Here It Is:
Form 10-Q for NEW ENERGY TECHNOLOGIES, INC.
14-Jan-2011
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Report on Form 10-Q contains forward-looking statements which involve assumptions and describe our future plans, strategies, and expectations, and are generally identifiable by use of words such as "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend," or "project" or the negative of these words or other variations on these words or comparable terminology. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished.
Such forward-looking statements include statements regarding, among other things, (a) the potential markets for our technologies, our potential profitability, and cash flows, (b) our growth strategies, (c) expectations from our ongoing research and development activities, (d) anticipated trends in the technology industry, (e) our future financing plans, and (f) our anticipated needs for working capital. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as in this Form 10-Q generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the matters described in this Form 10-Q generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. In addition to the information expressly required to be included in this filing, we will provide such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.
Although forward-looking statements in this report reflect the good faith judgment of our management, forward-looking statements are inherently subject to known and unknown risks, business, economic and other risks and uncertainties that may cause actual results to be materially different from those discussed in these forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect our actual results may vary materially from those expected or projected.
Overview
The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand our results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements included in this Form 10-Q.
The MD&A is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed 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 different assumptions or conditions.
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Background
We were incorporated in the State of Nevada on May 5, 1998, under the name "Octillion Corp." On December 2, 2008, we amended our Articles of Incorporation to effect a change of name to New Energy Technologies, Inc. The accompanying consolidated financial statements include the accounts of New Energy Technologies, Inc. and our wholly-owned subsidiaries, Sungen Energy, Inc. ("Sungen"), Kinetic Energy Corporation ("KEC"), Octillion Technologies Limited ("Octillion Technologies") and New Energy Solar Corporation ("New Energy Solar").
Sungen was incorporated on July 11, 2006 in the State of Nevada and has no assets and no liabilities.
KEC was incorporated on June 19, 2008 in the State of Nevada and has no assets and no liabilities.
Octillion Technologies was incorporated on April 11, 2007 in the Province of British Columbia, Canada for providing administrative services to the Canadian office. We ceased to conduct business in Canada on August 31, 2008 and closed this office. As a result, we dissolved Octillion Technologies and eliminated all intercompany balances, effective December 1, 2008.
New Energy Solar was incorporated on February 9, 2009 in the State of Florida and has no assets and no liabilities.
Our research and development activities are currently focused on the development of:
? MotionPower? Technology for capturing and converting the kinetic energy of moving vehicles to generate electricity; and
? SolarWindow? Technology which enables see-thru glass windows to generate electricity by applying electricity-generating coatings to their glass surfaces.
Ultimately, we plan to market MotionPower? Technology and/or SolarWindow? Technology products, if any, subject to receiving any requisite regulatory approvals, through co-marketing, co-promotion, licensing and distribution arrangements with third party collaborators. The decision as to which method or methods of commercialization we will pursue will depend on various factors including, but not limited to, our financial resources at the time, manufacturing costs, market acceptance of the product(s), and competing technologies or products at the time.
We believe that this approach could provide immediate access to pre-existing distribution channels, therefore potentially increasing market penetration and commercial acceptance of our products and enabling us to avoid expending significant funds for development of a large sales and marketing organization. Currently no such products or arrangements exist, nor can we currently project with any degree of accuracy when, if ever, such products or arrangements may exist. If we do not ultimately commercialize products derived from our MotionPower? Technology and/or SolarWindow? Technology we will not generate revenues from our operations as currently conducted.
Our success will be dependent upon our ability to develop products that are superior to existing products and products introduced in the future, and which are cost effective. In addition, we may be required to continually enhance any products that are developed as well as introduce new products that keep pace with technological change and address the increasingly sophisticated needs of the marketplace. There can be no assurance that we will be able to keep pace with the technological demands of the marketplace or successfully develop products that will succeed in the marketplace.
We cannot currently estimate with any accuracy the amount of either the additional funds or time required to successfully commercialize either technology, because the actual cost and time may vary significantly depending on results of current basic research and development and product testing, cost of acquiring an exclusive license, changes in the focus and direction of our research and development programs, competitive and technological advances, the cost of filing, prosecuting, defending and enforcing patent claims, the regulatory approval process, manufacturing, marketing and other costs associated with commercialization of products following receipt of regulatory approvals and other factors.
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SolarWindow? Technology
Current Research Agreements
USF Sponsored Research Agreement, Option Agreement, and License Agreement
On May 20, 2009, our wholly-owned subsidiary, New Energy Solar, entered into the USF Sponsored Research Agreement with USF, for support to the project entitled "Semitransparent Flexible Power Foil (SFPF)" relating to the development of a prototype flexible semi-transparent organic power foil (1ft by 1ft dimension) for use as an energy-generating window glass in building-integrated photovoltaic products (the "SolarWindow? Technology"). Pursuant to Rule 24b-2 we submitted a request to the SEC for confidential treatment of certain portions of the USF Sponsored Research Agreement, relating to the payment terms and scope of work under the USF Sponsored Research Agreement. Our request was granted by the SEC on June 11, 2009. Accordingly, the terms of the USF Sponsored Research Agreement have not been disclosed.
On May 20, 2009, our wholly-owned subsidiary, New Energy Solar, also entered into an Option Agreement (the "USF Option Agreement") with the University of South Florida Research Foundation, Inc., a not for profit corporation under Chapter 617 Florida Statutes, and a direct support organization of USF, pursuant to which New Energy Solar has the right to an exclusive option to obtain an exclusive worldwide commercial license under certain patents relating to the SolarWindow? Technology. Pursuant to Rule 24b-2 we submitted a request to the SEC for confidential treatment of certain portions of the USF Option Agreement, relating to the payment terms and scope of work under the USF Option Agreement. Our request was granted by the SEC on June 11, 2009. Accordingly, the terms of the USF Option Agreement have not been disclosed.
On June 21, 2010, our wholly-owned subsidiary, New Energy Solar, entered into a license agreement (the "USF License Agreement") with the University of South Florida Research Foundation. The USF License Agreement is related to our continuing development of a prototype flexible semi-transparent organic power foil (1ft by 1ft dimension) for an energy-generating window glass in building-integrated photovoltaic products. Pursuant to Rule 24b-2 we submitted a request to the SEC for confidential treatment of certain portions of the USF License Agreement, relating to the payment terms under the USF License Agreement. Our request was granted by the SEC on July 7, 2010. Accordingly, the terms of the USF License Agreement have not been disclosed.
Effective November 30, 2010, we entered into an addendum to the USF License Agreement, with USF expanding the scope of the USF License Agreement (the "Addendum"). On December 3, 2010 we filed a confidential treatment request with the SEC regarding certain terms and provisions of the Addendum. The SEC has requested that we modify our confidential treatment request to more specifically identify those terms as to which we seek confidential treatment. We are in the process of responding to the SEC's request.
Terminated Research Agreements
UIUC Sponsored Research Agreement
On August 25, 2006, through our wholly owned subsidiary, Sungen, we entered into a Sponsored Research Agreement ("UIUC Sponsored Research Agreement") with the University of Illinois at Urbana-Champaign ("UIUC") for the development of a new patent-pending technology to integrate films of silicon nanoparticle material on glass substrates, acting as photovoltaic solar cells that have the potential to convert normal home and office glass windows into ones capable of converting solar energy into electricity, with limited loss of transparency and minimal changes in manufacturing infrastructure (the "UIUC Silicon Nanoparticle Energy Technology"). On July 23, 2007, Sungen, amended its Sponsored Research Agreement with UIUC. Pursuant to this amended Sponsored Research Agreement, we agreed to provide an additional $203,617 to the previously awarded amount of $219,201 for a total of $422,818, to the University of Illinois in order to accelerate the development of films of silicon nanoparticle material composed of nanosilicon photovoltaic solar cells that have the potential to convert solar radiation to electrical energy.
The UIUC Sponsored Research Agreement expired on August 22, 2008. As of this date, we had advanced a total of $266,709 to the University of Illinois pursuant to the terms of the UIUC Sponsored Research Agreement. Pursuant to the terms of the UIUC Sponsored Research Agreement, we were to advance an additional $156,109 to the University of Illinois, which is included in accrued liabilities at November 30, 2010 and August 31, 2010. However, we have not made the advance pending determination as to whether funds previously paid to UIUC under the terms of the UIUC Sponsored Research Agreement have been fully expended. We are of the opinion that to the extent these funds were not expended they are refundable to us.
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We did not record any research and development expense pursuant to the UIUC Sponsored Research Agreement during either of the three month periods ended November 30, 2010 and 2009. During the period from inception (May 5, 1998) to November 30, 2010, we recorded $422,818 as research and development expense pursuant to the UIUC Sponsored Research Agreement.
Oakland Sponsored Research Agreement
On August 18, 2008, we entered into a two-year Sponsored Research Agreement ("Oakland Sponsored Research Agreement") with scientists at Oakland University to further the development of our photovoltaic technology for generating electricity on transparent glass windows.
Pursuant to the terms of the Oakland Sponsored Research Agreement we agreed to advance a total of $348,066 to fund the research and development activities of which $140,519 was payable on or before September 1, 2008, $127,547 was payable on or before October 1, 2009 and $80,000 was payable on demand during the contract period for reimbursement of materials provided by Oakland University. In August 2008, we advanced $140,519 to Oakland University pursuant to the Oakland Sponsored Research Agreement. In February 2009, in order to preserve our working capital, we decided that it was in our best interest not to proceed forward with the Oakland Sponsored Research Agreement and exercised our termination right by providing written notice to Oakland University of our election to terminate the Oakland Sponsored Research Agreement. As of the termination date of the Oakland Sponsored Research Agreement, $20,220 of the $140,519 initially advanced to Oakland University had been expended, all during the quarter ended February 28, 2009. The remaining $120,299 was refunded to us in April 2009.
MotionPower? Technology
Veryst Agreement
On November 4, 2008, our wholly-owned subsidiary, KEC, entered into an agreement (the "Veryst Agreement") with Veryst Engineering LLC ("Veryst") relating to the development of a car and truck energy harvester. The Veryst Agreement continues until terminated by either Veryst Engineering LLC or KEC. Pursuant to Rule 24b-2 we submitted a request for confidential treatment of certain portions of the Veryst Agreement, relating to the payment terms, scope of work and the milestone terms of the license agreement under the Veryst Agreement. Our request was granted on November 25, 2008. Accordingly, the terms of the Veryst Agreement have not been disclosed.
On September 9, 2009, we entered into two additional agreements with Veryst whereby Veryst performed additional testing of our vehicle energy harvester and advanced prototyping as well as continued development of a commercial scale truck energy harvester.
During the three months ended November 30, 2010 and 2009, we recorded $10,565 and $123,640, respectively, as research and development expense pursuant to the agreements with Veryst entered into on September 9, 2009. During the period from inception (May 5, 1998) to November 30, 2010, we recorded $313,657 as research and development expense pursuant to these same agreements.
On July 6, 2010, we entered into another agreement with Veryst whereby Veryst performed services associated with improving system energy capture and conversion, and enhancing electrical power production.
During both of the three months ended November 30, 2010 and 2009, we did not record any research and development expense pursuant to the agreement with Veryst entered into on July 6, 2010. During the period from inception (May 5, 1998) to November 30, 2010, we recorded $48,000 as research and development expense pursuant to the same agreement.
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We continue to utilize Veryst, on a consulting basis, to further test, calibrate, and develop our MotionPower? Technology.
Sigma Design Agreement
On May 1, 2009, KEC entered into a consulting agreement with Sigma Design Company ("Sigma Design") whereby Sigma Design provided ongoing engineering and product development services relating to the development of our MotionPower? Technology. On August 25, 2009, KEC entered into an additional consulting agreement with Sigma Design whereby Sigma Design continued to provide engineering services relating to the development of our MotionPower? Technology. On June 25, 2010, KEC entered into another consulting agreement with Sigma Design whereby Sigma Design will develop a modified prototype for the MotionPower? Technology, which will deliver more output than the original prototype. The agreements between KEC and Sigma Design are collectively referred to herein as the "Sigma Design Agreements"). Each of the Sigma Design Agreements may be terminated by either Sigma Design or us upon 30 days written notice to the other party. We have also engaged Sigma Design to conduct durability field tests of our MotionPower? Technology.
During the three months ended November 30, 2010 and 2009, we recorded $26,423 and $120,778 as research and development expense pursuant to the Sigma Design Agreements and services provided for the durability field tests. During the period from inception (May 5, 1998) to November 30, 2010, we recorded $292,694 as research and development expense pursuant to the Sigma Design Agreements and services provided for the durability field tests.
We continue to utilize Sigma Design, on a consulting basis, to further test, calibrate, and develop our MotionPower? Technology.
Nerve Regeneration Technology
On August 22, 2007, we spun off our wholly-owned biotechnology subsidiary, MicroChannel Technologies Corporation ("MicroChannel") with our shareholders. The net assets and results of operations of MicroChannel of the prior period have been reclassified as discontinued operations.
Results of Operations
Operating Expenses
A summary of our operating expense for the three months ended November 30, 2010
and 2009 was as follows:
Three Months Ended
November 30, Increase / Percentage
2010 2009 (Decrease) Change
Operating expense
Marketing and investor relations $ 37,055 $ 241,593 $ (204,538 ) (85 ) %
Wages and benefits 279,486 225,360 54,126 24
Professional fees 89,947 92,568 (2,621 ) (3 )
Research and development 57,122 274,314 (217,192 ) (79 )
Travel and entertainment 6,187 6,706 (519 ) (8 )
Other operating expenses 37,065 61,755 (24,690 ) (40 )
Total operating expense $ 506,862 $ 902,296 $ (395,434 ) (44 ) %
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Marketing and Investor Relations
Marketing and investor relations costs represent fees paid to publicize our technology within the industry and investor community with the purpose of increasing company recognition.
We utilize various third parties to manage our investor relations and facilitate our marketing programs, to increase company recognition and branding, and to provide shareholder communications.
The decrease in marketing and investor relations expense during the three months ended November 30, 2010 compared to the same period in 2009 is substantially due to us undertaking a targeted marketing program during the fourth quarter of fiscal year 2009, which continued into the first quarter of fiscal year 2010. We incurred $210,000 more during the prior year quarter than the current quarter as a result of our targeted marketing program designed to establish our brand name recognition early on in our corporate development. During that time, our marketing efforts, in addition to keeping our shareholders apprised of the advances to our technologies, generated more than 70 news media stories, including online, radio, television, and print media coverage in leading mainstream media in the United States.
We intend to continue to further develop and market our brand name and increase our brand recognition. Subject to the receipt of any requisite regulatory approvals, we believe our marketing strategy ultimately will facilitate the distribution, sale and public acceptance of our MotionPower? Technology and SolarWindow? Technology products.
Wages and Benefits
During the three months ended November 30, 2010, we incurred $43,664 in wages and benefits expense for services rendered by John A. Conklin, who was appointed to serve as our President, Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), effective August 9, 2010, and $235,822 in stock compensation expense for the amortization of the fair value of the stock option granted to Mr. Conklin on August 9, 2010 to purchase up to 2,000,000 shares of our common stock at an exercise price of $0.55 per share, expiring on August 9, 2020.
During the three months ended November 30, 2010, we incurred $42,065 in wages and benefits expense for services rendered by Meetesh Patel, our former President, CEO, and CFO, and $182,729 in stock compensation expense for the amortization of the fair value of the stock option granted to Mr. Patel on June 24, 2009 to purchase up to 2,000,000 shares of our common stock at an exercise price of $0.52 per share. The stock option granted to Mr. Patel was subsequently forfeited upon his resignation from all executive officer positions held with us and as one of our directors on August 9, 2010 and the related stock compensation previously recogonized was reversed.
Professional Fees
Professional fees primarily consist of accounting, audit and tax fees, legal fees, non-employee Board fees, SEC related filing fees, and consulting services provided to advance our MotionPower? and SolarWindow? Technology products ("Energy Consulting Services").
Professional fees decreased $2,621 during the three months ended November 30, 2010 compared to the same period in 2009 primarily as a result of a decrease in legal fees of approximately $16,900 directly related to the preparation and filing of our Form S-1 and amendments thereto during the prior year. Offsetting the decrease in legal fees are increases in accounting and audit related fees of approximately $5,000 and Energy Consulting Services of approximately $7,300. Accounting and audit related fees increased due to the timing of when audit field work was performed by the independent registered public accounting firm for our August 31 fiscal year end. Energy Consulting Services consists of consulting fees paid to third parties to provide technical advice, guidance, and business planning and modeling to help advance the commercial development of our technologies, including but not necessarily limited to our SolarWindow? and MotionPower? technologies.
Research and Development
Research and development costs represent costs incurred to develop our SolarWindow? and MotionPower? technologies and are incurred pursuant to our sponsored research agreements with USF, development agreements with Veryst, consulting agreements with Sigma Design, and agreements with other third party providers. These agreements include salaries and benefits for research and development personnel, allocated overhead and facility occupancy costs, contract services and other costs. Research and development costs are expensed when incurred, except for nonrefundable advance payments for future research and development activities which are capitalized and recognized as expense as the related services are performed.
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Please refer to the appropriate sections above for disclosure of the specific terms and amounts incurred for each research and development agreement.
Other Operating Expenses
Other operating expenses includes rent, patent filing costs, utilities, insurance, press releases, information technology related fees, printing costs, and other administrative costs.
Other operating expenses decreased $24,690 during the three months ended November 30, 2010 as compared to the same period of the prior year substantially due to decreases in press release expense of approximately $19,600 and patent expenses of approximately $5,300. During the quarter ended November 30, 2010, we announced the unveiling of our SolarWindow? Technology at USF as well as other significant advancements in the technology. During the quarter ended November 30, 2009, we made several announcements regarding the advancement of our MotionPower? Technology and the testing of such at Burger King and the Four Seasons Hotel. As we continue to advance our MotionPower? and SolarWindow? technologies we will continue to make announcements by way of press releases, resulting in additional fees for press releases. During the quarter ended November 30, 2009, we filed United States and international patent applications for our MotionPower? Technology and SolarWindow? Technology, resulting in higher expense in the prior year than in the current year.
Other Income (Expense)
A summary of our other income (expense) for the three months ended November 30,
2010 and 2009 was as follows:
Three Months Ended
November 30,
2010 2009 Change
Other income (expense)
Interest expense $ (251 ) $ - $ (251 )
Foreign exchange gain (loss) (497 ) 16 (513 )
