ITEM 1. — BUSINESS
Cautionary Statement Regarding Forward-Looking Information
This Annual Report on Form 10-KSB and other documents incorporated by reference contain certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding our current assumptions about future financial performance; the continuation of historical trends; the sufficiency of our cash balances for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future of the electrical storage device industry, all of which are subject to various risks and uncertainties.
When used in this Form 10-KSB; in our other filings with the Securities and Exchange Commission, in our press releases, presentations to securities analysts or investors, in oral statements made by or with the approval of an executive officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to identify such forward-looking statements. However, any statements contained in this Form 10-KSB that are not statements of historical fact may be deemed to be forward-looking statements.
We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including, but not limited to such factors as our ability to successfully implement our business plan; our ability to raise an adequate level of capital to fund our operations; market demand and pressures on the pricing for our propose products; changing market conditions, competition and growth rates within the electrical storage device industry; changes in accounting policies; risks associated with operations outside of the U.S.; changing economic conditions such as general economic slowdown, decreased consumer confidence and the impact of war on the economy; and other risks and uncertainties.
Background Information
Tamboril Cigar Company was engaged in the cigar manufacturing business between October 1996 and April 2000, when it filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Act. Our company engaged in no substantive business activities during the period from April 2000 through December 2003. On December 31, 2003, we entered into a business combination transaction with Axion Power Corporation (“Axion”) that was structured as a reverse takeover. Since then we have been engaged principally in research and development on a nanotechnology enabled hybrid electrochemical storage battery that we refer to as the E
3
Cell.
The E
3
Cell technology relies on a variety of physical and chemical processes to convert activated carbon into highly permeable nanoporous electrodes that we use to replace lead-based negative electrodes. At the date of this report, our E
3
Cell technology is proven but unexploited science. Our principal short-term goal is to take the E
3
Cell technology from the laboratory prototype stage through initial product rollout. We are focusing our efforts on engineering and manufacturing process development for our proposed alpha and beta prototypes. Within 30 to 60 days from the date of this report, we plan to begin in-house testing our alpha prototypes. We are currently negotiating terms for a second stage alpha testing with a major manufacturer of uninterruptible power supplies (“UPS”) for electronics. If our alpha testing is successful, we intend to promptly commence a larger beta testing program with our alpha testing partner and several other leaders in the electrical power industry. If our beta testing is successful, we plan to develop E
3
Cell products for use in fixed installations such as UPS, backup power systems for telecommunications and cable television networks and surplus energy storage systems for photovoltaic and wind power systems. If our initial commercialization is successful we plan to expand our focus and enter the larger market segments including high-performance battery systems for hybrid automobiles and other high-value applications.
For detailed information on the history of our company and our business combination with Axion, please see our Annual Report on Form 10-KSB for the year ended December 31, 2002 and our Current Report on Form 8-K/A dated March 15, 2004.
History of the E
3
cell technology and Axion
The E
3
Cell is “an asymmetrically super-capacitive lead-acid-carbon hybrid battery.” Reduced to basics, the E
3
Cell replaces the lead-based negative electrode in a conventional lead-acid battery with a highly permeable nanostructure enhanced carbon electrode that eliminates the physical deterioration problems associated with lead-based electrodes and gives E
3
Cell batteries super-capacitive characteristics that do not exist in conventional batteries.
C and T Co. Incorporated (“C&T”) and its staff conducted the initial research and development work on the E
3
Cell technology at facilities in Russia and Canada. C&T produced the first generation of E
3
Cell battery prototypes in 1997 and in subsequent years its research and development teams made significant improvements in the E
3
Cell technology’s performance and efficiency. They also refined the engineering and design parameters and developed manufacturing processes for our nanoporous carbon electrodes.
Between September 2001 and July 2003, a publicly held Nevada corporation named Mega-C Power Corporation (“Mega-C”) spent approximately $4 million on research, development and testing of the E
3
Cell technology. In the spring of 2003, Mega-C encountered a variety of problems including an investigation by the Ontario Securities Commission (the “OSC”) and a series of
lawsuits that alleged breach of contract, mismanagement and securities law violations. As a result of these problems, Mega-C ceased its operations in December 2003.
Axion was organized in September 2003 by a small group of previously unrelated investors who had substantial investments in Mega-C. Prior to the organization of Axion, its founders provided $390,000 of interim funding to Mega-C for the purpose of financing the continued development of the E
3
Cell technology. When it became clear that Mega-C could no longer function as an operating business enterprise, Axion’s founders decided to organize a new corporation that would:
·
Be subject to the corporate governance, disclosure and reporting requirements of the Exchange Act;
·
Separate the development and commercialization of the E
3
Cell technology from the ongoing litigation between the various stockholder and management factions at Mega-C;
·
Provide all Mega-C investors a reasonable share of the profits, if any, that arise from the future commercialization of the E
3
Cell technology; and
·
Provide a mechanism for the reallocation of ownership interests within Mega-C when the pending lawsuits are resolved.
In connection with the organization of Axion, its founders contributed $1.25 million in capital for the purpose of continuing the development of the E
3
Cell technology. Axion then raised an additional $650,000 in capital through a private placement to three accredited investors. Based on Axion’s agreement to provide additional development funding when required:
·
C&T granted Axion an exclusive worldwide license to develop, manufacture and sell E
3
Cell products for use in stationary installations;
·
C&T granted Axion the right to acquire C&T’s residual interest in the patents and other intellectual property rights embodied in the E
3
Cell technology; and
·
Mega-C agreed that it would not object to the license if Axion created a mechanism to preserve the equitable interests of the Mega-C Shareholders in the E
3
Cell technology.
In connection with the initial closing of the business combination with Axion, we created an irrevocable trust for the benefit of the Mega-C Shareholders. At the date of this report, the Mega-C Shareholders Trust is the record owner of 117,239,736 shares, or approximately 57% of our outstanding common stock. When all of the conditions of the trust have been satisfied, the shares held by the trust will be registered under the Securities Act, and then either distributed to or sold for the accounts of the Mega-C Shareholders.
BUSINESS RISK FACTORS
Investors considering acquiring shares of our common stock should consider carefully the following business risk factors. Any of the following risks, as well as other risks and uncertainties that are not yet identified or that we currently believe are immaterial, could harm our business, financial condition and operating results, and could result in the complete loss of any investment.
We are an early stage company and therefore our business and prospects are difficult to evaluate.
Tamboril did not engage in any substantive business during the three years ended December 31, 2003. Axion is a newly organized company that commenced operations in the fourth quarter of 2003. We have no meaningful operating history that you can rely on in connection with your evaluation of our business and prospects. Our prospects must be considered in light of the many risks, uncertainties, expenses, delays, and difficulties frequently encountered by companies in their early stages of development. Some of the risks and difficulties we expect to encounter include our ability to:
·
Adapt and successfully execute our evolving and unpredictable business model;
·
Maintain effective control over the cost of our research and development and beta testing activities;
·
Develop cost effective manufacturing methods for our beta E
3
Cells and proposed products;
·
Produce beta E
3
Cells in sufficient quantities to support our planned testing activities;
·
Manage and adapt to rapidly changing and expanding operations;
·
Implement and improve operational, financial and management systems and processes;
·
Respond effectively to competitive developments;
·
Raise the necessary capital to finance the growth of our business;
·
Attract, retain and motivate qualified personnel; and
·
Manage each of the other risks set forth below.
Because of our lack of operating history and the early stage of our development, we have limited insight into trends and conditions that may exist or might emerge and affect our business. We cannot be certain that our business strategy will be successful or that we will successfully address these risks.
The auditors report on our financial statements includes a going concern qualification.
We had accumulated losses of ($506,300) and a working capital deficit of ($791,631) at December 31, 2003. We will not be able to commence second stage beta testing of our proposed products without obtaining additional funds through the sale of securities or from other sources. We are currently seeking additional capital in order to meet our anticipated obligations. While recent sales of securities in private placement transactions alleviate the going concern issues, they do not eliminate them. Accordingly, the independent auditors’ report on our financial statements for the year ended December 31, 2003 contains a fourth explanatory paragraph that our financial statements have been prepared assuming that our company will continue as a going concern and that our potential to incur operating losses raises substantial doubt about that assumption.
We do not have a marketable product or any operating revenue.
Our proposed E
3
Cell batteries only exist at the laboratory prototype stage. We have never sold any products or generated any operating revenues. We will not be in a position to sell products based on our E
3
Cell technology until we complete the development and testing activities described in this report. There can be no assurance that our development and testing activities will be successful or that our proposed products will achieve market acceptance or be sold in sufficient quantities and at prices necessary to make them commercially successful.
We will need additional financing to continue our operations.
We have approximately $372,500 in cash on the date of this report. Our ability to continue our research, development and testing will be dependent upon increasing our capital resources. We believe our cash resources will be adequate for our cash requirements for a period of 30 to 60 days from the date of this Report. We will not be able to complete our alpha testing or commence our preliminary beta testing without obtaining additional funds from the sale of additional securities or from other sources. We are presently seeking additional capital. We cannot assure you that additional capital will be available to us on favorable terms, or at all. If adequate financial resources are not available when required, we may be forced to curtail our proposed operations. If we raise additional capital by selling preferred stock, the purchasers may have rights, preferences or privileges that are senior to the rights of our common stockholders. If we are unable to obtain additional capital when needed, our ability to continue our research and development and product testing activities will be materially and adversely affected.
We are involved in litigation.
We have recently been named as a defendant in a lawsuit that alleges a conspiracy between Axion, Mega-C, C&T and their respective officers, directors and affiliates to deprive Mega-C’s promoters of their rights to commercialize the E
3
Cell technology. We believe the lawsuit is without merit and intend to vigorously defend. Nevertheless, protracted litigation, or higher than anticipated legal costs, could significantly reduce our available working capital and have a material adverse impact on our business and prospects. There can be no assurance that we will be successful in our defense, which could have a material adverse impact on our business and prospects if substantial money damages are ultimately awarded to the plaintiffs.
We need to develop new manufacturing methods.
We have never produced commercial quantities of nanoporous carbon electrodes for use in E
3
Cell batteries. Since the production of nanoporous carbon electrodes requires highly sophisticated physical and chemical processing methods to preserve and enhance existing nanostructures, there is no assurance we will ever be able to produce our nanoporous carbon electrodes in commercial quantities. We are currently devoting significant financial and other resources to engineering and manufacturing process development. There is no assurance that we will be able to develop cost-effective manufacturing methods for our nanoporous carbon electrodes or our proposed E
3
Cell batteries, or that we will be able to offer our proposed E
3
Cell batteries at competitive prices.
We do not have any manufacturing facilities
Our research and development facility in Vaughan, Ontario will only be able to accommodate limited production of E
3
Cells for alpha evaluation and preliminary beta testing. Our Vaughan facility will not be able to produce
E
3
Cells in sufficient quantities to meet the requirements of our second-stage beta testing. There can be no assurance that we will have the necessary financial resources to build or acquire suitable manufacturing facilities when needed. Moreover, there can also be no assurances that we will be able to attract and retain qualified staff for any manufacturing facilities we acquire or that we will be able to effectively manage our manufacturing operations.
We do not have any vendor contracts.
We do not have any long-term contracts with our suppliers. Instead we purchase off-the-shelf components from third parties and manufacture other components in house. Our suppliers are not obligated to sell components to us and they may be unable to satisfy our future requirements on a timely basis. Moreover, the price of purchased components could fluctuate significantly due to circumstances beyond our control.
We will be a small player in an intensely competitive market and may be unable to compete.
The electrochemical battery industry is large, intensely competitive and resistant to technological change. If our product development efforts are successful, we will compete with numerous well-established companies that are much larger and have far greater financial, capital and other resources than we do. We may be unable to convince end users that our E
3
Cell technology is superior to lead-acid battery technology. Moreover, if our larger competitors introduce similar products, they will be better able to withstand price competition and finance their promotional programs. There is no assurance that we will be able to compete effectively.
We have limited marketing experience.
Market acceptance of our proposed products will depend in part on our ability to convince sophisticated end users of the advantages offered by our proposed E
3
Cell batteries. Our management team has limited experience in marketing and we will need to either employ qualified marketing personnel or enter into appropriate marketing agreements with others. There can be no assurance that we will be able to effectively market our proposed products.
The growth we seek is rare and inherently problematic.
Substantial future growth will be required in order for us to realize our business objectives. Growth of this magnitude is rare. To the extent we are able to develop competitive products and grow our business, we expect that such growth will place a significant strain on our managerial, operational and financial resources. We must manage our growth, if any, through appropriate systems and controls in each of these areas. We must also establish, train and manage a much larger work force. If we do not manage the growth of our business effectively, our revenues and profits could be materially and adversely affected.
We will try to use our stock to finance acquisitions.
As a key component of our growth strategy, we intend to acquire manufacturing facilities
and
other assets that we feel will enhance our revenue growth, operations and profitability. Whenever possible, we will try to use our stock as an acquisition currency in order to conserve our available cash resources for operational needs. Future acquisitions may give rise to substantial charges for the amortization of goodwill and other intangible assets that would materially and adversely affect our reported operating results. Any future acquisitions will involve numerous business and financial risks, including:
·
Difficulties in integrating new operations, technologies, products and staff;
·
Diversion of management attention from other business concerns;
·
Cost and availability of acquisition financing; and
·
Potential loss of key employees.
We will need to be able to successfully integrate any businesses we may acquire in the future, and the failure to do so could have a material adverse effect on our business, results of operations and financial condition.
Because of factors unique to us, the market price of our common stock is likely to be volatile.
Daily trading in our common stock has only recently commenced. Because of the manner in which we became a public company, the relatively small number of shares available for resale, the early stage of our business and numerous other factors, the trading price of our common stock is likely to experience significant fluctuations in the future. In addition, actual or anticipated variations in our quarterly operating results; the introduction of new products by our competitors; changes in conditions or trends in the battery industry; changes in governmental regulation; or changes in securities analysts' estimates of our future performance or that of our competitors or our industry in general, could all affect future stock performance. Investors should not purchase our units if they are unable to absorb a complete loss of their investment.
We will need to implement a substantial reverse split.
We had 205,642,440 shares of common stock and 49,441,563 presently exercisable stock purchase rights outstanding at March 26, 2003. Since we want to qualify for a listing on the Nasdaq Stock Market or the American Stock Exchange at the earliest possible date, we believe an immediate capital restructuring will be essential. While we will not be able to make final restructuring decisions until the market price of our shares in the over-the-counter market has stabilized, we believe a reverse-split on the order of 1 new share for every 8 to 12 outstanding shares will probably be required. A definitive reverse split proposal will be included in the proxy statement for our next stockholders meeting, which is tentatively scheduled for May 2004.
Our interim chief financial officer is not a full-time employee.
John L. Petersen has been an officer and director of our company since February 2003. While he has agreed to continue as a director of our company and as our interim chief financial officer pending the recruitment of a suitable successor, Mr. Petersen is not a full-time employee of our company and is not required to devote any specific amount of time to our business. Although we intend to recruit and hire a full-time chief financial officer, we do not currently have a senior financial executive who devotes his or her full time and attention to our business.
There is no assurance that we will qualify for a Nasdaq or Amex listing.
We intend to apply to have our common stock listed Nasdaq or Amex as soon as we meet the initial listing criteria and determine that we will continue to do so throughout the application process. As a prerequisite to such a listing we will be required to satisfy a number of requirements, including a minimum bid price of $3 to $5 per share. There can be no assurance that our common stock will ever trade at a price that meets these requirements. Even if our common stock satisfies the minimum bid price criteria, there can be no assurance respecting the length of time it may take to successfully prosecute a Nasdaq or Amex listing application, or that such an application will ever be approved. Until our common stock is approved for a Nasdaq or Amex listing, the only available trading markets will be the OTC Pink Sheets and Bulletin Board.
Our stock is subject to the "penny stock" rules which may make it a less attractive investment.
Our common stock trades on the Pink Sheets. Although we intend to file an application to list our stock on the Nasdaq or Amex in the future, we will not meet the initial listing standards for either of these markets until we obtain additional capital and revise our capital structure. Therefore, we cannot give you any assurance that a liquid trading market will exist when you decide to sell your shares. In addition, our stock is subject to the so-called "penny stock" rules that impose additional sales practice requirements on broker-dealers who sell low-priced securities to persons other than established customers and accredited investors. An accredited investor is generally defined as an investor with a net worth in excess of $1 million or annual income exceeding $200,000 or $300,000 together with a spouse. For transactions covered by the penny stock rules, a broker-dealer must make a suitability determination for the purchase and receive the purchaser's written consent to the transaction prior to sale. Therefore, both the ability of a broker-dealer to sell our common stock and the ability of holders of our common stock to sell their securities in the secondary market may be adversely affected. The Securities and Exchange Commission has adopted regulations that define a "penny stock" to be an equity security that has a market price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a disclosure schedule relating to the penny stock market. The broker-dealer must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is to sell the securities as a market maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. As a result of the additional suitability requirements and disclosure requirements imposed by the "penny stock" rules, an investor may find it more difficult to dispose of our common stock.
PLANNED BUSINESS OPERATIONS
Industry overview
The battery industry manufactures devices that store electrical energy in chemical form for use on demand by an electrical apparatus. The products produced by manufacturers range from simple batteries that provide electricity at the flip of a switch to smart batteries that use sophisticated feedback mechanisms to control charging, discharging and other operating parameters. The battery industry is experiencing an extended period of rapid growth that is fueled in part by the following factors:
·
Environmental concerns over transportation systems that rely on fossil fuels;
·
Economic concerns over the availability and cost of fossil fuels;
·
The emergence of new technologies for communications, transportation and power generation; and
Notwithstanding the rapid and sustained growth, the electrochemical battery industry faces a number of important technical challenges, including:
·
Developing products that have improved power output to weight ratios, or power densities;
·
Developing products that have improved charge and discharge rates;
·
Developing products that have longer life-cycles and can withstand repeated charging and discharging without a loss of performance;
·
Developing products that make a greater proportion of the stored energy available for use; and
·
Developing products that can be recycled using existing technologies and infrastructures.
In response to these challenges, the electrochemical battery industry is developing and introducing new products based on technologies that are increasingly complex, sophisticated and expensive. We believe growth and technical change in the electrochemical battery industry will continue to accelerate for foreseeable future.
Overview of lead-acid battery technology
The most common form of electrochemical battery is the lead-acid battery. Lead-acid batteries are essential components in a wide variety of consumer and industrial products including:
·
Automotive electrical systems;
·
Golf carts, wheelchairs, forklifts and other motive applications;
·
UPS equipment for computers and sensitive electronics; and
·
Power backup and conditioning systems for telecommunication and CATV equipment.
Despite their prominence in the market, lead-acid batteries have a number of inherently undesirable and heretofore unavoidable weaknesses, including:
·
Limitations on the proportion of the stored energy that can be used in deep discharge cycles without damaging the battery;
·
Life spans that are limited by internal chemical processes that deteriorate over time and significantly impact performance after a predictable number of discharge cycles.
A conventional lead-acid battery contains two lead-based electrodes, one negative and one positive. The negative electrode is the primary life-limiting component. Over the life of a lead-acid battery, internal electrochemical processes result in progressive and irreversible deterioration of the negative electrode. When the acid electrolyte can no longer freely penetrate the pores of the electrode, the battery loses its capacity to accept and hold a charge. At that point, the only alternative is to replace the old battery with a new one.
Lead-acid batteries deteriorate at different rates due to a variety of factors including the number of times the battery is charged and discharged; the rate of charge; the rate and depth of discharge; and other environmental conditions that effect internal electrochemistry.
Despite the inherent weaknesses of lead-acid battery technology, the worldwide market for lead-acid batteries accounts for approximately $30 billion in annual sales. We believe that worldwide demand for lead-acid batteries will continue to expand rapidly for the foreseeable future. However, as noted in a recent report by Frost & Sullivan [2002] World Lead-acid Battery Markets:
“The lack of technological developments and innovations in the total lead-acid battery market is one factor preventing significant growth rates ... Throughout 2001, a challenge that greatly impacted the lead-acid battery market was a lack of product originality and differentiation among product chemistries.”
Our proposed E
3
Cell batteries
Reduced to basics, our E
3
Cell replaces the lead-based negative electrode in a conventional lead-acid battery with a nanoporous carbon electrode that eliminates the physical deterioration associated with lead-based negative electrodes and gives E
3
Cell batteries super-capacitive characteristics that make it possible to rapidly deliver large amounts of stored energy. We believe our E
3
Cell is a major advance in the field of electrical energy storage. In rigorous testing, laboratory prototypes of our E
3
Cell have demonstrated a number of important competitive features and performance advantages that compare favorably with lead-acid batteries. The features and advantages include:
·
E
3
Cells have cycle-lives that are 4 to 5 times longer than lead-acid batteries, which means they can be charged and deeply discharged a greater number of times without a general failure or a significant performance loss;
·
E
3
Cells have high coulombic efficiencies, which means that more of the accumulated charge is available for use during deep discharge cycles;
·
E
3
Cells can withstand significantly faster sustained charge rates; and
·
E
3
Cell technology is expected to be largely compatible with existing lead-acid battery manufacturing methods and production facilities.
If our planned beta testing and product development work is successful, we believe we can become a leading competitor in the global market for high-performance batteries.
Applied nanotechnology solutions
The National Nanotechnology Initiative (“NNI”) is a federal research and development program established by the White House to coordinate multiagency efforts in nanoscale science, engineering, and technology. Sixteen Federal agencies participate directly in the NNI and a variety of other organizations contribute to the NNI through studies, cooperative research and development, and other collaborations. The NNI broadly defines a new technology as "nanotechnology" if it includes each of the following elements:
·
Research and technology development at the atomic, molecular or macromolecular levels, in the length scale of approximately 1 to 100 nanometers;
·
Creating and using structures, devices and systems that have novel properties and functions because of their small and/or intermediate size; and
·
Ability to control or manipulate on the atomic scale.
The carbon electrodes that we use to replace lead-based negative electrodes represent a convergence between traditional materials science and electrochemistry and newly emerging disciplines that focus on the unique physical and chemical reactions that only occur in ultra-small spaces, or nanotechnology. We do not build nanostructures from the bottom up by manipulating individual atoms or molecules. Rather, we start with activated carbon and:
·
Use proprietary physical and chemical processing techniques to optimize naturally occurring porosity in the 1 to 100 nanometer in size range;
·
Use other proprietary techniques to create massive structural permeability; and
·
Integrate processed carbon into a self-regulating system that controls electrochemical and electrostatic processes and results in a unique combination of battery and super-capacitor characteristics.
In a small but important way, we believe our methods for making highly permeable nanostructure enhanced carbon electrodes are properly classified as applied nanotechnology.
Our E
3
Cell battery design
The complete technical description of an electrical storage device based on our E
3
Cell technology is a “multi celled asymmetrically super-capacitive lead-acid-carbon hybrid battery.” Where a lead-acid battery uses two lead-based electrodes in each cell, our E
3
Cell battery uses a lead-based electrode for the positive pole and a polarizable nanoporous carbon electrode for the negative pole. We have developed manufacturing techniques that should, when fully developed, allow us to manufacture our nanoporous carbon electrodes at a cost that will compare favorably with the cost of traditional lead-based electrodes. There is no assurance, however, that we will be able to effectively move our manufacturing techniques from the laboratory bench to the factory floor.
The key feature that differentiates our E
3
Cell battery from a traditional lead acid battery is our use of a highly permeable and nanoporous carbon electrode to replace the lead-based negative electrode. This eliminates the physical deterioration associated with lead-based negative electrodes and gives our E
3
Cell batteries super-capacitive characteristics that make it possible to rapidly deliver large amounts of stored energy. As a result, our E
3
Cell batteries are expected to perform better in high performance applications where rapid charge and discharge rates, and the ability to withstand a large number of charge and deep discharge cycles are critical requirements.
In many respects, the configuration of our E
3
Cell battery will be similar to conventional lead-acid batteries. Our E
3
Cells, each of which has a maximum charging voltage of approximately 2.4 volts, will be arranged in a multi-cell configuration and use similar electrodes, separators, terminals, electrolytes and assembly techniques. Because of the parallels, our finished product is expected to look similar to a conventional battery. We believe the production of E
3
Cell batteries should be largely compatible with existing lead-acid battery production techniques and assembly processes. If our E
3
Cell technology is well received, we believe existing lead-acid battery manufacturers will be able to adapt existing production lines to our E
3
Cell technology for a fraction of the cost of a new facility.
Our product development and testing plan
We have prepared a detailed product development and testing plan that will, if successfully implemented over the next two years, advance our E
3
Cell technology from the laboratory prototype stage to initial product rollout. Our basic research is complete and our laboratory prototypes have demonstrated competitive features and performance advantages that we believe manufacturers of UPS equipment and industrial power backup systems will find highly desirable. If we can establish the value and utility of our E
3
Cell technology in a limited number of high-end industrial markets, we plan to increase our production capacity through acquisitions, joint ventures and licensing arrangements, and eventually enter the larger market segments including high-performance battery systems for hybrid automobiles and other high-value applications.
The cornerstone of our product development and testing plan is our research and development facility in Vaughan, Ontario. We are currently developing a small-lot E
3
Cell production line that will help us integrate the work of our research team with the practical issues faced by our materials science and manufacturing teams. We believe our Vaughan facility will shorten our product development cycles and improve the coordination between our laboratory scientists and our development engineers. The principal function of our Vaughan facility will be to insure that constructs, formulations and manufacturing methods that succeed in the laboratory are immediately tested under simulated manufacturing conditions. We do not believe our Vaughan facility will generate an operating profit, but we do believe that the ability to combine scientific research and prototype manufacturing in a single facility will increase the probability that our future manufacturing facilities will be able to produce quality products at predictable and competitive prices.
Alpha evaluation
.
We have designed a full sized “alpha evaluation cell” that can be efficiently produced in our Vaughan facility . Over the next 30 to 60 days we plan to begin fabrication of evaluation cells to support our planned alpha evaluation program. Initially, we will focus on producing individual E
3
Cells, but as our alpha evaluation program progresses we plan to fabricate increasingly complex multi-cell batteries. Over the next few months, we expect to produce approximately 500 alpha evaluation cells.
Our planned alpha testing program has two stages. Initially our engineering staff will conduct in-house testing for quality control and process optimization purposes. The goal of this in-house testing will be to determine whether our proposed battery design will consistently meet our performance standards. Thereafter, w e plan to begin a joint second stage alpha evaluation program with a single major manufacturer of UPS equipment. Our proposed industry partner is a worldwide leader in the UPS equipment market that generates approximately $1 billion in annual sales. While certain details of the proposed relationship remain unresolved at the date of this report, we believe a testing partnership with a major UPS equipment manufacturer will give us the advantage of their significant technical expertise and field support while giving them an opportunity to participate in the early development of a promising technology. If our alpha evaluation program is successful, we believe several other leaders in the electrical power industry will participate as evaluation partners during the beta testing stage.
During alpha evaluation, we will cooperate with our testing partner to develop detailed technical specifications for the more advanced “beta evaluation batteries” that will be used in our planned field tests. We will also finalize the design of our beta evaluation batteries and begin fabricating the required components. There is no assurance that our alpha evaluation will be successful or that we will be able to proceed to the beta evaluation stage.
Beta testing
. If our alpha evaluation yields favorable results , we intend to implement a two-stage beta testing program that we believe will require up to 18 months. We believe our preliminary beta testing will require between three and six months to complete and include the following tasks:
·
Manufacture preliminary
beta evaluation batteries;
·
Conduct extensive internal performance testing and establish quality control standards;
·
Deliver prototype beta evaluation batteries to our testing partners for preliminary assessment, evaluation and testing in application specific environments;
and
·
Design a standardized
E
3
Cell
battery for use in our second stage beta testing.
There is no assurance that our preliminary beta testing will be successful or that we will ever be in a position to proceed to our second-stage beta testing. If our preliminary beta testing yields favorable results, we believe
our second-stage beta testing will require an additional 12 months and include the following additional tasks:
·
Develop manufacturing and assembly processes and distribution systems for our standardized
E
3
Cell
battery;
·
Plan, design, build and test a dedicated facility for pilot production and experimental manufacturing of our standardized
E
3
Cell batteries in small commercial lots;
·
Expand the beta evaluation process to additional testing partners in a variety of market segments for the purpose of developing a customer base for a commercial product rollout; and
·
Develop a strategy for the production and commercial rollout of our proposed E
3
Cell batteries.
Anticipated testing costs
. We believe our alpha evaluation and preliminary beta testing can be conducted using our existing facilities and resources. The budgeted cost of our alpha evaluation is approximately $1.5 million and the anticipated cost of our preliminary beta testing is approximately $2.5 million. Our second stage beta testing activities will be considerably more expensive and require an investment of approximately $10 million. We do not presently have sufficient financial resources to pay the anticipated costs of our planned alpha evaluation and beta testing programs. We believe, however, that financing opportunities will become available as our alpha evaluation and beta testing progress, particularly if the intermediate results we obtain are favorable.
Commercial rollout
.
We do not have a well-defined strategy for the commercial rollout and production of our proposed E
3
Cell batteries. We may decide to build our own production facilities and develop our own distribution capacities, or we may decide to enter into partnerships, joint ventures and other arrangements with existing battery manufacturers who have excess production and distribution capabilities. There is no assurance that we will be able to establish the necessary manufacturing facilities when needed, or effectively manage the manufacturing, marketing and distribution of a new class of battery product.
Our growth strategy
Our strategy is to establish a foundation for products based on our E
3
Cell technology in a limited number of high-value market segments where performance is a primary consideration and cost is secondary. We have chosen three market segments where we believe the E
3
Cell has key features that will be readily recognized and rapidly accepted. These market segments are:
·
UPS equipment for computers and sensitive electronics;
·
Power backup and conditioning systems for telecommunication and CATV equipment;
·
Temporary storage systems for photovoltaic and wind energy generators that could derive substantial additional revenue from cost effective battery storage.
By focusing on these high-value industrial markets we believe we will be able to efficiently deploy a small and sophisticated marketing team that can concentrate on the needs of the relatively small number of manufacturers who compete in these large specialty markets. We believe this strategy is likely to:
·
Provide sufficient revenue to make our company self-sustaining at an early stage;
·
Provide a credible track record for larger and more conservative market segments that are not likely to rapidly adopt an emerging technology;
·
Provide a level of insulation from the superior marketing, financial and production resources of our better-established competitors; and
·
Provide multiple opportunities for high-level networking among sophisticated users.
If we are able to establish a credible market presence in our initial target markets, we then hope to use this foundation as a stepping-stone into successively larger market segments.
We do not view the E
3
Cell as a replacement for standard automobile batteries because all of the accessories in automotive electrical systems are tuned to a relatively narrow voltage range. However it appears that E
3
Cell batteries may offer a number of competitive features that would be attractive in battery systems for hybrid automobiles that:
·
Require fast charge acceptance capabilities;
·
Can withstand a large number of charge and discharge cycles without internal damage; and
·
Can provide fast response to peak power demands during rapid acceleration.
There are no uniform industry standards for battery systems in hybrid automobiles and it is impossible to predict whether our E
3
Cell batteries will be able to compete effectively with existing technologies or new technologies that are being developed by others. There is also no assurance that the market for hybrid automobiles will enjoy the growth rates that are presently anticipated by automobile manufacturers.
A second potential market that may develop in the future is power grid buffering systems; which are little more than extremely large and highly complex UPS systems. Since currently available power storage technologies are prohibitively expensive, the public power grid is largely unprotected and susceptible to frequent overstress and periodic failures. Based on preliminary investigations, we believe the products we intend to develop for the UPS market may also have potential in grid buffering. There can be no assurance, however, that we will ever develop a battery system that is suitable for use in grid buffering or that the electric power industry will be willing to incur the substantial costs associated with the installation and maintenance of a grid buffering system.
Patents and intellectual property
In connection with the Axion transaction, C&T agreed to transfer all of the patents, patent applications, trade secrets, know-how and other intellectual property associated with the E
3
Cell technology to our company. We have
no duty to pay any royalties or license fees with respect to the future commercialization of the E
3
Cell technology and we are not subject to any field of use restrictions. We believe the C&T patents and patent applications, along with our trade secrets, know how and other intellectual property will be critical to our success.
We include appropriate non-competition and confidentiality provisions in all agreements with our employees, customers, vendors and others in order to strengthen our intellectual property claims. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without authorization. Furthermore, the validity, enforceability and scope of protection afforded to intellectual property rights are constantly evolving. The laws of many countries do not protect intellectual property to the same extent as the laws of the U.S. and Canada.
We believe the E
3
Cell technology does not infringe outstanding patent rights held by others. Nevertheless, there may be patents issued or pending that are held by others and cover significant parts of the E
3
Cell technology. For example, we are aware that several patents have been issued that relate to the use of carbon electrodes and it may be argued that one or more of those patents are sufficiently broad to preclude our intended use. Disputes over rights to these technologies are likely to arise in the future. We cannot be certain that our products do not or will not infringe valid patents other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business.
We may license technology from third parties. Our proposed products are still in the development stage and we may need to license additional technologies to optimize the performance of our products. We may not be able to license these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our proposed products. Our inability to obtain any necessary licenses could delay our product development and testing until alternative technologies can be identified, licensed and integrated.
In general, the level of protection afforded by a patent is directly proportional to the ability of the patent owner to protect and enforce his rights through legal action. Since our financial resources are limited, and patent litigation can be both expensive and time consuming, there can be no assurance that we will be able to successfully prosecute an infringement claim in the event that a competitor develops a technology or introduces a product that infringes on one or more of our patents or patent applications. There can be no assurance that our competitors will not independently develop other technologies that render our proposed products obsolete. In general, we believe the best protection of our proprietary technology will come from market position, technical innovation, speed-to-market and product performance. There is no assurance that we will realize any benefit from our intellectual property rights.
Production and supply
Since our present management has limited experience in manufacturing, we will need to either employ qualified personnel to establish manufacturing facilities or enter into appropriate manufacturing agreements with others. There is no assurance that we will be successful in attracting experienced personnel or financing the cost of establishing additional manufacturing facilities, if required. Accordingly, there is no assurance that we will ever be capable of producing a quality product for sale at competitive prices. Since our company currently has no long-term manufacturing plans, there can be no assurance that we will be able to successfully manufacture our products.
The only component of our E
3
Cell batteries that we plan to manufacture in-house is our nanoporous carbon electrode. For all other components, we will either order “off-the-shelf” items from established manufacturers, or have the necessary components manufactured according to specifications and designs established by us. To date, we have encountered no difficulty in obtaining necessary parts or components. We are not dependent upon any single supplier. Although there are alternate sources of supply for substantially all of the components that will be included in our E
3
Cell batteries, we will depend on outside suppliers for substantially all of our raw materials and component parts. Therefore, there can be no assurance that our current or alternative sources will be able to meet all of our future demands on a timely basis. Unavailability of parts or components used in the manufacture of our products could require us to reengineer our products to accommodate available substitutions, which could increase our costs or have an adverse effect on manufacturing schedules, product performance and market acceptance.
Employees
Our company has fifteen full-time employees including a seven-member engineering team and a three-member management and business development team. C&T provides an additional fifteen full time employees for our company under the terms of a project management agreement. The employees provided by C&T include a ten-
member scientific team that includes six employees with PhDs or other advanced degrees, a nine-member support team who are primarily involved in scientific support and manufacturing activities and a three-member project and facilities management team.
Over the next twelve months, we plan to hire five to ten additional employees for our production engineering and manufacturing teams. We are not subject to any collective bargaining agreements and believe our relations with our employees are good.