coke oven gas
for
commercial scale fuel cell power plants to produce electricity. The Company
will
be working in cooperation with U.S. Steel’s Mon Valley Works plant in Mon
Valley, Pennsylvania. The terms and conditions of the grant agreement have
not
yet been finalized.
The
Company is using its working capital to manufacture 400 kW modules, test,
and validate the Company’s product and technology, complete power plant design
work, continue development work for an accelerated manufacturing facility and
for other general corporate purposes. Management estimates that its working
capital will last through the first quarter of 2008.
Results
of Operations
Comparison
of the Three Months Ended September 30, 2007 and Three Months Ended
September 30, 2006
The
following table sets forth certain of HydroGen’s operating data for the three
months ended September 30, 2007 and the three months ended September 30, 2006:
|
|
|
September 30,
2007
|
|
September 30,
2006
|
|
Increase
(Decrease)
|
|
|
Research
& development
|
|
$
|
2,530,000
|
|
$
|
1,853,000
|
|
$
|
677,000
|
|
|
Payroll
and related costs
|
|
|
644,000
|
|
|
432,000
|
|
|
212,000
|
|
|
Professional
fees
|
|
|
119,000
|
|
|
221,000
|
|
|
(102,000
|
)
|
|
Other
|
|
|
823,000
|
|
|
239,000
|
|
|
584,000
|
|
|
Totals
|
|
$
|
4,116,000
|
|
$
|
2,745,000
|
|
$
|
1,371,000
|
|
The
increase in research and development costs was due to the continuing
acceleration and expansion of ramp-up activities, power plant design, and other
development activities during the third quarter of 2007 compared to the third
quarter of 2006. The number of employees retained by the Company to contribute
to the research and development effort increased by approximately 25 employees
and resulted in increased labor and fringe benefit costs of approximately
$290,000. Also adding to this increase was the purchase of approximately
$385,000 of non-capitalized equipment and materials consumed within the
Company’s operations.
Of
the
$212,000 increase to payroll and related costs, $140,000 was due to an increase
of 8 employees required to support the Company’s operations. The remaining
increase was attributable to a slight increase in the Company’s fringe benefit
rate.
The
increase in other expenses related to several factors. Depreciation expense
increased by approximately $100,000 due to new manufacturing assets placed
in
service. Travel expenses increased by approximately $100,000 due to an increase
in sales, marketing, and project related activities. Rent and utility expense
increased by approximately $60,000 due to rent escalation and utility costs
associated with increased manufacturing activities.
Comparison
of the Nine Months Ended September 30, 2007 and the Nine Months Ended September
30, 2006
The
following table sets forth certain of HydroGen’s operating data for the nine
months ended September 30, 2007 and the nine months ended September 30, 2006:
|
|
|
September 30,
2007
|
|
September 30,
2006
|
|
Increase
(Decrease)
|
|
|
Research
& development
|
|
$
|
7,850,000
|
|
$
|
3,288,000
|
|
$
|
4,562,000
|
|
|
Payroll
and related costs
|
|
|
2,102,000
|
|
|
1,104,000
|
|
|
998,000
|
|
|
Professional
fees
|
|
|
414,000
|
|
|
712,000
|
|
|
(298,000
|
)
|
|
Other
|
|
|
2,305,000
|
|
|
848,000
|
|
|
1,457,000
|
|
|
Totals
|
|
$
|
12,671,000
|
|
$
|
5,952,000
|
|
$
|
6,719,000
|
|
The
increase in research and development costs was due to the continuing
acceleration and expansion of ramp-up activities, power plant design, and other
development activities during the nine months ended September 30, 2007 compared
to the nine months ended September 30, 2006. The number of employees maintained
by the Company to contribute to the research and development effort increased
by
25 which resulted in increased labor and fringe benefit costs of approximately
$600,000. The remaining increase in research and development costs was primarily
attributable to the purchase of approximately $3,900,000 of non-capitalized
equipment and materials consumed within the Company’s operations.
The
increase in payroll and related costs reflects an expansion of the Company’s
administrative staff to support the acceleration and expansion of activities
and
increases in the compensation of the existing employees that brought the
compensation closer to market rates. The number of employees required to support
the Company’s operations increased by 8 and has resulted in increased labor and
fringe benefit costs of approximately $250,000. Performance bonuses of $300,000
were accrued during the nine months ended September 30, 2007. No performance
bonuses were accrued during the nine months ended September 30, 2006.
The
decrease in professional fees incurred during the nine months ended September
30, 2007 compared to the nine months ended September 30, 2006 related primarily
to fees and expenses that decreased as a result of hiring staff to perform
work
that was previously outsourced.
The
increase in other expenses during the nine months ended September 30, 2007
compared to the nine months ended September 30, 2006 related to several factors.
Depreciation expense increased by approximately $300,000 due to new
manufacturing assets placed in service. Other public company expenses related
to
our listing on the NASDAQ Capital Market, coupled with increased investor
relations activities, increased expenses by approximately $130,000. Expenses
related to non-capitalized computer equipment and software increased by
approximately $140,000 due to the acquisition of computer equipment and software
for new employees and the relocation of the Company’s network servers. Rent and
utility expense increased by approximately $140,000 due to rent escalation
and
utility costs associated with increased manufacturing activities.
Item
3.
Controls
and Procedures
The
Company’s principal executive officers (“CEO” and “President”) and principal
financial officer (“CFO”) evaluated, together with other members of senior
management, the effectiveness of the Company’s disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
September 30, 2007; and, based on this review, the Company’s CEO, President and
CFO concluded that, as of September 30, 2007, the Company’s disclosure controls
and procedures were effective to ensure that information required to be
disclosed by it in the reports that it files or submits under the Securities
Exchange Act of 1934 (i) is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms and (ii) is accumulated
and communicated to the Company’s management, including the Company’s CEO,
President, and CFO, as appropriate, to allow timely decisions regarding required
disclosure.
PART
II.
OTHER
INFORMATION
|
Item
1.
|
Legal
Proceedings
|
None.
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
None.
|
Item
3.
|
Defaults
Upon Senior
Securities
|
None.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
None.
|
Item
6.
|
Exhibits
and Reports on Form
8-K
|
|
|
31.1
|
Certification
pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act
of 1934, as amended of Leo Blomen.
|
|
|
31.2
|
Certification
pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act
of 1934, as amended of Joshua
Tosteson.
|
|
|
31.3
|
Certification
pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act
of 1934, as amended of Scott
Schecter.
|
|
|
32
|
Certification
of the Chief Executive Officer, President and Principal Financial
Officer
of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
HYDROGEN
CORPORATION
|
|
|
By:
|
/s/
Leo Blomen
|
|
|
|
Chief
Executive Officer
|
|
|
|
Date:
November 8, 2007
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Joshua Tosteson
|
|
|
|
President
|
|
|
|
Date:
November 8, 2007
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Scott Schecter
|
|
|
|
Principal
Financial Officer
|
|
|
|
Date:
November 8, 2007
|
