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| PFCE.OB > SEC Filings for PFCE.OB > Form 10KSB on 23-Mar-2004 | All Recent SEC Filings |
23-Mar-2004
Annual Report
The following discussion should be read in conjunction with our audited financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements.
We did not generate any revenues during our fiscal years ended December 31, 2003 and 2002. During our fiscal year ended December 31, 2003 , we incurred costs and expenses totaling $99,554, which consisted of general and administrative expenses only and was a decrease of $479,119 from 2002. During our fiscal year ended December 31, 2002, we incurred costs and expenses of $578,673, which included $45,000 in stock based compensation, as well as $82,173 in selling, general and administrative expense. Also during our fiscal year ended December 31, 2002, we incurred a loss on asset impairment of $451,500 relevant to a determination by our management that our license agreement with Fullerene was impaired. This decision was based upon the uncertainty of our ability to raise sufficient capital in a timely manner to develop a commercially viable fuel cell technology.
As a result, we incurred a net loss of $103,382 during our fiscal year ended December 31, 2003 (less than $0.01 per share), as compared to a net loss of $(579,912) during our fiscal year ended December 31, 2002 ($0.01 per share). Because we did not generate any revenues during the years ended December 31, 2003 and 2002, following is our Plan of Operation, rather than a comparison of results of operations.
PLAN OF OPERATION
Our initial business plan was to develop and produce low cost fuel cells for transportation. During 2002, we revised our business plan to emphasize the development and production of low cost fuel cells for personal electronics or other applications requiring small size and longevity of use. We revised our original business plan as a result of the costs associated with developing transportation related fuel cells, which exceeded our available capital. We may reinstate the elements of the original business plan if our current business plan proves successful, of which there can be no assurance. As of the date of this Report, in order to bring about commercialization, we are focused on building a commercial prototype, enhancing product performance, reducing product costs, designing market- ready products, developing volume-manufacturing capability, and building customer and supplier relationships.
On November 21, 2002, we entered into an agreement with the University of California at Riverside to develop a commercially viable fuel cell prototype. The initial term of this agreement
ran through February 2003. In February 2003, we entered into an amendment which extended the term of this agreement through February 29, 2004. As of the date of this report, we are engaged in discussions to extend this agreement again and we expect that such an extension will be executed in April 2004. The activities of this venture continue as if the extension has already been executed. Pursuant to the terms of this agreement, we have agreed to reimburse the University for all costs and expenses incurred, both direct and indirect, in an amount not to exceed $131,266, pursuant to a budget agreed to by the parties. The University, through its SMART program, provides matching funds for all direct costs applicable to development of our project, which total $111,954. We tendered an initial payment of $70,000 upon execution of the agreement, with a second advance payment of $61,266 tendered in March 2003, pursuant to our exercise of our option to extend this agreement. It is not anticipated that we will be required to make any additional payments for any future extensions. In order to allow us to make the aforesaid payments, we borrowed funds from Fullerene. See "Part II, Item, 6, Management's Discussion - Liquidity and Capital Resources" below for the terms applicable to this obligation. All information which we provide to the University has been deemed confidential for a period of one (1) year after expiration or termination of the agreement.
We have also applied for additional matching funds through the SMART program and expect to have a decision shortly which could provide a multi-year relationship with the University of California at Riverside.
As a result of the above described relationship with the University of California at Riverside, on November 10, 2003, we announced that a research team headed by Professor Yushan Yan of the University has successfully developed a fuel cell using carbon nanotube-based electrodes. As a result of our research and development activities with the University, we expect that the use of multi- walled carbon nanotubes as a platinum support for proton exchange membrane fuel cells will reduce the manufacturing cost of fuel cells through a decreased use of platinum. Current technology uses platinum, a precious metal, as the catalyst for hydrogen to separate into a proton and electron. Since platinum is a high cost metal in very limited production, it is cost prohibitive, preventing fuel cells from being economically viable even at high volume production. Our proposed method of producing fuel cells is expected to minimize or eliminate the use of platinum. If successful, the result will be low cost fuel cells at high volume production levels. We believe that a fuel cell unit can replace conventional batteries because a fuel cell unit should provide longer usage at lower consumer cost. While no assurances can be provided that this development will result in our generating revenues, this development is considered by management to be a significant step forward in the use of fuel cell technology. We expect to have additional information concerning this development available in the near future.
We intend to use our proprietary technology to severely reduce or eliminate the need for platinum as a catalyst. We believe our next step in the implementation of our business plan is to develop a viable manufacturing prototype which, if it meets expectations, will be ready to be placed in production. We hope to accomplish this objective by opening our own laboratory to develop this additional prototype. We estimate that this will require us to raise a minimum of $1 million in additional debt or equity capital and there are no assurances that we will be able to raise this capital in the future. While we are currently engaged in various discussions with interested parties to provide these funds, as of the date of this Report we have no agreement with any party to provide the necessary funding to us on terms favorable to us, or at all. Further, any such funding may result in significant dilution to existing stockholders. The inability to obtain sufficient funds from external sources when needed will have a material adverse affect on our results of operations and financial condition. Since we announced our initial success of producing the carbon nanotube base catalyst
layer, we have received a significant amount of attention from the investment community and believe that we are close to finalizing an agreement for financing. We will use a portion of the funds to build our own laboratory and finalize a commercial prototype, while continuing to conduct research at the University of California at Riverside.
We have also entered into preliminary discussions with potential strategic partners to utilize our current technology position in order to assume a market leadership position in our target market of micro fuel cells. However, as of the date of this Report, no agreements have been entered into and there are no assurances that such discussions or any such agreement will occur in the foreseeable future.
We have also investigated the possibility of using our proprietary fuel cell technology to provide electricity for small commercial establishments and households. Although we do not currently have the rights to utilize our fuel cell technology in this market, we believe that, if we decide to pursue this market, we can acquire such rights from Fullerene on advantageous terms. However, there can be no assurances that we will be able to acquire such rights in the future.
Fuel cell acceptance appears to be accelerating. Large and small corporations, as well as the United States government, all appear convinced of the value of fuel cell technology. Despite all this activity, we have still not seen a commercial product that, in our opinion, is competitively priced with other forms of energy. We believe that, while fuel cell products will begin to proliferate, market acceptance will come only when prices fall to competitive levels.
There are currently several different technologies in use for fuel cell power generation. Each of these processes differs in methodology, suitable scale and efficiency. Our interest (and patent applications) is in the Proton Exchange Membrane (PEM) method which is very suitable for low temperature operation.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, we had $12,088 in cash. We had $5,648 in accounts payable, plus $3,652 in accounts payable to an affiliate. We also had an outstanding loan in the amount of $56,939, due to Fullerene, USA, Inc., our majority stockholder. In regard to this loan, we originally received an unsecured, non-interest bearing loan for $60,000 which was due September 14, 2002. On December 5, 2002, this note was cancelled with the consent of Fullerene and replaced with a note extending the due date to August 14, 2004.
We believe our next step in the implementation of our business plan is to develop a viable manufacturing prototype which, if it meets expectations, will be ready to be placed in production. We hope to accomplish this objective by opening our own laboratory to develop this additional prototype. We estimate that this will require us to raise a minimum of $1 million in additional debt or equity capital and there are no assurances that we will be able to raise this capital in the future. While we are currently engaged in various discussions with interested parties to provide these funds, as of the date of this Report we have no agreement with any party to provide the necessary funding to us on terms favorable to us, or at all. Further, any such funding may result in significant dilution to existing stockholders. The inability to obtain sufficient funds from external sources when needed will have a material adverse affect on our results of operations and financial condition. Since we announced our initial success of producing the carbon nanotube base catalyst layer, we have received a significant amount of attention from the investment community and believe that we are close to finalizing an agreement for financing. We will use a portion of the funds to build our own
laboratory and finalize a commercial prototype, while continuing to conduct research at the University of California at Riverside.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have identified critical accounting policies that, as a result of judgements, uncertainties, uniqueness and complexities of the underlying accounting standards and operation involved, could result in material changes to our financial position or results of operations under different conditions or using different assumptions. The most critical accounting policies and estimates are:
> The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
> Fair value of instruments. Our financial instruments consist of accounts receivable, accounts payable and long term debt. The fair value of financial instruments approximate their recorded values. Fair value of loans payable to stockholders and balances of bank lines of credit, in the circumstances, are not reasonably determinable.
Details regarding our use of these policies and the related estimates are described in the accompanying consolidated financial statements as of December 31, 2003 and 2002 and for the years ended December 31, 2003 and 2002. During the year ended December 31, 2003, there have been no material changes to our critical accounting policies that impacted our consolidated financial condition or results of operations.
TRENDS
Since our announcement of the successful development of a carbon nanotube support base fuel cell electrode in November 2003, we have been receiving a significant amount of attention from the investment community. In this regard, while there are no assurances, we are hopeful that we will be able to raise approximately $1 million in additional funding in order to allow us to build our own laboratory, to be located in the vicinity of the University of California at Riverside, in order to produce and demonstrate to fuel cell manufacturers a commercially viable prototype.
This laboratory is also expected to function as a hub to attract additional researchers from the University of California at Riverside, which is on the path to become a leader in the nano-technology field. We believe that there are many potential useful applications of nano-technology which can be expected in the immediate future, including fuel cells and flat panel displays. Also at this laboratory, functional prototypes will be made before bringing in manufacturers. Our plan is to have the manufacturers inspect the prototype once completed in order to generate their own test production unit. If successful, manufacturing can commence producing products in quantity in less than 12 months. We foresee the initial application to be a battery replacement for cell phones, mobile notebook computers/laptops and other applicable applications. This segment is known as the micro fuel cell market. We expect that these fuel cells will eventually be produced like modular computer chips and components.
We believe that the reason that the fuel cell market is not rapidly expanding at this time is due to high manufacturing costs. We believe that this development is inevitable, due to the advantages of low pollution and independence from fossil fuels. Major automobile, industrial and power supply companies are heavily involved in research and development activities of fuel cell technology and many have announced prototypes and commercial models. However, there has not been a major commercial breakthrough, which we attribute to the high cost of the products and the lack of consumer proven reliability. While no assurances can be provided, once the problem of high costs is resolved, we expect the micro fuel cell market to increase significantly.
INFLATION
Although our operations are influenced by general economic conditions, we do not believe that inflation had a material affect on our results of operations during 2003.
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