beacon equity research - qualitystocksqualitystocks.net/pdfs/etlyreport.pdf · 2007-09-10 ·...

BEACON EQUITY RESEARCHAnalyst: Lisa Springer, CFAInitial ReportSeptember 10th, 2007

ECOtality, Inc.

6821 E. Thomas Rd.Scottsdale AZ. 85251

Phone: 480-219-5005Fax: 480-219-5338email: [email protected]

www.ecotality.com

Company Profile

ECOtality, Inc. (ETLY) is a technology innovator developing clean energy so-lutions for the alternative energy industry. The Company, headquartered in Scottsdale, Arizona, is focusing on renewable energy technologies which it intends to commercialize through acquisitions, partnerships and research and development. ECOtality has forged alliances with Fortune 500 companies and leading research and development institutions to deliver commercially viable clean power. Its current research focus is designing and licensing a cost-effi-cient hydrogen-based electric power cell system called Hydrality™ for use in motor vehicles and industrial equipment. It is collaborating with JPL to design and test a full 65 kilowatt Hydrality™ system suitable for mass production and use in commuter buses and hopefully by extension, all vehicles.

Market Data

Symbol / ExchangeCoverage InitiatedCurrent PriceRatingPrice TargetOutstanding SharesMarket Cap.52-Week Range

OTC BB: ETLYSep 10th, 2007

$ 0.51Speculative Buy

$ 2.70107.00M$54.03M

$2.19 - $0.11

ETLY daily 9/06/07

volume

0.750.700.650.600.550.500.450.400.350.300.25

2

1.5

1

0.5

0

Mill

ions

AugJul

The Company was incorporated in Nevada in 1999 as Alchemy Enterprises to market biodegradable products. It commenced development of its electric power cell technology in early 2006, generated $12 million of gross proceeds from a private equity offering in October 2006, and changed its name to ECO-tality Inc. in November 2006. The Company is collaborating with the National Aeronautics and Space Administration’s (NASA) Jet Propulsion Labs (JPL) and the California Institute of Technology (CalTech) to develop an on-board hydrogen generation technology, Hydrality™ which will generate hydrogen on demand in a process that is non-toxic, non-combustible and environmental-ly friendly. The Company is also partnering with AirBoss Aerospace Inc. and GreenMountain Engineering, who will work with NASA’s JPL to develop and test a 5-10 KW stationary Hydrality system for remote and residential use.

Sep

In collaboration with AirBoss Aerospace Inc., ECOtality is developing a proto-type hydrogen fuel cell bus – the ECObus (a municipal concept bus) to promote

Analyst: Lisa Springer, CFAInitial ReportSeptember 10th, 2007

ECOtality, Inc. (OTC BB: ETLY) 2

Technologies address a $46 billion fuel cell market

Investment Highlights

Fuel cells are used in the stationary power market such as in generators for hospitals or computer data centers; in portable electronic equipment such as mobiles phones and laptop computers, and in transportation applications. A recent Price Waterhouse Cooper Report on the fuel cell industry forecast global demand for fuel cells reaching $46 billion by 2011. The report anticipates demand from the stationary power market will be a primary growth driver, with demand exceeding $17.9 billion, followed by the portable market ($17.6 billion) and the transporta-tion market ($10.3 billion).

The alternative energy sector in which ECOtality participates is experiencing robust growth due to rising overall energy demand (expected to grow 1.8% annually through 2030) and rising concerns regarding global warming, CO2 and other hazardous gas emissions, and the rapid depletion of fossil fuel resources. Alternative energy technologies are being offered as superior alternatives and the next generation of solutions for global energy challenges.

Breakthrough technologies

ECOtality’s portfolio consists of environmentally-friendly ground-breaking technologies that potentially address the world’s growing energy needs. The Company is currently focusing on developing its innovative Hydrality™ system in collaboration with NASA’s JPL, CalTech, GreenMountain Engineering LLC and AirBoss Aerospace Inc. Hydrality™ generates hydrogen on demand in a process that is non-toxic, non-combustible and safe for the environment. It offers a solution that overcomes the disadvantages of using compressed hydrogen – namely, the generation, transportation and storage of this volatile gas. The Company recently acquired Fuel Cell Store as a subsidiary, which further strengthens its portfolio with additional products for the hydrogen and fuel cell technology markets.

Strategic partnerships and alliances

The Company has strategic scientific and financial alliances with leading research institutions and Fortune 500 companies which are helping it further develop its proprietary green energy technologies.

ECOtality is collaborating with NASA’s JPL and CalTech on the development of Hydrality™, a portable system for producing hydrogen on demand. The Company has contracted with GreenMountain Engineering LLC to be the consulting engineers on the Hydrality™ project.

the Company’s projects and educate the public on renewable energy technologies. In addition, ECOtality recently acquired an online retailer in the fuel cell industry – Fuel Cell Store, which further strengthens its position in the hydrogen and fuel cell segments. In mid-July, ECOtality signed an agreement with Arizona State University to further develop regeneration solutions for magnesium oxide, the main byproduct of Hydrality™.

The Company has developed a prototype hydrogen fuel cell-powered bus, the ECObus, in partnership with AirBoss Aerospace Inc. and Arizona Public Service (APS) Company which is being used to educate the public about renewable energy technologies. It has also teamed up with Arizona State University to develop regenera-tion solutions for magnesium oxide, the byproduct of the Hydrality™ process.



The Company has strengthened its position in the clean energy sector by acquiring Fuel Cell Store, a web-based retailer of fuel cell products. Through these strategic partnerships and alliances, ECOtality has become positioned as a key emerging player in the fuel cell technology sector.

Experienced management

The Company’s management team has considerable experience in successful technology start-ups and in helping development-stage companies commercialize their technologies. Jonathan Read, ECOtality’s CEO and President, has over 30 years business experience as a brand manager, and managing director of international businesses. He has served as CEO of major restaurant and hospitality companies. Barry Baer, the Company’s CFO, has held CFO positions with several manufacturing companies, including Max Katz Bag Company and Apex Industries. He is a retired US Army Colonel as well as a Certified Public Accountant. His military service includes stints as Commander of an armored cavalry troop in Vietnam, Director of Accounting Systems, Commander of the 18th Finance Group during Operation Desert Shield/Desert Storm and Deputy Chief of Staff for Resource Manage-ment for the Army Material Command. Dr. Jerry Lin, the Chairman of the Company’s Technology Committee, is Chairman of the Department of Chemical Engineering at Arizona State University. He is an expert in the field of inorganic membrane solid oxide fuel cells adsorption and catalysis and has received numerous international professional and academic awards, including the United States National Science Foundation Career Award. He has also headed many research programs funded by federal agencies, including the US Department of Energy and Department of Defense, and private sector companies such as Amoco, BP, Exxon, Honda and the Petroleum Research Board.



Growing need for alternative energy sources

Hydrogen Fuel Cell Technology Market

Riding on robust worldwide economic growth, global energy demand has risen sharply in recent years. Accord-ing to ABS Energy Research, primary energy consumption is forecast to grow 1.8% annually through 2030. Fossil fuels are currently the world’s major source of energy, but these fuels when combusted emit hazardous gases such as CO2, carbon monoxide and sulfur that pose a serious threat to environment and contribute to global warming. Growing concern over environmental safety and the depletion of nonrenewable natural resources are driving a global search for safe, affordable alternative energy sources. Fuel cell technology was invented to convert chemical energy (in most cases hydrogen) into electrical energy to power engines without creating air pollution.

Huge market potential

Fuel cells are used primarily in the stationary power markets to power generators for hospitals, computer data centers and telecommunication towers. They are also used in portable electronic equipment such as cell phones and laptop computers and in the transportation segment. According to Price Waterhouse Cooper, global demand for fuel cells is expected to reach $46 billion by 2011. The stationary power market will represent the largest in-dividual segment at ($17.9 billion, followed by the portable power market ($17.6 billion) and the transportation market ($10.3 billion). Some analysts anticipate a 50% annual growth rate through 2021, resulting in a fuel cell market exceeding $2.6 trillion.

It is anticipated that by 2011, total production of fuel cell systems in the North American market will reach 600,000 units. Fuel cell-powered automobiles are expected to make up 90% of the total value of the North Ameri-can market and represents 1.7% of the new vehicle market with a total value of $3.9 billion. However, for fuel cell technology to be widely deployed in the transportation sector, significant cost reductions related to production must be achieved.

Source: PriceWaterHouseCooper Report – Fuel Cell Canada

Exhibit1: Estimated global demand to 2021

3,000

2,500

2,000

1,500

1,000

500

0

$ bi

llion

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021



Source: PriceWaterHouseCooper Report – Fuel Cell Canada

Exhibit 2: Transportation fuel cell systems (North American market 2011)

Buses, 14000

Industrial Truck, 48000

Automobiles, 540000

Hydrogen fuel cell technology

Hydrogen, a byproduct of other chemical processes, is an energy carrier and can be produced from a variety of resources (water, fossil fuels, biomass). According to ABS Energy Research, global production of hydrogen was estimated at approximately 50 million tons (Mt) or 500 billion Nm3 in 2006, which is sufficient to fuel 250 million fuel cell cars. The largest producers of hydrogen are the US and China, which together account for ap-proximately one-third of global hydrogen production.

Government support for hydrogen fuel technologies

Motivated by growing concerns over energy security, the US government is spending more to develop technolo-gies such as hydrogen-powered fuel cells. During his 2003 State of the Union address, President Bush announced a $1.2 billion hydrogen fuel initiative with the goal of reversing America’s growing dependence on foreign oil. This initiative included $720 million in funding over five years to further develop technologies and infrastruc-ture for producing, storing and distributing hydrogen fuel for powering vehicles and electricity generation. Combined with the FreedomCAR and Vehicle Technologies (FCVT) Program, President Bush proposed a total of $1.7 billion over five years to develop hydrogen-powered fuel cells, hydrogen infrastructure and advanced automotive technologies.

The US government is also introducing consumer incentives for the purchase or conversion of fuel cell vehicles by offering tax deductions ranging from $2,000 to $50,000. The government is also making efforts to attract fuel cell producers to the US by offering a variety of incentive packages that encourage overseas companies to es-tablish US facilities. The US Department of Energy’s Hydrogen Program has set a goal to produce 10% of the nation’s energy from hydrogen by 2030.



Environmentally-friendly technology

Hydrogen has great potential as an environmentally-friendly fuel because the only by-products of hydrogen en-ergy are pure water and heat. Unlike a conventional battery, a fuel cell uses a continuous flow of hydrogen so it is theoretically possible for a fuel cell to produce an infinite supply of electricity so long as hydrogen is supplied. When compared to a conventional internal combustion engine, a fuel cell is about twice as efficient.

Growing environmental awareness and concerns about depleting nonrenewable energy resources are helping to increase interest in hydrogen fuel cell technology and spur its further development as an energy-efficient, afford-able and environmentally- friendly power source.



ECOtality is focused on commercializing innovative clean energy solutions through acquisitions, partnerships and the development of early-stage renewable energy technologies. With an aggressive business model and nu-merous strategic partnerships and alliances, the Company is well- positioned to capitalize on the many growth opportunities in the emerging clean energy technology sector.

ECOtality identifies and acquires the rights to promising technologies, then outsources research & development as well as manufacturing activities. The Company provides essential financial, corporate and marketing support to research institutions in exchange for the rights to the technologies. The research institution’s scientific teams handle the daily research and technology development and help protect and strengthen their intellectual prop-erty. ECOtality, in turn, provides management and systems guidance.

Mass Commer-cialization

Business Strategy

Source: Beacon Research

Exhibit 3: Business Strategy

Business Strategy

Revenue Investor RelationsExpansionProduct development

Licensing AgreementsAlliance Advisors, LLCMergers & AcquisitionsPartnerships & alliances

Finance & Man-

age-ment

Support

Tech-nology Rights

NASA’s JPLCalTech University

GreenMountain Engineering LLC

AirBoss Aerospace Inc

SynergyAdvantages

Investor Relations Program

Fuel Cell Store Acquisition Investment Community Global Manufacturers



Lead Products

Hydrality™

The Company’s premier product, Hydrality™ could be the solution for making hydrogen a commercially viable fuel source. Hydrality™ is a patented technology for creating an electric power system that operates without combustion and without the problems associated with stored hydrogen. This portable system creates hydrogen on demand using benign, readily available magnesium and water. The Hydrality™ system produces hydro-gen in a process that is non-toxic, non-combustible and environmentally- friendly. Magnesium oxide created through the process can be recycled back to its original form through an electrolysis recharging process.

The Company is committed to developing and commercializing proprietary environmentally-friendly energy technologies and solutions. Its current focus is developing Hydrality™, an on-board hydrogen generation sys-tem for producing hydrogen on demand. Hydrality™ has been designed to work in conjunction with existing hydrogen fuel cell technology. It produces hydrogen on demand using readily available and benign materials – Magnesium compounds and water in a system that emits no exhaust other than pure water. ECOtality also owns Fuelcellstore.com, the leading on-line retail outlet for fuel cells and related products.

This ground-breaking technology requires no additional heat to start or to operate the process, and allows for the safe, efficient storage and generation of hydrogen. Recent milestones reported by JPL in tests of Hydatus™ in-clude: a 70-80% increase in hydrogen storage and output, a reduction in temperature enabling the use of reduced cost materials, a 400% improvement in regeneration efficiency and a reduction in system complexity resulting in reduced system size and cost. Hydrality™ meets the US Department of Energy’s 2010 goal of 6% hydrogen storage capacity. The onboard hydrogen fuel generator can be used to power hydrogen-fueled vehicles and a Hydrality™ prototype vehicle is in development and scheduled to introduction in the first half of 2008.

Source: Company Reports

Exhibit 4: Application of Hydrality™

Magnesium Water

HYDRALITY

Hydrogen

Fuel Cell

Electricity

Residential, Transport and Commercial Applications



ECObus

Fuel Cell Store’s products

Fuel Cell Store is an on-line retailer of fuel cell products and technologies. It distributes and sells a wide variety of fuel cell products, including fuel cell stacks, systems, component parts, demonstration kits and educational materials. Fuel Cell Store also offers consulting services to high schools, colleges, and research institutions inter-ested in establishing educational programs about fuel cell technologies. It hosts regular workshops and confer-ences to spread awareness about fuel cell technology. Its comprehensive product line, competitive pricing, and international distribution infrastructure are helping to strengthen ECOtality’s position as a key player in the hydrogen and fuel cell technologies segments. Fuel Cell Store has a wide distribution network extending into Japan, Russia, Italy, Portugal, and the US. In addition, its website, fuelcellstore.com creates new distribution op-portunities for other ECOtality products.

The Company, in collaboration with AirBoss Aerospace Inc. and Arizona Public Service (APS) Company, has built and is demonstrating a hydrogen fuel cell bus – ECObus (a municipal concept bus) in Arizona. The ECObus was originally acquired from Hydrogenics of Canada, along with an engineering package. ECOtality transitioned the vehicle from pure hydrogen power to the Hydrality™ powered system. ECOtality and APS are utilizing the bus as a mobile classroom to educate the public about alternative energy solutions.



Partnerships & Alliances

National Aeronautics and Space Administration’s (NASA) Jet Propulsion Lab (JPL)

Jet Propulsion Laboratory (JPL) is a NASA research center located in the cities of Pasadena and La Cañada Flin-tridge, near Los Angeles, California. Managed by the California Institute of Technology (Caltech), it builds and operates unmanned spacecraft for the National Aeronautics and Space Administration (NASA). Among its cur-rent projects are the Cassini-Huygens mission to Saturn, the Mars Reconnaissance Orbiter, and the Spitzer Space Telescope.

ECOtality collaborates with numerous research and development institutions and industry alternative energy market participants develop innovative clean technologies. The Company‘s strategic scientific and financial part-ners include:

JPL is working with the Company to further develop Hydrality™. ECOtality has entered into a partnership known as a task plan, with JPL to develop, build and patent prototype 10 and 65 kilowatt Hydrality™ systems.

AirBoss Aerospace Inc.

AirBoss Aerospace is a design, engineering and prototyping firm, primarily focused on aerospace applications. It specializes in developing proof-of-concept and prototype aircraft, ranging from general aviation aircraft and UAVs (unmanned aerial vehicles), to business jet class vehicles and spacecrafts. AirBoss acted as consulting engineers for ECOtality’s Hydrality bus – ECObus, and will work with JPL and CalTech in the development of Hydrality™.

GreenMountain Engineering

This consulting firm specializes in clean energy technology product designs and manufacturing development. It has provided innovative solutions for a number of elite corporate clients and has established a track record for efficient and successful prototype designs. GreenMountain, along with the JPL and AirBoss Aerospace, Inc., are assisting ECOtality in the research, development, and testing of a 5-10 kW stationary Hydrality™ system for remote and residential use. At present, GreenMountain and JPL are carrying out a series of tests and modeling programs to design a seven kilowatt Hydrality™ system.

Arizona State University (ASU)

ASU is well-known for its expertise in the areas of chemical engineering and photovoltaic technology. ECOtality has partnered with ASU to develop regeneration solutions for magnesium oxide and other magnesium com-pounds. Magnesium oxide is the main byproduct of Hydrality™. ASU will evaluate potential technologies for converting magnesium oxide back into its original form, magnesium, in a cost-effective manner for its use in Hydrality™. The project will specifically concentrate in evaluating and defining the kinetics, thermodynamics and reaction equilibriums of the conversion processes. The research contract extends through mid-2008.



Revenue Generation Strategy

ECOtality plans to licenses the rights to its technologies to manufacturers around the world for large-scale com-mercialization. The Company expects to generate revenues from technology sublicense fees, fuel licensing fees and fees for the design and technical support of refueling stations and royalties and transfer fees. In addition, ECOtality plans to acquire revenue-positive companies possessing complementary technologies that will be ac-cretive to earnings and enhance its technology portfolio.

Exhibit 5: Growth factors

Success

Increasing Demand for

Clean Energy

Aggressivebusiness model

Acquire complemen-tary technologies and

companies that will be accretive to earnings

Experienced management

Growing business opportunities

Strategicpartnerships and

alliances

Innovative Technologies

Source: Beacon Research



Competitive Analysis

ECOtality’s competitors include the following companies which are also developing fuel cell technologies and products.

Alternate Energy Corporation

Alternate Energy Corp., incorporated on August 1, 1997, is a development-stage company involved in bulk production of hydrogen and salable chemical by-products. The company’s Hydrogen Production Unit is a self-contained, semi-automated device that generates fuel cell quality hydrogen gas on-demand. The Hydrogen Pro-duction Unit can be connected to a variety of hydrogen-fueled applications, ranging from small power solutions such as fuel cells and converted internal combustion engines to plants that require hydrogen for the hydrogena-tion of food-oils. Alternate Energy Corp.’s Hydrogen Production Unit has fueled a number of power solutions over the last three years, including fuel cells produced by a developer of alkaline fuel cells.

Ballard Power Systems Inc.

Ballard Power Systems Inc. is engaged in the design, development, production, sales and servicing of proton ex-change membrane (PEM) fuel cells. It operates in three segments: Power Generation, Automotives and Material Products. It has R&D and manufacturing facilities in Burnaby, British Columbia, in addition to Lowell, Massa-chusetts. It has sales and customer service facilities in Dearborn, Michigan, Lowell, Massachusetts and Nabern, Germany.

The company has formed a joint venture with EBARA BALLARD Corporation of Tokyo, Japan to develop, pro-duce and sell fuel cell power generators that work on Ballard fuel cells. The company recently completed the sale of its Electric Drive Business.

Carthew Bay Technologies Inc.

Carthew Bay Technologies Inc. (formerly Astris Energy Inc.), is developing alkaline fuel cells (AFCs) and AFC generators. The company focuses on developing and marketing AFC system which can be used to provide back-up or off-grid power, or portable power for small vehicles. It has completed a series of prototype alkaline fuel cell generators, including: a 1-kilowatt portable system; a 1-kilowatt fuel cell power generator capable of powering golf cars, in-plant delivery vehicles and other small vehicles; a 4-kilowatt power unit capable of providing elec-tricity, heat and hot water for individual homes, motor homes and boats, and a 2.4-kilowatt portable power unit that can deliver backup power or portable power.

Ener1 Inc.

Ener1, Inc., through its subsidiaries, is engaged in the development and marketing of Lithium-ion batteries, fuel cells, and nanotechnology-related manufacturing processes and materials. It has three business segments: bat-tery, fuel cell and nanotechnology and operates through its three subsidiaries: EnerDel, Inc., NanoEner, Inc. and EnerFuel, Inc. The battery business develops and markets advanced lithium batteries. The battery business is car-ried on by its 80.5% owned subsidiary, EnerDel, Inc. which is operated as a joint venture with Delphi Corporation and develops lithium-ion (Li-ion) batteries, battery packs and components such as Li-ion battery electrodes and lithium electronic controllers for lithium battery packs. The fuel cell business, operated by its wholly-owned



subsidiary, EnerFuel, Inc., develops and markets fuel cells and fuel cell systems. The nanotechnology business is developing nanotechnology related manufacturing processes and materials for use in a variety of industrial applications and is operated by its wholly-owned subsidiary, NanoEner, Inc.

Millennium Cell Inc.

This New Jersey-based company, founded in 1998, is engaged in the development of hydrogen fuel cartridge technology and production of hydrogen batteries for use primarily in portable electronic devices for the mili-tary, medical, industrial and consumer electronic markets. Millennium Cell licenses its fuel cartridge technol-ogy and designs to fuel cell manufacturers, original equipment manufacturers, and other product-focused entities. The company has a strategic relationship with The Dow Chemical Company to collaborate on the design, development and commercialization of proton exchange membrane fuel cell power systems and com-patible Hydrogen on Demand fuel cartridges for use in portable electronic devices, and with Horizon Fuel Cell Technologies Ltd. focused on the commercialization of fuel cell- based power products.



Financial Analysis

The Company was in an early development stage with its electric power cell technology projects in 2006 and did not generate any revenues last year.

Financial Record

Revenues and gross profits of $35,464 and $15,138, respectively in the three months ended June 30, 2007 reflect product sales by the Company’s recently acquired Fuel Cell Store subsidiary. ECOtality’s operating expenses for the June 2007 quarter declined 80% year-over-year because of significantly reduced spending for licenses and permits. Licenses and permit expenses totaling $8.2 million in the second quarter of FY 2006 did not recur in the second quarter of FY 2007. However, legal, and professional fees relating to registering an equity offering and acquiring the assets of the Fuel Cell Store resulted in a 90% year-over-year increase in June quarter general & administrative expenses. Research and development costs represented approximately 24% of total expenses and reflect engineering services provided by the Jet Propulsion Laboratories and other firms supporting the Company’s project. The Company reported interest expense of $4,852 in the June 2007 quarter versus interest expense of $19,680 in the prior year June quarter.

Net losses totaled $188,546 or less than one cent per share in the second quarter of 2007, down from losses of $8,619,453, or approximately twelve cents per share, in last year’s June quarter.

Exhibit 6: Selected financial data f


June quarter 2007 June quarter 2006 FY 2006

Revenue

Gross Profit

Total Operating Expenses

Net Interest Income/(Expense)

Net Income / (Loss)

Loss / Share (Loss) Basic

$35,464

$15,138

$ 1,316,455

($4,852)

($188,546)

$0.00

Nil

Nil

$ 8,599,773

($19,680)

($8,619,453)

($0.12)

Nil

Nil

$ 14,055,877

($441,891)

($14,497,768)

($0.18)

At June 30, 2007, the Company had cash and cash equivalents of $3,251,529, down from $7,062,735 at year-end 2006. Working capital declined from $6,545,141 at year-end 2006 to $1,757,953 at June 30, 2007. The Company had an accumulated deficit of $20,514,125 at the end of this year’s June quarter.

Liquidity & Capital Requirements



Exhibit 7: Selected balance sheet data


June 30, 2007 December 31, 2006

Cash & cash equivalents

Net working capital

Total assets

Total long term liabilities

Total current liabilities

Stock holders’ Equity (deficit)

$3,251,529

$1,757,953

$5,499,512

$287,500

$2,435,738

$2,776,274

$5,047,968

$1,497,173

$7,929,433

$0

$606,479

$7,322,954

The Company has obtained financing totaling $12,074,935 in the past through private placements and may seek to raise additional funding over the next four years. Management believes its current capital resources, which include $1.2 million in cash and $2.0 million in certificates of deposits, are sufficient to fund its near-term work-ing capital requirements.

Evaluating ECOtality’s revenue growth prospects is difficult; the Company is not currently generating meaning-ful revenues and is likely at least several quarters away from generating any licensing fees. Although Hydral-ity™ technology offers several advantages compared to existing fuel cell technologies, there is no guarantee that the technology can be successfully commercialized or that meaningful revenues will result from licensing this technology.

Outlook

We think the best approach to valuing ECOtality is to consider the size of the Company’s potential market, as-sume a certain level of market penetration and then discount the resulting revenue estimate by a factor that takes into account the considerable risks involved in early-stage technologies. The principle fuel cell markets ECOtality plans to address are the stationary power market and the transportation market. These two sectors are forecast to drive fuel cell sales of $17.9 billion and $10.3 billion, respectively, by 2011. Assuming Hydrality™ tech-nology captures a 5% share in each segment and a 10% licensing fee for its technology, the Company’s licensing fee revenues could easily exceed $141 million by 2011. For the typical technology company, the odds of success-fully commercializing an early-stage technology generally range around 30-40%. Assuming a 40% likelihood of success for ECOtality, we derive a 2011 revenue estimate of $56 million. The present value of future revenues, discounted at 10% annually is approximately $41 million.

Long-term debt totaling $287,500 at June 30, 2007 consisted entirely of mortgage debt related to the purchase of an office building and due on or before January 16, 2012. Current liabilities consisted primarily of contingent li-ability relating to Potential Registration Rights and totaled $2,435,738. Stockholder’s equity totaled $2,776,274 at June 30, 2007, down from $7,322,954 at year-end 2006.



Exhibit 8: Peer group


Company Name

Ballard Power Systems Inc.

Ticker Symbol

Share Price(figure in $)

Market Cap. $ million

P/E P/S

2007 2008 2009 2007

Carthew Bay Technologies Inc.

Ener1 Inc.

Average for the Peer group

ECOtality Inc.

BLDP

CWBYF.OB

ENEI.OB

MCEL

ETLY.OB

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

8.77

N/A

56.58

208.25

91.2

N/A

Millennium Cell Inc.

20086.82

N/A

N/A

101.23

54.03

N/A

20094.94

N/A

N/A

N/A

4.94

N/A

4.48

0.03

0.27

0.62

0.50

513.38

1.49

130.09

36.44

54.03

The 2008 Price/Sales multiples for ECOtality’s fuel cell industry peers vary widely, from 6.8 times revenues for Ballard Power Systems to 101 times revenues for Millennium Cell, Inc. Applying a 7.0 times Price/Sales multiple to our 2008 revenue estimate for ECOtality, we derive a target price of approximately $2.70, suggesting consid-erable appreciation potential from the current $0.54 price. As a result, we are initiating coverage of ECOtality shares with a Speculative Buy rating and a $2.70 target price. We caution investors that there are numerous as-sumptions involved in deriving our target price; any or all of our assumptions could be flawed.

We further advise investors that, due to the Company’s early development stage and lack of revenue transpar-ency, an investment in ECOtality entails considerable risk and suggest that, before investing, potential investors carefully consider the risk factors discussed in the Risk Analysis section.



Risk Analysis

The Company’s Hydrality™ system is still in the development stage and will not begin to generate licensing for at least several more quarters. The company hopes to introduce a prototype system in mid2008. At present, the Company is generating modest revenues from its Fuel Cell Store subsidiary. Since ECOtality has no financial track record, analyzing its future revenue potential is difficult. In addition, although the Company has innova-tive products and technology, there is no guarantee that its products can be successfully commercialized.

Lack of operating history

The Company operates in a technology intensive industry, where technologies are continuously and rapidly evolving. The possibility exists that a competitor may introduce a fuel cell technology superior to Hydrality™. To maintain its competitive advantages, the Company must continuously invest in developing new technologies and improving its existing products and services.

Technology obsolescence

ECOtality’s product development is done in collaboration with leading research institutions. The Company’s de-pendence on these partners for developing its technologies may affect the timing of new products and its ability to successfully commercialize its technologies.

Dependence on partners for product development

The Company will likely need to raise additional funds to implement its business plan. There is no guarantee that ECOtality will be able to secure additional funding within the desired timeframe. Lack of adequate capital could adversely affect its future operations and growth prospects, as well as its ability to implement its business strategy.

Ability to generate funds for future growth



Management

Mr. Read has grown corporations in varied global markets through strategic partnerships, licensing agreements and creative management guidance. He attended Claremont McKenna College in Claremont, California and began his professional career in 1976 as a Regional Manager of Specialty Restaurant Cor-poration, operating a theme dinner houses across California. He later became Managing Director for a group of international companies based in Malaysia, Indonesia and Singapore, with businesses ranging from hospitality interests to manufacturing and real estate. Prior to founding ECOtality, Mr. Read was the founder, Chairman and CEO of Park Plaza International (Park Inn Inter-national/Park Plaza Worldwide) in 1986, growing that hotel chain from four hotels to a leading global hotel group with operations in 32 countries. Mr. Read previously served as Chairman and CEO of Shakey’s International - a worldwide restaurant chain with operations in the US, Southeast Asia, Japan, South America, Mexico, Europe and the Caribbean.

Jonathan R. ReadPresident and Chief Executive Officer

Mr. Baer formerly served as the CFO of Obsidian Enterprises, Inc. and held similar positions with a number of other manufacturing corporations, includ-ing, Max Katz Bag Company and Apex Industries. Previously, Mr. Baer worked for the City of Indianapolis as its Director of Public Works. He is a retired US Army Colonel as well as a Certified Public Accountant. His military service includes stints as Commander of an armored cavalry troop in Vietnam, Direc-tor of Accounting Systems, Commander of the 18th Finance Group during Operation Desert Shield/Desert Storm and Deputy Chief of Staff for Resource Management for the Army Material Command. He obtained a Bachelor’s de-gree in Accounting and Master’s degree from the University of Colorado. He currently serves as a member of the State of Indiana Unemployment Insurance Board.

Colonel Barry S. BaerChief Financial Officer

Dr. Lin also serves as a Professor and Chairman of the Department of Chemi-cal Engineering at Arizona State University (ASU) in Tempe, Arizona. His ex-tensive teaching career includes professorships at the Technology University of Cincinnati, where he served as Professor of Chemical Engineering and Co-director of the NSF Center for Membrane Applied Science, and a post-doctoral staff position at the University of Twente in the Netherlands. He is an expert in the field of inorganic membrane solid oxide fuel cells adsorption and cataly-sis. His articles have been published in more than 150 referred journal publi-cations and 2100 SCI citations. Dr. Lin has received numerous international professional and academic awards, including the United States National Sci-ence Foundation Career Award. He has also headed many research programs funded by federal agencies, including the US Department of Energy and De-partment of Defense, and private sector companies such as Amoco, BP, Exx-on, Honda and the Petroleum Research Board. Dr. Lin earned his Bachelor’s degree from Zhejiang University in China, and his Master’s and Doctorate degrees in chemical engineering from Worcester Polytechnic Institute in Mas-sachusetts.

Dr. Jerry Y.S. LinDirector and Chairman of the Technology Committee

Ms Lowry is responsible for managing the Company’s websites and internet marketing initiatives and brings to this position substantial experience in in-ternet sales and marketing. Prior to joining ECOtality, she was a sales execu-tive for Modavox, an internet technology firm specializing in streaming video and audio content. She earned her Bachelor’s degree in Anthropology with a focus in Maritime Archaeology from Saint Mary’s College of California.

Brooke LowryDirector of New Media



Mr. Read is responsible for the Company’s marketing and public relations strategies. Prior to joining ECOtality, he served as Assistant Finance Direc-tor on a successful congressional campaign in the 2006 national mid-term election. His extensive experience includes working at Edelman Public Rela-tions (Washington, D.C.), a prestigious international PR firm and at Arizona Monthly Magazine, one of the state’s premier politics and lifestyle magazines. He worked with healthcare company clients at Edelman, developing PR strat-egies for several Fortune 500 companies, government agencies and leading international health organizations.

Colin ReadDirector of Marketing

Ms Wilson has 15 years retail management experience and worked for Sears Holding Corporation and Sears Roebuck and Company before joining ECO-tality. At Sears, she initiated multiple training programs, coordinated remod-eling projects and was responsible for growth in top- line sales. She held re-gional and district management and business development positions at Sears. Prior to joining Sears, Ms Wilson was an executive for Mutual of Omaha Insur-ance Company.

Priscilla A. WilsonPresident and CEO, Fuel Cell Store



Beacon Equity Research (otherwise known as BER) is an independent research firm specializing in small and micro capitalization companies. BER has no investment banking or consultation conflicts thereby minimizing the inherent conflicts of interest between the research analysts and the companies they cover. BER is not a registered investment advisor or broker dealer. No information in this report should be construed as an endorsement to either buy or sell any securities mentioned in this report. The analyst(s) who prepared this report rely on publicly avail¬able information which neither the analyst, nor BER, can guarantee to be error-free or factually accurate. All conclusions in this report are deemed reasonable and appropriate by the author. The Private Securities Litigation Reform Act of 1995 provides investors a “safe harbor” in regard to forward-looking statements. To fully comply with the requirements of this law, BER cautions all investors that such forward-looking statements in this report are not guarantees of future performance. Unknown risk, uncertainties, as well as other uncontrollable or unknown factors may cause actual results to materially differ from the results, performance or expectations expressed or implied by such forward-look¬ing state-ments. Investors should exercise good judgment and perform adequate due-diligence prior to making any investment. Beacon Equity Research and its affiliates have been directly compensated a total of seven thousand five hundred dollars directly from Quality Stocks for enrollment of ETLY in its research program.Ratings and price targets in this report should not be construed as recommendations or stock price predictors. Readers of this report are urged to use due-diligence in any purchase of security listed herein. Readers should consult the Company’s SEC filings as well as our initial report on the firm to better understand the inherent risks associated with this security. There may be many uncon-trollable or unknown factors which may cause actual results to materially differ from the results, performance or expectations expressed or implied by such forward-looking statements. Investors should exercise good judgment and perform adequate due-diligence prior to making any investment.

Disclaimer

All decisions are made solely by the analyst and independent of outside parties or influence.

I, Lisa Springer, CFA, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report.

Lisa Springer, MBA, CFA - Research Analyst

Lisa serves Beacon Research Partners as a research analyst. She brings to the company over 15 years experience in equity research and invest-ment marketing. Prior to joining Beacon, Lisa worked as an equity analyst for an independent research provider. She has also held positions as investor relations officer for a NYSE-listed company and director of financial analysis for a large consulting firm. Lisa earned an MBA from the University of Chicago and is a Chartered Financial Analyst (CFA).

This report was created using publicly available information and has not necessarily been reviewed, nor approved by the management of VI-ASPACE. All conclusions and estimates, are solely those of Beacon Research.

beacon equity research - qualitystocksqualitystocks.net/pdfs/etlyreport.pdf · 2007-09-10 ·...

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