Tuesday, November 27, 2007

Fuel Cells: New Hat in the Ring

Never mind that the sector is already cluttered with plenty of fuel cell aspirants, ECOtality, Inc. (ETLY: OTC/BB) has thrown its corporate hat in the ring with an on-demand hydrogen storage and delivery system. Since transportation and safety is one of the drawbacks of hydrogen fuel cells, ECOtality’s technology looks interesting.

ECOtality is a self-styled electric power cell developer that has yet to produce revenue. The company acquired the core proprietary technology and has contracted with NASA’s
Jet Propulsion Laboratory (JPL) for further development work. The product under development, currently named Hydrality, is intended for industrial and commercial applications such as buses or other centrally-fueled vehicles.

JPL’s engineers have made some progress in increasing Hydrality's storage capacity beyond the 6% goal set by the U.S. Department of Energy. However, I am more impressed by the reduction in operating temperatures to a range of 300 to 400 degrees Centigrade. This means 1) lower cost materials can be used to make the Hydrality fuel cell and 2) greater efficiency in operation. ECOtality has a 7 kilowatt prototype on its workbench and has plans to design and test a full-size 65 kilowatt fuel cell that could be used in a bus.

ECOtality has been busy with acquisitions in the last year to round out its product offering. In June 2007, the company acquired FuelCellStore.com, a web-based seller of educational fuel cell products for students and teachers. On the surface this looks like a smart vehicle to build brand awareness, especially since the deal was completed for $350,000 in cash and 300,000 shares of stock valued at $189,000.

The logic behind the September 2007 acquisition of
Innergy Power Corp. is a little less obvious. Innergy manufactures solar battery solutions in Mexico. ECOtality issued 3.0 million shares to the sellers for the deal and guaranteed the stock would be worth $1.00 or more by September 2008. Since the stock has been on an uninterrupted decline from its 52-week high of $1.94 a year ago, the guarantee could a material cash demand a year from now.

No price guarantees were necessary to complete the November 2007 acquisition of
Electric Transportation Engineering (eTEC), a developer of electric vehicle infrastructure. ECOtality paid $3.0 million in cash and 6.5 million shares of stock for eTEC. Its SuperCharge systems is targeted at airport electric ground support equipment and advanced testing of plug-in hybrids.

The acquisitions have given ECOtality its first revenue since the company’s inception in 1999. Nonetheless, the cash burn rate remains high - $4.1 million in the first nine months of 2007. The company raised $12.1 million in a private placement in 2006, and had $1.9 million in cash and equivalents on the balance sheet at the end of September 2007. Besides the guarantee to the Innergy sellers, ECOtality is also on the hook for a total of $1.4 million payable to JPL for engineering work on Hydrality.

Adequate working capital is not the only concern confronting investors in ETLY shares. Besides the 2006 private placement and payments for acquisitions, stockholders have been diluted by stock issuances for professional services and licensing agreements. There are also 8.8 million in warrants outstanding with an average exercise price of $0.57.

Despite the weak balance sheet, ECOtality may have just as great a chance of carving out a niche in the hydrogen fuel cell market as any of the more familiar names. There is likely room for several more fuel cell producers given the variety of needs among end-uses. Fuel Cells 2000, a non-profit educational group, lists
several dozen fuel cell developers on its web site and includes over 1,000 companies in its Fuel Cell Directory.

Ballard Power Systems (BLDP: Nasdaq) has built up revenue, but continues to operate with steep losses. Ballard has made some progress, shipping 334 fuel cells since the beginning of 2007.

Millennium Cell (MCEL: Nasdaq) has yet to record significant revenue, but got a significant boost in November 2007 for its mobile application when the International Civil Aviation Organization endorsed regulations for fuel cell use on commercial aircraft. That break notwithstanding, Millennium decided to “partner-up” through an exchange of shares with Horizon Fuel Cell valued at $5.0 million. Horizon and Millenium are working on a portable power generator for emergency and recreational applications.

These early fuel cell players are more likely just paving the way for the sector and other competitors rather than setting up any barriers to entry. Investment in any of the fuel cell developers requires considerable patience, an extended investment horizon, and a stomach for the risk in shaky balance sheets.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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