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[May 15, 2013]
ECOTALITY, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The statements contained in all parts of this Quarterly Report on Form 10-Q that are not historical facts are, or may be deemed to be, forward-looking statements. Forward-looking statements are only predictions based on our current expectations and our projections about future events and are subject to risks, uncertainties, and assumptions that are difficult to predict. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, but are not limited to, those relating to the following: our business strategy, including anticipated trends and developments in and management plans for our business and the markets in which we operate; cash requirements and our ability to secure financing if and when necessary; expected growth; future operating expenses; future financial results, operating results, revenues, gross margin, operating expenses, products, projected costs, and capital expenditures; sales and marketing initiatives; competition; our ability to continue to grow and implement growth; and any other statements that are not historical facts.
When used in this Quarterly Report on Form 10-Q, the words "anticipate", "estimate", "expect", " may", "plan", "project", "believe", and similar expressions are intended to be among the statements that identify forward-looking statements. Our results may differ significantly from the results discussed in the forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. These factors include, but are not limited to, the matters discussed in Item 1A: "Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, 2012 and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K.
We caution you that actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward-looking statements. You should not place undue reliance on these forward-looking statements. The forward-looking statements in this document are made as of the date on which they are made and we do not undertake to update our forward-looking statements.
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2012.
23 --------------------------------------------------------------------------------Overview ECOtality, Inc. ("we", "ECOtality", the "Company") is a leader in advanced electric vehicle ("EV") charging and storage systems with over 20 years of experience in designing, manufacturing, testing and commercializing these technologies. We provide three primary product and service offerings: Blink, Minit-Charger and eTec Labs. ECOtality offers electric vehicle charging stations under the Blink brand and provides a turnkey network operating system for EV drivers, commercial businesses, and utilities. Minit-Charger manufactures and distributes fast-charging systems for material handling and airport ground support vehicles. eTec Labs is a trusted research and testing resource for government agencies, automotive OEMs, and utilities.
Blink With an extensive history in the EV supply equipment ("EVSE") industry, we provide the Blink brand of turnkey EVSE hardware and software systems. Our primary hardware products are the Blink Level 2 (240V) and DC Fast Charger systems for residential and commercial applications. All Blink chargers are connected to the Blink Network which provides system operators and EV drivers advanced connected services, including monitoring and control capabilities, through web connected devices.
We intend to leverage our EV charging technology, market leading position and strategic relationships to build and commercialize a sustainable EVSE and Blink Network that supports the broader acceptance of EVs both domestically and internationally. We intend to leverage our EV charging infrastructure to further establish our leadership position and to drive revenues through equipment sales, network subscription programs and usage fees, media advertising models and interface with utilities as outlined below: · Equipment Sales. We anticipate that a majority of our revenue will be derived from the sale of Blink chargers to residential and commercial customers. We plan to offer our Blink Level 2 residential charger directly as well as through both brick-and-mortar and online retail, and through key, strategic resellers. Installation of both commercial and residential Level 2 chargers is performed by third parties, including a network of certified contractors that are part of the Blink Certified Contractor Network. Our Blink Level 2 commercial charger and Blink DC Fast Charger are sold directly through our sales force and installed by our authorized installation partners. Over time, we expect to explore opportunities to sell our products through other dealers, distributors and utilities. We will derive revenue from installation services both residentially and commercially as either a direct installer, project manager or lead source for our network.
· Network Subscription and Usage Fees. We offer users paid access to our Blink Network through a variety of membership and usage fee alternatives. EV drivers are able to charge at any Blink station through a variety of options including interoperable RFID cards or fobs, smartphone applications, and mobile phone and credit card-based payment options. Blink users are able to choose between paying by the hour (Level 2) or session (DC Fast Charger) at prices that are often substantially less than the per-mile cost of using gasoline. Blink members may enjoy additional advantages of the Network, such as discounted charging rates, enhanced information on their charging patterns; as well as other capabilities.
· Media and Advertising. Our Level 2 commercial and DC Fast Chargers are being installed in a variety of retail, parking, and fueling station locations. We offer a variety of media and advertising opportunities to charger hosts and third party advertisers through our Blink commercial chargers.
· Utility Interface. Our smart chargers are equipped with an embedded micro-processor, an internal electric meter to monitor energy usage, and feature various communications capabilities. By utilizing our color touch screens and communications capabilities, our Blink chargers provide an opportunity for utilities to perform load management.
We believe the following competitive strengths position us as a leading global provider of EV charging solutions: · Blink Network. The Blink Network of charging stations provides all EV drivers the freedom to travel wherever they choose and to charge at commercial locations conveniently identified along the way. All Blink EVSE feature real time communications capabilities, and are designed to be networked into the Blink Network Operations Center to provide system administrators the ability to remotely monitor, control and communicate with all Blink EVSE. The Blink Network is a cloud-based operating system that can provide device management and provisioning, location pricing customization, transaction processing, payment gateways, data collection, content management, integration with utility smart grid services, load management and demand response programs. The open architecture of this system is designed to facilitate interoperability and to provide opportunity for point, location, and availability sharing. EV drivers will be able to pay for charging their EV at any Blink station through a variety of options including interoperable RFID cards, smartphone applications, and mobile phone and credit card-based payment options.
Consumers may also yield even greater advantages of the Blink Network, such as discounted charging rates, reservation systems, and enhanced Blink Network capabilities by becoming Blink Network members. Additionally, the Blink Mobile Application for smartphones and mobile devices enables users to find Blink charger locations, utilize GPS navigation, and receive charge status notifications.
24-------------------------------------------------------------------------------- · Strategic Partnerships. Based on our position as an innovator and market leader, we have established several key strategic partnerships to support product development, manufacturing, and deployment of our Blink Network. With regard to product development and manufacturing, we have forged important relationships with global power and automation technology firm, ABB, Inc.
("ABB"), and with auto and consumer product designer and manufacturer Roush Enterprises. Our partnership with ABB enables us to benefit from ABB's global value chains, streamline sourcing and production capabilities and allow for Blink charging systems to be powered by ABB's industry leading power electronics. Roush is a family of companies, which designs, engineers, and manufactures products for the specialty and niche vehicle, medical device, and consumer product markets. Roush is currently manufacturing Blink Level 2 residential and commercial chargers for ECOtality at their plant in Lavonia, Michigan.
· Smart Charging Stations. We believe our Level 2 and DC Fast Charger EV charging solutions are at the forefront of smart-charging technologies and have set a standard within the industry. Our chargers provide intelligent, user-friendly features to easily and safely charge EVs. Level 2 residential advanced charger features include binary wall mount design for ease of installation and physical layout, a touch screen providing charger status, statistics and history, programmable start/stop and synchronization with utility peak rates, ability to locate stations away from home, internal electric meter and wireless IEEE 802.11g, CDMA, and LAN capabilities. In addition to the above features, our Level 2 commercial chargers provide specified advertising space, selective height adjustment for ADA compliance and 360-degree beacon light for easy identification. Our DC Fast Charger adds a 42-inch LCD display for optional media and advertising, smart meter capability for demand response and energy management, and smart RFID payment technology. Each of our chargers also incorporates web-based information delivery and smart phone charger station location, GPS navigation, charge status, and completion/interruption notification.
· Project Manager of the Largest EVSE Deployment in U.S. History. As project manager of the largest EV infrastructure initiative in U.S. history, we are overseeing the infrastructure rollout and data collection for the EV Project.
We believe our unique position within the EV Project has and will continue to provide us several near- and long-term advantages relative to our competition.
In conjunction with the EV Project, we have developed three advanced and feature rich EVSE systems that will provide us opportunities to generate recurring revenue through a variety of revenue models. Upon completion of the EV Project, we expect to have one of the largest EV charging station footprints in the U.S., as well as the largest network connecting the charging stations to the grid, EVs and commercial retailers. This project will provide us an extremely valuable marketing tool to support future EVSE infrastructure projects both domestically and internationally.
The EV Project Through several competitive bidding opportunities, we have been awarded a variety of government reimbursable cost contracts, including a $100.2(1) million cost-share grant from the U.S. Department of Energy ("DOE") to lead, support and manage the largest deployment of EVs and charging infrastructure in U.S. history (this initiative, the "EV Project"). The goal of the EV Project is to develop, implement and study techniques for optimizing the deployment of charging infrastructure to support widespread market acceptance of EVs in the U.S. and internationally, as well as to identify commercially viable business models to create a sustainable EV charging industry. To achieve this objective, we have been deploying Blink residential and commercial charging stations in multiple major metropolitan areas throughout the United States. The EV Project officially launched on October 1, 2009, and included participation by Nissan and over 40 other government, utility and industry partners. The EV Project currently represents the world's largest EV infrastructure project as well as the largest network connecting charging stations to the grid, EVs and commercial retailers.
(1) The EV Project cost share grant, in the amount of $100.2 million includes $86.4 million awarded under the initial grant in September 2009 and $13.8 million awarded via a subsequent grant in June 2010.
The EV Project is scheduled for completion at the end of 2013. On a project-to-date basis through March 31, 2013, we have received $91.5 million under the project.
Minit-Charger Through our Minit-Charger business, we have a legacy of successfully meeting industrial charging needs, specifically focused on the manufacture and distribution of advanced fast-charging systems for off-road industrial applications including material handling and airport ground service equipment. Eliminating the need for petroleum-based fuels commonly used in material handling vehicles, Minit-Charger is a clean system that emits no harmful emissions. The Minit-Charger system recharges batteries four to six times faster than conventional chargers, and enables battery life that is equal to or longer than those using traditional charging methods. The Minit-Charger patented advanced algorithm technology provides a lighter, compact and more cost-effective fast-charging system. These chargers allow for the system to be pole or wall mounted in order to save valuable floor space and allows better cable management. The chargers also feature advanced data collection capabilities, including the patented Minit-Trak fleet and system data management system, which provides comprehensive performance evaluation of a battery's state-of-health and state-of-charge and automatically adjusts its charging rates to increase and maximize battery life. Minit-Chargers are being used by Southwest Airlines in airports around the country and in warehouses owned by Pepsico, Home Depot, and others.
eTec Labs We have a long history in clean and renewable energy technologies and have various standing contractual relationships as a vehicle tester and consultant for the DOE, national research laboratories, vehicle OEMs, national energy storage consortiums, and electric utilities. We provide services in energy storage, monitoring, system design and fabrication, product and vehicle testing, and product development. We have specific expertise in the areas of EV systems, recharging stations, energy demand management systems, utility communication systems, advanced battery technologies, fast charging technologies, and hydrogen production, storage and dispensing systems. We have been the testing partner for the DOE's Advanced Vehicle Testing Activity (AVTA) program since 1998 and have worked with the DOE, vehicle manufacturers and industry stakeholders to develop test procedures used to conduct baseline, accelerated, fleet, and battery performance evaluations. In September 2011, we were awarded an additional $26.4 million contract to conduct the DOE's Advanced Vehicle Testing and Evaluation (AVTE) program. The award expands our scope of work following the DOE's AVTA program, encompassing a five-year term to conduct ongoing vehicle evaluations for the DOE.
25-------------------------------------------------------------------------------- We have industry leading experience in many facets of electric and alternative vehicle strategy development. Utilizing that experience, we have developed our EV Micro-Climate planning process, a detailed planning and consulting program designed for municipal planning organizations and utilities to provide a deployment blueprint and action plan for a comprehensive EV charge infrastructure for a given market area. Our EV Micro-Climate planning program is an integrated turnkey consulting service that supports near- and long-term planning for the adoption of EVs. The implementation of the EV Micro-Climate process includes physical charge infrastructure installations at residential, commercial and public locations, as well as comprehensive review of regulatory issues, public awareness and marketing programs to support the various value chains associated with the EV Micro-Climate process. Additionally we have developed fleet analysis and utility consulting services that can be strategically uncoupled or used in conjunction with the Micro-Climate planning process to provide more comprehensive services to our customers.
The EV Micro-Climate process has been undertaken and refined in the original markets of the EV Project and has been implemented for an entire country in Europe, as well as many major utilities, including BC Hydro in British Columbia, and cities outside of the EV Project, such as Houston, Texas.
Other Operations Innergy is a wholly owned subsidiary based in San Diego, California which provides us the ability to further expand our production, manufacturing and assembly capabilities for Innergy's solar products and energy storage devices, as well as products of our other subsidiaries, including our Blink and Minit-Charger products.
Fuel Cell Store is a wholly owned subsidiary which operates as our online retail division. Fuel Cell Store (www.fuelcellstore.com) is an e-commerce marketplace that offers consumers a wide array of fuel cell products from around the globe.
Based in San Diego, California, Fuel Cell Store develops, manufactures, and sells a diverse and comprehensive range of fuel cell products that includes fuel cell stacks, systems, component parts and educational materials. Fuel Cell Store is a market place for fuel cell stack, component, and hydrogen storage manufacturers to unite with consumers and is an attractive source for hydrogen and fuel cell industry activity and direction.
Segment Information We operate our business in four reportable segments, which are described as follows: Ecotality North America ("ECONA") is a leader in the research, development and testing of advanced transportation and energy systems with a focus on alternative-fuel, hybrid and electric vehicles and infrastructures. ECONA's primary product offerings include: (i) the Blink line of charging stations for passenger vehicle applications, represented by Blink Level 2 residential and commercial chargers and Blink DC Fast Chargers, (ii) the Minit-Charger line of advanced fast-charge systems for industrial applications including material handling and airport ground support equipment, and (iii) testing and consulting services to utilities and government agencies, including programs such as Advanced Vehicle Testing Activities ("AVTA") and Advanced Vehicle Testing and Evaluation ("AVTE") for the DOE, the EV Micro-Climate program, and services provided under the EV Project.
Innergy provides unique power solutions including solar and battery pack manufacturing and assembly, and electric charging station assembly, repair and maintenance. The Company's Mexico production facility supports these low cost services with a well-trained labor force.
Fuel Cell Store ("FUEL CELL") is an online marketplace for fuel cell-related products and technologies with online distribution sites in the U.S., Japan, Russia, Italy and Portugal.
International ("INTL") - Ecotality Australia Pty Ltd. ("ECO Australia") is the Company's wholly owned subsidiary in Australia which markets and distributes the Company's Blink and Minit-Charger equipment in Australia. The Company includes ECO Australia in its International segment and as other international subsidiaries are established, they will also be included in the International segment.
During the first quarter of 2013, ECO Australia assigned its contract with the Australia State of Victoria's Department of Transportation ("VDOT") to a third party. As a result, we recognized the remaining deferred revenue under the VDOT contract and expensed the remaining net book value of equipment capitalized under the VDOT contract, resulting in net income for the first quarter of 2013 for this reporting segment.
Material changes in results of operations by segment for the three months ended March 31, 2013 as compared to 2012 are described in the Results of Operations section below.
26--------------------------------------------------------------------------------Results of Operations Three months ended March 31, 2013 compared to three months ended March 31, 2012 The following table sets forth our results of operations for the three months ended March 31, 2013 and 2012 (in thousands, except percentages): Three Months Ended March 31, $ Increase / % Increase / 2013 2012 (Decrease) (Decrease) Revenue Product $ 1,905 $ 1,422 $ 483 34 % Service 14,029 9,635 4,394 46 License - 2,593 (2,593 ) (100 ) Total revenue 15,934 13,650 2,284 17 Cost of goods sold Product 1,055 1,014 41 4 Service 8,929 7,482 1,447 19 Total cost of goods sold 9,984 8,496 1,488 18 Gross profit 5,950 5,154 796 15 Operating expenses: Sales and marketing 1,152 1,215 (63 ) (5 ) Research and development 469 326 143 44 General and administrative 4,801 4,912 (111 ) (2 ) Total operating expenses 6,422 6,453 (31 ) - Loss from operations (472 ) (1,299 ) 827 64 % Interest income (expense), net (80 ) 145 (225 ) Other income, net 4 2,404 (2,400 ) Income (loss) before income taxes (548 ) 1,250 (1,798 ) Income tax expense (40 ) (1 ) (39 ) Net income (loss) $ (588 ) $ 1,249 $ (1,837 ) 27--------------------------------------------------------------------------------Revenue Revenues primarily consist of cost reimbursements through government grants and cooperative agreements related to clean energy technologies; agreements under which we deliver services such as the development of the infrastructure for deployment of electric vehicles, including gathering and compilation of related data analysis; consulting services; retail sales of electric vehicle supply equipment ("EVSE"); and sales of industrial material handling products.
The following table sets forth revenue by type and reportable segment for the periods indicated (in thousands): Three months ended March 31, All Other ECONA Segments Total Product Sales 2012 $ 895 $ 527 $ 1,422 2013 1,553 352 1,905 Period change $ 658 $ (175 ) $ 483 Service Revenue 2012 $ 9,568 $ 67 $ 9,635 2013 13,815 214 14,029 Period change $ 4,247 $ 147 $ 4,394 License Revenue 2012 $ 2,593 $ - $ 2,593 2013 - - Period change $ (2,593 ) $ - $ (2,593 ) Total Revenue 2012 $ 13,056 $ 594 $ 13,650 2013 15,368 566 15,934 Period change $ 2,312 $ (28 ) $ 2,284 Product Sales Product sales in our ECONA segment increased $0.7 million to $1.6 million during the first quarter of 2013 primarily resulting from increased sales of industrial material handling products, which increased $0.7 million to $1.5 million. EVSE sales were flat between comparative periods at $0.1 million.
Product sales in all other segments decreased $0.2 million to $0.4 million during the first quarter of 2013, primarily due to declines in battery pack sales and from prioritization of resource allocation within our Innergy segment to EVSE deployment under the EV Project.
Service Revenue Service revenue in our ECONA segment increased $4.2 million to $13.8 million during the first quarter of 2013. Service revenue for all other segments increased $0.1 million to $0.2 million during the first quarter of 2013, reflecting no significant change from the first quarter of 2012.
A significant portion of service revenue in our ECONA segment resulted from activities associated with the EV Project. Revenue recognized under the EV Project increased $4.2 million to $12.8 million, primarily due to continued increases in the number of operating vehicles and residential and commercial installations under the EV Project. Revenue related to charging events (the billing of customers for charging events commenced in August 2012) increased $0.1 million to $0.1 million. Consulting revenues decreased $0.1 million to $0.9 million and reflect a shift in volume from the AVTA project as it nears completion, to activities under the AVTE project, which serves as a follow-on to the AVTA project with an expanded scope of work.
We anticipate the majority of our revenue in 2013 will be derived from the DOE Contract based on deliveries of chargers and the reporting of in-kind costs relating to cost share of EV Project participants.
License Revenue During the first quarter of 2012, we recorded $2.6 million in license revenue in connection with a licensing agreement entered into with ABB. We had no similar arrangements and thus recognized no license revenue during the first quarter of 2013.
28--------------------------------------------------------------------------------Cost of Goods Sold Cost of goods sold primarily consists of labor, materials, facilities and equipment related to the manufacturing of chargers and development of the Blink Network.
The following table sets forth cost of goods sold ("COGS") by type and reportable segment for the periods indicated (in thousands): Three months ended March 31, All Other ECONA Segments Total Product COGS 2012 $ 825 $ 189 $ 1,014 2013 952 103 1,055 Period change $ 127 $ (86 ) $ 41 Service COGS 2012 $ 7,434 $ 48 $ 7,482 2013 8,869 60 8,929 Period change $ 1,435 $ 12 $ 1,447 Total COGS 2012 $ 8,259 $ 237 $ 8,496 2013 9,821 163 9,984 Period change $ 1,562 $ (74 ) $ 1,488 Product COGS Product COGS in our ECONA segment increased $0.1 million to $1.0 million during the first quarter of 2013 primarily resulting from increased sales of industrial material handling products, which costs increased $0.2 million to $0.9 million. COGS associated with EVSE sales decreased $0.1 million to $0.1 million.
Product COGS in all other segments decreased $0.1 million to $0.1 million during the first quarter of 2013, reflecting no significant change from the first quarter of 2012.
Service COGS Service COGS in our ECONA segment increased $1.4 million to $8.8 million during the first quarter of 2013. Service COGS for all other segments were flat at $0.1 million during the first quarter of 2013, reflecting no significant change from the first quarter of 2012.
A significant portion of service COGS in our ECONA segment resulted from activities associated with the EV Project. Service COGS recognized under the EV Project increased $1.3 million to $8.2 million, primarily due to direct costs related to service revenue increases and increased depreciation on equipment in service under the DOE Contract. Excluding depreciation, ECONA segment service COGS was 29% and 48% of ECONA segment service revenue for the first quarter of 2013 and 2012, respectively. The resulting cost of goods sold reduction per revenue dollar and related favorable gross margin impact is the result of an increased percentage of DOE Contract revenues related to reporting of cost share for in-kind costs. In-kind costs include allowable costs of ownership incurred by the owners of vehicles in the program, which results in reportable cost share and revenue to us under the program for which we incur minimal related costs. Service COGS related to charging events increased $0.1 million to $0.1 million. Consulting service COGS was flat at $0.5 million.
Operating Expenses Total operating expenses were flat at $6.4 million during the first quarter of 2013. The majority of our operating expenses, including corporate administrative and support costs, are related to our ECONA segment. Operating expenses in our ECONA segment increased $0.3 million to $6.2 million during the first quarter of 2013. Operating expenses in our other segments decreased $0.3 million to $0.2 million during the first quarter of 2013, primarily due to a decrease in activity and related expenses in our international operations, specifically our ECOtality Australia subsidiary.
Sales and Marketing Sales and marketing expenses primarily consist of payroll and related benefits, consulting services, fees associated with attendance and booth rental at trade shows, and related expenses incurred in the support and promotion of our brand and our product and service offerings.
Sales and marketing expenses were $1.2 million during the first quarter of 2013, reflecting minimal change from the first quarter of 2012.
29 --------------------------------------------------------------------------------Research and Development Research and development expenses primarily consist of payroll and related benefits, contract labor, and consulting services in support of development activities related to EV products.
Research and development expenses increased $0.1 million to $0.5 million during the first quarter of 2013, primarily due to payroll and related benefits and consulting services incurred in connection with planned product development activities.
General and Administrative General and administrative expenses primarily consist of payroll and related benefits, facilities and data communication related expenses, and legal and professional fees.
General and administrative expenses decreased $0.1 million to $4.8 million during the first quarter of 2013, primarily attributable to a $0.4 million decrease in consulting services related to customer resource management ("CRM") system maintenance and support, a $0.4 million increase resulting from a charge related to potential liabilities in connection with a U.S. Department of Labor investigation (described below in Part II, Item 1 - Legal Proceedings), and a $0.1 million decrease in legal fees.
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