RNS Number : 0359E
PolyFuel Inc.
23 September 2008
23 September 2008
POLYFUEL, INC.
INTERIM RESULTS FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2008
PolyFuel, Inc. (LSE: PYF) ("PolyFuel" or the "Company"), a world leader in fuel cell technology, particularly engineered membranes for
portable electronic and automotive applications, today announces its interim results for the six months ended 30th June 2008.
PolyFuel made significant progress during the first six months of 2008 and since, achieving a number of important goals aimed at
enabling its customers to accelerate their progress toward the commercialisation of portable fuel cells.
HIGHLIGHTS
* Developed a functional prototype of a fuel cell power module for notebook-class computers designed to surpass lithium-ion
batteries in terms of runtime, size and weight and to provide continuous non-stop runtimes with the simple hot swap of small cartridges of
methanol fuel
* Presented the prototype notebook PC fuel cell power supply to several leading consumer electronics manufacturers in the Pacific
Rim
* Exhibited a mechanical demonstrator of the prototype at the Intel Developer Forum in Shanghai
* Advanced relationships with two additional prospective MEA partners while also building on existing relationships with Johnson
Matthey
* Secured $2 million in funding from the US Army's Communications and Electronics Research, Development and Engineering Command
* Revenues for the period effectively doubled to US$1.2 million (2007: US$0.6 million)
* Net loss decreased 7% to US$4.1 million (2007: US$4.4 million)
* Net cash used in operations decreased by approximately US$0.6 million to US$3.7 million (2007: US$4.3 million)
* Cash and short term investments totaled US$10 million at the period end (31 December 2007: US$13.7 million)
* Average cash burn rate going forward has been reduced to an estimated range of US$500k to US$550k per month from the Company's
previous estimate of US$600K to US$650K per month
Jim Balcom, Chief Executive Officer, commented:
"As PolyFuel enters the second half of 2008 and looks to the future, it perceives a portable fuel cell market that, while challenging,
is also one that continues to offer significant potential. Market demand for better portable power supplies continues to grow, and battery
and electronics manufacturers continue to look to fuel cell technology to deliver the extended runtimes that their customers desire.
PolyFuel's reference design strategy is focused on bringing commercialization of portable fuel cells forward by providing our customers with
a complete system solution for the large and fast growing portable electronics markets."
"We believe that this new system technology, combined with our leading edge, hydrocarbon-based membranes, places us at the forefront of
industry technology and will finally enable a new generation of fuel cells and portable, unplugged power supplies that will deliver on the
long-awaited promise of compact, lightweight, long-running and cost effective portable power."
For further information contact:
PolyFuel, Inc Tel: +1 650 429 4646
Jim Balcom, Chief Executive
Officer
Hogarth Partnership Limited Tel:+44 (0)20 7357 9477
Nick Denton / Sarah MacLeod
/ Ian Payne
KBC Peel Hunt Ltd Tel:+44(0)20 7418 8826
David Anderson
CHIEF EXECUTIVE'S REVIEW
Introduction
The principal driving force behind portable fuel cell products has always been the "runtime" gap, which is the demand for power supplies
whose runtime surpasses that of the incumbent lithium-ion battery ("LiB") technology. The demand for a safe solution to this runtime demand
gap continues to grow unabated, as evidenced by a recent consumer survey conducted by Intel* which showed that "improved battery runtime"
was the single most desired improvement sought by consumers in the notebook PC market, one of the largest and fastest growing segments in
consumer electronics. PolyFuel recognized this trend, as well as the sorely lacking availability of alternative power supply solutions in
the portable consumer electronics market, and has focused resources on developing a reference design for a fuel cell power supply which will
solve certain system-related challenges that have held back the widespread commercialization of this technology. This reference design would
then be provided to customers and partners in exchange for expected membrane-related revenue.
PolyFuel made significant progress during the first six months of 2008 and since, and has achieved a number of important goals aimed at
enabling its customers to accelerate their progress toward the commercialisation of portable fuel cells, as described below.
Technical Developments
In February, PolyFuel announced the completion of the first four milestones in the Company's five milestone program to develop a
prototype of a fuel cell power module for a notebook PC that can deliver all-day runtime. The endpoint of the program and the fifth
milestone is a working prototype designed to be integrated with a representative notebook PC, which surpasses the performance of today's
lithium-ion batteries in terms of runtime versus size and weight. In achieving its first four milestones, PolyFuel fundamentally solved the
water management problem that has plagued portable fuel cell developers for nearly a decade.
To complete these goals, PolyFuel engineered an entirely new membrane, a breakthrough "membrane electrode assembly" (MEA) design, and a
new system design that not only reduces the amount of water byproduct produced during fuel cell operation, but also recycles a significant
portion of that water directly back through the membrane to the fuel side, where it is reused to generate more electricity. As part of the
fourth milestone, multiple "proof of concept" fuel cells were operated for hundreds of hours under PolyFuel's dramatically simplified system
design and target operating conditions.
In July, we announced the unveiling of the functional version of our prototype fuel cell power supply for notebook-class computers
designed to provide continuous unplugged runtimes with the simple hot swap of small cartridges of methanol fuel. The consumer-friendly
design has been fully integrated with a representative notebook PC - the Lenovo T40 ThinkPad�. We developed the prototype as a technology
demonstrator and proof of concept and we intend to provide the technology as a reference design for consumer electronics manufacturers to
help accelerate their commercialization of portable fuel cell products.
During the period we also developed a new experimental membrane that mimicked some of the characteristics of fluorocarbon membranes,
while still retaining the principal advantages of PolyFuel's hydrocarbon chemistry. This membrane was engineered at the request of customers
who wanted to realize the benefits of PolyFuel's hydrocarbon membranes with their legacy system designs, which had been originally designed
around DuPont's Nafion membrane.
Market and Customer Developments
Samples of PolyFuel's newest portable fuel cell membrane, DM2, were recently shipped to several lead customers. It had been engineered
at their request, to allow for easier substitution of PolyFuel's hydrocarbon membrane into customers' legacy fluorocarbon membrane-based
systems. Feedback to date on the early trials of the new material has been very positive.
PolyFuel has continued to advance the relationship with its non-exclusive channel partner, JMFC. In keeping with our strategic focus,
during the year PolyFuel has redirected customer demand for value-added membrane products, such as catalysts and MEAs, to its first partner,
JMFC. During the year we have also advanced the relationship with two other prospective channel partners, as part of our effort to ensure
that PolyFuel's hydrocarbon membrane technology has the broadest possible market access.
PolyFuel's functional prototype of a notebook PC fuel cell power supply has now been demonstrated to several leading consumer
electronics manufacturers in the Pacific Rim and it has been met with enthusiasm. Feedback received indicates that it is clearly the
best-in-class of any of the many portable fuel cell prototypes demonstrated to-date. PolyFuel expects to continue further development and
commercialisation of the new prototype with one or more customers and/or technology development partners.
Financial Review
Revenues for the six months ended 30 June 2008 totaled approximately US$1.2 million, an increase of US$0.6 million from revenues of
US$0.6 million in 2007, of which US$0.8 million represented revenues earned on a cost reimbursement basis under the Company's cost-shared
technology development program with the DOE (DOE Program). This compares with DOE revenues of approximately US$0.3 million in the six months
ended 30 June 2007, an increase of US$0.5 million. The DOE Program was suspended in 2006 and subsequently reinstated in April 2007, and thus
the Company realized the cost-reimbursement benefits of these programs in 2008 for the entire six month period. The Company also earned
revenues, on a cost reimbursement basis, of US$0.4 million in the 2008 period reflecting the initiation of a 2 year, US$2.0 million Advanced
Technology Program project under the auspices of the National Institute of Standards and Technology (NIST) within the Department of
Commerce. These increases were partly offset by a decrease in revenue associated with membrane, membrane-related sales and engineering revenues, which decreased from US$0.3 million in the six months
ended 30 June 2007 to US$0.02 million in the period ended 30 June 2008, a decline of US$0.28 million, principally reflecting PolyFuel's
decision to redirect customer demand for value-added membrane products, such as MEAs, toward PolyFuel's value-added channel partner, JMFC,
and a decrease in revenue associated with one-time engineering projects.
Net losses in the first half of 2008 amounted to approximately US$4.1 million as compared with net losses of US$4.4 million in 2007.
This decrease in net losses was primarily attributable to the aforementioned increase in government reimbursement programs, partially offset
by a reduction in interest income, as a result of lower levels of cash available for investment in 2008.
Cash flow used in operations for the 2008 period was approximately US$3.7 million as compared with US$4.3 million in the corresponding
period in 2007. The decrease in capital required to fund operations in 2008 was attributable to a lower loss from operations, accounting for
US$0.3 million in cash savings, with the remainder due to balance sheet effects, primarily increases in accounts payable and accrued
liabilities. At 30 June 2008, the Company had on hand cash, cash equivalents and short-term investments of approximately US$10.0 million.
In August 2008, PolyFuel took steps to concentrate resources on its reference system design program. Re-prioritising capabilities will
allow the Company to reduce its overall expenditure level and lower its projected cash requirements. As a result of these measures, the
Company believes that it has sufficient cash to finance the business through the end of 2009.
Outlook
As PolyFuel enters the second half of 2008 and looks to the future, it perceives a portable fuel cell market that, while challenging, is
also one that continues to offer significant potential. Market demand for better portable power supplies continues to grow, while incumbent
battery technologies are increasingly challenged to keep pace with the need for longer runtimes. PolyFuel's reference design strategy is
focused on bringing commercialization forward by developing a DMFC solution for one of the largest and fastest growing consumer electronics
markets, notebook PCs.
Jim Balcom
Chief Executive Officer
23 September 2008
PolyFuel, Inc.
(A development stage enterprise)
FINANCIAL Statements FOR THE SIX MONTHS ENDED 30 jUNE 2008 (Unaudited)
Period from
27 January
1999
Six Months Ended 30 June (Inception) to
2008 2007 30 June 2008
US$ US$ US$
Revenues 1,160,297 594,876 4,621,352
Costs and operating expenses
Research and development 2,854,255 2,868,865 38,154,255
General and administrative 2,557,651 2,623,595 32,367,258
Total expenses 5,411,906 5,492,460 70,521,513
Loss from operations (4,251,609) (4,897,584) (65,900,161)
Interest income 210,093 520,271 3,322,388
Interest expense -- -- (1,591,326)
Other income (expense), net (13,844) 4,563 (47,959)
Net loss (4,055,360) (4,372,750) (64,217,058)
Net loss attributable to common (4,055,360) (4,372,750) (52,001,945)
stockholders
Net loss per share
Basic and diluted (0.07) (0.08)
Weighted average number of shares
used in net
loss per share calculations
Basic and diluted 57,736,388 57,321,654
The accompanying notes are an integral part of these consolidated financial statements.
PolyFuel, Inc.
(A development stage enterprise)
Consolidated Balance Sheets (Unaudited)
30 June 31 December
2008 2007
US$ US$
Assets
Current assets
Cash and cash equivalents 6,309,303 7,126,685
Short-term investments 3,693,548 6,576,170
Accounts receivable 165,291 134,511
Inventories 103,277 114,192
Prepaid expenses and other 347,753 330,392
current assets
Total current assets 10,619,172 14,281,950
Property and equipment, net 312,689 337,039
Other assets 199,240 195,300
Total assets 11,131,101 14,814,289
Liabilities and Stockholders'
Equity
Liabilities
Accounts payable and accrued 988,348 922,629
expenses
Deferred revenue 1,336 1,336
Total liabilities 989,684 923,965
Stockholders' equity
Common stock: US$0.001 par value, 100,000,000 shares authorised;
57,886,388 and 57,436,388 shares issued and outstanding at 30 June 2008
and 31 December 2007, respectively
57,886 57,436
Additional paid-in capital 59,586,209 59,272,722
Accumulated other comprehensive income (loss) (6,304) 1,180
Deficit accumulated during development stage (49,496,374) (45,441,014)
Total stockholders' equity 10,141,417 13,890,324
Total liabilities and stockholders' equity 11,131,101 14,814,289
The accompanying notes are an integral part of these consolidated financial statements.
PolyFuel, Inc.
(A development stage enterprise)
Consolidated Statements of Cash Flows (Unaudited)
Period from
27 January
1999
Six Months Ended 30 June (Inception) to
2008 2007 30 June 2008
US$ US$ US$
Cash flows from operating
activities
Net loss (4,055,360) (4,372,750) (64,217,058)
Adjustments to reconcile net
loss to net cash
used in operating activities
Depreciation and amortisation 95,634 114,207 3,254,228
Purchased research and -- -- 3,825,984
development
(Gain) loss on sale of -- 4,059 (112,667)
equipment
Stock-based expense - -- -- 45,887
non-employees
Stock-based employee 268,937 294,581 1,283,331
compensation expense
Non-cash expense related to
notes receivable -- -- 112,118
from stockholders
Non-cash interest expense
related to issuance of -- -- 1,006,401
warrants
Non-cash interest expense -- -- 34,980
related to bridge loans
Amortisation of securities 1,391 8,402 186,440
premium
Changes in assets and
liabilities
Accounts receivable (30,780) (115,836) (165,291)
Inventories 10,915 (42,443) (103,277)
Prepaid expenses and other (17,361) 110,036 (347,753)
current assets
Other assets (3,940) -- (199,240)
Deferred revenue -- (8,139) 1,336
Accounts payable and accrued 65,719 (319,970) 1,211,378
expenses
Net cash used in operating (3,664,845) (4,327,853) (54,183,203)
activities
Cash flows from investing
activities
Purchase of investments (3,701,253) (2,518,505) (26,923,926)
Maturities and sales of 6,575,000 4,250,000 23,037,633
available for sale investments
Proceeds from sale of property -- 255 140,980
and equipment
Purchase of property and (71,284) (52,420) (3,595,230)
equipment
Net cash provided by (used in) 2,802,463 1,679,330 (7,340,543)
investing activities
Cash flows from financing
activities
Proceeds from issuance of 45,000 8,287 28,331,208
common stock, net
Proceeds from issuance of
redeemable convertible -- -- 37,097,656
preferred stock, net
Proceeds from lease line and -- -- 2,545,612
finance facility
Repayment of lease line and
finance facility -- -- (2,545,612)
obligations
Proceeds from issuance of
notes payable and -- -- 2,404,185
bridge loans
Net cash provided by financing 45,000 8,287 67,833,049
activities
Net increase (decrease) in
cash and cash (817,382) (2,640,236) 6,309,303
equivalents
Cash and cash equivalents at 7,126,685 15,177,509 --
beginning of period
Cash and cash equivalents at 6,309,303 12,537,273 6,309,303
end of period
Six Months Ended 30 June Period from 27
January 1999
(Inception) to
2008 2007 30 June 2008
US$ US$ US$
Supplemental disclosure of
non-cash investing and
financing activities
Issuance of common and
redeemable convertible
preferred stock for
in-process research and -- -- 4,153,200
development and notes
payable
Issuance of warrants with
credit line, lease line, -- -- 1,006,901
finance facilities and
bridge loans
Repurchase of common stock for -- -- 62,631
notes receivable
Cancellation of notes -- -- 78,907
receivable
Conversion of redeemable
convertible preferred -- -- 43,380,636
stock upon recapitalisation
Issuance of common stock
option in connection with AIM -- -- 242,568
listing
The accompanying notes are an integral part of these consolidated financial statements.
notes to consolidated financial statements (unaudited)
NOTE 1 - Organisation, Basis of Presentation and Significant Accounting Policies
Organisation
PolyFuel, Inc. (the "Company") was incorporated in Delaware on 27 January 1999. The Company, a spin-off of SRI International, Inc., was
established primarily for the purpose of developing micro fuel cell technology. Since inception, the Company has been deemed to be in the
development stage as it has devoted substantially all of its efforts to developing its product, raising capital and recruiting personnel.
The Company is headquartered in Mountain View, California and is publicly listed on the London Stock Exchange Alternative Investment Market,
also known as the "AIM Market".
Principles of Consolidation
The accompanying financial statements have been prepared on a consolidated basis and, accordingly, reflect the financial position and
results of operations of both PolyFuel, Inc. and its wholly owned Canadian subsidiary, PolyFuel, Ltd. All intercompany account balances have
been eliminated in consolidation.
Basis of Presentation and Continuance of Operations
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results
for the six month period ended 30 June 2008 are not necessarily indicative of the results that may be expected for the year ending 31
December 2008, or for any future period. These unaudited, Consolidated Financial Statements and notes thereto should be read in conjunction
with the audited Consolidated Financial Statements included in the Company's Annual Report for the year ended 31 December 2007, a copy of
which can be found in its entirety on the Company's website.
These unaudited, Consolidated Financial Statements have also been prepared on a going concern basis. As such, they anticipate the
realisation of assets and the liquidation of liabilities in the normal course of business. Notwithstanding this fact, the Company has
incurred losses and negative cash flow from operations for every fiscal period since its inception. For the six months ended 30 June 2008,
the Company incurred a net loss of approximately US$4.1 million and negative cash flows from operations of US$3.7 million. There is no
assurance that the Company will be profitable in the foreseeable future. In the event the Company is not successful in generating profits
and positive cash flow from operations in future periods, it will need to raise additional financing to support its continuing operations.
While the Company has been successful in completing numerous rounds of public and private equity financing, totaling approximately US$67.8
million (net of issuance costs) through 30 June 2008, no assurances can be given that additional financing will be available or be available at terms acceptable for the Company, in which case, the
Company's ability to achieve its business objectives will be adversely affected. The Company's Consolidated Financial Statements do not
include any adjustments that might result from such adverse outcomes.
Significant Accounting Policies
The Company's significant accounting policies are disclosed in its Annual Report for the year ended 31 December 2007 and have not
changed materially as of 30 June 2008.
Recent Pronouncements
Fair Value of Financial Instruments
In September 2006, the Financial Statement Standard Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 157,
"Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 established a common definition for fair value, which is to be applied to U.S.
generally accepted accounting principles ("GAAP") requiring use of fair value, and a framework for measuring fair value, and expanded
disclosure about such fair value measurements. This pronouncement applies under the other accounting standards that require or permit fair
value measurements. Accordingly, this statement does not require any new fair value measurement. SFAS No. 157 is effective for financial
assets and financial liabilities for fiscal years beginning after November 15, 2007. In February 2008, the FASB released a FASB Staff
Position ("FSP") 157-1, "Application of FASB Statement No. 157 to FASB Statement 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under Statement 13." FSP 157-1 removed leasing transactions accounted for under FASB Statement 13 and related guidance from the scope
of SFAS No. 157. FSP 157-2, "Partial Deferral of the Effective Date of Statement 157," deferred the effective date of SFAS No. 157 for all
nonfinancial assets and nonfinancial liabilities, except those which are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations . SFAS No. 141R will change the accounting for
business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities
assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment and
disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS No. 141R
will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time.
SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," became effective for the Company on January 1,
2008. SFAS No. 159 includes an amendment of FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which permits an entity to measure certain financial assets and financial liabilities at fair value. The objective of SFAS No. 159 is to
improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and
liabilities using different attributes, without having to apply complex hedge accounting provisions. Under SFAS No. 159, entities that elect
the fair value option (by instrument) will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value
option election is irrevocable, unless a new election date occurs. SFAS No. 159 establishes presentation and disclosure requirements to help
financial statement users understand the effect of the entity's election on its earnings, but does not eliminate disclosure requirements of other accounting standards. Assets and
liabilities that are measured at fair value must be displayed on the face of the balance sheet. The Company did not elect the fair value
option for its financial assets and liabilities existing at January 1, 2008, nor for its financial assets and liabilities transacted in the
six months ended June 30, 2008.
NOTE 2 - Fair Value Measurements
As stated in "Note 1 - Organisation, Basis of Presentation and Significant Accounting Policies," on 1 January 2008 the Company adopted
SFAS 157, which established a framework for measuring fair value under GAAP and clarified the definition of fair value within that
framework. SFAS 157 does not require assets and liabilities that were previously recorded at cost to be recorded at fair value. For assets
and liabilities that are already required to be disclosed at fair value, SFAS 157 introduced, or reiterated, a number of key concepts that
form the foundation of the fair value measurement approach to be used for financial reporting purposes. The fair value of our financial
instruments reflects the amounts that we estimate we would receive in connection with the sale of an asset or paid in connection with the
transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). SFAS 157 also
established a fair value hierarchy that prioritizes the inputs used in valuation techniques into the following three levels:
Level 1-quoted prices in active markets for identical assets and liabilities
Level 2-observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3-unobservable inputs
The adoption of SFAS 157 did not have an effect on our financial condition or results of operations, but SFAS 157 introduced new
disclosures about how we value certain assets and liabilities. Much of the disclosure focuses on the inputs used to measure fair value,
particularly in instances in which the measurement uses significant unobservable (Level 3) inputs. A substantial majority of our financial
instruments are valued using quoted prices in active markets or are based on other observable inputs.
The following table sets forth the fair value of our financial assets measured on a recurring basis as of 30 June 2008. Assets and
liabilities are measured on a recurring basis if they are remeasured at least annually.
Level 1 (US$) Level 2 (US$) Level 3 (US$) Total (US$)
Assets
Cash equivalents $ 42,739 $ -- $ -- $ 42,739
Commercial paper -- 1,349,835 -- 1,349,835
Corporate debt securities -- 898,453 -- 898,453
Government debt securities -- 7,542,895 -- 7,542,895
Total $ 42,739 $ 9,791,183 $ -- $ 9,833,922
The Company's commercial paper, corporate debt securities and government debt securities investments have been classified as Level 2 of
the fair value hierarchy because these investments are valued using broker or dealer quotations or alternative pricing sources with
reasonable levels of price transparency.
NOTE 3 - Stock-Based Compensation
Effective 1 January 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), using the modified prospective transition method. Accordingly, stock-based
compensation cost is measured at grant date, based upon the fair value of the award, and is generally recognised as expense on a straight
line basis over the requisite employee service period.
Stock-based compensation expense recognised under SFAS No. 123R for the six months ended 30 June 2008 and 2007 was as follows:
Six Months Ended 30 June
2008 2007
US$ US$
Research and development 107,562 99,028
General and administrative 161,375 195,553
Total 268,937 294,581
Amounts include (i) amortisation related to the compensation cost for all post AIM listing share-based payments granted prior to, but
not yet vested as of 1 January 2006, based on the grant date fair value estimated in accordance with the pro forma provisions of Statement
123, and (ii) compensation expense pertaining to the share-based payment awards granted subsequent to 1 January 2006, based on the
grant-date fair value estimated in accordance with SFAS No. 123R.
There were no options granted in 2008. The weighted average estimated fair value per share of employee stock options granted during the
six months ended 30 June 2007 was determined to US$0.56, using the Black Scholes Option Pricing Model with the following underlying
assumptions:
Six Months Ended 30 June
2007
70%
4.85%
0%
6.25
The Company has estimated its expected stock price volatility based on historical volatility calculations for a group of peer comparable
companies. The weighted average risk free interest rate reflects the rates of U.S. government securities appropriate for the term of the
Company's stock options at the time of grant. The weighted average expected life of options granted is based on the simplified calculation
of expected life, described in the U.S. Securities and Exchange Commission's Staff Accounting Bulletin No. 107. Accordingly, the
weighted-average estimated life assumption of years is based on the average of the vesting term and the 10 year contractual lives of all
options awarded after 1 January 2006.
Stock-based compensation expense recognised in the unaudited Consolidated Statement of Operations for the six months ended 30 June 2008
and 2007 is based on awards ultimately expected to vest; therefore, such amounts have been reduced to reflect estimated forfeitures. SFAS
No. 123R requires forfeitures to be estimated at the time of initial grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The Company estimates forfeitures based on its historical activity, as it believes that these
forfeiture rates are indicative of its expected forfeiture rate.
As of 30 June 2008, the Company had unrecorded deferred stock-based compensation expense related to stock options of approximately
US$0.77 million after estimated forfeitures, which will be recognised over an estimated weighted-average remaining requisite service period
of 2.33 years. During the six months ended 30 June 2008 and 2007, the Company granted nil and 25,950 options with an estimated total fair
market value at grant date of approximately nil and US$0.01 million, respectively, after estimated forfeitures.
The Company accounts for equity instruments issued to non-employees in accordance with SFAS No. 123, Emerging Issues Task Force Issue
No. 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services and Financial Accounting Standards Board Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans. Accordingly, as these equity instruments vest, the Company will be required to remeasure the fair value of the equity
instrument at each reporting period prior to vesting and finally at the vesting date of the equity instruments. Stock-based compensation
expense recognised with respect to equity instruments issued to non-employees for the six months ended 30 June 2008 and 2007 and for the
period from 27 January 1999 (inception) to 30 June 2008 was nil, nil and US$45,887, respectively.
NOTE 4 - Net Loss per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period.
Diluted net loss per share is computed by giving effect to all potentially dilutive common stock equivalents, including stock options and
warrants. For the six months ended 30 June 2008 and 2007, the following potentially dilutive common stock equivalents were excluded from the
computation of diluted net loss per share as the effect would be antidilutive:
Six Months Ended 30 June
2008 2007
Stock options 7,858,497 * 7,788,520 *
Warrants 502,978 502,978
* Includes an option to purchase 444,616 shares of the Company's common stock which was granted to Collins Stewart Limited, the
Company's nominated advisor in connection with the Company's listing on AIM.
The following table sets forth the computation of basic and diluted net loss per share:
Six Months Ended 30 June
2008 2007
US$ US$
Numerator
Net loss attributable to common stockholders (4,055,360) (4,372,750)
Denominator
Weighted average common shares outstanding 57,736,388 57,321,654
Net loss per share
Basic and diluted (0.07) (0.08)
NOTE 5 - Stockholders' Equity
Stock Option Plan
In October 2000, the Company's Board of Directors adopted the 2000 Equity Incentive Plan (the "Plan"), which provides for the issuance
of incentive stock options to employees and nonqualified stock options to employees, directors and service providers of the Company. Under
the terms of the Plan, the Board of Directors is authorised to determine to whom options will be granted, the number of shares underlying
such grants, the term and the exercise price (which cannot be less than the estimated fair market value at the date of grant for incentive
stock options or 85% of the estimated fair market value for nonqualified stock options). The options are exercisable at times and in
increments as specified by the Board of Directors, and generally expire ten years from the date of grant.
Activity under the Plan for the six months ended 30 June 2008 were as follows:
Options Outstanding
Weighted
Shares available average exercise
Number of
for grant shares price (U.S.$)
Balances, 1 January 2008 1,546,198 8,447,269 0.58
Options exercised -- (450,000) 0.10
Options cancelled 583,388 (583,388) 0.95
Balances, 30 June 2008 2,129,586 7,413,881 0.58
Options outstanding and exercisable at 30 June 2008 by exercise price range are as follows:
Options Outstanding Options Exercisable
Weighted
average Weighted Weighted
remaining average Aggregate average Aggregate
Exercise contractual exercise intrinsic exercise Intrinsic
price Number life price value Number price Value
US$ outstanding (in years) US$ US$ exercisable US$ US$
22.50 421 2.2 22.5 -- 421 22.50 --
4.50 53,110 4.8 4.5 -- 53,110 4.50 --
0.55-1.77 4,191,350 8.21 0.89 -- 3,015,897 0.95 --
0.10 3,169,000 6.03 0.10 380,280 3,159,728 0.10 379,167
7,413,881 7.25 .58 380,280 6,229,156 0.55 379,167
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on options with an exercise price
less than the Company's closing stock price of UK11.23p per share (US$0.22 per share at the then effective exchange rate) as of 30 June
2008, which would have been received by the option holders had those option holders exercised their options as of that date. The total
number of in-the-money options exercisable as of 30 June 2008 was 3,159,728. As of 31 December 2007, there were 6,747,220 outstanding
options exercisable, and the weighted average exercise price was US$0.55 per share.
The aggregate intrinsic value of options exercised during the six months ended 30 June 2008 was approximately US$108,000. The total cash
received from employees as a result of employee stock option exercises during this period was approximately US$45,000.
Comprehensive Loss
Comprehensive loss consists of net loss and other comprehensive loss, which includes certain changes in equity that is excluded from net
loss. Specifically, unrealised losses on investments are included in accumulated other comprehensive loss in the stockholder's equity
section of the accompanying Consolidated Financial Statements. Comprehensive loss for the periods presented consisted of the following:
Six Months Ended 30 June
2008 2007
US$ US$
Net loss (4,055,360) (4,372,750)
Change in unrealised loss on investments (7,484) (2,564)
(4,062,844) (4,375,314)
As of 30 June 2008 and 31 December 2007, accumulated other comprehensive income (loss) represented unrealised losses on
available-for-sale investments of US$6,304 and unrealised gains on available-for-sale investments of US$1,180, respectively.
NOTE 6 - Income Taxes
Effective 1 January 2007, the Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes
- an interpretation of FASB Statement No. 109" ("FIN No. 48"). FIN No. 48 clarifies the accounting for uncertainty in income taxes by
prescribing the recognition threshold a tax position is required to meet before being recognised in the financial statements. It also
provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The
Company's policy is to record interest and penalties related to unrecognized tax benefits in income tax expense.
At June 30, 2008, there was no material increase in the liability for unrecognized tax benefits nor any accrued interest and penalties
related to uncertain tax positions. The Company does not expect any material changes in unrecognized tax benefits in the next twelve
months.
The Company is subject to taxation in the United States, California, and Canadian jurisdictions. The tax
years from 1999 through 2007, are subject to examination by the Internal Revenue Service and California
due to the net operating losses generated in those years. The Company is currently not under any federal,
state or Canadian audits.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Executive Summary
The following review should be read in conjunction with the Company's consolidated financial statements and related notes thereto for
the three years ended 31 December 2007 appearing on the Company's web site.
Company Description
PolyFuel is a development stage, advanced materials science company specialising in the design, development and manufacture of
hydrocarbon based fuel cell membranes primarily for portable power applications. The Company's products are currently being purchased and
evaluated by developers of portable fuel cell power systems and components who are considering their performance characteristics in the
context of commercial product launches. In addition to PolyFuel's primary focus in the area of portable power, the Company has also
developed a version of its hydrocarbon membrane which has been designed for automotive applications.
The Company's corporate headquarters are located in Mountain View, California where it conducts its membrane research and development,
manufacturing, business development and administrative functions. The Company also has a facility in Burnaby, British Columbia focused on
advanced research in portable fuel cell system technology.
Mission, Vision and Strategy
PolyFuel's mission is to become the world's leading supplier of fuel cell membranes for portable electronic and automotive applications.
The Company's vision and strategy for achieving this goal incorporates the following key elements:
* Establish and maintain market leadership through the continuing innovation of world leading fuel cell membrane products;
* Support our customers through the development of leading edge fuel cell system reference designs aimed at optimizing the
performance attributes of the PolyFuel membrane products;
* Secure the protection of our technology through rigorous attention to the filing of intellectual property patents and the
safeguarding of trade secrets;
* Focus sales and marketing efforts on the leading developers of fuel cell systems in the portable sector;
* Establish strong channel relationships with key "value added resellers" of fuel cell components; and,
* Control and optimise the deployment of capital resources.
Business, Products and Markets
As an emerging developer of hydrocarbon based membranes for fuel cell applications, PolyFuel's primary focus is on the world's portable
power markets, where advances in application technology (i.e. wireless networks, portable gaming, music, television, global positioning,
etc.) are stimulating an ever growing demand for energy that is rapidly exceeding the ability of existing battery technologies to meet it.
The Company refers to this growing divergence as the "runtime gap".
PolyFuel's membrane technology has been custom designed to enable these consumer electronics manufacturers to make portable fuel cells a
realistic alternative for the market. The membrane is, in essence, the "heart" of the fuel cell; that is, it dictates the cost, size,
weight, power and runtime of a portable fuel cell. PolyFuel has engineered a family of fuel cell membrane products specifically for portable
direct methanol fuel cells ("DMFCs"). The PolyFuel DMFC membrane has been selected by many consumer electronics manufacturers and portable
fuel cell system developers for use in their portable fuel cell research and development programmes, and is on test at several others.
The Company believes that PolyFuel's DMFC membrane products are essentially the "next generation" in fuel cell membrane technology.
Engineered using advanced "hydrocarbon chemistry", the Company believes that these products have inherently better mechanical properties,
higher fuel efficiency, are more robust, and are more environmentally friendly than the existing commercial products.
During 2007, the Company announced the introduction of an ultra-thin 20-micron version of its DMFC membrane and began shipping this
product to lead customers. This product delivers greater than 40% more power than any fuel cell membrane previously available.
In June 2008, the Company announced that it had developed the first functional version of its prototype power supply for notebook-class
computers that is designed to provide continuous non-stop runtimes with the simple hot swap of small cartridges of methanol fuel. The
consumer-friendly design has been fully integrated with a representative notebook - the Lenovo T40 ThinkPad�. PolyFuel developed the
prototype as a technology demonstrator and proof of concept for Original Equipment Manufacturers ("OEM").
The Company believes that the prototype represents a key step towards the attainment of PolyFuel's goal to create a reference design
with the size, appearance and performance consumers require for increasingly power-hungry notebook computers.
In addition to marketing and distributing its products directly to fuel cell system customers, it is also the Company's plan to
establish a number of non-exclusive, "sales channel cooperation agreements" with leading fuel cell value added resellers. These companies
will purchase PolyFuel's DMFC membrane products for incorporation into higher level fuel cell sub-assemblies, which will then be sold on to
various fuel cell system developers. In April 2006, the Company entered into the first such agreement with Johnson Matthey Fuel Cells
Limited, the fuel cell subsidiary of Johnson Matthey, Plc., one of the world's leading specialist chemicals companies. In addition to its
work in DMFC, PolyFuel has also done research in the area of fuel cell membranes for automotive applications. The Company has supplied its
material to a number of the world's leading automotive manufacturers for testing and evaluation.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon PolyFuel's unaudited Consolidated
Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these
financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from these estimates under alternative assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that
are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate
that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no
significant changes during the six months ended 30 June 2008 to the items that were disclosed as critical accounting policies and estimates
in Management's Discussion and Analysis of Financial Condition and Results of Operations in PolyFuel's Annual Report for the year ended 31
December 2007.
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for a full description of recent accounting pronouncements, including the expected
dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.
Results of Operations
The following table sets forth for the periods indicated, the Company's results of operations:
Six Months Ended 30 June
2008 2007
US$ US$
Revenues 1,160,297 594,876
Costs and operating expenses
Research and development 2,854,255 2,868,865
General and administrative 2,557,651 2,623,595
Total expenses 5,411,906 5,492,460
Loss from operations (4,251,609) (4,897,584)
Other income (expense), net (13,844) 4,563
Interest income 210,093 520,271
Net loss (4,055,360) (4,372,750)
Revenues
Total revenues for the six months ended 30 June 2008 were US$1.2 million as compared to US$0.6 million for the same period in 2007, an
increase of US$0.6 million, or 95% between periods. This increase was attributable to (i) a US$0.9 million increase in the revenue earned in
2008 for government programs on a cost reimbursement basis in connection with (a) a three year, US$3 million research and development
contract awarded the Company by the U.S. Department of Energy ("DOE") to develop a fuel cell power supply for a next generation laptop
computer (the "DOE Program"). The contract, which was originally awarded in August 2004, was suspended in January 2006 as a result of
governmental budgetary constraints and subsequently reinstated in April 2007. In 2008, revenue associated with this contract was US$0.8
million, as compared to US$0.3 million in 2007, an increase of US$0.5 million; and (b) US$0.4 million related to the start in 2008 of funds
associated with the Company's 2 year, US$2 million award from the Advanced Technology Program (Department of Commerce, National Institute of Standards and Technology), "Ultra-low methanol crossover
membranes and for higher energy density direct methanol fuel cells" project. No such funds were available in 2007; (ii) a US$0.2 million
decrease in sales of membrane and membrane-related products sold in 2008; and (iii) a US$0.1 million decrease in the amount of fuel cell
system engineering services provided in 2008, with both decreases primarily relating to PolyFuel's decision to redirect customer demand for
value-added membrane products, such as MEA's, toward PolyFuel's value-added channel partner, JMFC, and a decrease in revenue associated with
one-time engineering projects.
Research and Development
Research and development expenses consist of costs associated with product research, product development, non-recurring engineering
projects and government programs. Research and development costs were US$2.9 million for the six months ended 30 June 2008 as compared to
US$2.9 million for the same period in 2007, or unchanged between periods.
General and Administrative
General and administrative expenses consist of costs incurred in connection with sales and marketing, business development, and finance
and administrative activities; including personnel costs, consulting and professional service fees, facilities and other general corporate
expenses. General and administrative expenses were US$2.6 million for the six months ended 30 June 2008 as compared to US$2.6 million for
the same period in 2007, unchanged between periods.
Interest Income
Interest income for the six months ended 30 June 2008 was US$0.2 million as compared to US$0.5 million for the same period in 2007, a
decrease of US$0.3 million or approximately 60%. This decrease resulted from less cash available for investment in 2008, augmented by the
impact of decreasing interest rates.
Interest Expense
Interest expense for the six months ended 30 June 2008 and 30 June 2007 was nil and nil, due to the extinguishment of all outstanding
indebtedness in the first quarter of 2006.
Liquidity and Capital Resources
Since its inception and through 30 June 2008, the Company has financed its operations primarily with proceeds from the sale of private
and public equity totaling approximately US$67.8 million (net of issuance costs). In July 2005, the Company completed an initial public
offering of common stock on the AIM Market of the London Stock Exchange, placing 15,686,276 new shares of common stock (each share issued
together with 1/2 Series A warrant to purchase an additional share of common stock at UK60p per share within 18 months following the
placement) at a per share price of UK51p, raising a total of �8 million (US$14 million at the then effective exchange rate and before
transaction costs of approximately US$2.5 million).
In January 2006, the Company placed an additional 12,500,000 new shares of common stock in a follow-on offering at a per share price of
UK80p, raising a total of �10 million (US$17.5 million after conversion at the then effective exchange rate and before transaction costs of
approximately US$0.75 million).
As of 30 June 2008, the Company had US$6.3 million of cash and cash equivalents, and short-term investments of US$3.7 million for a
total of US$10.0 million available to fund future operations.
The following table sets out the Company's sources and uses of cash for the periods presented:
Six Months Ended 30 June
2008 2007
US$ US$
Cash used in operating activities (3,664,845) (4,327,853)
Cash provided by investing activities 2,802,463 1,679,330
Cash provided by financing activities 45,000 8,287
Net decrease in cash and cash equivalents (817,382) (2,640,236)
Cash Used in Operations
Net cash used in operations decreased by approximately US$0.7 million for the six months ended 30 June 2008 as compared with the
corresponding period in 2007. This decrease was attributable primarily to year-over-year improvement in loss from operations, which
accounted for US$0.3 million and an increase in accounts payable and accrued expenses, which contributed US$0.4 million.
Cash Provided by Investing Activities
Net cash provided by investing activities increased by approximately US$1.1 million for the six months ended 30 June 2008 as compared to
the corresponding period in 2007 due primarily to a decrease in the net purchase of investments.
Cash Provided by Financing Activities
Net cash provided by financing activities was US$45,000 and US$8,287 for the six month periods ended 30 June 2008 and 2007,
respectively, reflecting employee options exercise proceeds.
Contractual Cash Obligations
At 30 June 2008, the Company had total contractual cash obligations under all of its non-cancelable operating leases of US$0.28 million,
US$0.59 million, US$0.05 million and $0.13 million for the years ended 31 December 2008, 2009, 2010 and thereafter, respectively.
Summary
Management believes that the Company's cash, cash equivalents and short-term investments at 30 June 2008 will be sufficient to meet its
anticipated cash requirements for operating and working capital purposes for at least the next 12 months. Notwithstanding, the Company has
incurred losses and negative cash flow from operations for every fiscal period since its inception. While the Company has been successful in
completing numerous rounds of public and private equity financing, totaling approximately US$67.8 million (net of issuance costs) through 30
June 2008, no assurances can be given that additional financing will be available, in which case, the Company's ability to achieve its
business objectives will be adversely affected. The Company's consolidated financial statements do not include any adjustments that might
result from such adverse outcomes. The Company believes it will be dependent upon additional financing to support its continuing operations
after FY2009. The Company is a research and development enterprise and thus continues to face technology, industry and market risks, including, among others, the pace of commercialization
of Direct Methanol Fuel Cell technology, and there can be no assurance that the Company will be able to achieve its business objectives.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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