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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-31533
-----------------
PROTON ENERGY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1461988
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
50 Inwood Road, Rocky Hill, CT 06067
(Address of registrant's principal executive office)
(860) 571-6533
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares of common stock outstanding as of November 12, 2001 was
33,219,576 with a par value of $.01 per share.
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PROTON ENERGY SYSTEMS, INC.
INDEX to FORM 10-Q
PART I. FINANCIAL INFORMATION
Page
-----
Item 1 --Financial Statements
Condensed Consolidated Balance Sheets--September 30, 2001 (unaudited)
and December 31, 2000...................................................................... 3
Condensed Consolidated Statements of Operations--Three Month and Nine Month Periods
ended September 30, 2001 (unaudited) and September 30, 2000 (unaudited) and Cumulative
Amounts from Inception through September 30, 2001 (unaudited).............................. 4
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit) from
Inception through September 30, 2001 (unaudited)........................................... 5
Condensed Consolidated Statements of Cash Flows--Nine-Month Periods ended September 30,
2001 (unaudited) and September 30, 2000 (unaudited) and Cumulative Amounts from Inception
through September 30, 2001 (unaudited)..................................................... 6
Notes to Condensed Consolidated Financial Statements....................................... 7-10
Item 2 --Management's Discussion and Analysis of Financial Condition and Results of Operations...... 10-14
Item 3 --Quantitative and Qualitative Disclosures about Market Risk................................. 14
PART II. OTHER INFORMATION
Item 1 --Legal Proceedings.......................................................................... 15
Item 2 --Changes in Securities and Use of Proceeds.................................................. 15
Item 3 --Defaults upon Senior Securities............................................................ 15
Item 4 --Submission of Matters to a Vote of Security Holders........................................ 15
Item 5 --Other Information.......................................................................... 16
Item 6 --Exhibits and Reports on Form 8-K........................................................... 16
Signatures.......................................................................................... 17
Exhibit Index....................................................................................... 18
2
Part I--FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
PROTON ENERGY SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 10,207,193 $ 1,360,127
Marketable securities (Note 3)..................................... 160,593,088 173,389,002
Inventories and deferred costs (Note 4)............................ 2,901,319 1,649,674
Other current assets............................................... 2,795,614 2,902,426
------------ ------------
Total current assets........................................... 176,497,214 179,301,229
------------ ------------
Fixed assets, net (Note 5)............................................ 4,445,515 1,204,353
Other assets.......................................................... 98,591 246,889
------------ ------------
Total assets................................................... $181,041,320 $180,752,471
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 292,077 $ 185,733
Accrued expenses................................................... 360,314 435,598
Accrued compensation............................................... 506,867 507,250
Deferred revenue................................................... 1,361,859 1,035,302
Customer advances.................................................. 175,556 156,549
Taxes payable...................................................... 4,017 125,000
------------ ------------
Total current liabilities...................................... 2,700,690 2,445,432
------------ ------------
Commitments and contingencies (Note 9)
Stockholders' equity (Note 7):
Preferred stock, undesignated, $.01 par value per share; 5,000,000
shares authorized, no shares issued or outstanding............... -- --
Common stock, $.01 par value; 100,000,000 shares authorized;
33,208,576 and 33,088,043 shares issued and outstanding,
respectively..................................................... 332,086 330,880
Additional paid-in capital......................................... 241,956,386 242,092,743
Unearned compensation.............................................. (1,618,257) (2,374,361)
Accumulated other comprehensive gain (Note 3)...................... 2,703,421 289,000
Deficit accumulated during the development stage................... (65,033,006) (62,031,223)
------------ ------------
Total stockholders' equity..................................... 178,340,630 178,307,039
------------ ------------
Total liabilities and stockholders' equity..................... $181,041,320 $180,752,471
============ ============
The accompanying notes are an integral part of the financial statements.
3
PROTON ENERGY SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the period
from inception
Three Months Ended Nine Months Ended (August 16,
September 30, September 30, 1996) through
------------------------ -------------------------- September 30,
2001 2000 2001 2000 2001
----------- ----------- ------------ ------------ --------------
Contract revenue.................... $ 303,496 $ 350,125 $ 710,448 $ 537,256 $ 2,288,213
Product revenue..................... 60,157 -- 447,384 -- 503,334
----------- ----------- ------------ ------------ ------------
Total revenues............... 363,653 350,125 1,157,832 537,256 2,791,547
Costs and expenses:
Costs of contract revenue........ 260,345 236,502 689,816 324,600 1,818,222
Costs of production.............. 321,612 14,917 1,136,540 130,853 1,538,232
Research and development......... 1,810,437 891,229 4,289,584 2,077,692 12,036,440
General and administrative....... 1,768,808 949,477 5,164,784 2,381,771 13,236,097
----------- ----------- ------------ ------------ ------------
Total costs and expenses..... 4,161,202 2,092,125 11,280,724 4,914,916 28,628,991
----------- ----------- ------------ ------------ ------------
Loss from operations................ (3,797,549) (1,742,000) (10,122,892) (4,377,660) (25,837,444)
Interest income..................... 2,117,184 727,726 7,007,639 1,409,582 11,366,122
Gain on sale of marketable
securities (Note 3)............... 113,470 -- 113,470 -- 113,470
----------- ----------- ------------ ------------ ------------
Net loss............................ (1,566,895) (1,014,274) (3,001,783) (2,968,078) (14,357,852)
Deemed preferred dividends and
accretion......................... -- (1,261,000) -- (52,691,154) (54,191,154)
----------- ----------- ------------ ------------ ------------
Net loss attributable to common
stockholders...................... $(1,566,895) $(2,275,274) $ (3,001,783) $(55,659,232) $(68,549,006)
=========== =========== ============ ============ ============
Basic and diluted net loss per share
attributable to common
stockholders...................... $ (0.05) $ (1.18) $ (0.09) $ (29.16) $ (8.53)
=========== =========== ============ ============ ============
Shares used in computing basic and
diluted net loss per share
attributable to common
stockholders...................... 33,186,840 1,920,772 33,141,397 1,908,566 8,037,106
=========== =========== ============ ============ ============
The accompanying notes are an integral part of the financial statements.
4
PROTON ENERGY SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
Deficit
Accumulated Accumulated Total
Common Stock Additional Other During the Stockholders'
------------------- Paid-In Unearned Comprehensive Development Equity
Shares Amount Capital Compensation Income Stage (Deficit)
---------- -------- ------------ ------------ ------------- ------------ -------------
Initial capitalization............. 1,900,000 $ 19,000 $ -- $ -- $ -- $ -- $ 19,000
Net loss........................... (225,466) (225,466)
---------- -------- ------------ ----------- ---------- ------------ ------------
Balance at December 31, 1996....... 1,900,000 19,000 -- -- -- (225,466) (206,466)
Accretion.......................... -- -- -- -- -- (160,000) (160,000)
Net loss........................... -- -- -- -- -- (1,669,763) (1,669,763)
---------- -------- ------------ ----------- ---------- ------------ ------------
Balance at December 31, 1997....... 1,900,000 19,000 -- -- -- (2,055,229) (2,036,229)
Accretion.......................... -- -- -- -- -- (441,000) (441,000)
Net loss........................... -- -- -- -- -- (2,681,405) (2,681,405)
---------- -------- ------------ ----------- ---------- ------------ ------------
Balance at December 31, 1998....... 1,900,000 19,000 -- -- -- (5,177,634) (5,158,634)
Unearned compensation related to
stock option grants............... -- -- 1,099,281 (1,099,281) -- -- --
Amortization of unearned
compensation...................... -- -- -- 290,460 -- -- 290,460
Accretion.......................... -- -- (899,000) -- -- -- (899,000)
Net loss........................... -- -- -- -- -- (3,289,710) (3,289,710)
---------- -------- ------------ ----------- ---------- ------------ ------------
Balance at December 31, 1999....... 1,900,000 19,000 200,281 (808,821) -- (8,467,344) (9,056,884)
Issuance of common stock........... 8,051,950 80,519 125,768,765 -- -- -- 125,849,284
Conversion of preferred stock
into common stock................. 22,659,093 226,591 65,862,596 -- -- -- 66,089,187
Issuance of common stock
upon exercise of warrants......... 424,689 4,247 586,111 -- -- -- 590,358
Issuance of common stock
upon exercises of stock options... 52,311 523 8,483 -- -- -- 9,006
Unearned compensation related to
stock option grants............... -- -- 2,161,427 (2,161,427) -- -- --
Amortization of unearned
compensation...................... -- -- -- 595,887 -- -- 595,887
Deemed preferred dividends and
accretion......................... -- -- 47,457,155 -- -- (50,074,154) (2,616,999)
Issuance of stock option awards.... -- -- 47,925 -- -- -- 47,925
Change in unrealized gain on
marketable securities (Note 3).... -- -- -- -- 289,000 -- 289,000
Net loss........................... -- -- -- -- -- (3,489,725) (3,489,725)
---------- -------- ------------ ----------- ---------- ------------ ------------
Balance at December 31, 2000....... 33,088,043 330,880 242,092,743 (2,374,361) 289,000 (62,031,223) 178,307,039
Issuance of common stock
(unaudited)....................... 9,609 96 51,659 -- -- -- 51,755
Issuance of common stock upon
exercises of stock options
(unaudited)....................... 110,924 1,110 21,168 -- -- -- 22,278
Unearned compensation (unaudited).. -- -- (209,184) 209,184 -- -- --
Amortization of unearned
compensation (unaudited).......... -- -- -- 546,920 -- -- 546,920
Change in unrealized gain on
marketable securities (unaudited)
(Note 3).......................... -- -- -- -- 2,414,421 -- 2,414,421
Net loss (unaudited)............... -- -- -- -- -- (3,001,783) (3,001,783)
---------- -------- ------------ ----------- ---------- ------------ ------------
Balance at September 30, 2001...... 33,208,576 $332,086 $241,956,386 $(1,618,257) $2,703,421 $(65,033,006) $178,340,630
========== ======== ============ =========== ========== ============ ============
The accompanying notes are an integral part of the financial statements.
5
PROTON ENERGY SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Period
from
inception
(August 16,
Nine Months Ended September 30, 1996) through
------------------------------ September 30,
2001 2000 2001
------------- ------------ -------------
Cash flows from operating activities:
Net loss.................................................. $ (3,001,783) $ (2,968,078) $ (14,357,852)
Adjustments to reconcile net loss to net cash used in
operations:
Depreciation and amortization........................... 360,422 210,907 1,103,655
Amortization of premiums on securities.................. 360,206 -- 109,206
Non-cash stock-based expense............................ 546,920 553,650 1,803,304
Changes in operating assets and liabilities:
Inventories and deferred costs...................... (1,251,645) (711,964) (2,901,319)
Other current assets................................ 106,812 (800,167) (2,795,614)
Other assets........................................ 148,298 -- (98,591)
Accounts payable and accrued expenses............... (90,306) 277,803 1,214,977
Deferred revenue and contract advances.............. 345,564 491,401 1,537,415
------------- ------------ -------------
Net cash used in operating activities............ (2,475,512) (2,946,448) (14,384,819)
------------- ------------ -------------
Cash flows from investing activities:
Purchases of fixed assets............................... (3,601,584) (475,993) (5,438,970)
Purchases of marketable securities...................... (161,277,419) (51,048,812) (347,887,442)
Proceeds from maturities and sales of marketable
securities............................................ 176,127,548 5,686,630 189,888,569
------------- ------------ -------------
Net cash provided by (used in) investing
activities..................................... 11,248,545 (45,838,175) (163,437,843)
------------- ------------ -------------
Cash flows from financing activities:
Proceeds from sale of common stock, net................. 51,755 -- 126,290,765
Proceeds from exercise of stock options................. 22,278 8,406 31,284
Proceeds from exercise of warrants...................... -- -- 590,358
Proceeds from issuance of notes payable and warrants.... -- -- 2,000,000
Proceeds from issuance of mandatorily redeemable
convertible preferred stock and warrants.............. -- 50,038,159 59,488,174
Payment of initial public offering costs............ -- (370,726) (370,726)
------------- ------------ -------------
Net cash provided by financing activities........ 74,033 49,675,839 188,029,855
------------- ------------ -------------
Net increase in cash....................................... 8,847,066 891,216 10,207,193
Cash and cash equivalents at beginning of period........... 1,360,127 580,709 --
------------- ------------ -------------
Cash and cash equivalents at end of period................. $ 10,207,193 $ 1,471,925 $ 10,207,193
============= ============ =============
The accompanying notes are an integral part of the financial statements.
6
PROTON ENERGY SYSTEMS, INC.
NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Proton Energy Systems, Inc. (the "Company") was incorporated in Delaware on
August 16, 1996 to design, develop and manufacture proton exchange membrane
("PEM") electrochemical products. The Company employs PEM electrochemical
products in hydrogen generation and power generating and storage devices for
use in a variety of commercial applications. The Company manufactures products
for the domestic and international industrial gas market and operates in a
single segment. The Company is considered a development stage company, as
defined in Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises," because its
principal operations have not yet commenced.
2. BASIS OF PRESENTATION
In the third quarter of 2001, the Company established Technology Drive, LLC,
a Connecticut limited liability company solely owned by the Company. Technology
Drive, LLC holds title to approximately 44 acres of land in Wallingford,
Connecticut, where the Company plans to construct its new headquarters and
production facility. The condensed consolidated financial information includes
the accounts of the Company and Technology Drive, LLC, after elimination of
intercompany transactions.
The condensed consolidated financial information as of September 30, 2001,
for the three-month and nine-month periods ended September 30, 2001 and 2000,
and for the period from inception (August 16, 1996) through September 30, 2001
is unaudited. In the opinion of management, all adjustments, which consist
solely of normal recurring adjustments, necessary to present fairly in
accordance with generally accepted accounting principles, the financial
position, results of operations and cash flows for all periods presented, have
been made. The results of operations for the interim periods presented are not
necessarily indicative of the results that may be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-K filed on March 30, 2001.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as investments by owners and
distributions to owners. The following table sets forth the components of
comprehensive income:
September 30,
------------------------
2001 2000
----------- -----------
(unaudited) (unaudited)
Net loss................................. $(3,001,783) $(2,968,078)
Unrealized gains on marketable securities 2,414,421 --
----------- -----------
Total comprehensive loss.............. $ (587,362) $(2,968,078)
=========== ===========
Reclassification
Certain amounts in the 2000 financial statements have been reclassified to
conform with the 2001 presentation.
7
PROTON ENERGY SYSTEMS, INC.
NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS 141,
"Business Combinations" ("SFAS 141") and SFAS 142, "Goodwill and other
Intangible Assets" ("SFAS 142"). SFAS 141 applies to all business combinations
initiated after June 30, 2001, and requires these business combinations to be
accounted for using the purchase method of accounting. SFAS 142 applies to all
goodwill and intangibles acquired in a business combination. Under SFAS 142,
all goodwill, including goodwill acquired before initial application of the
standard, will not be amortized but will be tested for impairment within six
months of adoption of the statement, and at least annually thereafter.
Intangible assets other than goodwill will be amortized over their useful lives
and reviewed for impairment in accordance with SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS 142 is effective for fiscal years beginning after December 15, 2001, and
must be adopted as of the beginning of a fiscal year. The adoption of these
standards in 2002 is not expected to have a material impact on the Company's
financial condition or results of operations.
3. MARKETABLE SECURITIES
The Company classifies its entire investment portfolio as available for sale
as defined in SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." As of September 30, 2001, the Company's investment
portfolio consisted of U.S. government and agency securities held by two major
banking institutions. The maturities of marketable securities are as follows:
September 30, December 31,
2001 2000
------------- ------------
(unaudited)
Less than one year.... $ 81,726,919 $165,102,600
One to five years..... 78,866,169 8,286,402
------------ ------------
$160,593,088 $173,389,002
============ ============
Securities are carried at fair value with the unrealized gains/losses
reported as a separate component of stockholders' equity. Proceeds from the
sale of a security in the third quarter of 2001 totaled $15,546,432. The cost
was determined using the specific identification method and the resulting
realized gain was $113,470. The unrealized gain from marketable securities was
$2,703,421 and $289,000 at September 30, 2001 and December 31, 2000,
respectively.
4. INVENTORIES AND DEFERRED COSTS
Inventories are stated at the lower of cost or market value. Cost is
determined by the first-in, first-out method.
September 30, December 31,
2001 2000
------------- ------------
(unaudited)
Raw materials.................... $ 882,075 $ 545,583
Work in process.................. 695,114 133,315
Finished goods and deferred costs 1,324,130 970,776
---------- ----------
$2,901,319 $1,649,674
========== ==========
8
PROTON ENERGY SYSTEMS, INC.
NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. FIXED ASSETS
September 30, December 31,
2001 2000
------------- ------------
(unaudited)
Machinery and equipment................. $ 873,822 $ 805,229
Leasehold improvements.................. 373,308 280,705
Office furniture, fixtures and equipment 1,353,309 738,090
Construction in process................. 2,837,754 12,585
---------- ----------
$5,438,193 $1,836,609
Less: accumulated depreciation.......... (992,678) (632,256)
---------- ----------
$4,445,515 $1,204,353
========== ==========
Construction in process is primarily comprised of the land purchased for
construction of the new facility and includes costs to prepare the land for
construction.
6. LOSS PER SHARE
Net loss per share has been computed by dividing the net loss attributable
to common stockholders by the weighted average common shares outstanding. No
effect has been given to the exercise of common stock options, stock warrants,
convertible notes and redeemable convertible preferred stock, since the effect
would be antidilutive for all reporting periods.
7. CAPITAL STRUCTURE
In April 2000, the Company issued 14,306,901 shares of Series C Preferred
Stock for $3.50 per share for gross proceeds of approximately $50 million.
Concurrent with the issuance of the Series C Preferred Stock, the Company
recorded a beneficial conversion charge. The beneficial conversion charge was
calculated in accordance with EITF 98-5, "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios," and was the difference between the Series C Preferred Stock price and
the deemed fair market value of the Company's common stock into which the
Series C Preferred Stock was immediately convertible, limited to the total
Series C Preferred Stock proceeds. Accordingly, a deemed preferred dividend of
approximately $50 million as of the issuance date has been recognized as a
charge to accumulated deficit and net loss attributable to common stockholders,
and as an increase to additional paid-in capital.
In October 2000, the Company completed an initial public offering. Upon
closing the initial public offering, the outstanding shares of Series C
Preferred Stock and all other outstanding Preferred Stock automatically
converted into shares of Common Stock on a one-for-one basis.
8. STOCK OPTION GRANTS
During 1999 and 2000, the Company issued common stock options at less than
the fair value of its common stock. The compensation expense for such options
is amortized over the vesting periods of the related options. Accordingly, the
Company recorded stock-based compensation expense of $179,980 and $184,000 for
the three-month periods ended September 30, 2001 and September 30, 2000,
respectively, and $534,606 and $405,000 for the nine-month periods ended
September 30, 2001 and September 30, 2000, respectively.
9. COMMITMENTS AND CONTINGENCIES
In November 1999, the Company entered into an agreement with a distributor
to develop, market and distribute hydrogen generators to be used solely in
laboratory applications. This agreement grants the distributor
9
PROTON ENERGY SYSTEMS, INC.
NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
worldwide exclusivity to the commercial sale of this product during the
fifteen-year term of the contract as long as the distributor meets minimum
purchases, as defined in the agreement. The Company retains the right to modify
the contract once annually by providing six months notice. In the nine-month
period ended September 30, 2001, the Company recorded a loss of $251,000 under
this contract. Any future loss recognition is contingent on the distributor
placing additional orders and the Company's cost per unit exceeding the related
sale price per unit.
In 2001, the Company entered into a 10-year agreement with STM Power, Inc.
("STM") for the exclusive supply of high-pressure hydrogen replenishment
systems for Stirling Cycle Engines. Under an initial purchase order relating to
this agreement, STM has agreed to provide $395,000 for the product development
and delivery of prototype hydrogen replenishment systems. At September 30,
2001, $176,000 has been received and is recorded in customer advances.
10. RELATED PARTIES
In October 2001, the Company loaned $275,000 to Walter W. Schroeder, the
President of the Company and a director. The loan is for a term of two years
and is payable, with interest at the prime rate (currently 5.5%), in monthly
installments of $10,000 each with a final payment of approximately $64,000 at
maturity. The loan agreement contains no penalty for early repayment.
In 2001, the Company entered into a contract with STM to develop and deliver
hydrogen generators (see Note 9). Richard A. Aube, a member of the Company's
Board of Directors, is also a member of STM's Board of Directors.
11. SUBSEQUENT EVENT
In October 2001, the Company entered into a cost plus fixed fee contract
providing for payments of up to $6.2 million with the Naval Research Laboratory
for advanced fuel cell technology development. The contract contains two
phases. Phase I, totaling up to $3.2 million, consists of initial technology
development. Phase II, totaling up to $3.0 million, consists of prototype
fabrication and testing.
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this Form 10-Q and with our
Annual Report on Form 10-K filed for the fiscal year ended December 31, 2000.
This Form 10-Q contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "plan," "potential," "should," "will," and "would" or similar words. You
should read statements that contain these words carefully because they discuss
our future expectations and contain projections of our future results of
operation or of our financial position or state other forward-looking
information. However, there may be events in the future that we are unable to
predict accurately or control. The factors in the section captioned "Certain
Factors That May Affect Future Results, " contained in our Annual Report on
Form 10-K filed for the fiscal year ended December 31, 2000, and below in this
Form 10-Q under the "Legal Proceedings" caption, provide examples of risks,
uncertainties, and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Overview
We were founded in 1996 to design, develop and manufacture PEM
electrochemical products for commercial applications. Our proprietary PEM
technology is incorporated in two families of products: hydrogen generators, of
which we are currently manufacturing and delivering late-stage development
models to customers, and regenerative fuel cell systems, which we are currently
developing. Since our inception, we have funded our operations through private
financings that raised approximately $61.6 million, including $50.1 million
raised in a private financing in April 2000, and an initial public offering in
October 2000 which raised net proceeds of approximately $125.8 million.
10
PROTON ENERGY SYSTEMS, INC.
We began delivering late-stage development models of our hydrogen generators
to customers in 1999; revenue on such transactions has generally been deferred
until the expiration of the product warranty period. In the future, product
revenue will be recognized at the earlier of warranty expiration or when
estimates of warranty obligations can be made. As of September 30, 2001, we
have deferred revenue of approximately $1.4 million related to the units we
have delivered. In the future, we expect to derive the majority of our revenue
from the sale of the hydrogen generator and regenerative fuel cell systems
products we may develop.
We derive contract revenue from customer-sponsored research and development
contracts related to our PEM technology. For those contracts that do not
require us to meet specific obligations, we recognize contract revenue
utilizing the percentage-of-completion method, which is based on the
relationship of costs incurred to total estimated contract costs. For those
contracts that require us to meet specified obligations, including delivery and
acceptance obligations, amounts advanced to us pursuant to the contracts are
recognized as contract liabilities until such obligations are met. Once the
obligations are met, the amounts are recognized as contract revenue. From
inception through September 30, 2001, we have recognized approximately $2.3
million in contract revenue from research and development funding under
arrangements with both government and private sources. Under these contracts,
we have delivered HOGEN(R) hydrogen generators and demonstration regenerative
fuel cell systems. At September 30, 2001, we currently have ongoing research
and development projects with both NASA and the United States Department of
Energy, or DOE. Our current NASA contract was completed in September 2001 and
provided for total payments to us of approximately $600,000, all of which has
been recognized in revenue through September 30, 2001. The DOE contract extends
to September 2002 and provides for payments to us of approximately $1.3
million, of which we have recognized approximately $778,000 in revenue through
September 30, 2001.
We have generated cumulative losses since our inception, and as of September
30, 2001 our accumulated deficit was $65.0 million, of which $50.7 million is
attributable to deemed preferred dividends and accretion and $14.3 million is
attributable to net losses since inception. We expect to continue to make
significant investments in new product design and development for the
foreseeable future. We expect to incur operating losses in 2001 and for the
next several years and cannot predict when we will become profitable, if ever.
Results of Operations
Comparison of the Three Months Ended September 30, 2001 and September 30, 2000
Contract revenue. Contract revenue decreased from $350,000 for the three
months ended September 30, 2000 to $303,000 for the comparable period in 2001.
The amount in the third quarter of 2001 relates to activity under our NASA
contract as well as research and development activity related to Proton's
HOGEN(R) hydrogen generator under the DOE contract. The decrease in 2001
relates to decreased activity under our NASA contract which was completed in
September 2001. In the future, we expect contract revenue from
government-sponsored research and development contracts to decrease as a
percentage of total revenues as we begin to recognize increasing levels of
revenue from product sales.
Product revenue. Product revenue increased from $0 in the third quarter of
2000 to $60,000 for the third quarter of 2001. The amount in 2001 relates to
previously deferred revenue on products for which warranties have expired and
from product rentals and spare part sales.
Costs of contract revenue. Costs of contract revenue increased from $237,000
for the third quarter of 2000 to $260,000 for the third quarter of 2001. The
amount in 2001 and 2000 reflects costs incurred on our DOE and NASA contracts.
The increase in 2001 is due to increased activity on our cost-sharing DOE
contract coupled with lower average reimbursed billing rates.
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PROTON ENERGY SYSTEMS, INC.
Costs of production. Costs of production increased from $15,000 for the
third quarter of 2000 to $322,000 for the third quarter of 2001. The amount in
2001 reflects costs associated with manufacturing and delivering our hydrogen
generators which is in excess of the corresponding sales price as well as
warranty costs on units in the field. In addition, cost of production also
includes approximately $43,000 of cost recognized concurrent with the
recognition of revenue upon warranty expiration. To date, under our initial
order, we have recognized costs in excess of our contracted sales price with
Matheson Tri-Gas, Inc. in the amount of $373,000. We expect to continue to
incur costs in excess of our sales price under our contract with Matheson
Tri-Gas, Inc. as we refine our production process.
Under the Matheson Tri-Gas contract, Matheson has the exclusive right to
sell our hydrogen generators if it meets minimum purchase requirements
specified in the contract. Because we have not yet completed development of
commercial models of these units, no minimum purchase requirements are
applicable to Matheson prior to December 31, 2001. For periods after December
31, 2001, the contract currently provides that Matheson must purchase 1,000
units per year if it wishes to maintain exclusivity; however, the Company and
Matheson are currently in negotiation regarding quantity and price adjustments
for 2002. Under the contract, we have the right to increase prices on the units
once annually by providing six months notice, subject to either party's right
to terminate the contract if agreement on price increases is not reached. We
anticipate that the terms of the contract may be revised as commercial
development is completed. Any future recognition of losses by us under this
contract will depend on the number of orders placed by Matheson and the extent
to which our cost per unit exceeds the sale price per unit.
Research and development expenses. Research and development expenses
increased from $891,000 for the third quarter of 2000 to $1.8 million for the
third quarter of 2001. The increase was due to an increase in our research and
development activities related to our PEM technology in our regenerative fuel
cell systems and our hydrogen generators. These research and development
activities primarily related to increased salaries and benefits for our growing
research and development staff and materials to support our research and
development projects. We expect our research and development expenses to
continue to increase in the future.
General and administrative expenses. General and administrative expenses
increased from $949,000 for the third quarter of 2000 to $1.8 million for the
third quarter of 2001. This change primarily reflects an increase in salaries
and benefits of $351,000, as a result of an increase in employees, an increase
in accounting and legal expenses of $148,000, an increase of $100,000 in
educational and training related expenses, and an increase of $77,000 for state
minimum capital-based and franchise taxes.
Interest income, net. Interest income increased from $728,000 for the third
quarter of 2000 to $2.1 million for the third quarter of 2001. The increase
resulted from increased cash and marketable securities as a result of investing
the proceeds from our initial public offering.
Comparison of the Nine Months Ended September 30, 2001 and September 30, 2000
Contract revenue. Contract revenue increased from $537,000 for the nine
months ended September 30, 2000 to $710,000 for the comparable period in 2001.
This increase was primarily due to research and development activity related to
Proton's HOGEN(R) hydrogen generator under the DOE contract. In the future, we
expect contract revenue from government-sponsored research and development
contracts to decrease as a percentage of total revenues as we begin to
recognize increasing levels of revenue from product sales.
Product revenue. Product revenue increased from $0 in the first nine months
of 2000 to $447,000 for the comparable period of 2001. The amount in 2001
relates to previously deferred revenue on products for which warranties have
expired and from product rentals and spare parts sales.
12
PROTON ENERGY SYSTEMS, INC.
Costs of contract revenue. Costs of contract revenue increased from $325,000
for the first nine months of 2000 to $690,000 for the comparable period of
2001. The amount in 2000 reflects costs incurred on our DOE and NASA contracts.
The amount in 2001 primarily reflects costs incurred under the DOE contract.
The increase in 2001 is due to increased activity on our cost-sharing DOE
contract coupled with lower average reimbursed billing rates.
Costs of production. Costs of production increased from $131,000 for the
first nine months of 2000 to $1.1 million for the comparable period of 2001.
The amounts in 2000 and 2001 reflect costs associated with manufacturing and
delivering our hydrogen generators which is in excess of the corresponding
sales price as well as warranty costs on units in the field. The increase in
2001 is a result of increased production activity. In addition, in 2001, cost
of production includes approximately $400,000 of cost recognized concurrent
with the recognition of revenue upon warranty expiration as compared to $0 for
the first nine months of 2000.
Research and development expenses. Research and development expenses
increased from $2.1 million for the first nine months of 2000 to $4.3 million
for the comparable period of 2001. The increase was due to an increase in our
research and development activities related to our PEM technology in our
regenerative fuel cell systems and our hydrogen generators. These research and
development activities primarily related to increased salaries and benefits for
our growing research and development staff and materials to support our
research and development projects. We expect our research and development
expenses to continue to increase in the future.
General and administrative expenses. General and administrative expenses
increased from $2.4 million for the first nine months of 2000 to $5.2 million
for the comparable period of 2001. This change primarily reflects an increase
in salaries and benefits of $1.2 million, as a result of an increase in
employees, an increase in accounting and legal expenses of $375,000, an
increase of $331,000 in investor relation and annual report related expenses,
and an increase of $282,000 for state minimum capital-based and franchise taxes.
Interest income, net. Interest income increased from $1.4 million for the
first nine months of 2000 to $7.0 million for the comparable period of 2001.
The increase resulted from increased cash and marketable securities as a result
of investing the proceeds from the issuance of our Series C Convertible
Preferred Stock and initial public offering.
Liquidity and Capital Resources
Since our inception in August 1996 through September 2001, we have financed
our operations through the series A, A-1, B, B-1 and C convertible preferred
stock issuances and our initial public offering that, in total, raised
approximately $187.4 million. As of September 30, 2001, we had $170.8 million
in cash, cash equivalents and marketable securities.
Cash used in operating activities was $2.5 million for the nine months ended
September 30, 2001 and was primarily attributable to our net loss and increases
in inventory and deferred costs, offset by increases in deferred revenue. Cash
used in operating activities was $2.9 million for the comparable 2000 period
and was primarily attributable to our net loss and increases in inventory and
other current assets, offset by increases in deferred revenue.
Cash provided by investing activities was $11.2 million for the nine months
ended September 30, 2001 and was primarily attributable to proceeds from the
maturity of marketable securities offset by purchases of marketable securities
and fixed assets. Cash used in investing activities was $45.8 million for the
nine months ended September 30, 2000 and was primarily attributable to
purchases of marketable securities offset by maturities of marketable
securities.
Cash provided by financing activities was $49.7 million for the nine months
ended September 30, 2000 resulting from the issuance of Series C Convertible
Preferred Stock.
13
PROTON ENERGY SYSTEMS, INC.
We anticipate that our cash and marketable securities on hand as of
September 30, 2001 will be adequate to fund our operations, working capital and
capital expenditure requirements for at least the next 12 months. We have
purchased approximately 44 acres of land in Wallingford, CT to build our new
manufacturing facility. We currently anticipate relocating to our planned
manufacturing facility in the next 12 months. We expect to invest approximately
$11--$13 million over the next 9 to 12 months in connection with this facility.
To date through September 30, 2001, we have invested approximately $2.8 million
in connection with the facility, primarily related to the land purchase and
costs to prepare the land for construction. We are currently in negotiation
with a major financial institution regarding financing for a significant
portion of the facility construction. Over the next 12 months, we expect to
continue to fund the production of our hydrogen generators and to continue our
research and development activities on our regenerative fuel cell systems. We
cannot assure you that we will not require additional financing to fund our
operations or that, if required, any further financing will be available to us
on acceptable terms, or at all. If sufficient funds are not available, we may
be required to delay, reduce or eliminate some of our research and development
or manufacturing programs. The terms of any additional financing may require us
to relinquish rights to our technologies or potential products or other assets.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We hold marketable securities consisting of U.S. government and agency
securities that are held by two major banking institutions. We do not hold
derivative financial instruments. Interest rate risk is the major price risk
facing our investment portfolio. Such exposure can subject us to economic
losses due to changes in the level or volatility of interest rates. Generally,
as interest rates rise, prices for fixed income instruments will fall. As rates
decline the inverse is true. We attempt to mitigate this risk by investing in
high quality issues of short duration. We do not expect any material loss from
our marketable securities investments and believe that our potential interest
rate exposure is not material.
14
PROTON ENERGY SYSTEMS, INC.
PART II.
OTHER INFORMATION
ITEM 1. Legal Proceedings
Between July 3, 2001 and August 29, 2001, four purported class action
lawsuits were filed in the United States District Court for the Southern
District of New York against us and several of our officers and directors as
well as against the underwriters who handled our September 28, 2000 initial
public offering ("IPO") of common stock. All of the complaints were filed
allegedly on behalf of persons who purchased the Company's common stock from
September 28, 2000 through and including December 6, 2000. The complaints are
similar, and allege violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934 primarily based on the assertion that there was
undisclosed compensation received by the Company's underwriters in connection
with our IPO. We expect that the actions will be consolidated into a single
suit at some point in the future.
Although neither we nor the individual defendants have filed answers in any
of these matters, we believe that the individual defendants and we have
meritorious defenses to the claims made in the complaints and intend to contest
the lawsuits vigorously. However, there can be no assurance that we will be
successful, and an adverse resolution of the lawsuits could have a material
adverse effect on our financial position and results of operation in the period
in which the lawsuits are resolved. We are not presently able to reasonably
estimate potential losses, if any, related to the lawsuits. In addition, the
costs to us of defending any litigation or other proceeding, even if resolved
in our favor, could be substantial. Such litigation could also substantially
divert the attention of our management and our resources in general.
Uncertainties resulting from the initiation and continuation of any litigation
or other proceedings could harm our ability to compete in marketplace.
ITEM 2. Changes in Securities and Use of Proceeds
On October 4, 2000, we closed an initial public offering of our common
stock. The effective date of the Securities Act registration statement for
which the use of proceeds information is being disclosed was September 28,
2000, and the Commission file number assigned to the registration statement is
333-39748. After deducting underwriting discounts and commissions and offering
expenses, our net proceeds from the offering were approximately $125.8 million.
The net proceeds have been allocated for general corporate purposes and capital
expenditures, including purchase of equipment for and leasehold improvements to
our planned manufacturing facility, and the possible acquisition of businesses,
products or technologies that are complementary to our business. As of
September 30, 2001, approximately $8.1 million of the net proceeds of the
offering had been used to fund operations and purchase fixed assets. The
remaining net proceeds are invested in U.S. government securities and agencies.
As of September 30, 2001, none of the proceeds were paid directly or indirectly
to any director, officer or general partner of us or our associates, persons
owning ten percent or more of any class of our equity securities, or an
affiliate of us. Subsequent to September 30, 2001, the Company loaned $275,000
to an officer and director of the Company.
ITEM 3. Default upon Senior Securities
Not Applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
15
PROTON ENERGY SYSTEMS, INC.
ITEM 5. Other Information
Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.17 Secured Promissory Note, dated October 4, 2001, between the
Registrant and Walter W. Schroeder
(b) Reports on Form 8-K
None.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROTON ENERGY SYSTEMS, INC.
(Registrant)
By: /S/ WALTER W. SCHROEDER
--------------------------------------------
Walter W. Schroeder
President and Chief Executive Officer
By: /S/ JOHN A. GLIDDEN
--------------------------------------------
John A. Glidden
Vice President of Finance
(Principal Financial and Accounting Officer)
Date: November 13, 2001
17
EXHIBIT INDEX
10.17 Secured Promissory Note, dated October 4, 2001, between the Registrant and Walter W. Schroeder
18