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Nel ASA (A public limited liability company organised under the laws of Norway)
Org.no. 979 938 799
This Prospectus has been prepared in connection with the listing on Oslo Børs of up to
147,659,456 new shares in Nel ASA (“Nel” or the “Company”) with a nominal value of NOK
0.20 per share (the "Consideration Shares"), issued in connection with the acquisition of Proton
Energy Systems, Inc. (“Proton OnSite”)
Investing in the Company's shares involves certain risks. See section 2 “Risk Factors”.
Manager:
June 2017
2
IMPORTANT INFORMATION For the definitions of terms used throughout this prospectus (the “Prospectus”), see section 18 “Definitions and
Glossary of Terms”.
This Prospectus has been prepared in connection to the acquisition of Consideration Shares in relation to the
acquisition of Proton Energy Systems, Inc. This Prospectus has been prepared solely in the English language.
The Company has furnished the information in this Prospectus. This Prospectus has been prepared in compliance
with the Norwegian Securities Trading Act Chapter 7 and related legislation, including the EC Commission
Regulation EC/809/2004 implementing Directive 2003/71/EC of the European Parliament and of the Council of
4 November 2003 regarding information contained in prospectuses (the “Prospectus Directive“) as well as the
format, incorporation by reference and publication of such prospectuses and dissemination of advertisements
(hereafter “EC Regulation 8s09/2004“).
The Financial Supervisory Authority of Norway (the “Norwegian FSA“) has reviewed and approved this
Prospectus in accordance with the Norwegian Securities Trading Act sections 7-7 and 7-8. The Norwegian FSA's
control and approval in this respect is limited to whether the Company has included descriptions according to a
pre-defined list of disclosure requirements. The Norwegian FSA has not verified or approved the accuracy or
completeness of the information provided in this Prospectus. It is the Company's responsibility to ensure that the
information in the Prospectus is accurate and complete. Furthermore, the Norwegian FSA has not made any sort
of control or approval of the corporate matters described in or otherwise included in the Prospectus.
All inquiries relating to this Prospectus should be directed Carnegie AS (the “Manager“) or to the Company. No
other person has been authorised to give any information, or make any representation on behalf of, the Company
in connection with the issuance and listing of Consideration Shares in relation to the acquisition of Proton
Energy Systems Inc., and if given or made, such other information or representation must not be relied upon as
having been authorized by the Company or the Managers.
The information contained herein is as of the date hereof and subject to change, completion or amendment
without notice. There may have been changes affecting the Group subsequent to the date of this Prospectus. Any
new material information and any material inaccuracy that might have an effect on the assessment of the Shares
arising after the publication of this Prospectus and before the Consideration shares are listed on Oslo Børs, will
be published and announced promptly as a supplement to this Prospectus in accordance with section 7-15 of the
Norwegian Securities Trading Act. Neither the delivery of this Prospectus nor the completion of the listing at
any time after the date hereof will, under any circumstances, create any implication that there has been no
change in the Company's affairs since the date hereof or that the information set forth in this Prospectus is
correct as of any time since its date.
3
TABLE OF CONTENTS
1. EXECUTIVE SUMMARY .......................................................................................................................... 4
2. RISK FACTORS ........................................................................................................................................ 20
3. STATEMENT OF RESPONSIBILITY .................................................................................................... 27
4. CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS .............................. 28
5. THE ACQUISITION ................................................................................................................................. 29
6. THE PRIVATE PLACEMENT ................................................................................................................ 33
7. PRESENTATION OF NEL ASA .............................................................................................................. 36
8. HYDROGEN MARKET OVERVIEW .................................................................................................... 59
9. PRESENTATION OF PROTON ONSITE .............................................................................................. 71
10. NEL ASA FINANCIAL INFORMATION ............................................................................................... 91
11. UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION ................................... 107
12. BOARD OF DIRECTORS, MANAGEMENT AND EMPLOYEES ................................................... 116
13. SHARE CAPITAL ................................................................................................................................... 127
14. SHAREHOLDER MATTERS AND NORWEGIAN COMPANY AND SECURITIES LAW ......... 131
15. LEGAL MATTERS ................................................................................................................................. 138
16. NORWEGIAN TAXATION .................................................................................................................... 139
17. ADDITIONAL INFORMATION ............................................................................................................ 142
18. UNITED STATES INFORMATION ...................................................................................................... 142
19. DEFINITIONS AND GLOSSARY OF TERMS .................................................................................... 143
4
1. EXECUTIVE SUMMARY
Summaries are made up of disclosure requirements known as ‘Elements’. These elements are numbered in
Sections A – E (A.1 – E.7).
This summary contains all the Elements required to be included in a summary for this type of securities and
Issuer. Because some Elements are not required to be addressed, there may be gaps in the numbering sequence
of the Elements.
Even though an Element may be required to be inserted in the summary because of the type of securities and
Issuer, it is possible that no relevant information can be given regarding the Element. In this case a short
description of the Element is included in the summary with the mention of ‘not applicable’.
Section A – Introduction and warnings
Element Description
of Element
Disclosure requirement
A.1 Warnings This summary should be read as an introduction to this Prospectus.
Any decision to invest in the Shares should be based on consideration of this
Prospectus as a whole by the investor.
Where a claim relating to the information contained in this Prospectus is brought
before a court, the plaintiff investor might, under the national legislation in its
Member State, have to bear the costs of translating this Prospectus before the legal
proceedings are initiated.
Civil liability attaches only to those persons who have tabled the summary
including any translation thereof, but only if the summary is misleading,
inaccurate or inconsistent when read together with the other parts of this
Prospectus or it does not provide, when read together with the other parts of this
Prospectus, key information in order
A.2 Resale and
final
placement by
financial
intermediates
Not applicable. No resale will take place. No financial intermediaries will be used
for the final placement of the offer.
Section B - Issuer
Element Description
of Element
Disclosure requirement
B.1 The legal and
commercial
name of the
Issuer
Nel ASA.
B.2 The domicile
and legal form
of the issuer,
the legislation
under which
the issuer
operates and
its country of
incorporation.
Nel ASA is a public limited liability company (allmennaksjeselskap), governed by
the Norwegian Public Limited Companies Act, with company registration number
979 938 799. The Company is incorporated and organized under the laws of
Norway. The Company’s registered office is: Nel ASA, Karenslyst allé 20, 0278
Oslo, Norway. Telephone: +47 90 74 49 49, Website: www.nelhydrogen.com
B.3 Key factors
relating to
current
operations and
Nel is a global hydrogen technology company, delivering solutions to produce,
store and distribute hydrogen from renewable energy. The Company serves
industry, energy and gas companies with advanced hydrogen technologies, and
offers solutions covering the entire value chain, from hydrogen production to
5
activities,
main
categories of
products sold
and principal
markets in
which the
issuer
competes
manufacturing of hydrogen fueling stations, providing all FCEVs with comparable
fast fueling and long range as conventional vehicles today.
As a manufacturer of water electrolysers for hydrogen production, Nel’s primary
end market has historically been the industry sector, driven by applications where
hydrogen is used as an input factor. However, the Company through its
subsidiaries has throughout the early 2000s also gained experience with hydrogen
for energy applications, and is currently specialized within hydrogen electrolysers
and hydrogen (re)fueling stations (HRS).
The Company is organised into three business areas along the hydrogen value
chain: Nel Hydrogen Electrolyser, Nel Hydrogen Fueling and Nel Hydrogen
Solutions
Nel Hydrogen Electrolyser:
The Nel Hydrogen Electrolyser division is a global supplier of hydrogen
production plants based on alkaline water electrolyser technology. Nel is already
positioned in the traditional industrial market for hydrogen as an input factor, and
has made several deliveries to new industrial markets. The Company saw a high
level of sales leads both in the traditional and new markets in 2016, including
strong interest in Nel’s new containerised turn-key solution: the C-series.
In the coming years Nel expect to commercialize both low and high capacity
pressurized electrolysers, including the RotoLyser®. Furthermore, Nel will
continue to develop its product portfolio on both a technological basis and through
standardization.
One of the key markets Nel currently is focusing on is the market for hydrogen as
an energy carrier. The market is presently still in a nascent stage, however, given
that the market is potentially several times larger than the present electrolyser
market, Nel expects to place high priority on products that fit this market. The
market is related to the growth in renewable energies and the shift from fossil to
renewable fuels, which is gaining momentum globally.
Nel Hydrogen Fueling:
The Nel Hydrogen Fueling division is a manufacturer of H2Station®, a hydrogen
fueling stations that provides fuel cell electric vehicles (“FCEVs”) with
comparable fast fueling and long range as conventional vehicles today. The
current business division is primarily based on H2 Logic, which Nel acquired in
May 2015 and subsequently renamed Nel Hydrogen A/S.
Nel aims to become a leading supplier of Hydrogen Refuling Stations (“HRS”),
offering a complete solution from production of hydrogen to refueling of vehicles.
Nel’s Hydrogen Fueling division is currently strengthening their products by
introduction of the latest generation H2Station® in 2016, enabling higher capacity
and a small and flexible footprint, making the station relevant, both for new,
purpose-built hydrogen stations, as well as for retrofitting conventional gasoline
stations with a fueling line for hydrogen. These initiatives and Nel’s launch of its
new fueling station are being timed with the global launch of hydrogen FCEV’s.
Nel Hydrogen Solutions:
Nel Hydrogen Solutions division was established to generate potential market
opportunities across the Group. Hydrogen Solutions offers efficient system
integration, project development and sales across all of Nel’s divisions.
B.4a Significant
recent trends
affecting the
Issuer and the
industries in
Hydrogen is used for a wide array of applications, but in the commercial context is
primarily: i) an input factor in industrial processes, or ii) a fuel, and/or iii) used for
other energy carrier/energy storage applications.
6
which it
operates
Increased interest in hydrogen as an energy carrier is an important driver in the
mid-to-long-term. Demand for hydrogen is expected to increase due to the
commercialization of fuel cell technology and related hydrogen-based energy
storage applications.
Factors such as government regulations for desulfurization of petroleum products,
decreasing crude oil quality, and the search for cleaner fuels underpin the global
market for hydrogen-related solutions.
B.5 Group/Issuer’s
position
within the
group
Nel ASA is the parent company and 100% owner of New Nel Hydrogen Holding
AS, Nel Fuel AS, Nel Hydrogen A/S, Nel Hydrogen Inc. and Nel US Inc, as well
as 33 % owner of Inceptum 999 AS (to be names Hyon). New Nel Hydrogen
Holding AS owns 100% of the share capital in: New Nel Hydrogen AS, New Nel
Hydrogen P60 AS, New Nel Hydrogen Eiendom AS, as well as 37% of SAGIM.
New Nel Hydrogen AS additionally owns 100% of Rotoboost H2 AS. Nel Fuel
AS owns 100% of Everfuel US Inc., and Everfuel Denmark A/S in addition to
39% of Uno-X Hydrogen AS. Nel Hydrogen A/S own 1.1% of Copenhagen
Hydrogen Networks A/S and 51.5% of Danish Hydrogen Fuel A/S. Nel US Inc.
will own 100% of Proton Energy Systems, Inc. following Closing.
B.6 Persons
having an
interest in the
Issuer’s
capital or
voting rights
As of the date of this Prospectus, the following shareholder owns or controls more
than 5% of the issued share capital in the Company:
H2 Holding ApS (16.96%), of which 126,755,557 and 650,224 shares
respectively is held through two separate VPS accounts, hence the total
shareholdings of H2 Holding ApS (i.e. 127,405,781 shares) is not reflected
under the same account in VPS’ top 20 largest shareholder list
H2 Holding ApS, a company partially owned by leading employees Jacob
Krogsgaard (25.0%) and Mikael Sloth (25.0%) owns 127,405,781 shares
representing 17.02% of the Company’s share capital (based on 751,176,219 shares
outstanding).
Note that upon Closing and delivery of the Consideration shares on or about June/
July 2017, the Proton OnSite shareholder (i.e. F9 Investment LLC ) and option
holders will have an ownership in Nel of approximately 17.2-17.8 %, subject to
the Post Closing Adjustments, including the New Shares from the Private
Placement and assuming exercise of all Nel options to be issued to Nel Option
Recipients.
B.7 Selected
historical key
financial
information
The following financial information has been derived from the Company’s audited
financial statements as of, and for each of the three years ended 31 December
2016, 2015 and 2014 and from the unaudited condensed financial statements for
the three month period ended 31 March 2016 and 2017.
The financial information for 2014 represents primarily the Q4 figures of NewNel
Hydrogen AS. The three quarters prior to Q4 represent restructuring activities of
former DiaGenic ASA, see section 7.3 for more information regarding the
development of the Company. The financial information for 2015 represents the
full-year operations of New Nel Hydrogen AS, H2 Logic A/S’ figures as from
third quarter 2015 and Rotoboost H2 AS’ financials as from fourth quarter 2015.
The financial information for 2016 and first quarter 2017 represent the Group as
operating today prior to the inclusion of Proton OnSite.
The selected financial information set forth below should be read in conjunction
with the Company’s published financial statements and its accompanying notes.
7
Statement of comprehensive income
Statement of financial position
NOK 1,000 31.03.2017
(unaudited)
31.03.2016
(unaudited)
31.12.2016
(audited)
31.12.2015
(audited)
31.12.2014
(audited)
ASSETS
Technology....................................... 64,984 48,156 57,854 46,645 8,775
Customer relationships ..................... 26,968 30,621 27,861 31,569 32,175
Customer contracts ........................... 0 0 0 0 7,200
Goodwill .......................................... 317,604 326,768 317,629 332,958 60,799
Total intangible assets .................... 409,556 405,545 403,344 411,172 108,949
Fixed assets ...................................... 1,203 962 1,025 700 1,174
Land, buildings and real estate ......... 46,656 15,598 44,778 15,829 3,893
Total tangible fixed assets .............. 47,859 16,560 45,803 16,530 5,067
Investments in associates ................. 12,869 6,544 13,708 7,297 263
Total financial assets ...................... 12,869 6,544 13,708 7,297 263
Total non-current assets ................ 470,289 428,649 464,855 434,998 114,278
Inventory .......................................... 42,465 20,280 36,266 15,023 6,071
Trade receivables ............................. 38,469 20,839 34,974 40,361 18,927
Three months ended 31 March
Year ended 31 December
NOK 1,000
2017
(unaudited)
2016
(unaudited)
2016
(audited)
2015
(audited)
2014
(audited)
Sales income........................................................................................................................................................................... 31,650 21,823 98,446 88,539 12,067
Other operating income .......................................................................................................................................................... 3,052 4,187 16,032 11,386 0
Total operating income ........................................................................................................................................................ 35,702 26,010 114,479 99,925 12,067
Cost of goods sold .................................................................................................................................................................. 19,273 11,166 60,841 42,116 3,361
Payroll and payroll related costs ............................................................................................................................................. 18,201 13,979 60,266 29,891 7,342
Depreciation ........................................................................................................................................................................... 2,591 2,450 10,431 15,512 3,551
Impairment ............................................................................................................................................................................. 0 0 0 52 100
Other operating costs .............................................................................................................................................................. 11,228 8,485 38,253 30,613 10,885
Total operating expenses ...................................................................................................................................................... 51,294 36,080 169,790 118,184 25,239
Operating profit/loss ............................................................................................................................................................ -15,592 -10,070 -55,312 -18,259 -13,173
Finance income ...................................................................................................................................................................... 1,209 970 3,599 5,185 1,813
Finance costs .......................................................................................................................................................................... 839 404 -7,993 1,420 274
Share of profit (loss) from an associate -938 -617 -2,932 -13,286 0
Pre-tax profit/loss ................................................................................................................................................................. -16,160 -10,121 -62,637 -27,780 -11,633
Income tax expense ................................................................................................................................................................ 516 376 6,808 6,049 5,122
Net profit/ (loss) .................................................................................................................................................................... -15,644 -9,746 -55,829 -21,731 -6,511
Currency translation differences ............................................................................................................................................. 677 -6,167 -19,617 20,220 0
Comprehensive income ........................................................................................................................................................ -14,967 -15,913 -75,446 -1,511 -6,511
Basic earnings per share ......................................................................................................................................................... -0.02 -0.01 -0.08 -0.04 -0.02
Diluted earnings per share ...................................................................................................................................................... -0.02 -0.01 -0.08 0.04 -0.02
8
Other receivables ............................. 14,088 20,801 3,312 10,717 1,406
Financial current assets .................... 0 1,507 0 1,507 0
Cash and cash equivalents ................ 368,349 288,993 225,467 313.043 98,497
Total current assets ........................ 463,370 352,420 300,019 380,650 124,901
Total assets ..................................... 933,654 781,069 762,875 815,649 239,179
EQUITY AND LIABILITIES
Share capital..................................... 149,732 136,120 136,736 136,120 67,786
Share premium/ paid-in equity ......... 781,321 602,410 619,329 602,910 134,662
Treasury shares ................................ -1,377 -23,935 -1,377
Retained earnings ............................. -98,435 -12,935 -83,468 -8,022 -6,511
Total equity..................................... 831,241 714,595 671,219 731,008 195,937
Deferred tax ..................................... 13,041 20,456 13,552 21,027 15,984
Long term debt ................................. 8,940 14,568 12,550 14,641 7,578
Trade payables ................................. 19,564 6,592 16,790 16,760 3,100
Public duties payable ....................... 389 1,003 1,347 3,185 1,735
Tax payable ...................................... 373 383 370 375 0
Other current liabilities .................... 60,106 23,471 47,046 28,652 14,847
Total current liabilities .................. 80,432 31,449 65,553 48,972 19,681
Total liabilities ................................ 102,413 66,473 91,655 84,640 43,242
Total equity and liabilities ............. 933,654 781,069 762,875 815,649 239,179
9
Statement of cash flows
Three months ended 31 March
Year ended 31 December
NOK 1,000 2017
(unaudited)
2016
(audited)
2016
(audited)
2015
(audited)
2014
(audited)
Cash flow from operating
activities
Loss before income tax ........................................................................................................................................................... -15,637 -10,121 -62,637 -27,780 -6,511
Interest costs, reversed ............................................................................................................................................................ 91 -699 629 -503 -143
Interest income, reversed ........................................................................................................................................................ -847 155 -2,399 -2,303 -936
Depreciation and amortisation ................................................................................................................................................ 2,591 2,450 9,732 15,512 3,551
Impairment of subsidiaries ..................................................................................................................................................... 0 0 0 0 0
Impairment of fixed assets ...................................................................................................................................................... 0 0 467 52 100
Fair value granted option rights .............................................................................................................................................. 0 0 0 0 0
Changes in provisions, inventories,
trade receivable, trade payable .............................................................................................................................................
-7,035 4,389 -17,203 -17,985 -6,134
Changes in other short-term
receivables and other short-term
liabilities ..............................................................................................................................................................................
6,813 -17,448 37,244 -4,803 13,344
Net cash flow from operating
activities .............................................................................................................................................................................
-14,024 -21,275 -34,167 -37,810 3,270
Cash flow from investing activities
Proceeds for sale of tangible fixed
assets ...................................................................................................................................................................................
0 0 37 0 0
Investment in fixed assets ....................................................................................................................................................... -2,825 -552 -44,506 -581 0
Acquisitions of intangible assets ............................................................................................................................................. -8,582 -2,325 0 0 0
Payment of loan given to associates
company/JV ........................................................................................................................................................................
0 0 -15,737 0 0
Acquisition of subsidiaries .................................................................................................................................................... 0 0 0 -83,182 -37,495
Proceeds from sale of subsidiaries ......................................................................................................................................... 0 0 0 0 0
Net cash flow from investing
activities .............................................................................................................................................................................
-11,407 -2,878 -60,207 -83,763 -37,495
Cash flow from financing activities
Interest paid ............................................................................................................................................................................ -91 699 -629 472 143
Interest received ..................................................................................................................................................................... 847 -154 2,399 2,303 936
Gross cash flow from share issue ............................................................................................................................................ 176,747 0 7,118 337,186 112,573
Transaction costs connected to share
issues
-5,642 -500 0 0 0
Proceeds from new loan ......................................................................................................................................................... 0 413 0 1,118 0
Payment of short and long term
liabilities ..............................................................................................................................................................................
-3,548 -311 -2,090 -4,962 7,578
Net cash flow from financing
activities .............................................................................................................................................................................
168,313 147 6,798 336,118 121,230
Net change in cash and cash
equivalents ..........................................................................................................................................................................
-142,882 -24,050 -87,575 214,545 87,005
Cash flow in the beginning of the
period
225,467 313,042 313,042 98,497 11,492
Cash and cash equivalents end
period .................................................................................................................................................................................
368,349 288,992 225,467 313,042 98,497
Aside from the Acquisition of Proton OnSite and the Private Placement there has been no significant change in
the Company’s financial or trading position as of the date of this Prospectus.
10
B.8 Pro forma
financial
information
On 28 April 2017, the Company announced that they had signed a final share
purchase agreement to acquire 100% in Proton OnSite for a cash consideration of
USD 20 million and 158 908 088 shares to be settled through the issuance of 147
659 456 Consideration Shares and 11 248 632 share options in Nel ASA on a cash
and debt free basis and assuming normalized working capital. HWorld, a variable
interest entity of Proton OnSite will not be a part of the transaction. Closing of the
Acquisition is subject to certain conditions, including relevant public approvals as
described in section 5, absence of material adverse effects and correctness of
representations. The timing of Closing of the Acquisition depends on the public
approval process, but is expected to around June / July 2017. The 27 February
2017 Private Placement of NOK 176.7 million was completed to finance the cash
consideration and is therefore taken into account when compiling the pro forma
condensed financial information. The unaudited pro forma financial information
has been prepared assuming the Acquisition will be approved.
The unaudited pro forma condensed financial information has been prepared for
illustrative purposes to show how the Acquisition of Proton Onsite and the 27
February 2017 Private Placement (the “Transaction”), described above, might
have affected the Company’s consolidated income statement for 2016 if the
Transaction occurred on January 1, 2016 and the consolidated statement of
financial position as of 31 December 2016 if the Transaction occurred at the
balance sheet date. Because of its nature, the unaudited pro forma condensed
financial information addresses a hypothetical situation and, therefore, does not
represent what the Group’s actual financial position or results of operation or the
financial position had been, if the Transaction had in fact happened on those dates
and is not representative of the results of operation for any future period. Investors
are cautioned not to place undue reliance on this unaudited pro forma condensed
financial information.
11
Unaudited pro forma income statement of year ended 31 December 2016
IFRS
adjustments
Pro forma adjustments
Nel Proton
OnSite
Proton
OnSite Note
Pro
forma
NOK 1,000
IFRS US
GAAP unaudited unaudited
unaudited
unless otherwise stated
Operating income 98 446 228 203 326 649
Other operating income 16 032 16 032
Total operating income 114
478 228 203 342 681
Cost of goods sold 60 841 176 653 4 061 2 241 555
Total cost of goods sold 60 841 176 653 4 061 241 555
Payroll and payroll related costs 60 266 60 266
Depreciation 10 431 44 472 3,4 54 903
Impairment
Other operating costs 38 253 75 176 4 825 6 148 1,2,5 124 403
Total operating expenses 108
950 75 176 4 825 50 620 239 572
Operating profit (loss) -55 312 -23 626 -4 825 -54 682 -138 445
Financial income 3 599 3 599
Financial expenses 7 993 3 538 -1 086 2 10 445
Share of profit and loss associate and joint
venture 2 932 2 932
Net financial income/expense -7 326 -3 538 - 1 086 -9 778
Profit (loss) before taxes -62 637 -27 164 -4 825 -53 596 -148 222
Tax costs -6 808 -16 899 -23 707
Net income attributed to noncontrolling
interest -4 124 4 124 2 0
NET PROFIT (LOSS) -55 829 -31 288 -4 825 -32 572 -124 514
12
Unaudited pro forma statement of financial position as of 31 December 2016
IFRS
adjustments Pro forma
adjustments
Nel Proton
OnSite Proton OnSite Note
Pro
forma
NOK 1,000 IFRS US
GAAP
unless otherwise stated unaudited unaudited unaudited
ASSETS
Intangible assets
Technology 57 854 4 952 233 378 1,3 296 184
Customer relationship 27 861 57 849 3 85 710
Customer contracts 20 516 3 20 516
Intangible development asset 0
Goodwill 317 629 332 460 3 650 088
Total intangible assets 403 344 0 4 952 644 201 1 052 498
Land, buildings and real estate
Land, buildings and real estate, property 44 778 88 541 -74 157 2 59 162
Total land, buildings and real estate 44 778 88 541
59 162
Other fixed assets
Fixtures and fittings, tools, etc. 1 025 1 025
Total other fixed assets 1 025 0 1 025
Financial fixed assets
Long term receivables 0 7 281 7 281
Other financial fixed assets 13 708 -3 164 2 10 544
Total financial fixed assets 13 708 7 281 -3 164 17 825
Total non-current assets 462 855 95 822 4 952 566 881 1 130 510
Current assets
Inventories 36 266 47 187 83 453
Receivables
Trade receivables 34 974 61 414 96 388
Other receivables 3 312 12 114 15 426
Financial current assets
Total Receivables 38 286 73 528 0 0 111 814
Cash and cash equivalents 225 467 33 244 -10 391 2, 6, 248 320
13
Total current assets 300 019 153 959 0 -10 391 443 587
TOTAL ASSETS 762 875 249 781 4 952 556 490 1 574 098
EQUITY AND LIABILITIES 31.12.16
Equity
Share capital 136 736 733 41 795 7 179 264
Share premium/Other paid equity 619 329 188 275 332 577 7 1 140 181
Treasury shares -1 377 -1 377
Retained earnings -83 468 -138 322 4 952 158 978 1,8 -57 860
Noncontrolling variable interest entity 47 972 -47 972 2 0
Total equity 671 220 98 657 4 952 485 378 1 260 208
Liabilities
Provisions
Deferred tax liability 13 551 118 462 3 132 013
Total provisions 13 551 0 0 118 462 132 013
Other long term liabilities
Other long term liabilities 12 550 78 498 -47 776 2,6 43 272
Total other long term liabilities 12 550 78 498 0 -47 776 43 272
Current liabilities
Accounts payable 16 790 22 817 39 607
Tax payable 370 370
Social security, VAT etc. payable 1 347 1 347
Other current liabilities 47 046 49 810 426 2,5 97 282
Total current liabilities 65 553 72 627 0 426 138 605
Total Liabilities 91 655 151 125 0 71 112 313 890
TOTAL EQUITY AND LIABILITIES 762 875 249 781 4 952 556 490
1 574 098
14
B.9 Profit forecast
or estimate
Not applicable, no profit forecast included.
B.10 Qualifications
in the audit
report
Ernst & Young AS has audited the Company’s annual financial statements since
2000. The audit reports for the last three years have been issued without
qualifications.
B. 11 Working
capital
In the opinion of the Company, its working capital is sufficient to cover the
Group’s present requirements for a period of at least 12 months from the date of
this Prospectus.
15
Section C – Securities
Element Description of
Element
Disclosure requirement
C.1 Type and class
of securities
being
offered/security
identification
numbers
The Company has only one class of shares, all issued in accordance with the
Norwegian Public Limited Liabilities Act. The Company's Shares are
denominated in Norwegian Kroner (NOK).
The Consideration Shares will be issued electronically and rank pari passu with
existing Shares in all respects following the registration of the share capital
increase in the Norwegian Register of Business Enterprises. The Consideration
Shares will be registered in book-entry form with the VPS with ISIN
NO0010081235.
The holders of the Consideration Shares will be entitled to dividend from and
including the date of registration of the share capital increase in the Norwegian
Register of Business Enterprises. The Consideration Shares shall be listed on Oslo
Børs prior to being delivered (or upon delivery) to the Sellers.
C.2 Currency NOK
C.3 Number of
shares and per
value
As of the date of this prospectus the Company’s current share capital is NOK
150,235,243.8 divided into 751,176,219 ordinary Shares, each with a par value of
NOK 0.20.
The Company’s total number of shares will increase by the number of
Consideration Shares issued following the Acquisition, and the number and future
exercise of Nel options issued to Nel Option Recipients. The Consideration
Shares shall be equal to 158,908,088 Nel shares each with a par value of NOK
0.20 (as adjusted for any share dividend, share split, combination or other similar
recapitalization of Nel’s share prior to the Closing) less the value of the options
issued to the Nel Option Recipients. (see section 5.6 for Consideration Shares
resolved to be issued by the Board of Director, ex options to be issued to Nel
Option Recipients).
C.4 Right attached
to the securities
The Company has only one class of shares. Pursuant to the Norwegian Public
Limited Companies Act, all shares have equal rights to the Company’s profits, in
the event of liquidation and to receive dividend, unless all the shareholders
approve otherwise.
All the Shares are validly issued and fully paid. All of the Company’s Shares hold
the same rights and no major shareholders have different voting rights.
The rights attached to the Consideration Shares are the same as those attached to
the Company’s existing Shares. The holders of the Consideration Shares will be
entitled to dividend from and including the date of registration of the share capital
increase in the Norwegian Register of Business Enterprises
C.5 Restrictions on
free
transferability
The Shares in the Company are freely transferable and, subject to the Articles of
Association and any applicable securities laws.
The share is subject to the following lock-up restrictions:
Lars Markus Solheim received in October 2014, 13,846,154 shares in Nel ASA,
in which 50% of the shares are subject to a four years lock up period with
expiration 9. October 2018. The remaining 50% were subject to a lock-up period
of two years, which expired October 2016.
Jacob Krogsgaard and Mikael Sloth control the company H2 Logic ApS, which
received 126,755,555 consideration shares in connection to the acquisition of H2
Logic A/S on 25 June 2015. These shares were subject to a lock-up period of two
years from the time of acquisition. In the period between two years and four
16
years, H2 Holding ApS agreed not to transfer or place any encumbrances on more
than 50% of the Consideration Shares it has received. After four years H2
Holding ApS may freely divest the Consideration Shares it has received.
Ole Arnt Lindgren, Magne Myrehaug and Erik Evju received in October 2014,
13,846,154 shares each in Nel ASA, in which 50% of the shares are subject to a
four years lock up period with expiration 9. October 2018. The remaining 50%
were subject to a lock-up period of two years, which expired October 2016.
The Consideration Shares will additionally be subject to certain lock-up
restriction describes further in section 5.7.
C.6 Listing and
admission to
trading
The Company’s Shares are listed on Oslo Børs.
The Consideration Shares shall be listed on Oslo Børs prior to being delivered (or
upon delivery) to the Sellers. The share capital increase pertaining to the
Consideration Shares is expected to be registered in the Norwegian Register of
Business Enterprises and issued to the Sellers within five working days of the
closing date of the Acquisition. The Consideration Shares shall be listed on Oslo
Børs prior to being delivered (or upon delivery) to the Sellers.
The timing of Closing of the Acquisition depends on the public approval process,
but is expected to occur around June / July 2017.
C.7 Dividend
policy
Under the Company’s strategy, and following the strengthening of the balance
sheet in February 2017, dividends are not currently part of the plan for this stage
of the business development process.
The Company has not paid any dividend for the financial years 2016, 2015 or
2014.
17
Section D – Risks
Element Description
of Element
Disclosure requirement
D.1 Key risks
specific to the
Issuer or its
industry
Risks relating to the hydrogen market
- There are risks associated with technological change, both related to
technology elements within the field of hydrogen as well as technology
elements outside hydrogen that potentially could make hydrogen less relevant
for the future.
- In addition, if competitors gain advantages in the development of alternative
technologies, this could affect the competitive position of the Company
- The efficiency of hydrogen, the so-called “well-to-wheel”, is typically lower
than that of battery technologies. A higher price for renewable power could
consequently negatively affect the demand for hydrogen technologies.
- Nel is dependent on a limited number of third party suppliers for key
production components for its products and any disruption to supply could
negatively impact its business significantly
- Nel relies on external suppliers of services and goods to meet agreed or
generally accepted standards
- If Nel does not achieve satisfactory yields or quality in manufacturing its
products, the Company’s sales could decrease significantly and its
relationships with its customers and its reputation may be harmed significantly
- Problems with product quality or product performance, including defects in
Nel’s products, could result in a significant decrease in the number of
customers and in revenues, significant unexpected expenses and loss of
market share
- Nel relies upon intellectual property and trade secret laws and contractual
restrictions to protect important proprietary rights, and, if these rights are not
sufficiently protected, its ability to compete and generate revenue could suffer
significantly
- Nel may not obtain sufficient patent protection on the technology embodied in
its products and production processes, which could significantly harm its
competitive position and increase its expenses significantly
- Nel could become involved in intellectual property disputes that could be time-
consuming and costly and could result in loss of significant rights and/or
penalties, such as loss of freedom to operate
- Nel may incur significant costs to comply with, or as a result of, health, safety,
environmental and other laws and regulations
- Because the hydrogen market in which Nel is active is highly competitive and
many potential competitors may have greater resources, Nel may not be able
to compete successfully and may lose or be unable to gain market share
- The Group depends on key personnel
- Product liability claims against Nel could result in adverse publicity and
potentially monetary damages. Currently there are no product liability claims
against Nel
- If the information and the documentation on which the decision to acquire
Proton OnSite was based on was not correct and complete, this may affect the
Company's business, financial condition and results of operation
- If the integration of Proton OnSite into the Company takes longer or proves to
be more costly than anticipated, this may affect the Company's business,
financial condition and results of operation
18
Financial risk factors
- Since its incorporation Nel has accumulated losses and there is no assurance as
to when and if Nel will achieve significant revenues and profitability
- Unless the Company obtains sufficient revenues to fund its current and
planned operations, the Company may be required to raise additional capital
through equity issues, debt financing, collaborative arrangements, strategic
alliances or from other sources
- Credit risk or potential loss may arise from any failure in the ability or
willingness of a counter party to fulfil its contractual obligations
- Currency risk: The Company’s revenues have historically taken place in EUR,
and a modest number of transactions have taken place in SEK, GBP and USD.
However, if the Company continues to grow, including the Acquisition of
Proton OnSite, it is expected that the portion of transactions in foreign
currency will increase and therefore the Company will be influenced by
variations in the exchange rate against the NOK
- Interest rate risk: Nel’s risk exposure in relation to changes in market interest
rate are the Company’s pensions, leases and bank deposits, and change in
interest rates may therefore affect the capital return
D.3 Key risks
specific to the
securities
Risk factors related to the ownership of the Shares
- Volatile market price
- Future share issues and potential dilution
- Future share issues could reduce the market price of the Shares and adversely
affect the Company’s ability to raise additional capital
- The Company may or may not pay any cash dividend for the foreseeable
future
- Shareholders may never obtain a return on their investment
- Limited liquidity in the trading market
- Exchange rate risk for investors outside of Norway
- Holders of Shares registered in a nominee account may not be able to exercise
voting rights and other shareholder rights
- The ability of shareholders of the Company to make claims against the
Company in their capacity as such following registration of the share capital
increase in the Register of Business Enterprises is severely limited under
Norwegian law
Section E – Offer
Element Description of
Element
Disclosure requirement
E.1 Net proceeds Nel will issue USD 50 million in new consideration shares (the “Consideration
Shares”) from Nel, to be adjusted for the number of options issued to the Nel
Option Recipients. The Consideration Shares will be issued at NOK 2.72 per
share each with a par value of NOK 0.20 per share, and will therefore amount to
158,908,088 new shares to be issued on the closing date of the Acquisition, less
the value of the options issued to the Nel Option Recipients (see section 5.6 for
Consideration Shares resolved to be issued by the Board of Director, ex options
to be issued to Nel Option Recipients).
E.2a Use of
proceeds
Nel will issue the Consideration Shares to the Proton OnSite shareholders (the
“Sellers”) as consideration for the Acquisition
19
E.3 Terms and
conditions
Closing of the Acquisition is subject to certain conditions, including relevant
public approvals, absence of material adverse effects and correctness of
representations. The timing of Closing of the Acquisition depends on the public
approval process, but is expected to occur around June / July 2017.
E.4 Material
interest in the
offer
The Company is not aware of any other interests, conflicting or otherwise, that
are considered material to the Acquisition (i.e. Consideration Shares).
E.5 Selling
shareholders
and lock-up
There are no selling shareholders related to the issue of Consideration Shares.
The Consideration Shares in connection with the Acquisition are subject to lock-
up conditions. Until the first anniversary of Closing the Acquisition, the Seller
agrees not to transfer or place any encumbrances on any of the Consideration
Shares. In the period between the first and second anniversary the Seller agrees
not to transfer or place any encumbrances on more than 50% of the Consideration
Shares it has received. After the second anniversary, the Consideration Shares are
not restricted by lock-up agreements.
E.6 Dilution The immediate dilutive effect of the Acquisition for the Company’s shareholders
will not be fixed before after Closing due to the Post Closing Adjustments,
however for illustration purposes the estimated dilution effect based on three
scenarios of the Post Closing Adjustments of USD -1,000,000, USD 0 and USD
1,000,000 will represent a dilution effect of 17.2%. 17.5% and 17.7%
respectively.
E.7 Estimated
expenses
charged to the
investor
Not applicable. Expenses related to the Acquisition will not be charged to the
investor by the Company.
20
2. RISK FACTORS
An investment in the Share involves a number of risks. If any of the following risks and uncertainties actually
occurs, the Group's cash flows, business, results of operations and financial position could be adversely affected.
In that case, the trading price of the Shares could decline and potential investors could lose all or part of their
investments. The order in which the risks are presented does not reflect the likelihood of their occurrence or the
magnitude of their potential impact on the Group's cash flows, business, results of operations and financial
position. The risks may materialise individually or cumulatively.
Potential investors should carefully consider the risk factors set out below and the information set out in section
4 “Cautionary note regarding forward looking statements” in addition to the other information contained herein
before making an investment decision.
2.1 RISKS RELATING TO THE HYDROGEN MARKET
2.1.1 There are risks associated with technological change, both related to technology elements within
the field of hydrogen as well as technology elements outside hydrogen that potentially could make
hydrogen less relevant for the future. Additionally if competitors gain advantages in the development of
alternative technologies, this could affect the competitive position of the Company
The market for Nel's electrolyser and hydrogen refueling products and services is subject to technological
change. The success of the Company depends on the timely perception of new trends, developments and
customer needs, constant further development of engineering expertise and ensuring that the portfolio of
products and services keeps pace with technological developments. This presents the risk that competitors may
launch new products and services earlier or at more competitive prices or secure exclusive rights to new
technologies. If these circumstances materialize, it may have a significant adverse effect on the Company's
business, prospects, financial results or results of operations.
The efficiency of hydrogen, the so-called “well-to-wheel”, is typically lower than that of battery technologies. A
higher price for renewable power could consequently negatively affect the demand for hydrogen technologies.
2.1.2 Nel is dependent on a limited number of third party suppliers for key production components for
its products and any disruption to supply could negatively impact its business significantly
Nel is dependent on a limited number of third party suppliers for key production components for its electrolyser
and hydrogen refueling products. If the Company fails to develop or maintain its relationships with its suppliers
or such suppliers are prevented from supplying, the Company may be unable to manufacture its products or its
products may be available only at a higher cost or after a long delay, which could prevent the Company from
timely delivering its products to its customers and the Company may experience order cancellation, customer
claims and loss of market share.
2.1.3 Nel relies on external suppliers of services and goods to meet agreed or generally accepted
standards
Nel’s electrolyser and hydrogen refueling manufacturing operations rely on external subcontractors and suppliers
of services and goods to varying degrees. This operating model inherently contains a risk to Nel’s goodwill and
branding. If suppliers fail to meet agreed or generally accepted standards in areas such as environmental
compliance, human rights, labour relations and product quality, this could have a significant adverse effect on
the Company’s business, prospects, financial results and results of operations. In general the Company aim at
dual sourcing of critical components to limit risk. In addition, the majority of spend is directed towards large
industrial companies with full ISO compliance and smaller vendors that are in compliance with local legislation.
Further, Nel conducts regular quality reviews, including production site visits for risk assessment.”
2.1.4 If Nel does not achieve satisfactory yields or quality in manufacturing its products, the Company’s
sales could decrease significantly and its relationships with its customers and its reputation may be
harmed significantly.
The manufacture of Nel’s products is a complex process, and Nel continuously strives to introduce
improvements to its processes. If Nel does not achieve planned yields, its product costs could increase, and
product availability would decrease, which could have a significant adverse effect on the Company’s business,
prospects, financial results and results of operations.
21
Nel, like any manufacturer, could from time to time receive complaints from customers regarding the quality of
its products. If Nel is not able to achieve satisfactory quality in manufacturing its products or does not continue
to develop at the same rate as its competitors, the demand for its products could be adversely affected and
existing contracts could be terminated, which could have a significant adverse effect on the Company’s business,
prospects, financial results and results of operations.
2.1.5 Problems with product quality or product performance, including defects in Nel’s products, could
result in a significant decrease in the number of customers and in revenues, significant unexpected
expenses and loss of market share
Nel’s products must meet stringent quality requirements, but may contain defects that are not detected until after
they are shipped or are installed because Nel cannot test for all possible scenarios or applications. Any such
defects could cause Nel to incur significant replacement costs or re-engineering costs, divert the attention of its
engineering personnel from product development efforts, and significantly affect its customer relations and
business reputation. If Nel delivers defective products or if there is a perception that its products are defective,
Nel’s credibility and the market acceptance and sales of its products could be harmed. This could have a
significant adverse effect on the Company’s business, prospects, financial results and results of operations.
Furthermore, widespread product failures may damage Nel’s market reputation, reduce its market share and
cause sales to decline. A successful product liability claim against Nel could require it to make significant
damage payments, which would negatively affect Nel’s business, prospects, financial results and results of
operations. Although a defect in Nel’s products may be caused by defects in products delivered by Nel’s sub-
suppliers which are incorporated into Nel’s products, there can be no assurance that Nel will be entitled to or
successful in claiming reimbursement, repair, replacement or damages from its sub-suppliers relating to such
defects.
2.1.6 Nel relies upon intellectual property and trade secret laws and contractual restrictions to protect
important proprietary rights, and, if these rights are not sufficiently protected, its ability to compete and
generate revenue could suffer significantly
Nel seeks to protect important proprietary manufacturing processes, documentation and other written materials,
and other intellectual property primarily under patent, trade secret and copyright laws. It also typically requires
employees, consultants and companies that have access to its proprietary information to execute confidentiality
agreements. The steps taken by Nel to protect its proprietary information may not be adequate to prevent
misappropriation of its technology. In addition, Nel’s proprietary rights may not be adequately protected
because:
people may not be deterred from misappropriating its technologies despite the existence of laws or
contracts prohibiting misappropriation;
policing unauthorized use of Nel’s intellectual property is difficult, expensive and time-consuming, and
Nel may be unable to determine the extent of any unauthorized use; and
the laws of certain countries in which Nel markets or plans to market its products may offer little or no
protection for its proprietary technologies.
Unauthorized copying or other misappropriation of Nel’s proprietary technologies could enable third parties to
benefit from its technologies without paying for doing so. Any inability to adequately protect its proprietary
rights could harm Nel’s ability to compete, to generate revenue and to grow its business. This could have a
significant adverse effect on Nel’s business, prospects, financial results and results of operations.
Some of Nel's patents are due to expire within the next couple of years which means that Nel will lose the sole
right to certain technology in certain areas. Although the Company believes that this will have little effect on the
Company's competitive position, no assurance can be made to this point.
2.1.7 Nel may not obtain sufficient patent protection on the technology embodied in its products and
production processes, which could significantly harm its competitive position and increase its expenses
significantly
Nel’s patent applications may not result in issued patents, and even if they result in issued patents, the patents
may not have claims of the scope that Nel seeks. In addition, any issued patents may be challenged, invalidated
or declared unenforceable, or a competitor may have filed similar patent applications as Nel’s present and future
patents may provide only limited protection for its technology and may not be sufficient to provide competitive
22
advantages. For example, competitors could be successful in challenging any issued patents or, alternatively,
could develop similar or more advantageous technologies on their own or design around Nel’s patents. Also,
patent protection in certain countries may not be available or may be limited in scope and any patents obtained
may not be as readily enforceable as in all jurisdictions, making it difficult for Nel to effectively protect its
intellectual property from misuse or infringement by other companies in these countries. Any inability to obtain
and enforce intellectual property rights in some countries could have a significant adverse effect on Nel’s
business, prospects, financial results and results of operations. In addition, given the costs of obtaining patent
protection and the sometimes limited potential for protection, Nel may choose not to protect certain innovations
that later turn out to be important. There is also a general risk that Nel receives information subject to
confidentiality agreements, regarding other parties’ know-how and trade secrets in relation to technology which
may hinder Nel from development of similar intellectual assets.
2.1.8 Nel could become involved in intellectual property disputes that could be time-consuming and
costly and could result in loss of significant rights and/or penalties such as loss of freedom to operate
From time to time, Nel, its customers or third parties with whom Nel works may receive claims, including claims
from various industry participants, alleging infringement of their patents. Although the Company is not currently
aware of any parties pursuing infringement claims against Nel, there can be no assurance that it will not be
subject to such claims in the future. Irrespective of this, the Company has received a proposal for entering into a
license agreement and the Company is currently assessing the relevance of such license, and depending on the
outcome of this assessment it cannot be ruled out that a dispute may arise.
Nel has certain registered trademarks and has applied for registration of certain trademarks. Although Nel does
not consider registration of trademarks to be critical in the marketing of its products, and that the present use of
such trademarks to Nel’s knowledge most likely does not violate any third party’s rights, there can be no
guarantee that no third party will be successful in claiming damages from Nel and/or in stopping Nel from using
such trademarks in the relevant jurisdiction, in which case it could harm Nel’s ability to compete, generate
revenue and to grow its business.
Although the Company is currently not aware of infringement of Nel's intellectual property by other parties, it
cannot guarantee that such infringement does not currently exist or will not occur in the future. To protect its
intellectual property rights and to maintain its competitive advantage, Nel may file suits against parties who it
believes are infringing its intellectual property. Intellectual property litigation is expensive and time consuming,
could divert management’s attention from Nel’s business and could have a material adverse effect on Nel’s
business, prospects, financial results or results of operations. In addition, Nel’s enforcement efforts may not be
successful.
2.1.9 Nel may incur significant costs to comply with, or as a result of, health, safety, environmental and
other laws and regulations
Nel’s operations are subject to numerous environmental requirements. Such laws and regulations govern, among
other matters, air pollution emissions, wastewater discharges, solid and hazardous waste management, and the
use, composition, handling, distribution and transportation of hazardous materials. Many of these laws and
regulations are becoming increasingly stringent (and may contain “strict liability”), and the cost of compliance
with these requirements can be expected to increase over time.
Nel’s production depends on various discharge permits granted by various authorities. From time to time,
breaches of the allowed emission limits set out in such permits may occur. If such limits of the relevant permits
should be exceeded, this may have a significant effect on Nel’s operations and result, as Nel may be ordered to
temporarily halt production, be subject to fines and/or be ordered to undertake corrective measures.
Nel cannot predict the impact of new or changed laws or regulations relating to health, safety, the environment
or other concerns or changes in the ways that such laws or regulations are administered, interpreted or enforced.
The requirements to be met, as well as the technology and length of time available to meet those requirements,
continue to develop and change. To the extent that any of these requirements impose substantial costs or
constrain Nel’s ability to expand or change its processes, Nel’s business, prospects, financial results and results
of operations could suffer. Any breach of such requirements could in addition result in fines or other substantial
costs and/or constraint Nel’s ability to operate its production plant, which could have a significant adverse effect
on its business, prospects, financial results and results of operations.
23
2.1.10 Because the hydrogen market in which Nel is active is highly competitive and many potential
competitors may have greater resources, Nel may not be able to compete successfully and may lose or be
unable to gain market share
Nel competes with a large number of competitors. Many competitors are developing and are currently producing
products based on technologies that may have costs similar to, or lower than, Nel’s projected costs. Many of
Nel’s existing and potential competitors may have longer operating histories, greater name recognition,
structurally better cost positions through geographical location or agreements with local authorities (including
direct and indirect subsidies), better access to skilled personnel, better access to research and development
partners, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than Nel. As a result, they may be able to respond more quickly than
Nel can to the changing customer demands or to devote greater resources to the development, promotion and
sales of their products. Nel’s business relies on sales of its products, and competitors with more diversified
product offerings may be better positioned to withstand a decline in the demand for products of the types that
Nel offers. It is possible that new competitors or alliances among existing competitors could emerge and rapidly
acquire significant market share, which would harm Nel’s business. If Nel fails to compete successfully, it could
have a significant adverse effect on Nel’s business, prospects, financial results and results of operations.
2.1.11 The Group depends on key personnel
The successful development and performance of the Group’s business depends on the Group’s ability to attract
and retain skilled professionals with appropriate experience and expertise. Further, if the Group loses the service
of its senior management or key personnel, it may not be able to execute its business strategy. There is no
assurance, however, that the Group will be able to attract or retain such personnel on acceptable terms or at all.
Any failure to attract or retain such personnel could have a material and adverse effect on the Group's business
and operations.
The success of the Group depends on qualified executives and employees, in particular certain executive officers
of the Group and employees with research and development expertise. The loss of executives, key employees in
the area of research and development, or other employees in key positions could have a material adverse effect
on the market position and research and development expertise of the Group. Considerable expertise could be
lost or access thereto gained by competitors. Post-contractual prohibitions on competition exist only for certain
members of the Group’s management and despite the existence of such post-contractual prohibitions, no
assurance can be given that such prohibitions will be complied with or, if breached, can be enforced effectively.
Due to intense competition, there is a risk that qualified employees will be attracted by competitors and that the
Group will be unable to find a sufficient number of appropriate new employees. There can be no assurance that
the Group will be successful in retaining these executives and the employees in key positions or in hiring new
employees with corresponding qualifications. If the Group fails to do so, it could have a significant adverse
effect on the Group’s business, prospects, financial results and results of operations.
2.1.12 Product liability claims against Nel could result in adverse publicity and potentially monetary
damages. Currently there are no product liability claims against Nel
It is possible that its products could result in injury, whether by product malfunctions, defects, improper
installation or other causes. Nel cannot predict whether or not product liability claims will be brought against it
or the effect of any resulting negative publicity on its business. Moreover, Nel may not have adequate resources
in the event of a successful claim against it. The successful assertion of product liability claims against Nel could
result in potentially significant monetary damages, which could have a significant adverse effect on Nel’s
business, prospects, financial results and results of operations. As of the date of this Prospectus, Nel is unaware
of any current or pending product liability claims made against the company.
2.1.13 If the information and the documentation on which the decision to acquire Proton OnSite was
based on was not correct and complete, this may affect the Company’s business, financial condition and
results of operation
The Company has completed a full and comprehensive due diligence of Proton OnSite based on the information
and documentation received by the seller and the target company. If the information provided does not properly
reflect the business and financial condition of Proton OnSite, this may affect the Company’s business, financial
condition and results of operation.
24
2.1.14 If the integration of Proton OnSite into the Company takes longer or proves to be more costly
than anticipated, this may affect the Company’s business, financial condition and results of operation
Any acquisition entails certain risks, including operational and company-specific risks. Although the integration
of Proton OnSite into the Company is envisioned to be as customary in such transactions, i.e. due to Nel’s
industry and business experience, there is also a risk that the integration process could take longer or be more
costly than anticipated. If this is the case, this may have a negative impact on the Company’s business, financial
position and results of operation.
2.2 FINANCIAL RISK FACTORS
2.2.1 Operating losses
Nel has since incorporation accumulated losses and such losses can continue if the Company proceeds with
product development, regulatory approval for sale of products delivered from its technology. The Company
plans to obtain revenues and a profitable business in the future. However, there is no assurance as to when and if
Nel will achieve significant revenues and profitability.
2.2.2 Ability to raise additional capital
Unless the Company obtains sufficient revenues to fund its current and planned operations, the Company may be
required to raise additional capital through equity issues, debt financing, collaborative arrangements, strategic
alliances or from other sources. Furthermore, the Company may seek to raise additional capital in order to
successfully execute strategies with respect to product development and commercialisation within its existing
business. There is no assurance that Nel will be able to raise additional capital at the relevant time. If required
funds are not available, the Company may have to reduce expenditure on product development and/or marketing
activities which could have a material adverse effect on the Company’s business, financial condition and
prospects. Lack of ability to obtain sufficient funding in the future could result in insolvency or liquidation of the
Company.
2.2.3 Credit risk
Credit risk is the potential loss that may arise from any failure in the ability or willingness of a counter party to
fulfil its contractual obligations, as and when they fall due. Additionally, competitive pressure and challenging
markets may increase credit risk through sales to financially weak customers, extended payment terms and sales
into new and immature markets. This could have a significant adverse effect on the Company’s business,
prospects, financial results and results of operations.
2.2.4 Currency risk
The Company's functional currency is NOK. The Company's transactions have historically mainly taken place in
EUR, and a modest number of transactions have taken place in SEK, GBP and USD. However, if the Company
continues to grow, including the Acquisition of Proton OnSite, it is expected that the portion of transactions in
foreign currency will increase. The Company's revenues will be influenced by variations in the exchange rate
against NOK, the same will apply to expenses in other currencies. The Company is currently not using financial
hedging instruments, but may consider such instruments for larger contracts.
2.2.5 Interest rate risk
Nel's risk exposure in relation to changes in market interest rates are the Company's pensions, leases and bank
deposits, and a change in interest rates may therefore affect the capital return.
2.3 RISK FACTORS RELATED TO THE OWNERSHIP OF THE SHARES
2.3.1 The market price of the Shares has been and may continue to be highly volatile, and investors may
not be able to resell Shares at or above the Issue price
The market price of the Shares could fluctuate significantly in response to a number of factors, including the
following:
- actual or anticipated variations in operating results
- changes in financial estimates or recommendations by stock market analysts regarding the Company
- announcements by the Company of significant acquisitions, partnerships, joint ventures or capital
commitments
- sales or purchases of substantial blocks of Shares
25
- additions or departures of key personnel
- future equity or debt offerings by the Company and its announcements of these offerings
- general market and economic conditions
2.3.2 Shareholders not participating in future offerings of Shares or other equity investments may be
diluted
Shareholders not participating in future offerings of Shares or other equity instruments may be diluted. Unless
otherwise resolved or authorised by the general meeting of the Company, shareholders in Norwegian public
companies such as the Company have pre-emptive rights proportionate to the aggregate amount of the Shares
they hold with respect to new Shares and other equity investments issued by the Company. However,
shareholders that do not exercise such pre-emptive right may experience dilution of their shareholding.
Furthermore; local selling and transfer restrictions may limit certain shareholders to exercise their pre-emptive
rights.
If the Company, in a share issue, resolves to deviate from the shareholders' pre-emptive rights, this may also
result in a substantial dilution of the shareholding of shareholders not being invited to participate in such share
issue.
Future issuances of Shares or other securities could dilute the holdings of shareholders the Company may seek to
issue additional equity or convertible equity securities to fund future acquisitions and other growth opportunities
or in connection with share incentives and option plans. Exercising options may also cause a dilution of existing
shareholders. To the extent that the Company issues additional shares, the existing shareholders' ownership
interest in the Company at that time may be diluted.
2.3.3 Future sales of Shares could reduce the market price of the Shares and adversely affect the
Company's ability to raise additional capital
The Company cannot predict what effect, if any, future sales of the Shares, or the availability of Shares for future
sales, will have on the market price of the Shares. Sales of substantial amounts of the Shares, sales made by
primary insiders or major shareholders, or the perception that such sales could occur, could adversely affect the
market price of the Shares, making it more difficult for shareholders to sell their Shares and for the Company to
issue shares to raise capital in the future at a time and price that they deem appropriate.
2.3.4 The Company may or may not pay any cash dividends for the foreseeable future. Shareholders
may never obtain a return on their investment
The Company shall aim at making the Shares in the Company an attractive investment object. The Company
aims at providing its shareholders with a competitive return on investment over time, in terms of dividend and
development in the share price. The Company’s target is that the underlying values shall be reflected in the share
price. The payment of future dividends will depend on the Company’s earnings, financial condition and other
factors including cash requirements, taxation, regulation, etc.
2.3.5 Limited liquidity in the trading market for the Shares could have a negative impact on the market
price and ability to sell Shares
The Company’s Shares are currently listed on Oslo Børs. This, however, does not imply that there will always be
a liquid market for the Company’s Shares, which historically have had a moderate liquidity. An investment in
the Shares may thus be difficult to realise. Investors should be aware that the value of the Shares may be volatile
and may go down as well as up. In the case of low liquidity of the Shares, or limited liquidity among the
Company’s shareholders, the share price can be negatively affected and may not reflect the underlying asset
value of the Company. Investors may, on disposing of the Shares, realise less than their original investment or
lose their entire investment.
2.3.6 The Company's investors outside of Norway are subject to exchange rate risk
The Shares are traded in NOK and any investor outside of Norway, who wishes to invest in the Share, or to sell
Shares, will be subject to an exchange rate risk which may cause additional costs to the investor.
26
2.3.7 Shareholders that are registered in a nominee account may not be able to exercise voting rights
and other shareholder rights as readily as shareholders whose Shares are registered in their own names
with the VPS
Beneficial owners of Shares that are registered in a nominee account (e.g., through brokers, dealers or other third
parties) may not be able to vote such Shares unless their ownership is re-registered in their names with the VPS
prior to the Company's general meetings. The Company cannot guarantee that such beneficial owners of Shares
will receive the notice for a general meeting in time to instruct their nominees to either effect a re-registration of
their Shares or otherwise vote their Shares in the manner desired by such beneficial owners. Further, beneficial
owners of Shares that are registered in a nominee account may not be able to exercise other shareholder rights
under the Norwegian Public Limited Companies Act (such as e.g. the entitlement to participate in a rights
offering) as readily as shareholders whose Shares are registered in their own names with the VPS.
2.3.8 The ability of shareholders of the Company to make claims against the Company in their capacity
as such following registration of the share capital increase in the Register of Business Enterprises is
severely limited under Norwegian law
Once the capital increase relating to any Shares (including the Consideration Shares) has been registered in the
Register of Business Enterprises, purchasers of those Shares have limited rights against the Company under
Norwegian law.
27
3. STATEMENT OF RESPONSIBILITY
The Board of Directors of Nel ASA accepts responsibility for the information contained in this Prospectus and
hereby declares that, having taken all reasonable care to ensure that such is the case, the information contained in
this Prospectus is, to the best of their knowledge, in accordance with the facts and contains no omissions likely to
affect its import.
Oslo, 12 June 2017
The Board of Directors of Nel ASA
Hanne Skaarberg Holen
Chair of the Board
Ole Enger
Board member
Beatriz Malo de Molina
Board member
Finn Jebsen
Board member
Mogens Filtenborg
Board member
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4. CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Prospectus includes “forward-looking” statements, including, without limitation, projections and
expectations regarding the Company’s future financial position, business strategy, plans and objectives. All
forward-looking statements included in the Prospectus are based on information available to the Company, and
views and assessments of the Company, as of the date of this Prospectus. Except as required by the applicable
stock exchange rules or applicable law, the Company does not intend, and expressly disclaims any obligation or
undertaking, to publicly update, correct or revise any of the information included in this Prospectus, including
forward-looking information and statements, whether to reflect changes in the Company's expectations with
regard thereto or as a result of new information, future events, changes in conditions or circumstances or
otherwise on which any statement in this Prospectus is based.
When used in this document, the words “anticipate”, “believe”, “estimate”, “expect”, “seek to”, "will", "may",
"intends", "assumes" or other words of similar meaning and similar expressions or the negatives thereof, as they
relate to the Company, its subsidiaries or its management, are intended to identify forward-looking statements.
The Company can give no assurance as to the correctness of such forward-looking statements and investors are
cautioned that any forward-looking statements are not guarantees of future performance. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors, which may cause the actual
results, performance or achievements of the Company and its subsidiaries, or, as the case may be, the industry, to
materially differ from any future results, performance or achievements expressed or implied by such forward-
looking statements. Such forward-looking statements are based on numerous assumptions regarding the Group’s
present and future business strategies and the environment in which the Company and its subsidiaries operate.
Prospective investors in the Share are cautioned that forward-looking statements are not guarantees of future
performance and that the Group’s actual financial position, operating result and liquidity, and the development of
the industry in which the Group operates may differ materially from those made in or suggested by the forward-
looking statements contained in this Prospectus. The Company cannot guarantee that the intentions, beliefs or
current expectations upon which its forward-looking statements are based will occur. Given the aforementioned
uncertainties, prospective investors are cautioned not to place undue reliance on any of these forward-looking
statements.
In particular, section 7.4, section 8 and section 9.5 of this Prospectus contains statements regarding the Group’s
strategy going forward.
29
5. THE ACQUISITION
5.1 BACKGROUND AND OVERVIEW
On 28 April 2017, Nel signed a final share purchase agreement (“SPA”) with F9 Investment LLC, the
shareholder of Proton Onsite, to acquire 100% of the shares in Proton OnSite (the "Acquisition") for a total
consideration of USD 70 million, on a cash and debt free basis and assuming a normalised working capital as of
closing (the "Purchase Price").
The timing of closing of the Acquisition depends on the public approval process (the “Closing”), but is expected
to occur around June / July 2017.
From the Purchase Price there will be deducted certain amounts, to be calculated as of Closing to adjust for (i)
consideration payable by Proton OnSite to employees for cancellation of a number of employee options (the
"Aggregate Option Cancellation Amount"), (ii) amounts owed by Proton OnSite to its previous shareholder as of
Closing (the "Seller Debt Payoff Amount"), and (iii) transaction expenses payable by Proton OnSite on Closing
(the "Closing Date Seller Transaction Expenses"). Certain Proton OnSite employee option holders (the "Nel
Option Recipients") will receive Nel options as consideration for cancellation of their Proton OnSite options.
The Nel Option Recipients will be finally concluded at the date of Closing. The value of such is to be calculated
prior to Closing and deducted from the Purchase Price.
The Purchase Price will be financed through USD 20 million in cash, to be adjusted for the Aggregate Option
Cancellation Amount, the Seller Debt Payoff Amount and the Closing Date Seller Transaction Expenses, and
USD 50 million in new consideration shares (the “Consideration Shares”) from Nel, to be adjusted for the
number of options issued to the Nel Option Recipients. The Consideration Shares will be issued at NOK 2.72 per
share each with a par value of NOK 0.20 per share, and will therefore amount to 158,908,088 new shares to be
issued on the closing date of the Acquisition, less the value of the options issued to the Nel Option Recipients
(see section 5.6 for Consideration Shares resolved to be issued by the Board of Director, ex options to be issued
to Nel Option Recipients).
The Purchase Price assumes that Proton Onsite as of Closing of the Transaction is cash and debt free, and has a
normalised working capital. An adjustment of the Purchase Price will be made following Closing based on the
actual levels of cash and debt, and to adjust for deviation between the actual and the agreed normalised working
capital, in each case as of Closing (the “Post Closing Adjustments”) as described in section 5.4.
The Consideration Shares will be issued on the closing date of the transaction and the closing cash amount will
be paid at the same time. 50% of the Consideration Shares will be subject to lock-up until the first anniversary of
Closing of the transaction, while the remaining Consideration Shares will be subject to lock-up until the second
anniversary of Closing. For further information, see section 5.7 below.
5.2 CONSIDERATION SHARES AND SHARE OPTION AGREEMENT
5.2.1 Consideration Shares
Nel will issue the Consideration Shares to the Proton OnSite shareholders (the “Sellers”) as consideration for the
Acquisition. The Consideration Shares shall be equal to 158,908,088 Nel shares (as adjusted for any share
dividend, share split, combination or other similar recapitalization of Nel’s share prior to the Closing) less the
value of the options issued to the Nel Option Recipients as described in section 5.5
5.3 CONDITIONS FOR COMPLETION OF THE TRANSACTION
Closing of the Acquisition is subject to certain conditions, including relevant public approvals, absence of
material adverse effects and correctness of representations. The timing of Closing of the Acquisition depends on
the public approval process, but is expected to around June / July 2017.
5.4 POST CLOSING ADJUSTMENTS TO CONSIDERATION SHARES
Certain adjustments of the Purchase Price will be made following Closing, based on the amounts of net debt and
working capital of Proton OnSite as of Closing. The Post Closing Adjustments will be made by Nel issuing
additional Consideration Shares to Proton OnSite's shareholder, or Nel receiving previously issued Consideration
30
Shares back from Proton OnSite's sellers, as the case may be, with the number of adjustment shares calculated
using NOK 2.72 per Nel share.
5.5 SHARE OPTION AGREEMENT
As of the closing date, Proton OnSite’s outstanding options will either be cancelled in exchange for a cash
payment by Proton OnSite, as a part of the USD 20 million cash settlement, and/or amended into options to
purchase Nel shares, hence reducing the portion of share consideration. The final number of ProtonOnSite’s
outstanding options that will be amended into options to purchase Nel shares will be finally concluded at the date
of Closing.
There are 1,316,400 Proton OnSite options that either will be cancelled for exchange for a cash payment or
amended into options to purchase Nel shares in the final SPA.
The Nel Option Recipients that as of the date of this Prospectus are intended to receive Nel options as
consideration for cancellation of their Proton OnSite options comprise of the five Proton OnSite management
members specified in the table below. The consideration to the Nel Option Recipients shall reflect the pro rata
allocation between cash and share consideration paid to the shareholder of Proton OnSite, but with the exception
that Nel options will replace Consideration Shares. This means that the Nel Option Recipients will receive the
same ratio of cash settlement as Proton OnSite’s shareholder, as part of the USD 20 million cash settlement, and
Nel options in the same ratio as Proton OnSite’s shareholder will receive Consideration Shares. Hence a portion
of the Consideration Shares will be replaced by Nel options issued to Nel Option Recipients. Prior to Closing of
the Acquisition, the Nel Option Recipients and their corresponding Proton OnSite option holding are as outlined
in the table below:
Employee # of options Strike price (USD)
Bow, David 75,000 4.00
Dayton, Jim 25,000 4.00
Friedland, Robert 500,000 1.00
Paul, Sheldon 40,000 1.00
Paul, Sheldon 60,000 1.20
Zagaja, John 75,000 4.00
The gross value of the portion of Nel Option Recipients’ options to be converted to Nel options will be converted
using a Nel share price of NOK 2.72 per share. The converted Proton OnSite options shall carry its current
aggregate exercise price when converted to Nel options.
For David Bow, Jim Dayton, Sheldon Paul and John Zagaja, 50% of the Proton OnSite options converted to Nel
options, as described above, shall be exercisable during the ninety day period following the first anniversary of
the Closing of the Acquisition, while the remaining portion of the converted option shall be exercisable at the
ninety day period following the second anniversary of the Closing of the Acquisition. For Robert Friedland 50%
of the converted options shall be exercisable during the ninety day period following the first anniversary of the
Closing of the Acquisition, while the remainder shall be exercisable during the ninety day period preceding the
earlier of (i) the expiration date of such Proton OnSite options, or (ii) the second anniversary of the Closing of
the Acquisition, and may be sold by Robert Friedland after any such exercise without any lock-up restriction.
As a result of the Consideration Shares being reduced with the number of options issued to the Nel Option
Recipients, Nel shall reimburse to the Seller the value of the option exercise price received by Nel. In the event
that any options issued to the Nel Option Recipients expire or are terminated prior to exercise, the Seller shall be
issued a corresponding number of options and be entitled to exercise the replacement options instead of the Nel
Option Recipients.
Upon Closing of the Acquisition, the Proton OnSite shareholder and option holders will have an ownership in
Nel of approximately 17.2-17.8 %, subject to Post Closing Adjustments, including the New Shares from the
Private Placement and assuming exercise of all Nel options to be issued to Nel Option Recipients.
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5.6 ISSUE OF THE CONSIDERATION SHARES
On 11 May 2017, it was announced that the Board of Directors of the Company resolved to issue 147,659,456
Consideration Shares to the Seller, subject to the Closing occurring (prior to the Post Closing Adjustments). The
Consideration Shares will be issued according to the board authorization set forth at the Annual General Meeting
held on 20 May 2016 whereby the Board was granted an authorization to increase the share capital with up to
NOK 68,000,000 representing 340,000,000 shares each at a par value of NOK 0.20 per share. For further
information regarding the Board’s authorization see section 13.6 .
The timing of the Closing of the transaction remains subject to a number of conditions, including relevant public
approvals and other third party consents. Closing remains expected to occur around June/July 2017. At that time,
and subject to Closing occurring, the share capital of Nel will be increased with the number of Consideration
Shares in the Norwegian Register of Business Enterprises, and the Consideration Shares will be registered and
delivered to the shareholders of Proton Onsite.
The Sellers shall, subject to the terms and conditions in the SPA, on the closing date, subscribe for the
Consideration Shares, which shall be settled as contribution in kind (No. tingsinnskudd). An expert report
relating to the contribution in kind has been prepared; 10-2 cf. section 2-6 of the Norwegian Public Limited
Liability Companies Act.
The share capital increase pertaining to the Consideration Shares is expected to be registered in the Norwegian
Register of Business Enterprises and issued to the Sellers within five working days of the closing date of the
Acquisition.
5.7 LOCK-UP AGREEMENTS
The Consideration Shares are subject to lock-up conditions. Until the first anniversary of Closing the
Acquisition, the Seller agrees not to transfer or place any encumbrances on any of the Consideration Shares. In
the period between the first and second anniversary the Seller agrees not to transfer or place any encumbrances
on more than 50% of the Consideration Shares it has received. After the second anniversary the Consideration
Shares are not restricted by lock-up agreements.
5.8 SHAREHOLDERS’ RIGHTS RELATING TO THE CONSIDERATION SHARES
The rights attached to the Consideration Shares are the same as those attached to the Company’s existing Shares.
The Consideration Shares will be issued electronically and rank pari passu with existing Shares in all respects
following the registration of the share capital increase in the Norwegian Register of Business Enterprises. The
Consideration Shares will be registered in book-entry form with the VPS with ISIN NO0010081235. The
registrar for the Company’s Shares in VPS is DNB Bank ASA, Registrar’s Department, P.O. Box 1600 Sentrum,
0021 Oslo, Norway.
The holders of the Consideration Shares will be entitled to dividend from and including the date of registration
of the share capital increase in the Norwegian Register of Business Enterprises. The Consideration Shares shall
be listed on Oslo Børs prior to being delivered (or upon delivery) to the Sellers.
Pursuant to the Norwegian Public Limited Companies Act, all shares have equal rights to the Company’s profits,
in the event of liquidation and to receive dividend, unless all the shareholders approve otherwise. Please see
section 14, which gives additional details regarding shareholding in a Norwegian Public Limited Company.
5.9 INTEREST OF NATURAL AND LEGAL PERSONS INVOLVED IN THE TRANSACTION
The Company is not aware of any other interests, conflicting or otherwise, that are considered material to the
Acquisition.
5.10 ADVISORS
Carnegie AS (“Carnegie”) has acted as financial advisor to Nel in connection with the Acquisition. The
Company’s legal counsel is Advokatfirmaet Schjødt AS.
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5.11 EXPENSES RELATED TO THE TRANSACTION
Transaction costs and all other directly attributable costs in connection with the Acquisition will be borne by the
Company and are estimated to approximately NOK 13 million.
5.12 DILUTION
The Company’s total number of shares will increase by the number of Consideration Shares issued following the
Acquisition, and the number and future exercise of Nel options issued to Nel Option Recipients. The final
number of new shares, thus the total number of outstanding shares (including the New Shares from the Private
Placement) after the Acquisition will be subject to the Post Closing Adjustments and future exercise of Nel
options issued as part of the Acquisition.
The immediate dilutive effect of the Acquisition for the Company’s shareholders will not be fixed before after
Closing due to the Post Closing Adjustments, however for illustration purposes the below table exhibits the
dilution effect based on three scenarios of the Post Closing Adjustments. Scenarios (i), (ii) and (iii) below
represents example calculations using Post Closing Adjustments of USD -1,000,000, USD 0 and USD 1,000,000
respectively.
(i) (ii) (iii)
Prior to the
Acquisition
(Including Private
Placement Shares)
Subsequent to the
Acquisition
(Consideration
Shares representing an amount of USD
49m)
Subsequent to the
Acquisition
(Consideration
Shares representing an amount of USD
50m)
Subsequent to the
Acquisition
(Consideration
Shares representing an amount of USD
51m)
Ordinary shares ............................................................................................................................................... 751,176,219 904,388,178 907,566,340 910,744,502
Consideration Shares and Nel options to Nel Option Recipients as % of total
number of Shares post Closing .......................................................................................................................
17.2% 17.5% 17.7%
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6. THE PRIVATE PLACEMENT
6.1 OVERVIEW
On 27 February 2017, the Company raised NOK 176.7 million in gross proceeds through a private placement of
64,980,000 new shares (the "New Shares") at a price of NOK 2.72 per share (the "Private Placement"). The
Private Placement took place and the price was set through an accelerated bookbuilding process after close of
markets on 27 February 2017.
The Private Placement, which represented approximately 9.5 % of the Company’s outstanding share capital, was
directed towards new investors and large existing shareholders of the Company. The price represented a discount
of 7.2 % to the last traded share price of NOK 2.93 on 27 February 2017.
6.2 USE OF PROCEEDS
The net proceeds from the Private Placement were used to secure funding for the contemplated acquisition of
Proton OnSite and for general corporate purposes, including funding strategic growth initiatives within the
Company's business. For more information see section 7.4.2
6.3 TYPE, CLASS, CURRENCY AND ISIN NUMBER OF THE SHARES
The Company has only one class of shares, all issued in accordance with the Norwegian Public Limited
Liabilities Act. The Company's Shares are denominated in Norwegian Kroner (NOK).
Following the registration of the share capital increase in the Norwegian Register of Business Enterprises in
connection with the Private Placement, the Company’s share capital increased to NOK 149,731,650.40 divided
into 748,658,252 shares, each with a par value of NOK 0.20.
The share capital increase was registered with the Norwegian Register of Business Enterprises on 6 March 2017.
The New Shares carry full shareholder rights in the Company as of the date of registration.
The New Shares issued in connection with the Private Placement were issued based on a Board authorisation
granted by the Company's annual general meeting held on 20 May 2016. For further information regarding the
Board’s authorisation, see section 14.
The Shares are registered in book-entry form with the VPS under an International Securities Identification
Number (“ISIN”). The Company's tradable Shares are registered under ISIN NO NO0010081235.
The registrar for the Company’s Shares in VPS is DNB Bank ASA, Registrar’s Department, P.O. Box 1600
Sentrum, 0021 Oslo, Norway
The Shares in the Company are freely transferable and, subject to the Articles of Association and any applicable
securities laws, there are no restrictions on trading in the Shares.
6.4 ADMISSION TO TRADING OF THE NEW SHARES
The shares allocated had a payment date on or about 2 March 2017 and were delivered on on 6 March 2017. The
New Shares allocated were settled through a delivery versus payment transaction on 6 March 2017.
The Shares were tradable immediately upon registration pursuant to §7-5 of the Norwegian Securities Trading
Act on 6 March 2017.
6.5 THE UNDERWRITING
There was no agreement with the Managers or other parties to underwrite or guarantee payment of the
Transaction.
6.6 NET PROCEEDS AND EXPENSES RELATED TO THE PRIVATE PLACEMENT
Transaction costs and all other directly attributable costs in connection with the Private Placement that was borne
by the Company are estimated to approximately NOK 5.3 million, thus resulting in net proceeds of
approximately NOK 171.4 million. No expenses or taxes will be charged by the Company or the Manager to the
subscribers in the Private Placement. All fees to the Manager were success-based.
34
6.7 RESOLUTION RELATING TO THE AUTHORISATION TO ISSUE SHARES
The New Shares have been issued pursuant to the following Board authorisation granted at the Annual General
Meeting held on 20 May 2016.
“The Board is granted authorization to increase the share capital with up to NOK 68,000,000 through one or
several share capital increases. The authorization may be used for one or more of the following purposes:
1. for issuance of shares in connection with the Company's share/option plan for employees; and/or
2. to provide the Company with financial flexibility, including in connection with investments, mergers
and acquisitions.
Price and conditions for subscription will be determined by the Board on issuance, according to the Company's
needs and the shares' market value at the time. Shares may be issued in exchange for cash settlement or
contribution in kind.
The existing shareholders pre-emptive rights to subscribe shares can be deviated from in connection with the
effectuation of this authorization.
The Board’s authorization is valid until the Annual General Meeting in 2017, but shall in any event expire at the
latest 15 months from the date of this annual general meeting.
The Board is at the same time given authorization to make the necessary amendments to the articles of
association on execution of the authorization. This authorization replaces all previously granted authorizations
to increase the share capital."
6.8 INTEREST OF NATURAL AND LEGAL PERSONS INVOLVED IN THE PRIVATE
PLACEMENT
The following management primary insiders in Nel ASA were allocated shares in the Private Placement (holding
after the transaction in parenthesis):
Øystein Stray Spetalen, BoD 3,156,557 shares
Jan Chr. Opsahl, BoD 1,427,219 shares
H2 Holding APS, employees 650,224 shares Strata Marine & Offshore AS and Ferncliff Maris AS, represented on the Board from September 2013 until May
2017 by Øystein Stray Spetalen, was allocated 3,156,557 shares in the Private Placement. After the Private
Placement Øystein Stray Spetalen held 36,367,842 shares in Nel ASA, representing 4.86 % of total shares
issued. Subsequent to the Private Placement on 6 March 2017, Strata Marine & Offshore AS and Ferncliff Maris
AS sold all their shareholdings in the Company.
Jan Chr. Opsahl, member of the Board from December 2014 until May 2017, through Dallas Asset Management
AS was allocated 1,427,219 New Shares, and was following completion hold 16,443,511 shares in the Company,
representing 2.20 % of total shares issued.
H2 Holding APS, owned by Jacob Krogsgaard, Senior Vice President of Nel Hydrogen Solution; Mikael Sloth,
Vice President Business Development; Jesper Boisen, Business Development Director of Nel Hydrogen A/S and
Thomas Luckmann, Service Director of Nel Hydrogen A/S, was allocated 650,224 New Shares, and will
following completion hold 127,405,781 shares in the Company, representing 2.20 % of total shares issued.
6.9 DILUTION EFFECT
The dilutive effect following the Private Placement represents a 8.7% dilution effect for the existing
shareholders.
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6.10 MANAGERS AND LEGAL ADVISORS
The Manager for the Private Placement is:
- Carnegie AS, P.O. Box 684 Sentrum, 0106 Oslo, Norway
- Arctic Securities AS, P.O. Box 1833 Vika, 0123 Oslo, Norway
.The Company’s legal advisor is:
- Advokatfirmaet Schjødt AS, Ruseløkkveien 14, Postboks 2444 Solli, 0201 Oslo, Norway.
6.11 JURISDICTION AND CHOICE OF LAW
The Private Placement is subject to Norwegian law, and subject to the restrictions in the Norwegian Public
Limited Liability Companies Act (Nw. Allmennaksjeloven). Any dispute arising in respect of the Private
Placement is subject to the exclusive jurisdiction of the Norwegian courts.
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7. PRESENTATION OF NEL ASA
7.1 GENERAL
Nel ASA is a public limited liability company (allmennaksjeselskap), governed by the Norwegian Public
Limited Companies Act, with company registration number 979 938 799. The Company is incorporated and
organized under the laws of Norway.
The Company’s registered office is:
Nel ASA
Karenslyst allé 20
0278 Oslo, Norway
Telephone: +47 90 74 49 49
Website: www.nelhydrogen.com
7.2 LEGAL STRUCTURE
Nel ASA is a holding company and 100% owner of New Nel Hydrogen Holding AS, Inceptum 999 AS (to be
renamed Hyon AS), Nel Fuel AS, Nel Hydrogen A/S and Nel Hydrogen Inc. In addition, Nel ASA will through
its subsidiary Nel US Inc. own 100% of Proton Energy Systems, Inc. following Closing. Nel ASA has no
operational activities and has as of the date of this Prospectus, 5 employees, which are all members of the
executive management.
The illustration below sets out the current legal structure of the Group.
7.2.1 Brief description of the subsidiaries and affiliated companies
New Nel Hydrogen Holding AS:
A holding company and 100% owner of New Nel Hydrogen AS, New Nel Hydrogen P60 AS and New Nel
Hydrogen Eiendom AS. In addition, New Nel Hydrogen Holding AS has a 37% ownership stake in SAGIM.
New Nel Hydrogen Holding AS is incorporated in Norway under organization number 913 683 439. The
company operates under the Nel Hydrogen Electrolyser division.
New Nel Hydrogen AS:
This wholly owned subsidiary of New Nel Hydrogen Holding AS is the operating entity within Nel’s electrolysis
business, responsible for selling, projecting, engineering and manufacturing all of Nel’s electrolysis projects.
Furthermore, New Nel Hydrogen AS owns all patents, inventories and rights for Nel’s products related to
electrolysis. New Nel Hydrogen AS is incorporated in Norway under organization number 912 185 877. The
company operates under the Nel Hydrogen Electrolyser division.
New Nel Hydrogen P60 AS:
37
This fully owned subsidiary is the development company under New Nel Hydrogen Holding AS; it owns the P60
technology, documents, prototype etc. There has been no activity in this company since the start in July 2013.
New Nel Hydrogen P60 AS is incorporated in Norway under organization number 912 221 326. The company
operates under the Nel Hydrogen Electrolyser division.
New Nel Hydrogen Eiendom AS:
This fully owned subsidiary of New Nel Hydrogen Holding AS owns the factory building “Bygg 160” where the
production of the cell material is performed, including warehouse etc. New Nel Hydrogen AS rents the factory
locations from New Nel Hydrogen Eiendom AS. New Nel Hydrogen Eiendom AS is incorporated in Norway
under organization number 912 370 771. The company operates under the Nel Hydrogen Electrolyser division.
SAGIM:
Nel has a 37% ownership stake in SAGIM, a French company that sells small scale hydrogen generator units.
Nel has an agreement with SAGIM whereby the company is allowed to use Nel’s diaphragm in their products.
The company operates under the Nel Hydrogen Electrolyser division.
RotoBoost H2 AS
This wholly owned subsidiary of New Nel Hydrogen AS holds all patented assets related to the RotoLyzer®, a
compact water electrolyser that provides the ideal solution for hydrogen refueling stations where space is
limited. Rotoboost H2 AS is incorporated in Norway with the organization number 912 756 699. The company
operates under the Nel Hydrogen Electrolyser division.
Inceptum 999 AS (to be renamed Hyon AS)
A joint venture between Nel ASA (33%), Hexagon Composites ASA (33%) and PowerCell Sweden AB (33%).
The parties aim at leveraging their respective capabilities and technologies to offer integrated solutions. The
company will initially focus on opportunities in the maritime and marine segments as well as projects to leverage
renewable energy resources.
Nel Fuel AS
Nel Fuel AS is incorporated in Norway with the organization number 915 319 351, and is established to
represent Nel’s ownership in joint ventures related to hydrogen refuelling station infrastructure. The company
operates under the Nel Hydrogen Solutions division.
Everfuel US Inc.
Everfuel US Inc. is incorporated in the State of California in accordance with Californian law and operates under
the California General Corporation Law, with the company organisation number 36-4824190. The company
operates under the Nel Hydrogen Solutions division.
UNO-X Hydrogen AS
A joint venture between Uno-X (41%), Nel Fuel AS (39%) and Praxair (20%). The joint venture will build a
network of hydrogen refueling stations with hydrogen production, allowing fuel cell electric vehicles (FCEVs) to
operate in and between all the major cities in Norway. The company operates under the Nel Hydrogen Solutions
division.
Everfuel Denmark A/S
At the time of this Prospectus, the Everfuel A/S structure has been established, but does not have any current
operations. Nel Hydrogen A/S is incorporated in Denmark and registered under number 384 56 695. The
company operates under the Nel Hydrogen Solutions division.
Nel Hydrogen A/S
This wholly owned subsidiary (former H2 Logic A/S) of Nel ASA continuously develops and manufactures the
H2 Station® hydrogen fueling station for FCEV refueling. Its production facility is located in Herning, Denmark.
Nel Hydrogen A/S is incorporated in Denmark and registered under CRV number 269 33 048. The company
operates under the Nel Hydrogen Fueling division.
Copenhagen Hydrogen Network A/S (“CHN”):
CHN (registered with the Danish Business Authority under CRV-number 36 41 389) is a joint venture agreement
between Nel Hydrogen A/S (former H2 Logic A/S) and Air Liquide Advanced Business S.A. whereby Nel
Hydrogen A/S owns a 1.1% stake of the shares. CHN was established by Nel Hydrogen A/S (then H2 Logic) in
2011 as a 100% owned subsidiary, with the purpose of establishing and operating a network of Hydrogen
38
Refueling Stations in Denmark. In June 2014 Air Liquide joined as investor and co-owner. The company
operates under the Nel Hydrogen Fueling division.
Danish Hydrogen Fuel A/S (“DHF”):
DHF (registered with the Danish Business Authority under CRV-number 360 39 264) is a joint venture
agreement between Nel Hydrogen A/S (former H2 Logic A/S) and the companies OK a.m.b.a. and Christian
Nielsen Strandmøllen A/S (“CNS”), whereby Nel Hydrogen A/S owns a 51.5% stake of the shares. Nel
Hydrogen A/S’s actual share of voting rights in DHF is at present 49.99% due to terms enshrined in the
shareholder’s agreement stating that no owner can have voting rights above 49.99%. Hence DHF is counted as
an affiliated company of Nel Hydrogen A/S, and not a subsidiary. DHF was established by Nel Hydrogen A/S
(then H2 Logic) in 2014 as a 100% owned subsidiary, with the purpose of establishing and operating a network
of Hydrogen Refueling Stations in Denmark (“HRS”). In January 2015 OK and CNS joined as investors and co-
owners of DHF. The company operates under the Nel Hydrogen Fueling division.
Nel Hydrogen Inc.:
At the time of this Prospectus, the Nel Hydrogen Inc. structure has been established in the State of California but
does not have any current operations. The company operates under the Nel Hydrogen Solutions division.
Nel US Inc.:
A company 100% owned by Nel ASA, and established for the purpose of acquiring Proton Energy Systems, Inc.
Proton Energy Systems, Inc.:
Proton Energy Systems, Inc. will become a wholly owned subsidiary of Nel US Inc. following Closing. For
more information regarding the company see section 9.
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7.3 HISTORICAL BACKGROUND AND COMPANY DEVELOPMENT
The Company was incorporated on 3 June 1998 under the name DiaGenic ASA. On 21 October 2014, the
Company changed its name to Nel ASA following the acquisition of New Nel Hydrogen Holding AS. The
Company has been listed on Oslo Børs since 2004. The below table outlines a high-level overview of the
Company’s history. Section 7.3.1 to 7.3.7 below outlines key milestones under the Nel name in more detail,
presenting the Company’s development as a hydrogen technology company (the principal activity of the
Company).
Year Key milestones & events
History under the DiaGenic name
1997 ............................................................................................................................................... Medical concept discovered
1998 ............................................................................................................................................... DiaGenic founded 2000 ............................................................................................................................................... Full time research 2002 ............................................................................................................................................... Proof of concept 2004 .............................................................................................................................................. First patent granted (US/EU) 2004 .............................................................................................................................................. DiaGenic merged with listed company Mefjorden ASA and received approval to remain listed
2006 ............................................................................................................................................... Prototype diagnostic tests developed for Breast Cancer and Alzheimer’s disease 2007 ............................................................................................................................................... Breast Cancer diagnostic test enters clinical trials 2008 ............................................................................................................................................... Parkinson’s Disease pilot study initiated 2008 ............................................................................................................................................... Product launch of Breast Cancer test in India
2009 ............................................................................................................................................... Breast Cancer and Alzheimer’s test CE market 2009 ............................................................................................................................................... First distribution agreement for Europe
2013 ............................................................................................................................................... The board and management decide to restructure the Company
2013 ............................................................................................................................................... All commercial activities for ADtect® were terminated 2013 ............................................................................................................................................... Validation study for MCItect® failed to reach the study goals
2013/2014 ...................................................................................................................................... All of the staff and management left the Company
History under the Nel name
2014- October ............................................................................................................................... The Company enters into the hydrogen electrolysis sector through the acquisition of New Nel
Hydrogen Holding AS and changes its name to Nel ASA
2015- May ..................................................................................................................................... Nel acquires H2 Logic, a supplier of Hydrogen Refueling Stations
2015- August ................................................................................................................................. Nel acquires RotoBoost H2 AS which holds all assets related to the RotoLyzer®
2015- December ............................................................................................................................ Jon André Løkke appointed CEO of Nel, effective 4 January 2016
2016- March ..................................................................................................................................
Nel establish a joint venture Uno-X Hydrogen AS, owned by Uno-X, Nel and Praxair with an
ownership stake of 41%, 39% and 20% respectively, with the intent of installing 20 hydrogen
refueling stations, covering all the major cities in Norway by 2020
2016- April .................................................................................................................................... Nel launched their next generation hydrogen refueling station: the H2Station®
2016- April .................................................................................................................................... Nel initiates feasibility partner study for large-scale hydrogen production in Norway
2016- April .................................................................................................................................... Nel enters into a LOI with Meløy Energi AS and Meløy Næringsutvikling AS to re-establish
large-scale hydrogen production in Glomfjord
2016- May ..................................................................................................................................... Nel enters into a partnership agreement with GREENSTAT AS for the development of large- and
small scale hydrogen production facilities in Norway based on renewable energy
2016- June ..................................................................................................................................... Bent Skisaker appointed new CFO of Nel, effective 1 September 2016
2017- February .............................................................................................................................. Nel enters into an agreement with SunPower to build and operate the first solar-driven hydrogen
production plant in USA
2017- February .............................................................................................................................. Nel enters into a framework contract for the supply, construction and maintenance of H2Station®
hydrogen fueling stations in California for Royal Dutch Shell Plc (“Shell”) in a partnership with
Toyota Motor Corp 2017- April .................................................................................................................................... Nel signes final Joint venture agreement with Hexagon Composites ASA and PowerCell Sweden
AB to establish a joint venture (JV) for the development of integrated hydrogen projects
2017- April .................................................................................................................................... Nel acquires Proton OnSite
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7.3.1 Entering the hydrogen business – change of name from DiaGenic to Nel
Nel (formerly DiaGenic historically developed diagnostic tests based on peripheral gene expression for early
detection of Alzheimer’s disease, Parkinson’s disease and breast cancer. On 28 October 2013, the Company
announced that its board of directors and management would be seeking to restructure the Company. The board
then initiated the process of giving notice to all staff, which was concluded in October 2013. On 25 February
2014, an extraordinary general meeting approved a rights issue. The proceeds were to be used to fund the
evaluation and pursuit of growth and/or development opportunities in the Company’s existing business areas, as
well as new opportunities in the biotech/pharmaceuticals sector and other market segments.
On 8 October 2014, the Company acquired 100% of the shares in New Nel Hydrogen Holding AS for a total
consideration of NOK 120 million. The transaction was financed through NOK 40 million in cash and NOK 80
million in shares. The consideration shares issued were valued at NOK 0.65 per share. The purchase price
allocation identified fair value adjustments on intangible assets of NOK 98.5 million, of which the following
assets were identified: customer contracts of NOK 9.6 million, related customer relationships of NOK 33.0
million, technology of NOK 9 million, deferred tax on excess value amounts of NOK 13.9 million, and the
remaining value of NOK 60.8 million allocated to goodwill.
The acquisition represented a change in strategic direction for the Company to include a new business area. The
pharmaceutical activities remained as a separate business area within Nel. As per end of 2016 the pharmaceutical
activities are limited to having a licence agreement with a third party. On 21 October 2014, the Company
changed its name to Nel ASA and subsequently its ticker on Oslo Børs to NEL.
7.3.2 Bankruptcy and subsequent restructuring
New Nel Hydrogen (prior to being acquired by the Company) is based on Nel Hydrogen AS, which went
bankrupt in June 2013. At the time of its bankruptcy, the company had incurred significant claims and liabilities
associated with three major projects the company worked on at the time. The claims were far greater than the
company was able to cover. In addition, it was found that the company had unlimited financial liability exposure
going forward on two of the projects.
After the bankruptcy the assets were purchased out of the bankruptcy by New Nel Hydrogen, in consultation
with the former owners (Ferncliff) of Nel Hydrogen together with Nel Hydrogen's bank DNB.
New Nel Hydrogen renegotiated the existing contracts and now believes the risk profile in their current projects
to be acceptable and balanced. While the Nel Hydrogen group prior to the bankruptcy had about 40 employees,
the New Nel Hydrogen group had in 2014 approximately 20 employees, but with the same capacity for delivery
as the previous company.
Ferncliff re-entered as an investor in New Nel Hydrogen in 2014.
7.3.3 Acquisition of H2 Logic AS
On 31 May 2015, Nel acquired H2 Logic AS for a total consideration of NOK 300 million which was settled in
cash and shares, split by NOK 100 million and NOK 200 million respectively. The share consideration issued
was valued at NOK 1.35 per share. The purchase price allocation identified fair value adjustments on intangible
assets of NOK 286.6 million, of which the following assets were identified; customer relationships of NOK 2.7
million, technology of NOK 21.4 million, financial assets of NOK 6.2 million and deferred tax on the excess
value amounts to NOK 6.0 million. The remaining value left a recognized goodwill of NOK 262.3 million
By acquiring H2 Logic (now named Nel Hydrogen A/S) Nel entered into a larger portion of the hydrogen value
chain from hydrogen production using electrolysis through to the hydrogen refueling station end market. The
acquisition represented a step forward in the energy carrier market with gained competence from H2 Logic
within the hydrogen transport market.
7.3.4 Acquisition of RotoBoost H2 AS
On 13 August 2015, the Company acquired RotoBoost H2 AS for a conditioned acquisition price. The base
purchase price was NOK 8.0 million, whereas the conditioned fulfilment of 2 specific conditions/milestones will
increase the total consideration with respectively NOK 2.0 million and NOK 3.0 million to a total of NOK 13.0
million (as of the date of this Prospectus the conditions are not yet fulfilled). The acquisition was financed
through cash payment. The transaction was closed and the shares were transferred to Nel on 20 September 2015.
41
The purchase price allocation identified fair value adjustments on intangible assets of NOK 2.2 million, of which
NOK 2.2 million was allocated to technology, NOK 0.6 million was identified as deferred tax on the excess
value, and the remaining value of NOK 0.6 million was allocated to goodwill.
The target company, RotoBoost H2 AS holds all assets required to the RotoLyzer® which is a pressurized,
compact electrolyser, which utilizes a vertical, rotating cell pack, providing full operational flexibility while
allowing for low production costs. The technology is patented and has been verified through extensive testing.
7.3.5 Nel establishes a joint venture: Uno-X Hydrogen
On 3 December 2015, Nel Fuel AS signed a Letter of Intent with Uno-X Gruppen AS, part of Reitangruppen AS,
for the rollout of minimum 20 hydrogen refueling stations covering all the major cities in Norway within 2020.
The companies established a joint venture Uno-X Hydrogen AS, owned by Uno-X and Nel Fuel AS with 51 %
and 49 % respectively.
On 24 May 2016, it was announced that Uno-X Hydrogen AS had entered into an agreement with a Norwegian
affiliate of Praxair, as a strategic alliance to install 20 hydrogen refueling stations, covering the major cities in
Norway by 2020. Following the agreement, Praxair’s Norwegian affiliate holds 20 % of Uno-X Hydrogen, with
Uno-X Gruppen and Nel holding 41 % and 39 %, respectively. The joint venture will build a network of
hydrogen refueling stations with hydrogen production, allowing fuel cell electric vehicles (FCEVs) to operate in
and between all the major cities in Norway. The stations will be deployed in cities like Oslo, Bergen, Trondheim,
Stavanger, and Kristiansand, along with corresponding corridor locations.
The first station opened in November 2016 in Sandvika. In December 2016 Nel was awarded a contract from the
Uno-X Hydrogen to build a hydrogen fueling station in Bergen.
7.3.6 Nel establishes a joint venture: Inceptum 999 AS (to be renamed Hyon AS)
On 19 January 2017, Nel ASA signed a Letter of Intent with Hexagon Composites ASA and PowerCell Sweden
AB to establish a joint venture for the development of integrated hydrogen projects. The agreement was signed
on 20 April 2017.
The Joint Venture is equally owned by Nel, Hexagon Composites ASA and PowerCell Sweden AB, and
represents a one-stop-shop for customers wanting to utilise hydrogen technologies across the value chain: From
renewable hydrogen production, to storage, distribution and dispensing, to generating electricity via fuel cells.
The jointly-owned entity manages and develops the projects to ensure that technologies from the partners are
effectively integrated into complete and optimal solutions for the customer.
7.3.7 Acquisition of Proton OnSite.
On 28 April 2017, the Company signed a final share purchase agreement to acquire 100% of Proton Energy
Systems Inc.(“Proton OnSite”) for an acquisition price of USD 70.0 million. For further information regarding
the Acquisition see section 5.
For information on the purpose of the Company as set out in the Articles of Association, reference is made to §3
of the Articles of Association, which are incorporated in section 0 of this Prospectus hereunder.
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7.4 BUSINESS OBJECTIVES AND STRATEGY
7.4.1 Business objectives
Nel is a global hydrogen technology company, delivering solutions to produce, store and distribute hydrogen
from renewable energy. The Company serves industry, energy and gas companies with hydrogen technologies,
and offers solutions covering the entire value chain, from hydrogen production to manufacturing of hydrogen
fueling stations, providing all FCEV’s with comparable fast fueling and long range as conventional vehicles
today.
7.4.2 Business strategy
Nel currently covers a large portion of the hydrogen value chain, from hydrogen production solutions based on
water electrolysis, through to the hydrogen refueling station end market. By targeting a broader market and
continuously improving its products, Nel aims to maintain and strengthen its position as a global manufacturer of
electrolysers and hydrogen fueling stations, and to play an important role in the different markets for utilisation
of hydrogen. Nel has a strong focus on increasing market shares through existing markets and further expansion
in Europe, US and Asia.
The Company’s strategy is to grow its revenues in an attractive market that is expected to grow rapidly in the
coming years. The Company has today invested in an indirect cost base, mainly related to overhead and
administration, to support and position the Company for growth in the coming years. The Company anticipates
that future growth in revenue will benefit from scale advantages on the indirect cost base, and hence contribute
positively to profit margins. In addition, the Company foresees to benefit from cost improvements through larger
scale production and general improvements and rationalizations in production. Hence, the Company anticipate to
improve its profitability as it grows its revenue through improving gross margins and lower ratio of indirect costs
in percent of revenue.
The following constitute the foundation for Nel’s strategy in the respective segments going forward:
Nel Hydrogen Electrolyser:
Nel is already positioned in the traditional industrial market for hydrogen as an input factor, and has made
several deliveries to new industrial markets. The Company saw a high level of sales leads both in the traditional
and new markets in 2016, including strong interest in Nel’s new containerised turn-key solution: the C-series.
In the coming years Nel expects to commercialize both low and high capacity pressurized electrolysers,
including the RotoLyser®. Furthermore, Nel will continue to develop its product portfolio on both a
technological basis and through standardization to enable the Company to offer even more competitive products.
One of the key markets Nel currently is focusing on is the market for hydrogen as an energy carrier. The market
is presently still in a nascent stage, however, given that the market is potentially several times larger than the
present electrolyser market, Nel expects to place high priority on products that fit this market. The market is
related to the growth in renewable energies and the shift from fossil to renewable fuels, which is gaining
momentum globally. The energy-markets set new demands for the flexibility on the production of hydrogen in
order to “follow” the natural fluctuations which occur with renewable electricity generation from e.g. wind and
solar power, also referred to as “power-to-gas”. Pressurized electrolysers perform this task with greater ease than
atmospheric ones (through elevating the pressure in the electrolyser, the flexibility increases as a result, i.e. the
gas takes less space, and makes the electrolysers more compact), and PEM electrolysers specifically have
through the last years proven to perform this task also for larger size electrolysers.
The acquisition of Proton OnSite is a strategic action with regards to this market, which will give Nel access to
advanced, pressurized PEM–technology and commercially mature products which are ideal for the power-to-gas
market, as well as industrial segments which complements the segments where Nel today is most competitive.
Nel aims to apply its unique knowledge, experience and position within large scale hydrogen generators to the
new markets within hydrogen as an energy carrier, both through further development of atmospheric units and a
strengthened focus on pressurized electrolysers. Furthermore, high competence within energy systems will help
Nel provide solutions for energy storage applications.
With the acquisition of Proton OnSite, Nel now covers all relevant sizes and technologies in the electrolysis
market, which compromise of atmospheric- and pressurised- alkaline and PEM electrolysers. Throughout the
years both Nel and Proton OnSite have built up a considerable network of sales agents, as well as a solid
43
customer bases. Expanding the portfolio of products offered by Nel and Proton OnSite is an important measure
to drive sales growth through the combined company’s sales network.
Nel Hydrogen Fueling:
Nel aims to become a leading supplier of Hydrogen Refuling Stations (“HRS”), offering a complete solution
from production of hydrogen to refueling of vehicles. Nel’s Hydrogen Fueling division, which is primarily based
on Nel Hydrogen A/S (formerly H2 Logic) has already gained global footprint with delivery of more than 30
stations worldwide to 8 countries since 2003, and is currently strengthening their products by introduction of the
latest generation H2Station® in 2016, enabling higher capacity and a small and flexible footprint, making the
station relevant, both for new, purpose-built hydrogen stations, as well as for retrofitting conventional gasoline
stations with a fueling line for hydrogen. A high focus on technology development within Nel has also ensured
that the HRS from Nel have been the first to comply with the international standards for refueling. These
initiatives and Nel’s launch of its new fueling station are being timed with the global launch of hydrogen
FCEV’s.
Further potential improvement and development is expected with the new RotoLyzer®, providing an ideal
solution for hydrogen refueling stations where space is limited. Nel’s international presence, which will be
further strengthened by including the network from Proton OnSite means it is well positioned as the market for
hydrogen refueling stations grows. With no carbon footprint, hydrogen and electricity are set to become the main
energy carriers of the future. The superior energy efficiency, design and scalability of Nel Hydrogen’s unique
electrolyser technology are set to facilitate profitable growth in harmony with a zero-emission vision of the
future.
Additionally in the current phase of the development of the Company and the market in which the Company
operates, the Company is continuously evaluating and discussing with third parties opportunities such as
investments, M&A opportunities and strategic co-operations with existing or potential customers, or
combinations of the aforesaid. Such discussions may or may not materialize in firm commitments or contracts in
the near or mid-term future
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7.5 BUSINESS DESCRIPTION
7.5.1 Overview of current operations
As described in section 9.5 Nel is a global hydrogen technology company, delivering solutions to produce, store
and distribute hydrogen from renewable energy.
The Company is organized into three business areas along the hydrogen value chain. The following subsection
provides a detailed description of Nel’s three divisions: Nel Hydrogen Electrolyser, Nel Hydrogen Fueling and
Nel Hydrogen Solutions.
The figure below exhibits an overview of Nel’s presence in all end markets for hydrogen.
Electrolysis
Hydrogen production from water and
electricity
Energy storage
Hydrogen as a “battery” for
renewable energy
Distribution
methods
Onsite
Trucked in
Pipeline
Addressing all end markets for hydrogen
End markets
Hydrogen Refuelling Stations
Industrial end markets
Electrolyser = H2
Electricity
production
Renewable energy
7.5.2 Hydrogen Electrolyser
The Nel Hydrogen Electrolyser division is a global supplier of hydrogen production plants based on alkaline
water electrolyser technology. The business division dates back to 1927, when Norsk Hydro developed large-
scale electrolyser plants, providing hydrogen for use in ammonia production with fertilizer as the end-product.
Since then, the electrolyser technology has been improved continuously, and Nel Hydrogen Electrolyser has
accumulated unique experience and knowledge about hydrogen fueling stations and power-to-gas systems.
Traditionally, hydrogen is used as an input to a number of industrial applications, including as industrial
feedstock, to provide a protective atmosphere, and for other purposes. Relevant sectors include food production,
chemicals/refining, metallurgy, glass production, electronics, generator cooling, and the production of
polysilicon for use in PV solar panels.
Looking ahead, hydrogen will increasingly be utilised as an energy carrier, both to maximise the utilisation of
renewable energy and, subsequently, as a sustainable fuel for zero-emission FCEVs. With the commercial
introduction of FCEVs already taking place, Nel Hydrogen Electrolyser intends to supply the hydrogen fueling,
energy storage and power-to-gas markets.
HYDROGEN FUELING HYDROGEN
ELECTROLYSER
HYDROGEN SOLUTIONS
45
Water electrolysis (“electrolysis” for the purpose of this Prospectus) is the process of splitting water into
hydrogen and oxygen using an electrical current. The inputs to this process are simply water and electrical
power. Nel’s Hydrogen Electrolyser division is responsible for delivery of complete hydrogen plants including
both in-house electrolyser manufacturing and guidance to industrial customers who themselves perform the
installation, before Nel takes part in the commissioning and start-up of the plant. Nel has a global reach through
own sales representatives and an extensive agent network. Since 1927 Nel’s Hydrogen Electrolyser division has
delivered approximately 850 hydrogen solutions, and has delivered and sold to 60 countries worldwide. The
illustration below gives an overview of Nel’s global presence within the electrolyser market.
Main Office Local sales representatives Countries with installed NEL Hydrogen electrolysers
The water electrolyser market currently only accounts for a small fraction of the total hydrogen market, but is
expected to grow significantly in the coming years, primarily driven by increased fueling and energy storage
demand. By 2020, 40 % of renewable electricity is expected to take the form of wind and solar power according
to IEA (International Energy Agency).
A number of energy storage projects have been initiated worldwide, and Nel Hydrogen Electrolyser expects this
development to be a main driver of demand for hydrogen energy storage in the medium term. The sector has
specific interest in Nel Hydrogen Electrolyser, because the market growth is making Nel Hydrogen
Electrolyser’s portfolio of large-scale products increasingly relevant.
Nel Hydrogen Electrolyser started commercial sales of electrolysers in the 1970s, and has in total delivered
approximately 850 electrolyser units to a broad range of industries across Europe, South America, Africa and
Asia. Nel Hydrogen Electrolyser has production facilities in Notodden, Norway, and has a global reach through
its in-house sales apparatus and extensive network of agents.
Nel Hydrogen Electrolyser’s A-series of electrolysers are widely respected for their robustness, reliability and
energy efficiency. The products set a benchmark for competitors. When the products’ flexibility, ease-of-use,
high capacity and safety record are added to the list, the solutions are simply difficult to match.
Nel’s electrolyser division has also launched the new containerised C-range electrolysers, thereby offering a low-
cost, turn-key solution, which also offers among the smallest footprint, for commercially available,
containerised, high capacity electrolysers. The new configurations Nel C-150 and Nel C-300 are containerised
and will be offered in addition to the existing industrial A-series of electrolysers. The new products will have an
output capacity of 150 and 300 Nm3/hr respectively, which is equivalent to about 330 or 660 Kg/day. The
standard gas output pressure will be 200 bar, which makes these products ideal for producing renewable
hydrogen integrated with hydrogen fueling stations for cars, busses or other utility vehicles.
46
In addition, the company is developing the RotoLyzer®, a pressurised, compact electrolyser, which utilises a
vertical, rotating cell pack, providing full operational flexibility, while allowing for low production costs. This
opens up new market segments for Nel Hydrogen Electrolyser, and provides an ideal solution for hydrogen
fueling stations where space is limited, or integration with renewable energy sources. The technology is patented
and has been verified through extensive testing.
7.5.3 Hydrogen Fueling
The Nel Hydrogen Fueling division is a manufacturer of H2Station®, a hydrogen fueling station that provides
FCEVs with comprable fast fueling and long range as conventional vehicles today. The current business division
is primarily based on H2 Logic, which Nel acquired in May 2015 and subsequently renamed Nel Hydrogen A/S.
The division has since its incorporation in 2003 under H2 Logic, invested significantly in R&D, bringing
H2Station® to a level where products are offered to the early market for roll-out of larger networks of hydrogen
fueling stations.
Today, Nel and its Hydrogen Fueling division is one of few global suppliers of fast fueling for FCEVs.
H2Station® technology is in operation in several European countries, providing hydrogen fueling for FCEV’s
from major car manufacturers. In total Nel has delivered more than 30 stations in 8 countries since 2003.
Furthermore, Nel was among the first to achieve fast fueling of hydrogen in compliance with the SAE J2601
refueling standard, which is required by the major car manufacturers to ensure a safe and fast refuelling of
FCEVs. In Denmark, Nel has delivered H2Station® technology for the entire Danish network of hydrogen
fueling stations, operated in collaboration with international oil, energy and gas companies.
Aside from providing fast fueling, H2Station® technology has a long proven track-record of reliable operations
with more than 99 % availability – one among the highest recorded in the world for a scattered network of 24-
hour publicly available hydrogen fueling stations. The ambition is to keep this position and act as the preferred
supplier of hydrogen fueling stations for international infrastructure operators such as oil, energy and gas
companies.
7.5.4 Hydrogen Solutions
Nel Hydrogen Solutions division was established to generate potential market opportunities across the Group.
Hydrogen Solutions offers efficient system integration, project development and sales across all of Nel’s
divisions.
Hydrogen fueling networks:
There is a growing demand for hydrogen fueling networks, following the introduction of commercial Fuel Cell
Electrical Vehicles (FCEV) from international car manufacturers. Nel has the technology and experience to
efficiently build several renewable hydrogen fueling networks.
Renewable hydrogen:
Nel offers a complete turnkey hydrogen production and fueling solution. Starting from 100kg/day and larger, Nel
provide the solution that suits the customers’ needs. H2Station® combining fueling of cars, busses and trucks,
will help grow business and grant fast return on investment for station owners. Nel provides turn-key
installation, offering multiple operation and maintenance services for its customers.
Storage solutions:
Hydrogen will likely play a major part in the future energy society, as intermediate energy storage in renewable
energy systems. Nel’s high performance, scalable electrolyser technology stores surplus energy from solar and
wind power, allowing energy suppliers stable and flexible delivery of electricity. When required, Nel also
integrate equipment components from other global suppliers, into the customised Nel solution.
Nel Hydrogen Solutions aims to be the preferred business partner for the hydrogen industry in California, Japan
and Germany for the development of hydrogen solutions across the value chain, from hydrogen fueling stations
networks to large-scale renewable hydrogen production plants. Nel Hydrogen Solutions leverages on the
experience from delivering and operating the entire Danish hydrogen network, in collaboration with global oil-,
energy- and gas companies.
Nel Hydrogen Solutions will also be responsible for the deployment of equipment to Uno-X Hydrogen and the
building of a network of hydrogen fueling.
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7.6 PROCESS DESCRIPTION AND LAYOUT
7.6.1 Nel Hydrogen Electrolyser
7.6.1.1. Alkaline electrolysis
Electrolysis takes place when an electric current flows through an electrolyte (water with 25% potassium
hydroxide “KOH” concentration) from an anode to a cathode. Water molecules are instantly split into hydrogen
and oxygen in a volume ratio of 2:1. The oxygen is usually released to the atmosphere, while the hydrogen will
undergo further treatments, depending on the use for which it is intended. The below figure provides an
illustration of the electrolysis process.
Alkaline electrolysis process diagram
Transformer and rectifier:
The transformer and rectifier are used to convert the AC high voltage supply into DC current input.
Electrolyser:
Hydrogen and oxygen are produced through electrolysis of water. The electrolyser is of the filter press type with
bipolar electrodes separated by diaphragms. Hydrogen gas is generated at the cathode and the oxygen at the
anode. The gases bubble up through the electrolyte to be conveyed by internal ducts into separation tanks at the
front of the electrolyser.
Electrolyte system:
This module consists of two gas separators and the electrolyte recirculation system. In the separators the
electrolyte is recovered and is then chilled and recycled into the cell block. The electrolyte, which consists of a
25% aqueous potassium hydroxide solution, acts as a catalyst to speed up the reaction and to remove evolved
heat in the electrolyser.
Scrubber:
The scrubber serves three main functions: i) remove residual traces of electrolyte ii) cool down the hydrogen and
iii) feed water tank.
Gas holder:
The gas holder is a buffer tank installed between the electrolyser and the compressor. If required, the hydrogen
gas is compressed to the required level by one or more compressors. It compresses the gas from atmospheric
pressure in the gas holder to the required pressure.
Deoxidiser and dryer:
From the gas scrubber, the hydrogen has a purity level of 99.9%. If a higher purity level is required, the gas can
be further purified. The impurities consist almost entirely of oxygen and water (in addition to nitrogen). The
oxygen and water are easily removed. The oxygen is removed by a catalytic recombination with hydrogen in a
deoxidiser. The gas is dried by a twin absorption system consisting of two towers that are filled with a desiccant
Source: NEL ASA
48
to absorb the water. One tower is in operation, while the other one is being regenerated. The result is very high
purity hydrogen.
7.6.2 Nel Hydrogen Fueling
7.6.2.1. Hydrogen supply flexibility
Hydrogen can be produced centrally or at the fueling station (on-site) from a range of energy sources, both fossil
and renewables. This enables market regions and countries to optimize the hydrogen supply to the energy
sources, and make it domestically available and hence increase security of energy supply.
Hydrogen production from natural gas achieves higher energy efficiency over the entire supply chain compared
with gasoline powered vehicles, whilst achieving zero tailpipe emissions1. Production based on electricity can,
when based on renewables, enable a fully zero emission supply. In addition, hydrogen production can also be
used to balance and store, and thus integrate larger shares of fluctuating renewable energy in power grids.
For markets where electricity is the preferred energy source for hydrogen production, Nel’s electrolyser products
can be offered together with H2Station® from Nel.
H2Station® is designed to connect to any hydrogen supply mode (delivered or onsite). Inside the H2Station®
hydrogen is compressed and stored before being fuelled into the vehicle. The core technology is the control and
cooling systems as this ensures a fast, safe and complete fueling of the vehicle according to the SAE J2601
standard, which is required by the car manufacturers. In addition, the entire system and plant design is the key to
achieve a stable and reliable system, ensuring a high availability for vehicle users. Nel has through its subsidiary
Nel Hydrogen A/S filed and published patents covering various features in the fueling process (see section 7.14).
The fueling nozzle is a global industrial recognized standard, enabling fueling of any vehicle type. For cars a
fueling pressure of 70MPa (700bar) is used by most car manufacturers to ensure a long range comparable to
gasoline. For busses and industrial vehicles such as forklifts 35MPa (350bar) is sufficient to cover the daily duty
cycles.
The below figure provides an illustration of the H2Station® process layout
H2Station® process layout
1 Only tail pipe emission from a Fuel Cell Electric Vehicle is water vapour
49
7.7 PRODUCT OFFERING
The figure below sets out an overview of Nel’s current products, split by business segments.
HYDROGEN ELECTROLYSER HYDROGEN FUEL
H2Station®A-series RotoLyzer
NEL C-150 NEL C-300
C-e
rie
s
* To be commercialized
3.3 x 2.2 m 0.5 x 0.5 m
7.7.1 Nel Hydrogen Electrolyser
7.7.1.1. Atmospheric electrolyser: The A-range
One of Nel’s main markets is atmospheric electrolysers. The Company’s product line (“NEL A”) consists of
three separate electrolysers: NEL A-150, NEL A-300, and NEL A-485. Each product has a different production
capacity range, but is based on similar technology. The outlet pressure of the electrolyser is up to 1,000 bar after
compression. These electrolysers operate at atmospheric pressure and are tailor-made hydrogen plants for on-site
production.
Nel’s atmospheric electrolyser plants are delivered in separate modules and installation is performed at the
customer’s location. The product offering is an asbestos free solution.
Nel’s A-series of electrolysers are based on proven technology with more than 500 deliveries worldwide. Nel’s
atmospheric electrolysers are used in a variety of applications including large scale traditional industry (requiring
50-500+ Nm3/h), renewable industry (e.g. polysilicon production requiring 500+ Nm3/h) and energy carrier
applications such as synthetic fuel and utility scale energy storage (requiring 150-500+ Nm3/h).
The benefits of Nel’s atmospheric electrolysers include: i) reliable hydrogen supply, ii) high flexibility and iii)
cost-efficient solutions.
i. Nel’s A-series of electrolysers are based on decades of development and are able to deliver non-stop
hydrogen supply for years without need for maintenance shut-down (a replacement of the cell stack
would typically be required after approximately 7 to 10 years). On-site electrolyser production enables
customers to control their own supply of hydrogen.
ii. Quick start-up and shut-down of the electrolyser plant allows for flexible hydrogen production
according to the end user’s demand. Nel’s atmospheric electrolysers have a robust operational range
and can be automatically adjusted to produce between 20% and 100% of the installed capacity.
Because of their modular design, the Nel A-series can be pre-designed for future expansion of
capacity.
iii. The Nel A-series of electrolysers use special catalytic coating that provides the most energy efficient
electrolysers in the market, thereby reducing operating costs. Additionally, with Nel’s PLC control
system, the plant runs automatically and unattended, whereby only routine shift inspections are
required.
50
7.7.1.2. Containerised electrolyser: The C-series
In 2016 Nel launched a new containerised electrolyser; The C-series, which compromise of two new
configurations: NEL C-150 and NEL C-300. The new series offers a low-cost, turn-key solution, representing
among the world’s smallest footprint for commercially available, containerised, high capacity electrolysers. The
footprint of the C-series is approximately 115 m2, representing a footprint of ~25% of the closest comparable
electrolyser in the market.
The products will have an output capacity of 150 and 300 Nm3/hour respectively, which is equivalent to about
330 or 660 Kg/day. The standard gas output pressure will be 200 bar, which makes these products ideal for
producing renewable hydrogen integrated with hydrogen fueling stations for cars, busses or other utility vehicles.
The Company launched the Nel C-series in August 2016. One contract is signed (delivery autumn 2017), and
several offers are in the pipeline.
7.7.1.3. Pressurized compact electrolyser: The RotoLyzer®
The Company is developing the RotoLyzer®, a pressurized, compact electrolyser, which utilizes a vertical,
rotating cell pack, providing full operational flexibility, while allowing for low production costs. This opens up
new market segments for Nel, and provides an ideal solution for hydrogen fueling stations where space is
limited, or integration with renewable energy sources.
The RotoLyzer®, utilizes a vertical, rotating cell pack, leading to several advantages in the production of
hydrogen. The technology is patented and has been verified through extensive testing.
Nel is focusing on a commercialization of the RotoLyzer® electrolyser with target of market introduction late
2017.
7.7.2 Nel Hydrogen Fueling
7.7.2.1. Hydrogen refueling station: The H2Station®
In April 2016 Nel launched the latest generation H2Station®. The new product is a result of three years of
ongoing development of new and patented technologies. The product has a capacity of 200 kg/day, and has a
footprint of 10m2.
The H2Station® features a new, in-house designed hydrogen dispenser, which is 1/3 the size of a normal
dispenser. The new H2Station® dispenser can be located up to 50 meters away, which enables flexible
integration of hydrogen alongside other fueling products, even at very compact sites.
The new refueling station can be supplied by centralized hydrogen production delivered by truck, as well as
onsite production of hydrogen, enabling Nel to deliver a complete solution to the customer. The hydrogen supply
can be made fully green by using a large-scale electrolyser from Nel’s Hydrogen Electrolyser division. This
enables use of renewable electricity for the hydrogen production.
H2Station® is assembled at the factory and shipped in a standard container. It allows for a fast start of operation
with minimal impact on the daily operation of the gas station site during installation. The H2Station® can be
packaged using standard or customized enclosure designs ensuring any desired visual appearance and integration
with the surroundings on both Greenfields and Brownfields.
The H2Station® builds on the operational legacy of the former CAR-100, which is used in multiple countries
across Europe and has a documented high performance with close to 99 % availability.
The station is designed for lean volume manufacturing at the world’s largest factory for hydrogen refueling
stations. When ramp-up and plant optimization is complete, the facility will have a name-plate production
capacity of up to 300 refueling stations per year, sufficient for refueling 200 000 new FCEV’s annually.
51
7.8 CUSTOMERS
7.8.1 Hydrogen Electrolysers
Nel has strong customer relations within a variety of industries. Nel’s atmospheric electrolysers have been
installed in more than 50 countries across the world. The following figure depicts customer concentration in
terms of new build sales of electrolysers since 1974. Nel’s customers are typically industrial companies that
require hydrogen in their production process.
Customer concentration (new build sales for the period 2000 to 2014)
Small
Medium
Large
Asia
Nordic
Europe
Africa/Middle East
Latin America
CIS (former
Soviet)
Source: Company Estimates
Note: Large denotes electrolysers with a capacity range of 150-500 Nm3/h, Medium denotes electrolysers with a capacity range of 60-150
Nm3/h, and Small denotes electrolysers with a capacity range of 10-60 Nm3/h
The Company’s customer base is dominated by Nordic, Asian and European companies that require large scale
electrolysers. These customers are concentrated in the industries described further in section 8.6. In recent years,
polysilicon producing companies have taken a larger share of new build sales, large electrolysers new build sales
have outpaced both small and medium size electrolysers and Asian companies have commanded a larger market
share of Nel’s electrolyser new builds sales.
7.8.2 Hydrogen Fueling
Nel’s Hydrogen Fueling division has a diverse income model that includes different contractual relations with
customers as outlined in the figure below.
Customer service contracts
52
7.9 GRANT AGREEMENTS
Nel is continuously securing grants from national and European public programs to support the Company’s R&D
and demonstration efforts. The majority of grants are awarded separately towards Nel’s business divisions; Nel
Hydrogen Electrolyser and Nel Hydrogen Fueling respectively.
Both Nel Hydrogen Electrolyser and Nel Hydrogen Fueling have had a continuous and growing pipeline of
public grants. This means that several grant contracts are under execution, negotiation and planning at the same
time. The grants received are primarily used for development of new and current technologies and products.
The below tables provide a more detailed outline of public grants received since 2014. Note that grants received
over multiple years are split equally between years.
Grantor/ type of grants Country Amount
2014 (DKK)
Energistyrelsen (EUDP) Denmark 2,239,650
Energistyrelsen (EUDP) Denmark 14,958,750
Total 17,198,400
2014 (NOK)
Innovation Norway Norway 300,000
EU Council Norway 283,489
Total 583,489
Grantor/ type of grants Country Income (NOK) Reduction of Cap. R&D Amount
2015 (NOK)
FCH-JU EU 10,074,181 10,074,181
Energistyrelsen (EUDP) Denmark 716,168
716,168
Transnova / Enova Norway
3,337,755 3,337,755
Energistyrelsen (EUDP) Denmark
3,937,099 3,937,099
Det Strategiske Forskningsråd (DSF) Denmark 808,414 808,414
Total
10,790,349 8,083,268 18,873,617
2016 (NOK)
HyfillFast Denmark 520,860 263 478 784,339
Copernic Denmark 167,330 0 167,330
H2Cost Denmark 0 524 215 524,215
REST Denmark 0 913 245 913,245
HyBoost Denmark 0 9 599 866 9,599,866
HyFAST EU Denmark 15,799,098 0 15,799,098
New Bus Fuel Denmark 207,710 0 207,710
H2ME1 Denmark 4,035,860 0 4,035,860
Phaedrus Denmark 0 0 0
Hyac Denmark 0 0 0
H2ME2 Denmark 0 5,969,564 5,969,564
Innovasjon Norge Norway 300,000
300,000
Norsk Forskningsråd Norway 75,360
75,360
Total 21,106,218 17,270,368 38,376,587
53
7.10 JOINT VENTURE AND OTHER AGREEMENTS
7.10.1 Joint ventures in Nel Hydrogen A/S
Nel Hydrogen A/S has two joint venture agreements associated with the companies Copenhagen Hydrogen
Network (“CHN”) and Danish Hydrogen Fuel (“DHF”). The joint venture approach has been applied in
Denmark as a mechanism for roll-out of a wide HRS network. For Nel it creates additional sale of H2Station®
products and services to the joint ventures. For the partners in the joint ventures the set-up ensures that all
competences for a successful roll-out are available.
With regards to CHN, the scope of the supply contracts for Nel Hydrogen A/S includes five HRSs based on the
H2Station® including on-site Hydrogen production. All five have been delivered and are in daily operation in
across Denmark. The partner in CHN is Air Liquide Danmark A/S (“AL”). AL is a global supplier of industrial
gas. Combined the partners in CHN has the competence and knowledge required for continuing to expand the
Danish HRS network as sale of fuel cell electric vehicle (“FCEV”) grows.
With regards to DHF, the scope of the supply contracts for Nel Hydrogen A/S includes up to five HRSs based on
the H2Station® contract. At present, a fourth repeat order for one H2Station® has been delivered. The partner in
DHF is OK Aa.m.b.a. Christian Nielsen Strandmøllen A/S (“CNS”). CNS is a supplier of industrial gas in
Denmark and Sweden for almost 100 years and is operating the only hydrogen electrolysis production plant in
Denmark (supplied by Nel). OK is a energy company in Denmark operating 670 conventional fueling stations,
almost 1/3 of the entire Danish network. Combined the partners in DHF has the competence and knowledge
required for continuing to expand the Danish HRS network as sale of FCEV grows.
7.10.2 H2Station® CAR-100 technology agreement for Japanese market
On July 10 2015, Nel Hydrogen A/S executed a binding technology transfer agreement with M Mitsubishi
Kakoki Kaisha, Ltd. (“MKK”) listed on the Tokyo stock exchange and a member of the Mitsubishi Group
companies. The agreement includes a technology transfer and adaption of the H2Station® CAR-100 product for
the Japanese market with the aim to achieve the first station in operation during 2016. The technology will be
licensed from Nel Hydrogen A/S to MKK, and the Company will assist in adapting the design for use in Japan.
The collaboration will provide Nel with access to the Japanese market
7.10.3 Glomfjord Hydrogen AS
A joint venture between Nel ASA (28,5%), Greenstat AS (28,5%), Meløy Energi AS (28,5%) and Meløy
Utvikling (14,3%) to invest in and build a large scale hydrogen production facility in Glomfjord, taking
advantage of local, low-cost renewable hydro power, and sell hydrogen to customers in the surrounding region. 7.10.4 Uno-X Hydrogen AS – a joint venture between Nel, Uno-X and Praxair
A joint venture between Uno-X Gruppen (41%), Nel Fuel AS (39%) and Praxair (20%) for the rollout of
minimum 20 hydrogen refueling stations and adjoining hydrogen production capacity to cover the major cities in
Norway within 2020. See section 7.3.5 for further details.
7.10.5 Framework agreement with SunPower
A framework agreement with SunPower to construct and operate renewable hydrogen production tied directly to
solar, representing the First project of its kind in the U.S., located in California.
7.10.6 Framework contract with Shell Plc.
A framework contract for the supply, construction and maintenance of H2Station® hydrogen fueling stations in
California for Royal Dutch Shell Plc in a partnership with Toyota Motor Corp.
7.10.7 Inceptum 999 AS (to be renamed Hyon AS) – a joint venture between Hexagon Composites ASA
and PowerCell Sweden AB
An equally owned joint venture to pursue hydrogen opportunities. The Parties aim at leveraging their respective
capabilities and technologies to offer integrated solutions. The joint venture will initially focus on opportunities
in the maritime and marine segments as well as projects to leverage renewable energy resources. See section
7.3.6 for further details. In connection with the newly established JV the newly established company decided at
their AGM on 31 May 2017 that each party were to invest NOK 1.5 million into the company.
54
7.11 KEY COMMERCIAL PUBLIC ANNOUNCEMENTS RECENT YEAR
Source: Newsweb, Oslo Børs
Date of announcement Key commercial public announcement
s 14 January 2016 ............................................................................................................................ Nel Fuel AS, a subsidiary of Nel ASA, was awarded a grant by Enova SF in excess of NOK 7.5
million for the construction and completion of one hydrogen refueling station as a part of Nel’s
strategy for the rollout of a network of refueling stations in Norway. Enova SF is the Norwegian
government enterprise responsible for promotion of environmentally friendly production and
consumption of energy.
1 April 2016 .................................................................................................................................. Nel ASA, through its subsidiaries, Nel Hydrogen AS and H2 Logic A/S, has was awarded a
contract of approximately NOK 25 million for the delivery of a hydrogen refueling station with
integrated on-site hydrogen production to Uno-X Hydrogen AS.
21 April 2016 ................................................................................................................................ Nel ASA, through a subsidiary, announced the entry of a Letter of Intent with Meløy Energi AS
and Meløy Næringsutvikling AS to establish Glomfjord Hydrogen AS (Glomfjord Hydrogen), for
the potential development of a large-scale, low-cost hydrogen production facility in Glomfjord
Industrial Park in Meløy, Norway.
4 May 2017 ................................................................................................................................... Nel ASA announced a partnership agreement with GREENSTAT AS for the development of
large- and small scale hydrogen production facilities in Norway based on renewable energy.
23 June 2016 ................................................................................................................................. Nel Hydrogen Solutions (formerly branded as a part of H2 Logic) announced the entry into an
agreement with the City of Mariestad for the sale and construction of a H2Station®. The
hydrogen fueling station will be located in the strategic Gothenburg-Stockholm corridor, and will
complete the last leg in connecting the Scandinavian capitals.
22 August 2016 ............................................................................................................................. Nel Hydrogen Solutions secured a repeat-order for two new H2Station® hydrogen stations from
an undisclosed European customer. Nel Hydrogen Fueling, formerly known as H2 Logic A/S and
a division of Nel ASA, has initiated production of H2Station®,the latest generation H2Station®.
9 September 2016 .......................................................................................................................... Nel Hydrogen Electrolyser, was awarded a contract by Marsa, a global producer of margarine
and liquid oils, for the delivery of a hydrogen electrolyser plant with supplementary equipment.
The agreement has a total value of around EUR 1 million.
28 September 2016 ........................................................................................................................ Nel Hydrogen Solutions, a division of Nel ASA was awarded a contract by SIA Hydrogenis, a
hydrogen project developer in Latvia, for the delivery of the new dual capability
H2Station®,which offers a combined hydrogen fueling solution for cars and buses in Riga.
5 October 2016 .............................................................................................................................. Uno-X Hydrogen AS, a Nel ASA joint venture, announced they were awarded a grant of NOK
19.8 million from the Norwegian public enterprise Enova SF, for an expansion of the Norwegian
hydrogen network with one hydrogen production facility and two hydrogen fueling stations in
Bergen.
12 October 2016 ............................................................................................................................ Nel Hydrogen Solutions, a division of Nel ASA, was awarded a contract by ASKO, Norway's
largest grocery wholesaler, for the delivery of a new solar-powered hydrogen production facility
and fueling station solution in Trondheim, enabling ASKO forklifts and delivery trucks to be
fuelled with locally produced renewable hydrogen.
12 October 2016 ............................................................................................................................ Nel Hydrogen Fueling was awarded two R&D grants totalling EUR 1.1 million from the Danish
EUDP program for the continued H2Station® hydrogen technology development.
13 December 2016 ........................................................................................................................ Nel Hydrogen Electrolyser, a division of Nel ASA, entered into an agreement with Instituto
Mexicano del Petróleo (IMP), a research institute, for the delivery of a Nel A-150 electrolyser
plant. With this agreement, Nel Hydrogen Electrolyser celebrates delivery to as many as 60
different countries worldwide.
15 December 2016 ........................................................................................................................ Nel Hydrogen Solutions, a division of Nel ASA, was awarded a contract by Uno-X Hydrogen AS
(Uno-X Hydrogen) to build the first H2Station® in Bergen, Norway.
19 January 2017 ............................................................................................................................ Nel ASA announced the entry into a Letter of Intent with Hexagon Composites ASA and
PowerCell Sweden AB to establish a joint venture for the development of integrated hydrogen
projects. The joint venture will initially focus on opportunities in the maritime and marine
segments as well as projects to leverage renewable energy resources.
13 February 2017 .......................................................................................................................... Nel Hydrogen Solutions, a division of Nel ASA was awarded a contract by Icelandic Hydrogen
for three H2Station® hydrogen fueling stations and a NEL C-series electrolyser.
15 February 2017…….. Nel announced the entry into an agreement with SunPower to build and operate the first solar-
driven hydrogen production plant in USA.
55
7.12 PROPERTY PLANT AND EQUIPMENT
As of 31 December 2016 Nel’s operating materials and properties at Notodden (Norway) and Herning
(Denmark) amounted to approximately NOK 4.5 million and NOK 40.9 million respectively.
The Company currently lease their main office at Karenslyst allé 20, 0278 Oslo Norway, with a duration until 16
November 2021. However the Company has a right to step out of the agreement from 16 November 2019, given
a prior notice of 6 months to the lessor.
Notodden, Norway:
Operations related to Nel’s Hydrogen Electrolyse division is located at the company’s facility at Notodden,
Norway. New Nel Hydrogen Eiendom AS, a subsidiary of New Nel Hydrogen Holding AS owns the production
building (“Bygg 160”) at Notodden. However, the ground is leasehold from Hydroparken AS, with a duration of
20 years from 1th September 2013, with right to extend additional 10 year with same conditions.
Bygg 160 has an area of 4,480 m2 and contains office facilities for production department, all production lines
and equipment used in production of electrodes for the hydrogen plants. Production capacity of 28 MW
electrolysis. Production capacity can be further expanded to 90 MW within the area of Bygg 160. Bygg 160 also
contains a laboratory, warehouse, storage and testing facilities.
The Company additionally leases facilities (“Bygg 1”) located at Heddalsvegen 11, 3674 Notodden, Norway.
The leasing contract with Hydroparken AS has a duration until July 2018. Bygg 1 contains office facilities for
administration, sales, project and engineering.
Parts of the operating materials of Nel Hydrogen Electrolyse division were purchased from DNB in July 2013 in
accordance with the company’s restructuring process further described in section 7.3.2. These materials mainly
consist of the following: three production lines, a treatment plant (cleaning water), an industrial washing
machine, sandblasting equipment, two forklifts, test station for testing of new high pressure products, a sinter
furnace, three storage tents, special tools and jigs, measuring equipment, a laboratory and warehouse and storage
equipment.
Herning, Denmark:
Operations related to Nel’s Hydrogen Fueling- and Solutions division are located at the company’s facility at
Industriparken 348, 7400 Herning, Denmark. Nel currently owns two buildings at Herning. The existing building
was acquired during 2014 by Nel Hydrogen A/S (formerly H2 Logic), after several years of rental. Nel
purchased a new factory in 2016, which is currently under reconstruction to fit Nel’s purpose. Nel has not yet
moved into the new building. The two buildings combined compromise of approximately 11,100m2 in size and
38,500m2 of land.
With the current plan the building will have a capacity of 150 employees and make it possible to develop and
manufacture 300 hydrogen fueling stations per year. The neighbouring land was also acquired (additional
9,100m2) to secure the possibility for future expansions.
Date of announcement Key commercial public announcement
s 21 February 2017 .......................................................................................................................... Nel Hydrogen Solutions, a division of Nel ASA entered into a framework contract for the supply,
construction and maintenance of H2Station® hydrogen fueling stations in California for Royal
Dutch Shell Plc (“Shell”) in a partnership with Toyota Motor Corp.
27 February 2017 .......................................................................................................................... Nel ASA entered into a non-binding term sheet to acquire the Connecticut U.S. based hydrogen
technology company Proton OnSite
6 March 2017 ................................................................................................................................ Nel Hydrogen Solutions, a division of Nel ASA was awarded a contract by H2 Frontier Inc. for a
H2Station® hydrogen fueling station to be installed in Los Angeles, California.
27 March 2017 .............................................................................................................................. Nel Hydrogen Solutions, a division of Nel ASA received the first purchase orders on H2Station®
equipment and services from Equilon Enterprises LLC (Royal Dutch Shell Plc, “Shell”) under the
earlier announced California framework contract.
20 April 2017 ................................................................................................................................ Nel ASA signs final joint venture agreement with Hexagon Composites ASA and PowerCell
Sweden AB to establish a Joint Venture for the development of integrated hydrogen projects
26 April 2017 ................................................................................................................................ Nel Hydrogen Solutions, a division of Nel ASA, received a purchase order from Uno-X
Hydrogen AS for equipment to build a second H2Station® in Bergen, Norway.
Source: Newsweb, Oslo Børs
56
7.13 MATERIAL CONTRACTS
Nel has not entered into any material contracts considered outside the ordinary course of business for the
Company. For material agreement, deemed to be inside the ordinary course of business see section 7.9 and 7.10
respectively for a description of the Company’s grant agreements and other partnership agreements. Additionally
all patents and R&D activity related to the Company is outlined in section 7.14 and 7.15 respectively.
Material contracts related to the target company Proton OnSite is outline in Section 9.13.
7.14 PATENTS
The Company currently has a patent entitled ‘Diaphragm element for an electrolytic filter press assembly’ which
provides protection in Canada, China, Germany, France, UK, India, Italy, Norway, Russia and South Africa.
This is what Nel calls the “rubber frame” patent. It is exclusively for Nel’s atmospheric electrolysers and relates
to the construction of the rubber-coated steel frame with moulded diaphragm. This patent is important to Nel as
it is one of the core technologies for Nel’s - series of electrolysers. This patent is based on the original Norsk
Hydro patent from 1995, but it is coming to the end of its term (ends in 2015 in Norway and 2016 in the other
countries).
This is one of the key technologies used in Nel’s atmospheric electrolysers, and it offers advantages, both from
manufacturing/production and operational perspectives. Although Nel will lose sole rights to use this technology
in the areas where it has sought protection, the Company deems it unlikely that there will be a loss of
competitive advantage after the patents expire. The cost for a competitor to develop and test a corresponding
technology will be very substantial as it would involve both material and process development (neither of which
have been published), and long term trials. Proper qualification testing would be very difficult since none of our
competitors have high capacity atmospheric electrolysers which would be required for this.
In addition to the aforementioned patent, Nel has a patent application pending for the ‘Electrolyser Frame
Concept, Method and Use’. This relates to the design which Nel used for the P-60, where the separator plates,
lye channels etc. are moulded into the rubber support, and there are no exposed metal parts when the stack is
assembled. This requires the use of pressure elements to press the electrodes against the diaphragm (zero-gap
configuration). The pressure element is included as part of the patent. This patent is based on Norwegian patent
application NO20111048 from 2011 and European patent application EP 12753598.7, and is now being pursued
in Europe (EPO), Eurasia, Japan and the US. This patent is also important for Nel as it is the foundation for the
construction of the pressurized electrolysers (though the patent does not specifically limit this type of
construction to pressurized systems). The follow-up process with applications in the different parts of the world
is on-going.
Apart from these two patents, Nel owns a patent concerning operation and control of gas filling which was
recently re-activated in connection with the market for hydrogen refueling stations.
Through the acquisition of Rotoboost H2, Nel has obtained licences for the following patents:
1. PCT/NO2006/000432. A device for production of Hydrogen.
2. PCT/NO2008/000194. A device and method for production of Hydrogen PCT= Patent Cooperation Treaty, NO=Norwegian Industrial Property office (NIPO)
Nel Hydrogen A/S has two patent applications filed and published on methods related to hydrogen fueling. The
patents have been submitted based on the normal patent procedures in relevant jurisdictions. The standard patent
process takes approximately 2 to 3 years depending on the patent authority. A patent expire 20 years from its
first filing date no matter when during these 20 years the patent is granted.
57
Status
Patent title Publication number Filing date
National phase/ Direct
national
(P) = Pending
(G) = Granted
Early publication
date
Method for determining start conditions when refueling a gas
tank
Pending as: US2015047739
EP2823213
01-03-2012 US (P)
EP (P) 22-09-2013
A method for refueling of gas
into a pressurized gas tank
Pending as: US2016273710
EP3058265
14-10-2013 US (P)
EP (P) 14-04-2015
Cooling of a fluid with a
refrigerant at triple point
Pending as:
PA 2015 70281 PCT/ DK2016 / 050128
13-05-2015 WO (P)
DK (P) 17-11-2016
Diaphragm compressor with an
oblong shaped chamber
Pending as:
PA 2015 70293 PCT/ DK2016 / 050127
19-05-2015 WO (P)
DK (P) 24-11-2016
A control system for a hydrogen refueling station
Pending as: PA 2016 70123
02-03-2016 DK (P)
Controlling direction of blast
wave in a hydrogen refueling
station
Pending as: PA 2016 00135
02-03-2016 DK (P)
Controlling of a supply pipe in
a hydrogen refueling system
Pending as:
PA 2016 00136 02-03-2016 DK (P)
Temperature control of
hydrogen hydrogen supply line
Pending as:
PA 2016 70124 02-03-2016 DK (P)
Communication system for a
hydrogen refueling system
Pending as:
PA 2016 70112 26-02-2016 DK (P)
EP=European Patent Office, US=United States of America, WO=World Intellectual Property Organization (WIPO)
On new technologies, several patent applications are in preparations and a pipeline of ideas are continuously
under evaluation. The table above gives an overview of Nel Hydrogen A/S current patent portfolio as filled and
published as of the date of this Prospectus. The patents are not fundamentally required to conduct hydrogen
fueling, but instead protects advantageous technology and product advantages in relation to hydrogen fueling.
7.15 RESEARCH AND DEVELOPMENT
Nel’s research & development (“R&D”) is related to both the electrolyser- and fueling division. Their R&D
primarily consists of developing new products and improving current technologies, in addition to manufacturing
and IT equipment.
As an indication of the level of internal R&D expenses, Nel currently has 8 and 18 FTEs working directly with
R&D in the electrolyser and fueling division respectively.
2013
The R&D expenses for fiscal years 2013 amounted to NOK 22.3 million. R&D expenses in 2013 concerned the
Group’s former healthcare operations (under the DiaGenic name) related to payroll expenses, operation of the
company's laboratory, fees to external research institutions and patent costs.
2014
The Group’s current core business was not incorporated before late 2014, when NEW Nel Hydrogen Holding AS
was acquired by Nel (formerly DiaGenic). There were no operations in the Company prior to this acquisition due
to the restructuring decided late 2013, hence no R&D expense was reported for the issuer in the fiscal year 2014.
2015
58
In 2015, Nel spent approximately NOK 1.7 million and DKK 10.9 million on R&D activities in the electrolyser
and fueling division respectively. The activities were mainly related to development of the Rotolyzer and the
H2Station ®. The company additionally receive grants related to R&D in 2015. See section 7.9 for a detailed
description of public grants received.
2016
In 2016, Nel spent approximately NOK 6.3 million and DKK 17.8 million on R&D activities in the electrolyser
and fueling division respectively. The Company additionally received grants related to R&D in 2016. See section
7.9 for a detailed description of public grants received.
7.16 SIGNIFICANT CHANGES IN THE COMPANY’S FINANCIAL OR TRADING POSITION
SINCE 31 MARCH 2017
- 20 April 2017: The final singing of a joint venture agreement with Hexagon Composites ASA and
PowerCell Sweden AB. See Section 7.3.6 for additional information
- 28 April 2017: The announcement of the acquisition of Proton OnSite. For additional information about
the Acquisition section 5
- 2 June 2017: The Company completed a share issue and exercise of employee share options on 2. June
2017. For further information see section 12.5.4
Aside from the above mentioned changes there has been no significant change in the Company’s financial or
trading position from 31 March 2017 until the date of this Prospectus.
59
8. HYDROGEN MARKET OVERVIEW
Parts of the information contained and data included in this section 8 “Hydrogen Market Overview” is based on
a market study (“Commercial Market Study”) dated April 2016, prepared by Arkwright at the request of the
Company. The commissioned Commercial Market Study is not publicly available. Explicit data sourced from
said study is clearly sourced as Commercial Market Study.
Arkwright has based the information contained in the Commercial Market Study on data and research from
recognised research companies, as well as official financial statistics and other publicly available information.
The industry and market overview does not purport to contain all of the information the recipient may desire or
require to make a decision to proceed with further investigations. Industry publications or reports generally
state that the information they contain has been obtained from sources believed to be reliable, but the accuracy
and completeness of such information is not guaranteed. Neither Arkwright nor the Company has independently
verified and cannot give any assurances as to the accuracy of market data contained in the Commercial Market
Study that was extracted from these industry publications or reports and reproduced herein. Market data and
statistics are inherently predictive and subject to uncertainty and not necessarily reflective of actual market
conditions. Such statistics are based on market research, which itself is based on sampling and subjective
judgements by both the researchers and the respondents, including judgements about what types of products and
transactions should be included in the relevant market. Interested parties should conduct their own
investigations and analyses of the industry and the Company. Certain statements, estimates and projections with
respect to future industry development are included herein. Such statements, estimates and projections reflect
various assumptions and anticipated results, which may or may not be correct.
As a result, prospective investors should be aware that statistics, data, statements and other information
relating to markets, market sizes, market shares, market positions and other industry data (and projections,
assumptions and estimates based on such information) may not be reliable indicators of the Group’s future
performance and the future performance of the industry in which it operates. Such indicators are necessarily
subject to a high degree of uncertainty and risk due to the limitations described above and to a variety of other
factors, including those described in section 2 “Risk Factors” and elsewhere in this Prospectus.
Although the information set out herein is believed to be correct, no representation or warranty, express or
implied, is given by Arkwright or the Company, as to the accuracy or completeness of the contents of this
industry and market overview or to the accuracy or completeness of the projections included herein or of any
other document or information supplied at any time in connection with the Acquisition and Private Placement.
Other sources used in this chapter, denoted where relevant, are publicly available.
8.1 INTRODUCTION
Hydrogen is used for a wide array of applications, but in the commercial context is primarily: i) an input factor in
industrial processes, or ii) a fuel, and/or iii) used for other energy carrier/energy storage applications. As a
manufacturer of water electrolysers for hydrogen production, Nel’s primary end market has historically been the
industry sector. However, the Company through its subsidiaries has throughout the early 2000s also gained
experience with hydrogen for energy applications, and is currently specialized within hydrogen electrolysers and
hydrogen (re)fueling stations (HRS).
The following sections start by summarizing the different methods for producing hydrogen, followed by
overview of both applications of hydrogen (i.e. energy carrier applications and hydrogen as an input factor for
industrial production) and lastly provide information about market size, forecast and key competitors.
8.2 METHODS FOR THE PRODUCTION OF HYDROGEN
Hydrogen generation is performed principally through three different techniques: electrolysis, reforming and
gasification. Nel is a supplier of water electrolysers which commands the smallest portion of the total hydrogen
market. However, electrolysis has significant advantages compared to the other production techniques and is
expected to exhibit the highest growth rate of the three production methods going forward (see section 8.3
“Advantages of Electrolysis”).
60
8.2.1 Electrolysis
For the purpose of this Prospectus, water electrolysis (“electrolysis”) describes the process of using an electric
current to split water into hydrogen and oxygen. Electrolysis is principally used in smaller applications and
where gas infrastructure is not well established. Electrolysers have a typical capacity range from 10-485 Nm3/h
and are capable of producing the highest purity levels of any of the described production methods. Since
electricity is the main input factor, and thus the main cost of producing hydrogen from electrolysis, it has
traditionally been more expensive than the alternative technologies with a typical cost of 6-7 USD/kg of
hydrogen, compared to 1-3 USD/kg. But, due to higher fluctuations and generally lower electricity prices due to
the increase in renewables, hydrogen from electrolysis is becoming increasingly cost competitive.
8.2.2 Reforming
Reforming describes the process of using natural gas which reacts with steam in the presence of a catalyst,
yielding hydrogen and carbon dioxide. Hydrogen produced from reforming is typically transported via pipelines
or manufactured in large on-site production units. Reforming yields medium purity hydrogen and often requires
additional purification. Reforming is considered an inexpensive method for producing hydrogen and typically
costs from 1-3 USD/kg of hydrogen depending on various input factors. Hydrogen manufacturing facilities using
reforming have a typical capacity range from 300-100,000 Nm3/h.
8.2.3 Gasification
Gasification describes the process by which coal reacts with steam and oxygen, yielding a mixture of hydrogen
and carbon dioxide. The production method is considered to be the most inexpensive of the three technologies
(typical cost of 1-2 USD/kg hydrogen) when the gasification is performed at large scale centralized facilities.
The method produces the lowest purity hydrogen of the three described production methods. Installations using
gasification technology are comparatively large and have a capacity range from 1,000-100,000 Nm3/h.
8.3 ADVANTAGES OF ELECTROLYSIS
Electrolysers provide the sole technology for the production of carbon free hydrogen. Furthermore, electrolysis
is the only technology capable of handling energy storage from fluctuating energy sources, such as wind and
solar. The following section enumerates some of the advantages of electrolysis compared to reforming or
gasification.
8.3.1 Superior environmental performance
The electrolysis process uses only water and electricity as input factors in the production of high purity
hydrogen. No carbon dioxide emissions are created in the production process compared to gasification and
reforming, both of which create carbon dioxide as a by-product in the production process. Electrolysis thus
provides significant potential in the de-carbonization of the transportation sector, both through hydrogen as a
fuel, and hydrogen from electrolysis as a component in synthetic and conventional fuel production.
8.3.2 Superior when limited infrastructure
Electrolysis is often the preferred alternative in areas with industrial growth that have limited natural gas or
hydrogen infrastructure (i.e. India, South America and Russia). Additionally, electrolysis plants have a typical
capacity rage of 50-485 Nm3/h compared to 300-100,000 Nm3/h and 1,000-100,000 Nm3/h for reforming and
gasification plants respectively. Due to the smaller scale of electrolysis plants, the technology is often preferred
in production processes that do not require the typical amount of hydrogen produced from a reforming or
gasification plant.
8.3.3 Cost efficient solution under certain conditions
Electrolysis can be a cost effective solution due to a number of considerations. First, since electricity constitutes
the majority of operating costs, electrolysis is inexpensive in areas with inexpensive electricity. Furthermore, this
aspect of electrolysis means that the production technique is subject to limited input cost fluctuations. Second,
electrolysis is supported by government funding for R&D projects aimed to reduce carbon emissions, thus
reducing investment costs. Third, electrolysis is a cost effective solution for smaller installations that require less
hydrogen (with higher purity). Lastly, electrolysis may be subject to significant economies of scale in the event
of large scale roll-out of electrolysers for energy carrier applications.
61
8.3.4 Energy storage from renewable energy
The strong growth in renewable energy production provides an appealing market potential for energy storage
based on electrolysis. Especially the intermittency of renewable energy sources such as wind and solar create a
demand for energy storage. Significant improvements in fuel cell technology enable efficient conversion back to
electricity, be it in a stationary or transport application.
8.4 HYDROGEN AS AN ENERGY CARRIER
Hydrogen is, alongside with electricity, considered the most important energy carrier of the future. It can be
produced from virtually anything, and leaves no other emissions than pure water vapour when converted to
electricity in a fuel cell. Hydrogen also maximises the value of renewable energy, as it can be produced in
periods of excess energy. This also has a grid stabilizing effect, and enables a higher share of intermittent
renewable energy for electricity production.
8.4.1 Hydrogen as a fuel
Hydrogen is an ideal fuel for vehicles, as it provides zero tail-pipe emissions while offering the same
convenience as conventional vehicles have today, both with regards to range and refuelling time. At the same
time it offers the benefits of an electric drivetrain, giving a smooth and quiet drive, with fast acceleration.
Hydrogen is efficiently converted to electricity in fuel cells with water as only emission (Fuel Cell Electric
Vehicle / “FCEV”). Fuel cells are compact and scale easily without compromising on efficiency enabling
suitability for all sizes of vehicles – and especially for the medium to large sized vehicles. For some large
vehicles it is the only viable zero-emission fuel.
The ongoing introduction of FCEVs by major car manufacturers creates a market demand for the deployment of
an infrastructure of hydrogen refuelling stations (HRS) and hydrogen production – the two markets addressed by
Nel.
HRS can be installed both as stand-alone stations, or integrated alongside other fuels at conventional fuelling
stations. The fuelling process and nozzle, which connects to the vehicle is internationally standardized, and
ensures fuelling of more than 500 kilometre range in 3-5 minutes.
8.4.2 Energy storage & grid balancing
By transforming electricity to hydrogen through electrolysis, energy can be stored for later use. Alternatively, the
hydrogen can be used to feed directly into existing natural gas pipelines, or go through a methanisation process
to produce synthetic methane.
Hydrogen’s energy storage capabilities are particularly relevant for intermittent renewable energy sources such
as wind and solar. The increased share of intermittent renewable electricity generation poses a challenge for both
power producers and system operators. Due to intermittent electricity production, power producers are not able
to fully utilize the generation potential of their plants, while system operators are finding it increasingly difficult
to ensure grid stability and security of supply. Several countries have already experienced significant generation
losses due to lack of flexibility in supply, which is also incurring costs on governments. According to statistics
provided by Ludwig-Bölkow-Systemtechnik there was in Germany in 2015 paid EUR 478 million to energy
companies to disconnect wind parks from the grid in periods with excess electricity, compared to EUR 82.9
million in 2014
If the excess electricity is converted to hydrogen, the energy is conserved, and can be utilized for a great variety
of applications at a later stage, and at different locations from where it was initially produced. Hydrogen energy
storage increases the value of intermittent electricity generation for both producers and system operators due to
the following considerations:
1. Improved utilization of generating assets and a high-value product in addition to electricity
2. Increase grid flexibility and ability to perform fast regulation services (voltage control and frequency
regulation)
3. Ability to perform energy time arbitrage for producers, i.e. store the energy generated and make it
available to the market when the producer is able to achieve a higher price
62
4. Reduced need for grid extensions
5. Improved security of supply
8.4.3 Synthetic fuel
Synthetic fuel produced using electrolysis represents a sustainable alternative to petroleum-derived fuel.
Hydrogen can be used as an input factor together with carbon dioxide in production of synthetic gas, the key
intermediate energy carrier in synthetic fuel production.
The following figure shows one way renewable synthetic fuel can be created using electrolysis.
Schematic overview – renewable synthetic fuel production from biomass
1) Alternative feed stocks such as coal or natural gas may be used as well in the production of synthetic fuel
2) As an input factor, the energy production need not be derived from a renewable energy source
8.4.4 Biofuel
Biofuels (i.e. biomass converted into liquid fuel such as ethanol and biodiesel) constitute the majority share of
synthetic fuel production. However, future growth rates are expected to be higher for coal-to-liquids and gas-to-
liquids.
A biofuel is a hydrocarbon that can be made from organic matter in a short period of time, and represents an
alternative to fossil fuels. The pollution is approximately equivalent to fossil fuels. With small upgrades, most
engines can run on pure biofuel or a mixture of biofuel and conventional fuel. Ethanol is already found in most
gasoline mixtures over the world, making up 10-15% on average. The balance between the use of biofuel and
fossil fuels is determined by cost, availability and food supply. Focus on global warming, fragility of food supply
and “greener” options have led to a decline in popularity of biofuels.
Hydrogen can be used as an input to thermochemical Biomethanol refineries. By adding hydrogen to the process,
it is possible to shift the hydrogen to carbon ratio in the syngas, and thereby exploiting all the available carbon in
the biomass feedstock. This process will generate no pollution. The Hydrogen is ideally produced through
electrolysis as it also removes the need for an external O2 plant.
The bellow figure illustrates the biorefinery process both with (i.e. advances refinery) and without (i.e.
conventional) hydrogen as input.
63
Overview of biorefinery process
Source: Commercial Market Study
8.5 HYDROGEN AS AN INPUT FACTOR
8.5.1 Traditional industry
Hydrogen (produced via electrolysis) is used as an input factor in a number of industries. In such applications
hydrogen is either used as a feedstock (for example within the petroleum industry to break down crude oil into
fuel oil or as a component within food production such as margarine, cookies etc.), a protective atmosphere
(where it is applied in several industries to prevent oxidation and to ensure an oxygen-free environment) or for
cooling purposes (hydrogen functions as a cooling medium due to its heat absorption functionality for generators
producing large amount of heat).
Food industry / Edible Oils and Fats:
Electrolysis is used for the hydrogenation of oils and fats to raise the melting point of the product. Hydrogen is
widely used for the production of margarine and shortenings for the food industry, as well as production of soap
and detergents. Oils and fats with low melting points can be converted into fats with higher melting points,
which are more useful in the food industry. This process, called hydrogenation, is a chemical reaction in which
unsaturated bonds (double bonds) between carbon atoms are reduced by attaching a hydrogen atom to each
carbon atom. This is achieved by agitating the oil or fat together with gaseous hydrogen and a powdered catalyst
(usually nickel) within a vessel at a specific temperature and pressure. A hydrogenation process is often operated
as a batch process with peak consumption at the beginning of the process. Storage facilities are therefore often
included in such plants to maximise production capacity. The amount of hydrogen required in hydrogenation
applications depends on the initial degree of saturation of the feedstock and the required degree of saturation in
the finished product.
Steel industry / Metallurgy:
Electrolysis is used in a number of specialty steel production processes. It is commonly used in annealing
furnaces (heat treatment) that require protective atmosphere to avoid oxidation. The following applications
describe how hydrogen is used in various metallurgy processes.
Annealing: stainless steels, carbon steels and non-ferrous materials are annealed in order to trigger the
relaxation of internal stresses and give a softer product. To avoid oxidation and/or decarburization during
the process, a protective atmosphere is required in the furnace. When hydrogen is added as a reducing
agent, the result is a clean and bright surface, whilst the presence of carbon species will enable the
decarburization to be controlled. Depending on the metal and required properties, the atmosphere is
comprised of between 5% (non-ferrous) and 100% (stainless steel) hydrogen.
Neutral hardening: neutral hardening involves heating components above their phase transformation
temperature and then quenching them in oil or salt baths, or in a specific gas quenching cell. This
treatment results in a hard and durable martensitic or bainitic structure inside the components. A
protective atmosphere with hydrogen is usually required to prevent oxidation or decarburization during
the process.
64
Sintering: sintered mechanical components are commonly produced in continuous furnaces. A protective
reducing atmosphere with hydrogen is required in the cooling zone to prevent any oxidation and obtain a
bright surface.
Glass industry:
The largest end user of hydrogen in the glass industry is the float glass industry, which makes use of hydrogen as
a protective atmosphere. Other applications of hydrogen in the glass industry include; fused silica, industrial
diamonds and light bulb sintering.
Float gas: to produce sheets of flawless glazing for windows, doors, etc., a continuous ribbon of glass is
“floated” on a bed of tin. In order to allow the irregularities in the glass to even out, the glass is held in a
controlled atmosphere with a ratio of approximately 90% nitrogen to 10% hydrogen. The hydrogen in the
controlled atmosphere acts as a scavenging agent to ensure an oxygen-free environment, since molten tin
is highly sensitive to oxidation, even in trace quantities.
Industrial diamonds (chemical vapour deposition): industrial diamonds are usually produced by
energizing mixtures of hydrogen and hydrocarbon gases with heat or electrical energy in a deposition
reactor. A region of ionized gas (plasma) drives the complex chemistry which causes diamond coatings to
grow on objects placed in the reactor.
Light bulb filaments: carbon-free tungsten filament manufacture employs a process involving the direct
reduction of tungsten oxide with hydrogen, enabling it be drawn through a series of dies.
Electronics:
Nitrogen and hydrogen are used in the electronics industry to ensure the production atmosphere is free of
moisture and other impurities. Hydrogen is used in the following applications in the electronics industry:
Semiconductor and integrated circuit packaging: electronic packaging is the technology of taking an
integrated circuit (IC) and creating the interface with which it connects to a printed circuit board (PCB)
and communicates with other IC's. In the production of packages the presence of moisture and oxides can
lead to reductions in yields. Nitrogen and hydrogen are used to ensure the atmosphere is free of moisture
and other impurities.
Epitaxy manufacturing: epitaxy, in particularly Metal Organic Chemical Vapor Deposition (MOCVD) or
Metal-Organic Vapor Phase Epitaxy (MOVPE) is a widely used method for preparing epitaxial structures
by depositing atoms on a wafer substrate. In a carrier gas of hydrogen and nitrogen, atoms are deposited
by decomposing organic molecules (precursors) while they are passed over the hot substrate. Undesired
remnants are removed or deposited on the walls of the reactor.
Chemicals / Petrochemicals:
Hydrogen is a key chemical building block in many chemical processes. It is used in the manufacture of
ammonia, methanol, hydrogenated hydrocarbons, aldehydes, metal oxides reduction and hydrogen peroxide to
name a few.
Ammonia: ammonia is normally manufactured using the Haber-Bosch process in which nitrogen and
hydrogen react over an iron catalyst.
Methanol: synthetic gas (methanol) is produced mainly from natural gas, or alternatively from light
petroleum products or coal. Methanol is formed when carbon monoxide and hydrogen react on a metal
catalyst.
Alcohols (aldehydes): synthetic alcohols are produced by the hydrogenation of aldehydes, carboxylic
acids, esters and olefines.
Metal oxides: metal ores of copper, lead, iron and nickel can be reduced using hydrogen in belt furnaces.
Hydrogen peroxide: hydrogen peroxide is manufactured mainly by autoxidation using oxygen from the
air or from an electrolyser and using hydrogen gas in the presence of a metal catalyst.
65
Power industry:
Friction in turbine generators produces large amounts of heat. Being the lightest element in the periodic table,
hydrogen has a small molecule size, giving it low viscosity. This property makes it ideally suited as a cooling
medium for large generators in power plants. The following applications describe how hydrogen is used in
applications related to the power industry.
High speed turbine generators: during operation, friction in power plant turbine generators produces large
amounts of heat which must be dissipated in order for the generators to operate at maximum efficiency. In
smaller generators air is used for cooling, but in larger plants hydrogen is often used. Friction in the
generator windings can amount for 30-40% efficiency loss in a generator, and hydrogen helps keep this
loss to a minimum.
Nuclear power plants: hydrogen is used to react with oxygen in the cooling water system of boiling water
nuclear reactors to suppress inter-granular stress corrosion cracking in the cooling system.
8.5.2 Renewable industry – polysilicon production
Hydrogen is used as a protective atmosphere in the production of polysilicon for the solar industry. Polysilicon is
a material consisting of small silicon crystals, and is used for silicon ingots and wafer production for the solar
cell industry. In the production of polysilicon via the Siemens process, large amounts of hydrogen are used to
react with tri-chlorosilane gas to produce silicon.
8.6 MARKET SIZE AND FORCAST
8.6.1 Introduction
The use of hydrogen has historically been driven by applications where hydrogen is used as an input factor.
Increased interest in hydrogen as an energy carrier is an important driver in the mid-to-long-term. Demand for
hydrogen is expected to increase due to the commercialization of fuel cell technology and related hydrogen-
based energy storage applications.
Markets and Markets additionally reports that the hydrogen generation market is expected to grow from an
estimated USD 115.25 billion in 2017 to USD 154.74 billion by 2022, at a CAGR of 6.07%. Factors such as
government regulations for desulfurization of petroleum products, decreasing crude oil quality, and the search
for cleaner fuels underpin the global market for hydrogen-related solutions.
According to Markets and Markets, Asia-Pacific was the largest market for hydrogen generation in 2015 due to a
growing demand for petroleum products from refineries with lower sulfur content. Governments in Asia-Pacific
are also administering stringent regulations regarding sulfur content of petroleum products, and are investing
highly in R&D of hydrogen and fuel cell technology to reduce sulfur emissions in the environment.
The following section aims to provide an overview of historical sales of electrolysers and hydrogen fueling
stations, as well as a tentative forecast of the two markets.
8.6.2 Electrolyser market
The market for hydrogen used in energy carrier applications presents an attractive growth opportunity for
electrolyser producers. However, the market is subject to significant uncertainty as several of the markets are in
nascent stages.
According to the Commercial Market Study, the electrolyser market is projected to grow 6-fold in the coming 10
years, with Power-to-Gas (i.e. hydrogen produced from renewables) becoming increasingly important. The
graphs below exhibit a forecast of the annual electrolyser market split by segment and equipment size. The
paragraphs below the graphs describe the segments in some more detail based on the Commercial Market Study.
66
Electrolyse market – by segment
Electrolyse market – by equipment sixe
ee Source: Commercial Market Study
Industry2
Hydrogen for industrial services will serve as a baseline for the market, with an assumed 4 % CAGR from 2017-
2025.
Power-to-Gas (Grid balancing)
Hydrogen produced as a result of the challenges and violent price variations related to renewables is expected to
grow slowly towards 2019 correlated with market moving towards full commercialization. Further growth is
forecasted from 2023 as projected sizes are getting bigger with potential strong growth driven by grid balancing
projects and decentralized hydrogen as a fuel projects.
Hydrogen as fuel:
The market for hydrogen fuel is expected to grow rapidly from 2020 and onwards, with the market consisting of
both centralized and decentralized electrolysers. The forecasted strong growth is driven by the general growth in
the hydrogen transport sector, in addition to the growth stemming from increasing renewable portion within
“fossil hydrogen” used as fuel. See section 8.6.3 for information on the drivers of hydrogen fueling.
Refineries:
The market of utilizing hydrogen electrolysis in refineries is large, but highly uncertain. It is viewed as a
potentially new segment for electrolysis driven by new fuel directives. The total market potential is assumed to
be 1500MW, and to grow rapidly from 2020 and onwards.
2 Industry includes: Chemical, Glass, Metals, Edible Oils, Power plants, Electronics, Renewable industry, other applications
67
Nel is well positioned for growth in the electrolyser market, with medium to large scale electrolysers having the
largest growth projections going forward. Nel is today at the forefront within these segments with their
Atmospheric electrolysers (100-500 Nm3), and new developing electrolyser technologies, both to capture the
small scale market (Rotolyzer 10-100 Nm3 & existing product portfolio of Proton OnSite), and to strengthen
position within large scale electrolysers (Pressurized 100-1000 Nm3). Furthermore, with the acquisition of
Proton OnSite, Nel will attain a competitive edge also within power-to-gas projects where high operational
flexibility is needed.
8.6.3 Hydrogen fuel
Hydrogen can be used to fuel the next generation vehicle platforms. There is strong interest by automakers,
governmental agencies and consumers in the commercialization of fuel cell electric vehicles (“FCEVs”). The
FCEV technology has gone through several decades of development and rigorous testing in several regions
around the world.
When Hyundai, as the first car manufacturer in the world launched their FCEV for commercial sales in 2014, it
was first launched in Norway and Denmark, where the pre-commercial prototype vehicles had been tested since
2011. Since then, in addition to Hyundai several car manufactures including Mercedes Benz, Toyota, Honda,
BMW, Nissan, Daimler, GM, Audi and Volkswagen have launched or announced launch of FCEVs. All major
remaining car manufacturers are active on development of FCEVs and are expected to commence market launch
onwards 2020. A good example of a large car manufacturer with a clear FCEV strategy is Toyota which is
preparing to launch a new 20% cheaper Mirai in 2019, ramping up production to 30,000 units/year from 2020.
The Company deems current market environment to be especially attractive for the development of the FCEVs
due to what the Company calls for “fossil parity”, that is renewable hydrogen becoming cost competitive
compared to gasoline. The Company sees that several of the major markets have reached or will reach fossil
parity in the coming years due to substantial cost reductions for renewables and hydrogen technologies, and sees
a future where renewable hydrogen out-performs gasoline on a cost basis.
The below table exhibits the growth expected for hydrogen fuelled vehicles. Navigant research expects the
FCEV market to experience strong growth from 2020 and onwards.
Source: Commercial Market Study
The ongoing commencing of large scale roll-out of FCEVs by the major car manufacturers is creating a growing
demand for hydrogen infrastructure covering both production (i.e. of electrolysers) and hydrogen refuelling
stations. Target markets are those where major car manufacturers are deploying FCEVs firstly, among others
USA (California), Europe (Germany, UK and Scandinavia)) and Japan. As vehicle manufacturing volume is
increasing, the number of regional markets is expected to increase. That means new markets in new states in the
USA, more countries in Europe and developed regions in Asia.
For the initial target markets, national initiatives formed by public and private stakeholders are planning to
commence a coordinated roll-out of hydrogen infrastructure to meet the demand from FCEVs. Besides HRS
68
location planning, the efforts also include considerations on financing mechanisms that combine public and
private investments. The table below exhibits an overview of existing and planned stations the coming years.
Regional roll-out plans for Hydrogen refuelling stations
European present market
USA/Japan/Korea/EU new markets
Later potential markets
California/USA
Japan
# stations status/target Market
Korea
2016 2020 2030
1650
300
2016 2018 2023
20100
400
2015 2020 2020
865
270
2016 2020 2030
25100
2016 2020 2025
<80160
320
2016 2020 2025
<10100
230
2016 2020 2030
<1560
900
1.600
Source: Scandinavia Hydrogen Highway Partnership, UK H2mobility/Driving.co.uk, Japan Times, Clean Energy Partnership (DE),
Carbuyer UK,
The following section provides a shortly elaborated description of each initial target market, the associated
national initiative and market potential.
Scandinavian Hydrogen Highway Partnership (SHHP):
SHHP was formed in 2006 by private stakeholders in Norway, Sweden and Denmark, with the purpose of
deploying hydrogen fuel cell vehicles and constructing and clustering hydrogen refueling stations. The
partnership consists of regional clusters involving major and small industries, research institutions, and local,
regional and national authorities. All activities are backed with strong public and private support in terms of
funding, attractive financial tax exemption schemes and investments.
Their goal is to create one of the first regions in Europe where hydrogen is available and used in a network of
refuelling stations. All the major car manufacturers are today active on FCEV deployment in Scandinavia and
onwards 2020 and 2030 the HRS network is planned to grow to respectively 50 and 300 units.
H2Mobility Germany:
A public private initiative formed in 2010 and consisting of major car manufacturers, oil and gas companies,
with the aim to deploy an initial network in Germany of up to 100 and 400 HRSs onwards 2018 and 2023
respectively. Beyond 2023 the network has a target to grow accordingly with FCEV deployments, potentially
reaching 1,000 HRSs by 2030.
UK H2Mobility:
The public private initiative was launched in 2012, inspired by the similar German initiative. In 2013 the results
of the initial FCEV and HRS planning was launched, which aimed for a continuous roll-out of up to 1.6 million
FCEVs and 1,150 HRS’s across the UK onwards 2030. As of 2016 13 HRS were operational, and target of 65
HRS for 2020.
Japan:
In January 2011, a group of 13 Japanese companies, including oil- and gas companies together with car
manufacturers, announced that they aimed to build 100 hydrogen refuelling stations in key metropolitan areas in
69
Japan within 2015, coinciding with the commercial launch of FCEVs. The initiative was supported by the
national government entity METI, who has supported the infrastructure build-up with 50%, and allocated USD
63 million for this alone in the fiscal year of 2014. Japan currently has approximately 80 HRS’s installed, with a
target of 160 and 320 hydrogen fueling stations by 2020 and 320 respectively.
Korea:
Late 2016 the Korean government announced national plans to expand the network of HRS from 10 stations in
2016 to 100 stations by 2020 and 230 stations by 2025.
California/USA:
California Fuel Cell Partnership is composed of public and private stakeholders since 1999 and conducts
planning of FCEV and HRS deployment in the state. In 2013 the Californian State set aside USD 20 million per
year in funding of HRS’s with the aim to reach 100 stations before 2024. California Energy Commission has in
2016 doubled the grant funding opportunity to USD 33 million, with a target to reach 100 HRS by 2020 and
1,600 stations by 2030. Current funding is estimated to cover approximately 20 stations, for installation in 2017.
8.7 COMPETITIVE OVERVIEW
8.7.1 Electrolyser market
The current market for electrolysers consists of a various number of players, with presence in different
application areas including Power to Gas, Hydrogen Fueling and Industrials. Certain major players (including
Hydrogenics) are present in all areas.
Furthermore, the companies differ in their offering of electrolysis technologies. Current technologies offered on
the market include atmospheric- and pressurised alkaline electrolysers, as well as pressurized PEM electrolysers.
Nel currently offers atmospheric alkaline electrolysers. Through their acquisition of Proton OnSite, Nel will gain
access to pressurized PEM–technology from the current market leader within this technology, and thus
strengthen its position as an important player in the space.
8.7.2 Hydrogen fuel market
The current market for hydrogen fueling stations is represented by a few players. However, with increasing
growth in FCEVs and high focus on environmental solutions, it is likely that the number of suppliers will
increase in the near future.
The following table provides an overview of the key players in the hydrogen electrolyser market split by
application, in addition to an overview the current suppliers of hydrogen fueling stations. The companies
represented in the hydrogen electrolyser market below are the following: Nel, Hydrogenics, PERIC, Proton
OnSite, McPhy Energy, ITM Power, Siemens, Teledyne Energy Systems, Suzhou Jingli Hydrogen, Hitachi
Zosen and THE.
The companies currently represented in the hydrogen fueling market below are Linde, Air Products, Air Liquide
and Powertech.
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POWER TO GAS HYDROGEN FUELING 1) INDUSTRIAL
Note: 1) Refers to the market which offers electrolyser for the hydrogen fueling industry; 2) Refers to the market which produce and offer hydrogen fueling stations; Source: Commercial Market Study
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9. PRESENTATION OF PROTON ONSITE
9.1 GENERAL
Proton OnSite is a US S Corporation incorporated on 16 August, 1996, in the State of Delaware in accordance
with Delaware law and operates under the Delaware General Corporation Law, with a federal tax identification
number of 06-1461988
The Company’s registered office is:
10 Technology Drive
Wallingford, CT 06492 USA
Telephone: +01 203 678 2000
Website: www.protononsite.com
9.2 LEGAL STRUCTURE
Proton Energy Systems, Inc.
9.2.1 Brief description of the subsidiaries and affiliated companies
As of the date of this prospectus HWorld Real Estate LLC (“HWorld”) and SunHydro LLC (“SunHydro”) are
considered affiliated companies. At the close of the Transaction they will would no longer be affiliated
companies of Proton OnSite.
HWorld Real Estate LLC
Proton OnSite leases its office- and production premises from HWorld Real Estate LLC. HWorld has no other
operating revenue other than the operating lease income from Proton OnSite. HWorld is in historical accounts
determined to be a variable interest entity in which Proton OnSite has provided certain financial support. World
will not be a part of the Transaction.
SunHydro LLC
Proton OnSite is engaged in providing certain product development service to Sun Hydro. For further
information see section 9.11. SunHydro will not be a part of the Transaction.
9.3 ORGANIZATIONAL STRUCTURE
9.3.1 Executive Management
The table below sets forth the members of the Executive Management as of the date of this Prospectus. Name Position Business address:
Robert J. Friedland President and Chief Executive Officer 10 Technology Drive, Wallingford, CT USA 06492
Sheldon A. Paul Chief Financial Officer 10 Technology Drive, Wallingford, CT USA 06492
John A. Zagaja III Senior Vice President of Engineering 10 Technology Drive, Wallingford, CT USA 06492
David T. Bow Senior Vice President of Sales, Marketing and Service 10 Technology Drive, Wallingford, CT USA 06492
James E. Dayton Vice President of Manufacturing 10 Technology Drive, Wallingford, CT USA 06492
9.3.1.1. Brief biographies of members of the Executive Management team
Robert J. Friedland, President and Chief Executive Officer Robert J. Friedland is President and Chief Executive Officer of Proton OnSite. Mr. Friedland, a founder of
Proton OnSite in 1996, has held several senior positions at the company since its inception. Earlier in his
career, Mr. Friedland was with United Technologies Aerospace Systems (formerly the Hamilton Sundstrand
division) where he held various positions.
Mr. Friedland holds a degree in Bachelor of Science in mechanical engineering from Syracuse University and an
MBA from Rensselaer Polytechnic Institute.
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Current directorships and senior management
position ..........................................................................................................................................
Proton OnSite (CEO), Connecticut Business and Industry
Association (board member),
Previous directorships and senior management
positions ........................................................................................................................................
Fuel Cell and Hydrogen Energy Association in Washington DC
(board member), CT Technology Council (board member), CT
Hydrogen and Fuel Cell Coalition (board member), Distributed
Energy Systems Corp. (President, COO, Senior VP of Technology),
Proton OnSite (Senior VP of Strategic Sourcing, Senior VP
Sourcing and Manufacturing, VP of Operations), United
Technologies Aerospace Systems (Program Operations Manager)
Sheldon A. Paul, Chief Financial Officer
Sheldon A. Paul joined Proton OnSite in August, 2008 as Vice President of Finance and Administration, and was
later promoted to Chief Financial Officer in September, 2013. Prior to joining Proton Onsite, Mr. Paul
developed and managed a private consulting practice providing CFO services to medium sized privately held
companies.
Mr. Paul holds a Bachelor of Science in Accounting from the University of Connecticut and is a Certified Public
Accountant.
Current directorships and senior management
position ..........................................................................................................................................
Proton OnSite (CFO)
Previous directorships and senior management
positions ........................................................................................................................................
Proton OnSite (VP Finance & Administration), Sheldon Paul &
Associates (Principal), Information Management Associates, Inc.
(Senior VP, Finance & Administration), Dinex International Inc.
(VP, Finance & Administration, Treasurer)
David T. Bow, Senior Vice President of Sales, Service and Marketing
David Bow was appointed Senior Vice President of Sales and Marketing on 2 June, 2014 and in 2015 added the
responsibility of Service as well. Prior to joining Proton OnSite, Mr. Bow held the position as Senior Vice
President of Global Commercial Development in Cosa+Xenatu Corporation.
Mr.Bow holds an Executive Finance-Executive Master of Business Administration program form Kellogg
School of Management, Northwestern University, Chicago.
Current directorships and senior management
position ..........................................................................................................................................
Proton OnSite (Senior VP of Sales, Service and Marketing)
Previous directorships and senior management
positions ........................................................................................................................................
Cosa + Xenatur, Corporation (Senior VP Global Commercial
Development), Dionex Corporation (VP of Sales, Services and
Marketing), Buffers & Biochemicals Corporation (Founder and
President)
James E. Dayton, Vice President of Manufacturing
James E. Dayton was appointed Vice President of Manufacturing in April 2015. Prior to joining Proton OnSite,
Mr. Dayton held the similar positions between 2013-2015 in Doosan Fuel Cell America, Inc. and ClearEdge
Power (formerly UTC Power). Between 1999-2013, Mr. Dayton worked at UTC Power as Manager of
Operations- Transportation, Space and Defence.
Mr. Dayton holds Bachelor of Science in Chemical Engineering from the University of Connecticut.
Current directorships and senior management
position ..........................................................................................................................................
Proton OnSite (VP of Manufacturing Operations)
Previous directorships and senior management
positions ........................................................................................................................................
Doosan Fuel Cell America (VP of Manufacturing Operations), Inc.,
ClearEdge Power (Director of Manufacturing Operations), UTC
Power (Manager of Operations- Transportation, Space and
Defence)
John A. Zagaja III, Senior Vice President of Engineering
John Zagaja is Senior Vice President of Engineering at Proton OnSite where he has overall responsibility for
technology development and product design. Mr. Zagaja joined Proton OnSite in 2014 and brings an extensive
background of product development and project management experience. Prior to joining Proton OnSite, Mr.
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Zagaja was with United Technologies Aerospace Systems for 32 years where he held positions of increasing
responsibility in Engineering and Program Management.
Mr. Zagaja holds a Bachelor of Arts from Fairfield University, Bachelor of Science in Chemical Engineering
from the University of Connecticut, and Master of Science in Computer Engineering from Rensselaer
Polytechnic Institute.
Current directorships and senior management
position ..........................................................................................................................................
Proton OnSite (Senior VP of Engineering)
Previous directorships and senior management
positions ........................................................................................................................................
United technologies Aerospace Systems (Manger, Programs and
Business Development), Hamilton Sundstrand Space Systems
International (Program manager, Orion Spacecraft), Hamilton
Sundstrand Space Systems International (Chief of Systems Design)
9.3.2 Employees
As of the date of this Prospectus, Proton OnSite has 87 employees. Of those employees, 20 are in manufacturing,
28 are in engineering, 20 are in sales and customer service, 6 are in technical service and 13 are in finance and
executive management. Of our 20 employees in sales and customer service, 6 are based outside of Wallingford,
CT. One person is based in Switzerland and the other 5 are all based in the United States in various locations.
At year end in 2015 and 2014 the corresponding numbers of employees were 94 and 95 respectively.
9.4 HISTORICAL BACKGROUND AND COMPANY DEVELOPMENT
The company was founded and incorporated on 16 August 1996 under the name Proton Energy Systems Inc.
d/b/a Proton OnSite since 2011. The core operations consisted of designing, developing and manufacturing
Proton Exchange Membrane (PEM) electrochemical products for commercial applications, making the company
among the first to manufacture and deliver systems incorporating PEM technology. The PEM technology was, at
the time, incorporated into two families of products: hydrogen generators and regenerative fuel cell systems. In
1999 Proton OnSite began delivering late stage development models of their hydrogen generators to customers.
In 2000 the company was listed on NASDAQ under the ticker symbol PRTN. In 2003 the company expanded its
business through the acquisition of Northern Power Systems, Inc. (“Northern Power Systems”), a leader in the
design, manufacturing, and installation of integrated on-site power systems for stationary commercial and
industrial applications. As a result of the acquisition Distributed Energy Systems was established as a holding
company comprising Proton OnSite and Northern Power Systems and the ticker symbol was changed to DESC,
with the aim of bringing together the two businesses. With its two operating units Distributed Energy Systems
delivered practical, ready-today energy solutions with the aim of capitalizing on the changing energy landscape.
In the longer term, Distributed Energy Systems was to identify and fund other initiatives, implementing new
strategic acquisitions, joint ventures, and alliances to meet emerging customer and investor needs. Effective as of
11 December 2003 NASDAQ ceased the trading of Proton OnSite shares, and started trading shares of
Distributed Energy Systems after each outstanding share of Proton OnSite was converted into Distributed
Energy Systems common stock.
In June 2008 Distributed Energy Systems filed for bankruptcy under Chapter 11, and the stock was suspended
and subsequently delisted in July 2008. As a consequence of the insolvency, Distributed Energy Systems had to
sell both of their operating units. Northern Power Systems Inc. was acquired by NEA Wind Acquisition Corp in
June 2008, while F9 Investments LLP acquired Proton OnSites in late July 2008.
Proton OnSite has since developed into a global leader in hydrogen energy and innovative gas solutions. A
recent, key milestone in 2015 was the introduction of the world's first PEM Megawatt Electrolyser for the
growing global energy storage market and hence expanding the 18 year portfolio of safe and reliable
electrolysers.
To best address the company’s diversity of markets and reflect the growing array of commercial products and
services offered by the company, the company changed its name to Proton OnSite in 2011.
The below table outlines an overview of important events in the history and development of Proton OnSite,
including selected contract wins:
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Year Key milestones & events
1996............................................................................................................................................... Proton OnSite is established
1996............................................................................................................................................... Built proof of concept demonstration models for the hydrogen generator and regenerative fuel
cell system technology
1998............................................................................................................................................... Delivered prototype hydrogen generator to NASA
1999............................................................................................................................................... Delivered late stage development model hydrogen generator for commercial application
2000............................................................................................................................................... Proton OnSite listed on NASDAQ
2002............................................................................................................................................... Completing construction of the company’s new 100,000 square foot facility in Wallingford
2003............................................................................................................................................... Business expanded with the acquisition of Northern Power Systems, creating Distributed Energy
Systems
2008............................................................................................................................................... Bankruptcy and delisting of Distributed Energy Systems
2008............................................................................................................................................... Proton OnSite. is acquired by F9 Investments LLP (i.e. Tom Sullivan)
2011............................................................................................................................................... Proton OnSite awarded order to install a hydrogen generator for fuel cell vehicle fueling at the
Joint Base Pearl Harbor Hickham
2014............................................................................................................................................... Proton OnSite chosen to install an on-site hydrogen generator at one of the first hydrogen fuel
cell stations in Germany’s new nationwide H2Mobility refueling network
2015............................................................................................................................................... Proton OnSite introduced the world's first PEM Megawatt Electrolyser for the growing
global energy storage market
2015............................................................................................................................................... Proton OnSite delivers electrolyser for first power to gas project in the US
2016 Proton OnSite delivers electrolyser for Switzerland’s first public fueling station
2016............................................................................................................................................... Proton OnSite awarded 13 megawatt electrolysers – the world’s largest megawatt PEM
electrolyser deal
9.5 BUSINESS OBJECTIVES AND STRATEGY
9.5.1 Business objectives
Proton OnSite is a global provider of proton exchange membrane (PEM) water electrolysis products, which
produce ultra-high purity hydrogen for industrial purposes. The company is considered to be a global leader in
hydrogen energy and innovative gas solutions, a position built through its 20 year history. Proton OnSite’s
products generate hydrogen gas from water and electricity and are sold in approximately 75 countries.
The company has, in addition to its hydrogen business, expanded its suite of principal products beyond hydrogen
generators to include nitrogen and zero air generators, which are essential to expanding the customer base in the
analytical laboratory market. However, such activities comprise a small part of the company’s principal
activities. Additionally, the company has a proprietary control system product called the StableFlowTM
Hydrogen Control System which is used in conjunction with its hydrogen generators to improve performance of
electric generators in power plants by actively monitoring and controlling the purity, pressure and dew point to
optimize the conditions in the electric generator. The company also provides the associated services and spare
parts to ensure that its products meet the high reliability requirements demanded by its customers.
9.5.2 Business strategy
Proton OnSite is a global provider of PEM water electrolysers, a position developed since 1996 with the aim of
meeting the diverse requirements of the company’s customers in the best ways possible through creativity and
offering practical solutions. The company continues to expand and strengthen its product offering to serve the
evolving market demands, and to serve a broader set of markets including power plants, semiconductor
manufacturers and laboratories. The most significant recent development in pursuing its strategy is the megawatt
product line (“MW” or “MW Products”), see product description of the products (i.e. M200, M400) outlined in
section 9.8.1 below. Proton OnSite has developed a world-class full differential pressure PEM electrolyser, and
the cost competitive systems are viewed to be a key success criterion in positioning the company to benefit from
the attractive commercial power-to-gas market which is driven by the increasing need for energy storage. A key
milestone reflecting the company’s strategy is evident from the 13 megawatt electrolysers deal announced in
December 2016, at the time of announcement the world’s largest megawatt PEM electrolyser deal. The company
will deliver megawatt-scale PEM electrolysers for the deployment of fuel cell-powered buses in the cities of
Foshan and Yunfu in China.
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Proton OnSite’s objective is to continue its development to be on the forefront of an evolving market whilst
maintaining sound financial development. Hence, the company is selective when it comes to assessing
attractiveness and risks related to new jobs and projects. The company’s uncompromising attention to excellence
and quality has enabled and will continue to enable Proton OnSite to deliver, install and support gas generation
units on every continent.
9.6 BUSINESS DESCRIPTION
9.6.1 Overview of current operations
The company has divided their operations into three segments, which comprise Commercial Products,
Development Contracts and Services, as further described in the sub-sections below.
9.6.2 Commercial products
Commercial products consist of operations related to the following three markets: industrial, energy and
laboratory.
9.6.2.1. Industrial
Industrial applications constitute the majority of Proton OnSite’s operations. The markets within industrial
products are comprised of the following applications: power plant electric generator cooling, material
processing, meteorology, and semiconductor fabrication, described in more detail below.
Power plant
Hydrogen is used to cool the windings of large electric generators at electrical power plants because of its high
heat capacity and low density. Power plants utilizing hydrogen-cooled generators must maintain optimal
hydrogen purity and pressure inside of the generator casing for efficiency, safety, and equipment reliability.
There are two ways to fill the hydrogen demand: onsite hydrogen generation, or having the gas delivered in
cylinders or tube trailers. The latter option does not optimize generator capabilities. Additionally, moisture in the
hydrogen supplied by this method can lead to formation of cracks in the generator retaining rings, higher
maintenance costs and possible generator failure.
The solution to optimizing generator performance is onsite hydrogen generation. Proton OnSite's hydrogen
generation systems reduce the need for hydrogen inventory, reduce maintenance, improve safety and maximize
generator capacity with consistent hydrogen pressure. Thus, these units reduce overall hydrogen supply costs
while reducing wind age loss.
Material Processing
The company’s hydrogen generation systems serve as efficient, reliable and productive means to provide
hydrogen for the materials processing industry where hydrogen is commonly used to provide a reductive
atmosphere. In comparison to dissociated ammonia, exo or endo gas, onsite generated hydrogen gas is a drier
and safer alternative for processing, and eliminates inventory of flammable or poisonous gas.
The company’s hydrogen generation systems are easy to permit, easy to install, and operate automatically. These
systems appeal to a variety of applications within this industry and optimize the processes across the board. By
utilizing these generators, professionals can eliminate the need for delivery and storage of hazardous gases. In
fact, when paired with generated nitrogen, a hydrogen generator system can eliminate gas deliveries and storage
entirely.
Meteorology
In meteorological applications, hydrogen is used as a lift gas when helium is unavailable or prohibitively
expensive. Onsite hydrogen generation systems are suited to produce the gas at its point of use, using only
electricity and water to provide hydrogen at 13.8 barg/ 200 psig pressure without the need for mechanical
compression.
Compared to traditional caustic electrolysers with mechanical compressors, Proton OnSite manufactures
hydrogen generation systems that utilize PEM electrolysis technology. These generators are compact,
lightweight, one-box automated systems that are small enough to deliver by light plane, and have minimal
maintenance required for the highest on-stream time.
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Semiconductor
As high purity carrier gas is a key component to semiconductor processes, professionals in this industry require a
sound gas supply. Proton OnSite provides products that utilize PEM technology to address such
needs. Hydrogen generation systems manufactured by Proton OnSite are efficient, reliable and productivity-
enhancing when it comes to providing ultra-high purity hydrogen for semiconductor requirements.
The company’s hydrogen generation systems are easy to permit, easy to install, and operate automatically. They
produce pure, dry hydrogen at 200+ psig for use in 100% hydrogen atmospheres, or for blending with delivered
or generated nitrogen to provide high purity synthetic atmospheres. A Proton OnSite hydrogen generation
system completely eliminates the need for delivery and storage of hazardous gases, such as ammonia or bottled
hydrogen. When paired with generated nitrogen, a hydrogen generator system can eliminate gas deliveries
and storage entirely.
9.6.2.2. Energy
Power to Gas The power to gas market comprises Proton OnSite’s megawatt scale electrolyser platform, i.e. the MW Products.
Proton OnSite launched their first power to gas project in the US in 2015. Proton OnSite has developed a world-
class full differential pressure PEM electrolyser, and the cost competitive systems are viewed to be a key success
criterion in positioning the company to benefit from the attractive commercial power to gas market which is
driven by the increasing need for energy storage.
The growth of renewable energy has created a need for large scale energy storage. The MW Product addresses
this need by providing scalable cost effective conversion of excess, stranded or curtailed power to hydrogen,
thereby creating a carbon-free solution for storing energy and providing grid balancing services.
Fueling
Proton OnSite sells commercial electrolysers in to fueling solutions for the fuel cell transportation market. These
systems, when fed with renewable energy, are completely carbon free and provide high purity hydrogen for light
duty vehicles, fork lifts, trucks and buses.
Military
Proton OnSite is a trusted partner to the military, supplying cell stacks to the Navy in partnership with United
Technologies Aerospace Systems, to generate breathable oxygen for submarines. The technology has been
utilized on the US, British and French navies.
9.6.2.3. Laboratory
In the laboratory market, professionals seek gas that can be supplied in a safe, cost effective, and reliable
manner. Proton OnSite offers a portfolio of hydrogen, nitrogen and zero air generators to serve this market and
eliminate the need for delivered bulk gas or cylinders.
Hydrogen is used as an ultra-high purity fuel and reducing agent in analytical labs. Proton OnSite’s hydrogen
generation systems are well-suited to provide ultra-high purity hydrogen as a carrier gas with consistent
composition and predictable low levels of oxygen and nitrogen.
9.6.3 Development Contracts
Development contracts comprise government-sponsored research and development contracts. Proton OnSite’s
government programs support a diverse set of applications and requirements, for agency sponsors, primes, and
Federal laboratory collaborators. Proton OnSite contract research activity includes active programs with ARPA-
E, Department of Energy, National Science Foundation, and Air Force Research Laboratory.
The materials and applied research afforded by these contracts provides the foundation for technology and
process innovation in the company’s existing product lines, as well as new solutions to real world needs in both
the government and civilian marketplace.
9.6.4 Services
Service includes commissioning and training for all generators sold, service plans in many geographies,
maintenance kits and accompanying service visits and spare parts. The length of service contracts is normally 1
year, based on a fixed price.
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9.7 PROCESS DESCRIPTION
9.7.1 Proton Exchange Membrane (PEM) technology
Proton OnSite’s hydrogen generators are electrochemical devices that convert water and electricity into
hydrogen gas using a process known as PEM electrolysis. The core of a hydrogen generator is an electrolysis cell
consisting of a solid electrolyte, also known as a proton exchange membrane. Catalyst material is bonded to both
sides of the membrane, forming two electrodes. To generate hydrogen, water is introduced to one side of the
membrane and voltage is applied to the electrodes. This process divides the water into protons, electrons and
oxygen. The protons are drawn through the proton exchange membrane and recombined with the electrons at the
opposite side of the membrane to form hydrogen. The oxygen is removed from the cells with the excess water
flow. This process produces hydrogen with a high level of purity and at significant pressures.
A single electrolysis cell is typically integrated into a complete cell assembly that includes flow field structures
that provide mechanical support, conduct current and provide a means to introduce water and remove gases.
These cell assemblies are stacked and compressed between two end plates along with other support components
to form a complete cell stack. The hydrogen production capability of a cell stack is approximately proportional
to the area of each cell, the number of cells in the stack and the electric current supplied.
Proton Exchange Membrane process (PEM)
Source: Proton OnSite
9.7.2 Pressure swing adsorption (“PSA”) technology
Pressure swing adsorption is a widely-used technology for the purification of gases under pressure which takes
advantage of a gases’ molecular characteristics and affinity for an adsorbent material. This technology is applied
in two different separation applications in Proton OnSite gas generation products.
The first is specific to our laboratory nitrogen generators where nitrogen is separated from air using carbon
molecular sieve (CMS) packed beds. Alternating between both CMS columns, firstly O2, moisture, CO2, and
other “contaminants” are adsorbed, allowing the pure nitrogen to flow into an accumulation tank at the outlet.
See illustration below
PSA is also used in our industrial hydrogen generation products to remove moisture from a hydrogen product
stream. In this case the beds are packed with zeolite material which has an affinity for moisture. Like the
process described for nitrogen, by alternating between two adsorbent filled vessels, one vessel being on line and
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removing moisture at high pressure, and the other off line releasing the trapped moisture at low pressure, it is
possible to thoroughly dry and deliver the hydrogen for end use. PSA process
Source: Proton OnSite
9.8 PRODUCT OFFERING
9.8.1 Brief overview of Proton OnSite’s current products
See below a brief description of Proton OnSite’s product offering.
G200, G400, G600, G600-HP
Hydrogen G200/G400/G600/G600-HP are bench-top generators that utilize a
Proton Exchange Membrane (PEM) cell stack and desiccant dryer to produce
ultra high purity (UHP) hydrogen for laboratory applications. These systems
are capable of sensing demand and adjusting production rate, while
maintaining quiet operation
G4800
Hydrogen G4800 laboratory-sized generator is designed for multiple GC FID
and carrier gas applications. The G4800 is the only generator large enough to
handle all carrier gas requirements. It utilizes Proton Exchange Membrane
(PEM) cell stack and PSA technology to produce UHP hydrogen for
laboratory applications.
S-20, S-40
Hydrogen S-Series generators utilize a Proton Exchange Membrane (PEM)
cell stack and PSA technology to produce ultra-high purity hydrogen for
various applications; some of which include materials processing, generator
cooling and semiconductor fabrication, meteorological balloon filling, etc.
S-Series hydrogen generators produce the equivalent of four cylinders of
better-than-UHP grade hydrogen every day, which help many industries
eliminate costs associated with delivery and use of hydrogen.
H2, H4, H6
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Hydrogen H-Series generators utilize Proton Exchange Membrane (PEM)
cell stack and PSA technology to produce ultra-high purity hydrogen for
various applications; some of which include materials processing, generator
cooling and semiconductor fabrication, etc. These systems benefit hydrogen
users by improving supply reliability and site safety, while also reducing
hydrogen storage space.
The generators are modular, field-upgradeable and designed to compete with
delivered hydrogen anywhere in the world. A single H6 unit will supply the
equivalent of one and one-half jumbo tube trailers every month. Multiple H-
systems may be combined for additional capacity at no extra integration cost.
C10, C20, C30
Hydrogen C-Series generators utilize Proton Exchange Membrane (PEM)
cell stack and PSA technology to produce ultra-high purity hydrogen for
various applications; some of which include materials processing,
semiconductor fabrication, hydrogenation, energy storage, fueling, etc. This
series benefits hydrogen users by improving supply reliability and site safety,
while also reducing hydrogen storage space.
StableFlow Hydrogen Control System
The StableFlow™ Hydrogen Control System is a breakthrough product
allowing power plants to actively control electric generator casing hydrogen
purity, pressure and dew point. These systems can save most plants up to
$1000/yr/ MW of capacity in fuel costs.
MW Products: M200, M400 (M Series)
The M Series is an innovative, ground-breaking product that has the ability to
integrate renewable sources of electricity generation, convert surplus
electricity to produce hydrogen, and store that hydrogen for future use. The
product is sized at a scale that can accept one or two megawatts (MWs) of
power and produce almost 1000 kilograms of hydrogen per day. That
hydrogen can be injected into the natural gas grid (Power-to-Gas), used for
biogas upgrading, fuel hydrogen fuel cell vehicles, and serve industrial
applications. The modular and scalable M Series platform makes it an easy
option for project managers looking for a solution that will satisfy their
energy storage needs, whether at two MWs or larger
Proton additionally offer products related to nitrogen, air, dualgas and trigas production to the analytical
laboratory market, which constitute a small portion of Proton OnSite’s operations and sales.
9.9 CUSTOMERS
Proton OnSite has a diverse customer base with its products sold to approximately 75 countries worldwide.
Proton OnSite’s customers range from industrial companies who require hydrogen in their production, to
laboratory institutes that require hydrogen for research purposes.
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Proton OnSite is also a trusted partner to the military through their relationship with United Technologies
Aerospace Systems, and has delivered cell stacks for contracts in the U.S., U.K., and France who utilize the
company’s products in relation to military applications.
The following figure depicts a geographic split of customer concentration in terms of revenues generated
between 2014-2016. United States represents the largest share constituting approximately 53% of total revenues
the last three years.
Source: Proton OnSite
Customer split per. 2014- 2016
53.4%
1.3%
5.7%
13.0%
11.0%
13.9%
1.3%
0.4%
United States
Remainder of North America
Africa
Asia
Middle East
Europe
South America
Oceania
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9.10 GRANTS AGREEMENTS
Since 2014 Proton OnSite has received numerous grants from the State and Federal Government. These grants
have helped fund summer interns, employee training and research and development activities. None of these
individual grants have been material to the financial results of our business.
9.11 JOINT VENTURES AND OTHER AGREEMENTS/ PARTNERSHIPS
Sun Hydro, LLC
The company is engaged in providing certain product development service to Sun Hydro. The company was
reimbursed for its direct costs associated with this arrangement and such reimbursements are netted against the
related development costs in the accompanying financial statements. Total reimbursements under this
arrangement were $72,965, $97,148 and $290,584 in 2016, 2015 and 2014, respectively.
There are no current documented customer partnership agreements outside of Proton OnSite’s purchase orders.
9.12 PROPERTY PLANT AND EQUIPMENT
As of 31 December 2016 Proton OnSite’s net property, plant and equipment amounted to approximately USD
10.27 million. The corresponding numbers for 2015 and 2014 are USD 10.68 million and USD 10.85 million
respectively.
The Company leases its operating facility from HWorld under an operating lease agreement that expires in June
2024. The Company has the right to extend this lease for two consecutive terms of five years each. The lease is
an absolute net lease with all costs, real estate taxes, expenses and obligations being the responsibility of the
Company. The Company subleases a portion of its office building under the terms of an agreement dated 18 June
2009, and amended in February 2014, which provides for monthly payments of approximately $16,000 through
June 2019.
Proton OnSite additionally leases their telephone equipment under a non-cancellable capital lease agreement
which expires 28 February 2018.
9.13 MATERIAL CONTRACTS
Proton OnSite has not entered into any material contracts considered outside the ordinary course of business for
the Company. For material agreement, deemed to be inside the ordinary course of business see section 9.10 and
9.11 for a description of the company’s grant agreements and other partnership agreements. Additionally all
patents and R&D activity related to the Company is outlined in section 9.14 and 9.15 respectively.
Material contracts related to the acquiring company Nel are outline in Section 7.13.
9.14 PATENTS
Proton OnSite is subject to numerous pending- and grated patents dating back to the company’s incorporating in
1996. The company have patents registered under different jurisdictions, as outlined in the table below. As of the
date of this Prospectus Proton OnSite has 35 registered-, 2 pending-, 6 published- and 1 granted patent by the
European Patent Office.
Patent Status
Registered Pending Published EPO Granted
United States 33 1 1 -
Canada 1 0 2 -
India 0 1 0 -
United Kingdom 1 0 2 1
European patent offices 0 0 0 1
Sum 35 2 6 1
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9.15 RESEARCH AND DEVELOPMENT
Research and development (“R&D”) costs consist primarily of salaries, related personnel costs, materials and
overhead aimed at developing new products and improving processes to increase efficiency and reduce product
costs. As an indication of the level of internal R&D expenses, Proton OnSite currently has 26 Engineers
dedicated to R&D. When the Engineers in the R&D department contribute on projects, the cost is allocated to
Cost of goods sold.
2014
The R&D expenses for fiscal years 2014 amounted to USD 5.85 million. R&D expenses in 2014 was for
commercialization of a megawatt scale electrolyser, improvement of cell stack manufacturing processes,
improvements of existing products and reduction of product costs.
2015
The R&D expenses for fiscal years 2015 amounted to USD 2.91 million. R&D expenses in 2015 was for
commercialization of a megawatt scale electrolyser, improvements of our laboratory and other commercial
products lines.
2016
The R&D expenses for fiscal years 2016 amounted to USD 2.163 million. R&D expenses in 2016 was for to the
production release of our megawatt scale electrolyser, existing product improvements and cost reductions.
83
9.16 FINANCIAL INFORMATION
9.16.1 Introduction
The following financial figures have been derived from Proton OnSite’s audited financial statements for the
fiscal years ended 2016, 2015 and 2014.
9.16.2 Accounting principles
The preparation of the financial statements in accordance with accounting standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
In 2016, the company adopted the FASB’s Accounting Standards Update No. 2015-03. The audited financials
for the year 2015 represents the financials numbers presented in the 2016 annual report.
9.16.3 Income statement
Proton OnSite’s income statement for the three years ended 31 December 2016, 2015 and 2014
Income Statement Year ended
USD 1,000 (ex. # shares)
2016
(audited)
2015
(audited)
2014
(audited)
Revenues ................................................................................................................................................................................ 27,170 27,789 23,659
Cost of revenues ..................................................................................................................................................................... 21,032 18,639 16,318
Gross profit ........................................................................................................................................................................... 6,138 9,150 7,341
Operating expenses:
Selling .................................................................................................................................................................................... 3,749 3,583 3,231
Research and Development .................................................................................................................................................... 2,163 2,914 5,850
General and administrative ..................................................................................................................................................... 3,038 2,743 4,034
Total operating expenses ...................................................................................................................................................... 8,951 9,239 13,114
Loss from operations ............................................................................................................................................................ -2,813 -89 -5,773
Interest expense, net of interest income .................................................................................................................................. 421 849 565
Consolidated net loss .............................................................................................................................................................. -3,234 -938 -6,339
Net income attributed to noncontrolling interest ..................................................................................................................... 491 488 355
Loss attributed Proton OnSite ............................................................................................................................................. -3,725 -1,427 -6,694
Loss per share:
Basic and diluted loss per share .............................................................................................................................................. -0.44 -0.17 -0.79
Weighted average shares outstanding (ex 1000) ..................................................................................................................... 8,500,000 8,500,000 8,500,000
84
9.16.4 Balance sheet
Proton OnSite’s balance sheet for the three years ended 31 December 2016, 2015 and 2014.
USD 1,000
31.12.2016
(audited
31.12.2015
(audited)
31.12.2014
(audited)
ASSETS
Current assets:
Cash and cash equivalents
1,912 1,298 1,249
Accounts receivable, net
7,125 5,579 4,785
Unbilled accounts receivable
309 258 184
Inventories ........................................................................................................................................................................... 5,474 6,149 5,662
Costs and estimated earnings in excess of billings on
contracts in progress ............................................................................................................................................................
509 2,481 73
Other current assets ............................................................................................................................................................. 587 651 717
Total current assets ........................................................................................................................................................... 15,916 16,417 12,670
Property, plant and equipment, net ($8,603 and $8,823 or
collateral of variable interest entity debt)
10,272 10,680 10,846
Restricted cash .................................................................................................................................................................... 1,945 1,603 1,040
Spare parts inventory ........................................................................................................................................................... 285 439 471
Due from related parties ...................................................................................................................................................... 537 142 130
Other assets ......................................................................................................................................................................... 23 26 101
Total assets ......................................................................................................................................................................... 28,977 29,307 25,258
EQUITY AND LIABILITIES
Current liabilities:
Accounts payable ................................................................................................................................................................ 2,647 2,854 2,312
Current portion of mortgage payable of variable interest
entity ...................................................................................................................................................................................
531 531 531
Accrued expenses and warranty reserve .............................................................................................................................. 2,171 2,522 1,849
Deferred revenue and customer advances ............................................................................................................................ 2,793 1,239 3,048
Capital lease obligation, current portion .............................................................................................................................. 19 17 -
Billings in excess of costs and estimated earnings on
contracts in progress ............................................................................................................................................................
266 195 62
Total current liabilities ...................................................................................................................................................... 8,425 7,358 7,802
Long-term liabilities:
Mortgage payable of variable interest equity, less current
portion .................................................................................................................................................................................
3,437 3,960 4,555
Notes payable to stockholder ............................................................................................................................................... 5,667 3,335 9,404
Capital lease obligation, less current portion ....................................................................................................................... 3 22 -
Total liabilities 17,532 14,674 21,760
Equity:
Proton OnSite.:
Common stock, $.01 par value; 12,500,000 shares
authorized;
8,500,000 shares issued and outstanding ............................................................................................................................. 85 85 85
Additional paid-in capital .................................................................................................................................................... 21,842 21,776 9,702
Accumulated deficit ............................................................................................................................................................ -16,047 -12,322 -10,895
Total Proton OnSiteequity (deficit) .................................................................................................................................
5,880 9,539 -1,107
Noncontrolling variable interest equity ................................................................................................................................ 5,565 5,094 4,606
Total equity ......................................................................................................................................................................... 11,445 14,633 3,498
Total liabilities and equity ................................................................................................................................................. 28,977 29,307 25,258
85
9.16.5 Cash flow statement
Proton OnSite’s cash flow statement for the three years ended 31 December 2016, 2015 and 2014.
USD 1,000
31.12.2016
(audited)
31.12.2015
(audited)
31.12.2014
(audited)
Operating activities:
Consolidated net loss ......................................................................................................................................................... -3,234 -938 -6,339
Adjustments to reconcile consolidated net loss to net cash used in operating activities:
Depreciation and amortization ............................................................................................................................................. 639 627 427
Stock-based compensation expense ..................................................................................................................................... 66 82 92
Bad debt expense ................................................................................................................................................................. 208 1 -
Changes in operating assets and liabilities:
Accounts receivable ............................................................................................................................................................ -1,754 -795 -2,680
Unbilled accounts receivable ............................................................................................................................................... -51 -73 70
Inventories ........................................................................................................................................................................... 830 -456 230
Costs and estimated earnings in excess of billings on contracts in progress ......................................................................... 1,972 -2,408 -72
Other current assets ............................................................................................................................................................. 64 66 -133
Due from related parties ...................................................................................................................................................... -395 -12 15
Other assets ......................................................................................................................................................................... 3 3 8
Accounts payable ................................................................................................................................................................ -207 542 1,089
Accrued expenses and warranty reserve .............................................................................................................................. -351 673 479
Deferred revenue and customer advances ............................................................................................................................ 1,553 -1,809 1,856
Billings in excess of costs and estimated earnings on contracts in progress ......................................................................... 71 133 21
Net cash used in operating activities ................................................................................................................................. -586 -4,365 -4,937
Investing activities:
Purchases of equipment ....................................................................................................................................................... -223 -401 -1,150
Increase in restricted cash .................................................................................................................................................... -342 -563 -190
Net cash used in investing activities .................................................................................................................................. -565 -964 -1,340
Financing activities:
Mortgage payments ............................................................................................................................................................. -531 -531 -446
Loan proceeds from stockholder .......................................................................................................................................... 3,447 6,087 6,605
Loan repayments to affiliate ................................................................................................................................................ -20 - -10
Payment of notes payable to stockholder ............................................................................................................................. -1,115 -165 -
Payment of capital lease obligation ..................................................................................................................................... -17 -13 -
Net cash provided by financing activities ......................................................................................................................... 1,765 5,378 6,149
Net change in cash and cash equivalents ............................................................................................................................. 614 49 -128
Cash and cash equivalents, beginning of year ...................................................................................................................... 1,298 1,249 1,376
Cash and cash equivalents, end of year ............................................................................................................................ 1,912 1,298 1,249
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................................................................................................................................... 421 403 385
Purchase of equipment financed through capital lease .........................................................................................................
obligation ............................................................................................................................................................................ - 52 -
Conversion of notes payable to additional paid-in capital - 11,991 -
86
9.16.6 Statement of changes in equity
The table below shows the audited reconciliation of equity as of 31 December 2016, 2015 and 2014 for Proton
OnSite.
USD 1,000 (ex. # shares)
Common
stock
(shares)
Share
capital
Additional
Paid-in
Capital
Accumulated
Deficit
Total
Proton
OnSite
Non-
controlling
interest
Total
equity
Equity at 31.12.2013 ....................... 8,500,000 85 9,611 -4,201 5,495 4,251 9,745
Equity at 01.01.2014 ....................... 8,500,000 85 9,611 -4,201 5,495 4,251 9,745
Stock-based compensation expense .. - - 92 - 92 - 92
Net (loss) income ............................. - - - -6,694 -6,694 355 -6,339
Equity at 31.12.2014 ....................... 8,500,000 85 9,702 -10,895 -1,107 4,606 3,498
Equity at 01.01.2015 ....................... 8,500,000 85 9,702 -10,895 -1,107 4,606 3,498
Stock-based compensation expense .. - - 82 - 82 - 82
Conversion of notes payable ........... - - 11,991 - 11,991 - 11,991
Net (loss) income ............................. - - - -1,427 -1,427 488 -938
Equity at 31.12.2015 ....................... 8,500,000 85 21,776 -12,322 9,539 5,094 14,633
Equity at 01.12.2016 ....................... 8,500,000 85 21,776 -12,322 9,539 5,094 14,633
Distribution ...................................... - - - - - -20 -20
Stock-based compensation expense .. - - 66 - 66 - 66
Net (loss) income ............................. - - - -3,725 -3,725 491 -3,234
Equity at 31.12.2016.. ..................... 8,500,000 85 21,842 -16,047 5,880 5,565 11,445
9.16.7 Management discussion and analysis
9.16.7.1. Financial year 2016
Profit and loss:
For 2016 the total revenue and income for Proton OnSite amounted to USD 27.17 million. Revenues consist of
revenues from sale of Commercial Products, income from Development Contracts and fees from services.
The gross profit for 2016 was USD 6.14 million. Furthermore, other operating expenses which includes selling
cost, research and development expenses and general and administrative expenses amounted to USD 8.95
million, giving a total operational loss of USD 2.81 million.
Net finance costs for 2016 were USD 0.42 million, which resulted in a consolidated net loss of 3.23 million.
Net income attributed non-controlling interest was in 2016 USD 0.49 million, thus resulting in a total loss
attributed Proton OnSite of USD 3.73 million.
Financial position:
At 31 December 2016, total assets amounted to USD 28.98 million, whereas current assets represented USD
15.92 million including cash and cash equivalents of USD 1.91 million. Current assets primarily relate to
working capital items related to Proton OnSite’s operations, including receivables (USD 7.13 million) and
inventory (USD 5.47 million) which comprises the largest line items. Of non-current assets, property, plant and
equipment comprises the largest item (USD 10.27 million). However, note that a large part of the land, buildings
and real estate property not will be included in the Acquisition as HWorld was consolidated by Proton OnSite as
a variable interest entity, and HWorld is not part of the Acquisition. See section 11.6, note 2 for more
information.
As of 31 December 2016, current and long-term liabilities amounted to USD 8.43 million and USD 9.11 million
respectively. The majority of current liabilities comprised of working capital elements related to Proton OnSite’s
operations such as accounts payable (USD 2.65 million), accrued expenses and warranty reserve (USD 2.17
million) and deferred revenue and customer advances (USD 2.79 million). Long-term liabilities comprised
primarily of two components, mortgage payable of variable interest entity, less current portion and deferred
financing costs of USD 3.44 million and notes payable to stockholder of USD 5.67 million. The interest on notes
payable to stockholder was 6%, and was considered by Proton OnSite to be consistent with market terms. As of
31 December 2016 (and prior to the Acquisition) the due date of the outstanding balance was 31 December 2018
(Please see section 5.1 for further information on Seller Debt Payoff Amount in relation with the Acquisition).
87
Note that HWorld, consolidated by Proton OnSite as a variable interest entity not is part of the Acquisition, see
section 11.6, note 2 for more information. The notes payable to stockholder comprised of subordinated
promissory notes due to the stockholder (i.e. borrowing provided by the owner of the company). Proceeds from
such notes has primarily been used to fund working capital and new product development. Reported equity was
USD 11.45 million, of which USD 5.57 million was noncontrolling variable interest equity.
Cash flow statement:
Proton OnSite’s net cash outflow from operating activities amounted to USD – 0.59 million in 2016. Total net
cash outflow from investing activities was USD -0.57 million.
The cash outflow from the operating and investing activities was financed through loan proceeds from
stockholders, resulting in positive net cash from financing activities of USD 1.77 million. The cash and cash
equivalents at the end of 2016 increased to USD 1.91 million from USD 1.30 million in the beginning of the
year.
9.16.7.2. Financial year 2015
Profit and loss:
For 2015 the total revenue and income for Proton OnSite amounted to USD 27.79 million. Revenues consist of
revenue from sale of Commercial Products, income from Development Contracts and fees from services.
The gross profit for 2015 was USD 9.15 million. Furthermore, other operating expenses which includes selling
cost, research and development expenses and general and administrative expenses amounted to USD 9.24
million, giving a total operational loss of USD 0.089 million.
Net finance costs for 2015 were USD 0.85 million, which resulted in a consolidated net loss of 0.94 million.
Net income attributed non-controlling interest was in 2015 USD 0.49 million, thus resulting in a total loss
attributed Proton OnSite of USD 1.43 million.
Financial position:
At 31 December 2015, total assets amounted to USD 29.31 million, whereas current assets represented USD
16.42 million including cash and cash equivalents of USD 1.30 million. Current assets primarily relate to
working capital items related to Proton OnSite’s operations, including receivables (USD 5.58 million) and
inventory (USD 6.15 million) which comprises the largest line items. Of non-current assets, property, plant and
equipment comprises the largest item (USD 10.68 million). However, note that a large part of the land, buildings
and real estate property not will be included in the Acquisition as HWorld was consolidated by Proton OnSite as
a variable interest entity, and HWorld is not part of the Acquisition. See section 11.6, note 2 for more
information.
As of 31 December 2015, current and long-term liabilities amounted to USD 7.36 million and USD 7.32 million
respectively. The majority of current liabilities comprised of working capital elements related to Proton OnSite’s
operations such as accounts payable (USD 2.85 million), accrued expenses and warranty reserve (USD 2.52
million) and deferred revenue and customer advances (USD 1.24 million). Long-term liabilities comprised
primarily of two components, mortgage payable of variable interest entity, less current portion and deferred
financing costs of USD 3.96 million and notes payable to stockholder of USD 3.34 million. Note that HWorld,
consolidated by Proton OnSite as a variable interest entity not is part of the Acquisition, see section 11.6, note 2
for more information. The notes payable to stockholder comprised of subordinated promissory notes due to the
stockholder (i.e. borrowing provided by the owner of the company). Proceeds from such notes has primarily
been used to fund working capital and new product development. Reported equity was USD 14.64 million, of
which USD 5.09 million was noncontrolling variable interest equity.
Cash flow statement:
Proton OnSite’s net cash outflow from operating activities amounted to USD -4.37 million in 2015. Total net
cash outflow from investing activities was USD -0.96 million.
The cash outflow from the operating and investing activities was financed through loan proceeds from
stockholders, resulting in positive net cash from financing activities of USD 5.38 million. The cash and cash
equivalents at the end of 2015 increased to USD 1.30 million from USD 1.25 million in the beginning of the
year.
88
9.16.7.3. Financial year 2014
Profit and loss:
For 2014 the total revenue and income for Proton OnSite amounted to USD 23.66 million. Revenues consist of
revenue from sale of Commercial Products, income from Developing Contracts and fees from services.
The gross profit for 2014 was USD 7.34 million. Furthermore, other operating expenses which includes selling
cost, research and development expenses and general and administrative expenses amounted to USD 13.11
million, giving a total operational loss of USD 5.77 million.
Net finance costs for 2014 were USD 0.57 million, which resulted in a consolidated net loss of 6.34 million.
Net income attributed non-controlling interest was in 2014 USD 0.36 million, thus resulting in a total loss
attributed Proton OnSite of USD 6.70 million.
Financial position:
At 31 December 2014, total assets amounted to USD 25.26 million, whereas current assets represented USD
12.67 million including cash and cash equivalents of USD 1.25 million. Current assets primarily relate to
working capital items related to Proton OnSite’s operations, including receivables (USD 4.79 million) and
inventory (USD 5.66 million) which comprises the largest line items. Of non-current assets, property, plant and
equipment comprises the largest item (USD 10.85 million). However, note that a large part of the land, buildings
and real estate property not will be included in the Acquisition as HWorld was consolidated by Proton OnSite as
a variable interest entity, and HWorld is not part of the Acquisition. See section 11.6, note 2 for more
information.
As of 31 December 2014, current and long-term liabilities amounted to USD 7.80 million and USD 13.96
million respectively. The majority of current liabilities comprised of working capital elements related to Proton
OnSite’s operations such as accounts payable (USD 2.31 million), accrued expenses and warranty reserve (USD
1.85 million) and deferred revenue and customer advances (USD 3.05 million). Long-term liabilities comprised
primarily of two components, mortgage payable of variable interest entity, less current portion and deferred
financing costs of USD 4.56 million and notes payable to stockholder of USD 9.40 million. Note that HWorld,
consolidated by Proton OnSite as a variable interest entity not is part of the Acquisition, see section 11.6, note 2
for more information. The notes payable to stockholder comprised of subordinated promissory notes due to the
stockholder (i.e. borrowing provided by the owner of the company). Proceeds from such notes has primarily
been used to fund working capital and new product development. Reported equity was USD 3.50 million, of
which USD 4.61 million was noncontrolling variable interest equity.
Cash flow statement:
Proton OnSite’s net cash outflow from operating activities amounted to USD -4.94 million in 2014. Total net
cash outflow from investing activities was USD -1.34 million.
The cash outflow from the operating and investing activities was partly financed through loan proceeds from
stockholders, resulting in positive net cash from financing activities of USD 6.15 million. In total the cash and
cash equivalents at the end of 2014 decreased to USD 1.25 million from USD 1.38 million in the beginning of
the year.
9.16.8 Segment and geographical reporting
The Group operates within two business segments, Commercial Product and Development contract. The
Company’s chief operating decision makers measure operating segment performance and allocate balances
based on revenues and gross margin less selling expenses. Research and development and general and
administrative expenses are primarily for the benefit of all segments and are not specifically allocated.
Identifiable assets of the Company are not segregated by operating segment and are located in the United States.
Segment split
The following table provides an overview of Proton OnSite’s income statement, broken down by operating
segment for the fiscal year ended 31 December 2016, 2015 and 2014.
89
USD 1,000 2016 2015 2014
Revenue:
Commercial Product ........................ 23,345 24,978 20,282
Development Contracts .................... 3,825 2,810 3,376
Total revenues ................................ 27,170 27,789 23,659
Gross profit less selling expenses:
Commercial Product ........................ 1,971 5,256 3,428
Development Contracts .................... 417 311 682
Total gross profit less selling expenses 2,389 5,567 4,110
Unallocated costs and expenses
Research and Development .............. 2,163 2,914 5,850
General and administrative............... 3,046 2,743 4,034
Loss from operations ..................... -2,821 -89 -5,773
The majority of revenues were generated from Commercial Products, which in 2016 and 2015 amounted to
approximately USD 23 million and USD 25 million respectively. Revenues from Commercial Products saw a
marginal decrease from last year.
Similarly, gross profit saw a decrease for Commercial Products and a marginal increase for Development
Contracts between 2015 and 2016. Gross Profit in 2016 amounted to USD 2.0 million and USD 0.4 million
respectively for Commercial Products and Development Contracts.
90
Geographic split
The following table provides an overview of Proton OnSite’s revenues broken down by geography for the fiscal
year ended 31 December 2016, 2015, and 2014.
The majority of revenues have the past three years been generated from the Unites States. In 2016 revenues from
the United States amounted to USD 13.6 million and represented approximately 50% of total revenues. Africa,
Europe and Asia saw an increase in revenues from 2015 to 2016. However, there was a drop in revenues from
other regions, specifically in the Middle East and United States.
9.16.9 Auditor
The Company’s auditor is Cohn Reznick LLP. The address of Cohn Reznick LLP is 350 Church Street,
Hartford, CT 06103, USA. The audit reports for the last three years have been issued without qualifications.
9.16.10 Investments
Historical investments
The company’s historical investments have primarily been related to R&D consisting of materials and overhead
aimed at developing new products and improving processes to increase efficiency and reduce product costs. For
further information related to the Proton’s historical R&D use please see section 9.15.
Future investments
The company has made no firm commitments to any material future investments. Going forward investments
will be related to the ordinary course of business, more explicitly that includes supporting growth in the Power to
Gas related products.
USD 1,000 2016 2015 2014
United States .................................... 13,613 16,401 11,945
Remainder of North America ........... 371 220 460
Africa ............................................... 3,834 454 162
Asia.................................................. 4,062 1,949 4,225
Middle East ...................................... 2,009 5,592 1,052
Europe ............................................. 3,157 2,894 4,840
South America ................................. 83 144 853
Oceania ............................................ 41 135 124
Total revenues ................................ 27,170 27,789 23,659
91
10. NEL ASA FINANCIAL INFORMATION
As a result of the acquisitions of H2 Logic AS, RotoBoost H2 AS, both in 2015, and lately Proton OnSite
announced April 2017, the Company’s historical financial information is not representative for the full range of
the Company’s operations going forward.
The following financial information is presented in this Prospectus:
i) Audited financial information for the years ended 31 December 2016, 2015 and 2014;
ii) Unaudited financial information for the three month period ended 31 March 2017 and 2016
The financial information for 2014 represents primarily the Q4 figures of New Nel Hydrogen AS. The three
quarters prior to Q4 represents restructuring activities of former DiaGenic ASA, see section 7.3 for more
information regarding the development of the Company. The financial information for 2015 represents the full-
year operations of New Nel Hydrogen AS, H2 Logic A/S’ figures as from third quarter 2015 and Rotoboost H2
AS’ financials as from fourth quarter 2015. The financial information for 2016 and first quarter 2017 represent
the Group as operating today prior to the inclusion of Proton OnSite.
Annual and quarterly financial statements presented below have been prepared in accordance with International
Financial Reporting Standards as adopted by EU. Annual financial statements for 2014, 2015 and 2016 are
audited in accordance with auditing standards and practices generally accepted in Norway. Interim financial
statements for the first and fourth quarter 2016, and first quarter 2017 have been prepared in accordance with
applicable accounting standards but not audited. In the Company’s opinion the financial information gives a true
and fair view of the financial position of the Company.
Details of Nel’s financial statements and explanatory notes are incorporated by reference to this Prospectus as
further described in section 10.3 hereunder.
10.1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with International Financial Reporting Standards
(IFRS) as adopted by the EU and valid as of 31 December 2014. The IFRS principles have been applied
consistent with those of previous financial years.
Please see Annual Report for 2016 pages 40 through 46 for Nel’s accounting policies, incorporated by reference
to this Prospectus.
10.2 HISTORICAL FINANCIAL INFORMATION
The following financial information has been derived from the Company’s audited financial statements as of,
and for each of the three years ended 31 December 2016, 2015 and 2014 and from the unaudited condensed
financial statements for the three month period ended 31 March 2016 and 2017.
The selected financial information set forth below should be read in conjunction with the Company’s published
financial statements and its accompanying notes.
10.2.1 Statement of comprehensive income
The Company’s income statements for the three years ended 31 December 2016, 2015 and 2014 and from the
unaudited condensed financial statements for the three month period ended 31 March 2016 and 2017 are set out
below.
92
10.2.2 Statement of financial position
Set out below is the Company’s statement of financial position for the three years ended 31 December 2016,
2015 and 2014 and from the unaudited condensed financial statements for the three month period ended 31
March 2016 and 2017.
NOK 1,000 31.03.2017
(unaudited)
31.03.2016
(unaudited)
31.12.2016
(audited)
31.12.2015
(audited)
31.12.2014
(audited)
ASSETS
Technology....................................... 64,984 48,156 57,854 46,645 8,775
Customer relationships ..................... 26,968 30,621 27,861 31,569 32,175
Customer contracts ........................... 0 0 0 0 7,200
Goodwill .......................................... 317,604 326,768 317,629 332,958 60,799
Total intangible assets .................... 409,556 405,545 403,344 411,172 108,949
Fixed assets ...................................... 1,203 962 1,025 700 1,174
Land, buildings and real estate ......... 46,656 15,598 44,778 15,829 3,893
Total tangible fixed assets .............. 47,859 16,560 45,803 16,530 5,067
Investments in associates ................. 12,869 6,544 13,708 7,297 263
Total financial assets ...................... 12,869 6,544 13,708 7,297 263
Total non-current assets ................ 470,283 428,649 462,855 434,998 114,278
Three months ended 31 March
Year ended 31 December
NOK 1,000
2017
(unaudited)
2016
(unaudited)
2016
(audited)
2015
(audited)
2014
(audited)
Sales income........................................................................................................................................................................... 32,650 21,823 98,446 88,539 12,067
Other operating income .......................................................................................................................................................... 3,052 4,187 16,032 11,386 0
Total operating income ........................................................................................................................................................ 35,702 26,010 114,479 99,925 12,067
Cost of goods sold .................................................................................................................................................................. 19,273 11,166 60,841 42,116 3,361
Payroll and payroll related costs ............................................................................................................................................. 18,201 13,979 60,266 29,891 7,342
Depreciation ........................................................................................................................................................................... 2,591 2,450 10,431 15,512 3,551
Impairment ............................................................................................................................................................................. 0 0 0 52 100
Other operating costs .............................................................................................................................................................. 11,228 8,485 38,253 30,613 10,885
Total operating expenses ...................................................................................................................................................... 51,294 36,080 169,790 118,184 25,239
Operating profit/loss ............................................................................................................................................................ -15,592 -10,070 -55,312 -18,259 -13,173
Finance income ...................................................................................................................................................................... 1,209 970 3,599 5,185 1,813
Finance costs .......................................................................................................................................................................... 839 404 -7,993 1,420 274
Share of profit (loss) from an associate -938 -617 -2,932 -13,286 0
Pre-tax profit/loss ................................................................................................................................................................. -16,160 -10,121 -62,637 -27,780 -11,633
Income tax expense ................................................................................................................................................................ 516 376 6,808 6,049 5,122
Net profit/ (loss) .................................................................................................................................................................... -15,644 -9,746 -55,829 -21,731 -6,511
Currency translation differences ............................................................................................................................................. 677 -6,167 -19,617 20,220 0
Comprehensive income ........................................................................................................................................................ -14,967 -15,913 -75,446 -1,511 -6,511
Basic earnings per share ......................................................................................................................................................... -0.02 -0.01 -0.08 -0.04 -0.02
Diluted earnings per share ...................................................................................................................................................... -0.02 -0.01 -0.08 0.04 -0.02
93
Inventory .......................................... 42,465 20,280 36,266 15,023 6,071
Trade receivables ............................. 38,469 20,839 34,974 40,361 18,927
Other receivables ............................. 14,088 20,801 3,312 10,717 1,406
Financial current assets .................... 0 1,507 0 1,507 0
Cash and cash equivalents ................ 368,349 288,993 225,467 313.043 98,497
Total current assets ........................ 463,370 352,420 300,019 380,650 124,901
Total assets ..................................... 933,654 781,069 762,875 815,649 239,179
EQUITY AND LIABILITIES
Share capital..................................... 149,732 136,120 136,736 136,120 67,786
Share premium/ paid-in equity ......... 781,321 602,410 619,329 602,910 134,662
Treasury shares ................................ -1,377 -23,935 -1,377
Retained earnings ............................. -98,435 -12,935 -83,468 -8,022 -6,511
Total equity..................................... 831,241 714,595 671,219 731,008 195,937
Deferred tax ..................................... 13,041 20,456 13,552 21,027 15,984
Long term debt ................................. 8,940 14,568 12,550 14,641 7,578
Trade payables ................................. 19,564 6,592 16,790 16,760 3,100
Public duties payable ....................... 389 1,003 1,347 3,185 1,735
Tax payable ...................................... 373 383 370 375 0
Other current liabilities .................... 60,106 23,471 47,046 28,652 14,847
Total current liabilities .................. 80,432 31,449 65,553 48,972 19,681
Total liabilities ................................ 102,413 66,473 91,655 84,640 43,242
Total equity and liabilities ............. 933,654 781,069 762,875 815,649 239,179
Source: The Company’s Q1 2016 and Q1 2017 interim financial report and annual reports 2016, 2015 and 2014
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10.2.3 Cash flow statement
The table below summarises the Company’s statement of cash flow for the three years ended 31 December 2016,
2015 and 2014 and from the unaudited condensed financial statements for the three month period ended 31
March 2016 and 2017.
Three months ended 31 March
Year ended 31 December
NOK 1,000 2017
(unaudited)
2016
(audited)
2016
(audited)
2015
(audited)
2014
(audited)
Cash flow from operating
activities
Loss before income tax ........................................................................................................................................................... -15,637 -10,121 -62,637 -27,780 -6,511
Interest costs, reversed ............................................................................................................................................................ 91 -699 629 -503 -143
Interest income, reversed ........................................................................................................................................................ -847 155 -2,399 -2,303 -936
Depreciation and amortisation ................................................................................................................................................ 2,591 2,450 9,732 15,512 3,551
Impairment of subsidiaries ..................................................................................................................................................... 0 0 0 0 0
Impairment of fixed assets ...................................................................................................................................................... 0 0 467 52 100
Fair value granted option rights .............................................................................................................................................. 0 0 0 0 0
Changes in provisions, inventories,
trade receivable, trade payable .............................................................................................................................................
-7,035 4,389 -17,203 -17,985 -6,134
Changes in other short-term
receivables and other short-term
liabilities ..............................................................................................................................................................................
6,813 -17,448 37,244 -4,803 13,344
Net cash flow from operating
activities .............................................................................................................................................................................
-14,024 -21,275 -34,167 -37,810 3,270
Cash flow from investing activities
Proceeds for sale of tangible fixed
assets ...................................................................................................................................................................................
0 0 37 0 0
Investment in fixed assets ....................................................................................................................................................... -2,825 -552 -44,506 -581 0
Acquisitions of intangible assets ............................................................................................................................................. -8,582 -2,325 0 0 0
Payment of loan given to associates
company/JV ........................................................................................................................................................................
0 0 -15,737 0 0
Acquisition of subsidiaries .................................................................................................................................................... 0 0 0 -83,182 -37,495
Proceeds from sale of subsidiaries ......................................................................................................................................... 0 0 0 0 0
Net cash flow from investing
activities .............................................................................................................................................................................
-11,407 -2,878 -60,207 -83,763 -37,495
Cash flow from financing activities
Interest paid ............................................................................................................................................................................ -91 699 -629 472 143
Interest received ..................................................................................................................................................................... 847 -154 2,399 2,303 936
Gross cash flow from share issue ............................................................................................................................................ 176,747 0 7,118 337,186 112,573
Transaction costs connected to share
issues
-5,642 -500 0 0 0
Proceeds from new loan ......................................................................................................................................................... 0 413 0 1,118 0
Payment of short and long term
liabilities ..............................................................................................................................................................................
-3,548 -311 -2,090 -4,962 7,578
Net cash flow from financing
activities .............................................................................................................................................................................
168,313 147 6,798 336,118 121,230
Net change in cash and cash
equivalents ..........................................................................................................................................................................
142,882 -24,050 -87,575 214,545 87,005
Cash flow in the beginning of the
period
225,467 313,042 313,042 98,497 11,492
Cash and cash equivalents end
period .................................................................................................................................................................................
368,349 288,992 225,467 313,042 98,497
Source: The Company’s Q1 2016 and Q1 2017 interim financial report and annual reports 2016, 2015 and 2014
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10.2.4 Statement of changes in equity
The table below shows the audited reconciliation of equity as of 31 December 2016, 2015 and 2014.
NOK 1,000 (ex. # shares) Number of
shares
Share
capital
Share
premium
Other
reserve
Currency
conversion
effects
Other
equity Total equity
Equity at 01.01.2014 ....................... 8,159,873 1,632 45,015 -310 0 -37,662 8,675
Allocation of net loss 2013 ............... -37,972 310 37,662 0
Treasury shares ................................ -2,085 -2,085
Transaction cost ............................... -5,342 -5,342
Share issue 15 April 2014 ................ 100,000,000 20,000 30,000 50,000
Share issue 20 April 2014 ................ 176,923,077 35,385 79,615 115,000
Share issue 13 November 2014 ........ 53,846,154 10,769 24,231 35,000
Fair value adjustment for acquisition of
Nel Hydrogen ................................
1,200
1,200
Retained earnings ............................. -6,511 -6,511
Equity at 31.12.2014 ....................... 338,929,104 67,786 133,463 1,200 0 -6,511 195,937
Equity at 01.01.2015 ....................... 338,929,104 67,786 133,463 1,200 0 -6,511 195,937
Increase in capital 12 January 2015 .. 50,000,000 10,000 55,000 65,000
Increase in capital 2 February 2015 .. 10,000,000 2,000 11,000 13,000
Increase in capital 12 June 2015 ....... 51,301,852 10,260 58,997 69,258
Increase in capital 26 June 2015 ....... 148,148,148 29,630 170,370 200,000
Increase in capital 14 July 2015 ....... 22,222,222 4,444 25,556 30,000
Increase in capital 19 August 2015 ... 30,000,000 6,000 61,500 67,500
Increase in capital 17 December 2015 . 30,000,000 6,000 105,000 111,000
Transaction cost rel. to capital increase -18,571 -18,571
Gain sale shares owned by company -604 -604
Retained earnings ............................. 20,220 -21,731 -1,511
Equity at 31.12.2015 ....................... 680,601,326 136,120 601,710 1,200 20,220 -28,242 731,008
Equity at 01.01.2016 ....................... 680,601,326 136,120 601,710 1,200 20,220 -28,242 731,008
Transaction cost rel. capital increase..
Increase in capital 16 June 2016 ....... 3,076,926 615 6,503 7,118
Option and share program ................ 9,916 9,916
Treasury shares ................................ -,1377 -1,377
Retained earnings ............................. -19,617 -55,829 -75,446
Equity at 31.12.2016 ....................... 683,678,252 136,736 608,213 11,116 603 -85,447 671,219
Source: The Company’s annual reports 2016, 2015 and 2014
The table below shows the unaudited reconciliation of equity as of 31 March 2016 and 31 March 2017.
NOK 1,000 (ex. # shares) Number of
shares
Share
capital
Share
premium
Other
reserve
Currency
conversion
effects
Other equity Total equity
Equity at 01.01.2016 ....................... 680,601,326 136,120 601,710 1,200 20,220 -28,242 731,008
Transaction cost .............................. -500 -500
Retained earnings ............................. -9,746 -9,746
Currency transaction differences ...... -6,167 -6,167
Equity at 31.03.2016 ....................... 680,601,326 136,120 601,210 1,200 14,052 -37,984 714,595
Equity at 01.01.2017 ....................... 683,678,252 136,736 608,213 11,116 603 -85,447 671,219
Transaction cost ...............................
Share issue 27 February 2017 ........... 64,980,000 12,996 158,107
171,103
Retained earnings ............................. -15,644 15,644
Options and share program ............... 3,884 3,884
Currency transaction differences ...... 677 677
Equity at 31.03.2017 ....................... 748,658,252 149,732 766,320 15,000 35,378 -135,191 831,241
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Source: The Company’s Q1 2016 and Q1 2017 interim financial report
10.3 MANAGEMENT DISCUSSION AND ANALYSIS
Figures in brackets below refer to the corresponding period last year.
10.3.1 The three month period ended 31 March 2017 and 2016
Profit and loss:
Nel reported revenues in the first quarter 2017 of NOK 35.7 million, compared to NOK 26.0 million in the first
quarter of 2016, representing a growth of 37.3 per cent, following an increased interest in hydrogen solutions as
fueling stations, electrolysers and integrated systems. Operating expenses increased to NOK 51.3 million (36.1).
The cost of goods sold totalled NOK 19.3 million (11.2), while salaries and personnel expenses amounted to
NOK 18.2 million (14.0). Depreciation and amortisation was NOK 2.6 million (2.5). Other operating expenses
increased to NOK 11.2 million (8.5).
Net financial income amounted to NOK -0.7 million (-0.8)), while pre-tax income totalled NOK -16.2 million (-
10.1). Net profit (loss) amounted to NOK -15.6 million (-9.8), while comprehensive income equalled NOK -15.0
million (-15.9). Nel had a currency translation difference of NOK 0.7 million (-6,2).
Financial position:
Total assets stood at NOK 933.7 million (781.1), including intangible assets of NOK 409.6 million. This is an
increase of NOK 152.6 million compared to the ending balance as of 31 March 2016 mainly attributable to the
increase in the Company’s cash balance. Goodwill totalled NOK 317.6 million (326.8) as of 31 March 2017. The
identified intangible assets include related customer relationships of NOK 27.0 million (30.6) and technology of
NOK 65.0 million (48.2). As of 31 March 2017, investments in tangible fixed assets amounted to NOK 47.9
million (16.6), with land, buildings and other property totalling NOK 46.7 million (15.6). Inventories ended at
NOK 42.5 million (20.3) and total receivables at NOK 52.6 million (41.1).
As of 31 March 2017, the company had cash and cash equivalents of NOK 368.3 million (289.0).
Cash flow:
Net cash flow from operating activities was NOK -14.0 million (-21.3), while net cash flow from investment
activities totalled NOK -11.4million (-2.9). Net cash flow from share issues was NOK 171.1 million (-0.5), while
instalments on long-term liabilities ended at NOK -3.5 million (-0.3). The cash balance on 31 March 2017
amounted to NOK 368.3 million (289.0).
The increase in the Company’s cash balances is mainly attributable to the private placement in the first quarter of
2017 which is explained in further detail in section6.
10.3.2 Financial year 2016
Profit and loss:
Nel generated revenues of NOK 114.5 million in 2016 (99.9). Operating expenses increased to NOK 169.8
million (118.2). The cost of goods sold totalled NOK 60.8 million (42.1), while salaries and personnel expenses
amounted to NOK 60.3 million (29.9). Depreciation and amortisation was NOK 10.4 million (15.5). Other
operating expenses increased to NOK 38.2 million (30.6). Higher level of cost of goods sold in 2016 is a result
of the introduction phase of Car-200 (a new model of the Company’s hydrogen refuelling station) and that the
product mix included a higher proportion of product sale, which has a higher cost of goods sold than service and
after-market sales. The higher level of salaries and personnel expenses in 2016 is due to the introduction of a
stock option- and share incentive programs.
Net financial income amounted to NOK -7.3 million (-9.5), while pre-tax income totalled NOK -62.6 million (-
27.8). Net profit (loss) amounted to NOK -55.8 million (-21.7), while comprehensive income equalled NOK -
75.4 million (-1.5). Nel had a currency translation difference of NOK -19.6 million (20.2).
Financial position:
Total assets stood at NOK 762.9 million (815.6), including intangible assets of NOK403.3 million (411.2).
Goodwill totalled NOK 317.6 million (333.0) as of 31 December, 2016. The identified intangible assets include
related customer relationships of NOK 27.9 million and technology of NOK 57.8 million. As of 31 December
2016, investments in tangible fixed assets amounted to NOK 45.8 million (16.5), with land, buildings and other
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property totalling NOK 44.8 million (15.8). Inventories ended at NOK 36.3 million (15.0) and total receivables
at NOK 38.3 million (51.1). The increase in tangible fixed assets is largely related to acquisition of a new
building in Herning.
As of 31 December 2016, the company had cash and cash equivalents of NOK 225.0 million (313.0).
Cash flow:
Net cash flow from operating activities was NOK -34.2 million (-37.8), while net cash flow from investment
activities totalled NOK -60.2 million (-83.8). Gross cash flow from share issues was NOK 7.1 million. The cash
balance on 31 December 2016 amounted to NOK 225.5 million (313.0). Positive contribution to net cash flow
from operating activities is release of work in progress and increase in prepayments in 2016 reflected in Changes
in other short-term receivables and other short-term liabilities. Cash flow from investment activities is largely
related to the acquisition of new building in Herning and funding of an associated company where the Company
owns a minority shares.
10.3.3 Financial year 2015
Profit and loss:
Nel generated revenues of NOK 99.9 million in 2015 (12.1), reflecting the acquisition of H2 Logic. Operating
expenses increased to NOK 118.2 million (25.2). The cost of goods sold totalled NOK 42.1 million (3.4), while
salaries and personnel expenses amounted to NOK 29.9 million (7.3). Depreciation and amortisation was NOK
15.5 million (3.6). Other operating expenses increased to NOK 30.6 million (10.9).
Net financial income amounted to NOK -9.5 million (1.5), while pre-tax income totalled NOK -27.8 million (-
11.6). Net profit amounted to NOK -21.7 million, while comprehensive income equalled NOK -1.5 million (-
6.5). Nel had a currency translation difference of NOK 20.2 million (-6.5).
The Board of Directors proposes that the loss for 2015, which totals NOK 1.5 million, be covered by transfers
from the share premium account, or other reserves.
Financial position:
Total assets stood at NOK 815.6 million (239.2), including intangible assets of NOK 411.2 million (109,0).
Goodwill totalled NOK 333.0 million (60.8) as of 31 December, 2015. The identified intangible assets include
related customer relationships of NOK 31.6 million and technology of NOK 46.6 million. As of 31 December
2015, investments in tangible fixed assets amounted to NOK 16.5 million (5.1), with land, buildings and other
property totalling NOK 15.8 million (3.9). Inventories ended at NOK 15.0 million (6.1) and total receivables at
NOK 51.1million (20.3). The company actively strengthened its financial position during the year.
As of 31December 2015, the company had cash and cash equivalents of NOK 313.0 million (98.5). Based on the
strategy and ramp-up plan for the company, the board has proposed that no dividend be paid for 2015.
Cash flow:
Net cash flow from operating activities was NOK -37.8 million (3.2), while net cash flow from investment
activities totalled NOK -83.8 (-37.5). Net cash flow from share issues was NOK 337.2 million (112.5), while
instalments on long-term liabilities ended at NOK -5.0 million (7.5). The cash balance on 31 December 2015
amounted to NOK 313.0 million (98.5).
10.3.4 Financial year 2014
Profit and loss:
Nel generated revenues of NOK 12.1 million in 2014 compared to NOK 0.2 million in 2013, reflecting the
acquisition of Nel Hydrogen whereby Nel Hydrogen’s fourth quarter results were consolidated into the Group.
Operating expenses decreased to NOK 25.2 million down from NOK 37.3 million following the transition from
a diagnostic research organisation to a hydrogen-focused entity. The cost of goods sold totalled NOK 3.4 million
compared to NOK 0.6 million in 2013, while salaries and personnel expenses amounted to NOK 7.3 million
compared to 20.8 million in 2013. Depreciation and amortisation increased to NOK 3.6 million from NOK 0.7
million in 2013 due to the new business model, with impairments of tangible and intangible assets equalling
NOK 0.1 million compared to 1.3 million in 2013. Other operating expenses were reduced to NOK 10.9 million
in 2014 compared to NOK 14.0 million in 2013.
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Net financial income amounted to NOK 1.5 million in 2014 versus NOK 0.6 million in 2014, while pre-tax
income totalled NOK -11.6 million versus NOK -36.6 million in 2013. Comprehensive income equalled NOK -
6.5 million versus NOK -37.7 million in 2013. Based on the strategy and ramp-up plan for Nel Hydrogen, the
board has proposed that no dividend be paid for 2014.
Financial position:
Total assets stood at NOK 239.1 million as of 31 December 2014 versus NOK 15.2 million as of 31 December
2013. As a result of the acquisition of Nel Hydrogen intangible assets of NOK 108.9 million were realized of
which the largest items included goodwill (NOK 60.8 million) and customer relationships which were valued at
NOK 32.2 million. As of 31 December 2013, Nel had no intangible assets.
As of 31 December 2014, investments in tangible fixed assets amounted to NOK 5.1 million versus NOK 0.3
million as of 31 December 2013, with land, buildings and other property totalling NOK 3.9 million versus NOK
0.0 million as of 31 December 2013. Inventory stood a NOK 6.1 million as of 31 December 2014 compared to
NOK 0.0 million as of 31 December 2013. Total receivables amounted to NOK 20.3 million as of 31 December
2014 compared to NOK 3.4 million as of 31 December 2013. As of 31 December 2014, the Company’s cash
balance increased as a result of three equity issues and as of 31 December 2014 cash and cash equivalents stood
at NOK 98.5 million compared to NOK 11.5 million as of 31 December 2013.
Cash flow:
Net cash flow from operating activities increased to NOK 4.3 million in 2014 compared to NOK -35.5 million in
2013, while investments in tangible fixed assets resulted in a cash outflow of NOK 37.5 million in 2014
compared to NOK 0.0 million in 2013. The primary reason for the increase in cash flow from operating activities
in 2014 compared to 2013 is the fact that the Company’s 2014 financials include consolidated figures for Nel
Hydrogen which was consolidated into Nel ASA as of Q4 2014.
Net cash flow from share issues was NOK 112.6 million in 2014 compared to NOK 30.2 million in 2013.
Specifically, the Company raised gross proceeds of NOK 50 million in the rights offering on 4 April 2014, NOK
35 million in the private placement on 10 October 2014, NOK 35 million in the rights issue on 5 November
2014, NOK 65 million in the private placement on 28 November 2014.
The Company’s cash balance was reduced by the NOK 40 million cash consideration paid to the shareholders of
New Nel Hydrogen Holding AS in October 2014 as part of the acquisition of New Nel Hydrogen Holding. Net
cash from long-term liabilities ended at NOK 7.6 million for 2014 versus NOK -1.7 million for 2014. The cash
balance on 31 December 2014 amounted to NOK 98.5 million compared to NOK 11.5 million as of 31
December 2013.
10.4 SEGMENT REPORTING
The Group operates within two business segments, Hydrogen Electrolyser and Hydrogen Fueling (including
Solutions). Through its subsidiary Nel Hydrogen AS based in Notodden, Norway, the group offers hydrogen
plants based on water electrolysis technology for use in various industries. Through its subsidiary Nel Hydrogen
A/S based in Herning, Denmark, the group offers H2Stations® for fast fueling of fuel cell electric vehicles as
well as services in relation to the supply of these stations.
Prior to 2015, Nel reported under the two segments: Hydrogen (for the purpose of comparison defined as
Hydroen Electrolysis solutions) and Healthcare. The business segment Healthcare was from 2015 omitted as a
separate segment. Figures are thus included under “Others”. Note that all Healthcare related operations were
terminated as of 2016 .
The previous Healthcare segment consisted of developing innovative and patient friendly in vitro diagnostic
(IVD) products for early detectionof diseases. Nel controls some patents in major markets including the US, EU
and Japan, related to its technology and method to detect diseases of the central nervous system and cancer
through gene expression in peripheral blood.
The Management monitors the operating results of its business units separately for the purpose of making
decisions about resource allocation and performance assessment. Segment performance is evaluated based on
profit or loss and is measured consistently with profit or loss in the consolidated financial statements.
99
Transfer prices between operating segments are on an arm’s length basis in a manner similar to transactions with
third parties.
10.4.1 The three month period ended 31 March 2017 and 2016
The following table provides an overview of Nel’s income statement, total assets and total liabilities broken
down by operating segment for the three month period ended 31 March 2017 and 2016.
NOK 1.000
External revenues
(by customer location) Hydrogen fueling
Hydrogen
electrolyser Other / Eliminations Consolidated
Q1 16 Q1 17 Q1 16 Q1 17 Q1 16 Q1 17 Q1 16 Q1 17
Total revenue 18.8 19.3 7.8 16.2 -0.6 0.2 26.0 35.7
Total operating expenses .................. 19.5 24.7 11.6 3.4 5.0 23.5 36.1 51.6
Operating profit.............................. -0.7 -5.4 -3.8 -0.2 -5.6 -10.3 -10.1 -15.9
Net financial income ........................ -0.6 -0.2 -0.1 -0.3 0.6 0.0 -0.1 -0.5
Pre-tax profit .................................. -1.3 -5.6 -4.0 -0.6 -4.4 -9.7 -9.7 -15.9
Total assets ...................................... 53.3 138.9 82.5 101.5 645.3 692.6 781.1 933.0
Total liabilities ................................ 26.1 52.1 49.2 56.0 -8.8 -6.0 66.5 102.1
10.4.2 Fiscal year 2016 segment reporting
The following table provides an overview of Nel’s income statement, total assets and total liabilities broken
down by operating segment for the fiscal year ended 31 December 2016.
NOK 1,000
External revenues
(by customer location) Hydrogen fueling
Hydrogen
electrolyser Other / Eliminations Consolidated
Norway............................................. 9,929 19,790 29,719
Denmark ........................................... 54,960 3,500 58,461
Saudi Arabia ..................................... 6,798 6,798
Ireland .............................................. 2,065 2,065
Turkey .............................................. 3,633 3,633
Germany ........................................... 5,378 5,378
Other countries ................................. 6,204 2,221 8,424
Total revenue .................................. 71,092 43,386 0 114,479
Total revenue .................................... 71,092 43,386 0 114,479
Total operating expenses .................. 87,182 52,318 30,290 169,790
Operating profit.............................. -16,089 -8,932 -30,290 -55,312
Financial income .............................. 809 2,905 -116 3,599
Financial expense ............................. 1,171 2,099 7,654 10,924
Tax expense...................................... -2,917 -1,952 -1,939 -6,808
Profit after tax ................................ -13,535 -6,173 -36,121 -55,829
Total assets ...................................... 390,362 78,867 293,645 762,875
Total liabilities ................................ 33,244 3,835 54,576 91,655
*Major eliminations are excess value on intangible assets and depreciation of these excess values made in the consolidation of the financial statements not recognized in the business segments
100
10.4.3 Fiscal year 2015 segment reporting
The following table provides an overview of Nel’s income statement, total assets and total liabilities broken
down by geography and operating segment for the fiscal year ended 31 December 2015.
NOK 1,000
External revenues
(by customer location) Hydrogen fueling
Hydrogen
electrolyser Other / Eliminations Consolidated
Norway............................................. 410 21,591 22,001
Denmark ........................................... 38,577 0 38,577
Chile ................................................. 9,562 9,562
India ................................................. 5,203 5,203
Russia ............................................... 4,549 4,549
Sweden ............................................. 3,809 3,809
Other countries ................................. 2,052 14,083 89 16,224
Total revenue .................................. 41,039 58,797 89 99,925
Total revenue .................................... 41,039 58,886 0 99,925
Total operating expenses .................. 35,224 58,300 24,660 118,184
Operating profit.............................. 5,815 586 -24,660 -18,259
Financial income .............................. 171 1,430 3,584 5,185
Financial expense ............................. 11,497 1,201 2,008 14,706
Tax expense...................................... -2,506 -3,183 -360 -6,049
Profit after tax ................................ -3,006 3,999 -22,724 -21,731
Total assets ...................................... 350,750 139,266 325,633 815,649
Total liabilities ................................ 39,150 25,218 20,272 84,640
10.4.4 Fiscal year 2014 segment reporting
The following table provides an overview of Nel’s income statement, total assets and total liabilities broken
down by geography and operating segment for the fiscal year ended 31 December 2014.
NOK 1,000
External revenues
(by customer loacation) Hydrogen fueling
Hydrogen
electrolyser Other / Eliminations Consolidated
Norway............................................. 1,626 0 1,626
Chile ................................................. 2,133 0 2,133
India ................................................. 2,010 0 2,010
Japan ................................................ 4,481 0 4,481
Other countries ................................. 1,817 0 1,817
Total revenue .................................. 12,067 0 12,067
Total operating expenses .................. 17,065 8,174 25,239
Operating profit.............................. -4,999 -8,174 -13,173
Financial income .............................. 1,572 241 1,813
Financial expense ............................. -268 -5 -274
Tax expense...................................... -145 5,267 5,122
Profit after tax ................................ -3,840 -2,672 -6,511
Total assets ...................................... 271,340 -32,261 239,079
101
Total liabilities ................................ 34,554 8,589 43,142
Source: The Company’s 2014 annual report
10.5 AUDITOR
The Company’s auditor since November 11, 2000 has been Ernst & Young AS. The address of Ernst & Young
AS is Oslo Atrium, Box 20, N – 0051 Oslo. Ernst & Young AS is a member of the Norwegian Institute of Public
Accountants.
Ernst & Young AS has audited the Company’s annual financial statements since 2000. The audit reports for the
last three years have been issued without qualifications.
Ernst & Young AS has issued an Independent Assurance Report on the unaudited pro forma condensed financial
information included as Appendix A. Ernst & Young AS has not audited, reviewed or produced any report on
any other information provided in this Prospectus.
10.6 TRENDS
On 8 October 2014, the Company acquired 100% of the shares in New Nel Hydrogen Holding AS (“Nel
Hydrogen”). The transaction represented a change in strategic direction for the Company to include a new
business area, hydrogen. The Nel Group’s healthcare activities remained as a separate business area within the
Nel Group throughout 2015. As of 2016 all healthcare related operations were put on hold.
On 25 June 2015, Nel successfully completed its acquisition of H2 Logic, which has positioned Nel as a global
supplier of Hydrogen Refuelling Stations, which demand is growing due to general growing focus and interest in
the overall Hydrogen market. The Company takes a key role in the development of supply infrastructure for Fuel
Cell Electric Vehicles and continues to strengthen its capabilities through investments in organic and structural
growth initiatives within its business segments.
By targeting a broader market and continuously improving its products, Nel aims to strengthen its position as a
manufacturer of electrolysers and hydrogen fueling stations, and to play an important role in the different
markets for utilisation of hydrogen.
On 28 April 2017, the Company signed a share purchase agreement to acquire Proton OnSite. The Acquisition of
Proton OnSite is a strategic action with regards to position Nel in the power-to-gas market, as well as industrial
segments which complements the segments where Nel today is most competitive. With the Acquisition of Proton
OnSite, Nel now covers all relevant sizes and technologies in the electrolysis market, which comprise of
atmospheric- and pressurised- alkaline and PEM electrolysers.
Other than what has been described, the Company is not aware of trends, uncertainties, demands, commitments
or events that could have a material effect on the Group’s prospects for the current financial year.
10.7 GOVERNMENTAL, ECONOMIC, FISCAL, MONETARY OR POLITICAL POLICIES THAT
MAY MATERIALLY EFFECT THE COMPANY’S OPERATIONS
The Company has in the past received public grants for both the Hydrogen Electrolysers and Hydrogen Fuelling
parts of the business to support R&D investments, prototype development and other initiatives to develop the
Company’s business and environmental friendly hydrogen technology. Therefore, governmental subsidies have
had a material effect on the Company’s operations and are expected to continue to do so in the foreseeable
future. For further information regarding public grants please see 7.9.
Other than the abovementioned, policy measures to support emission free technology such as fuel cell vehicles,
for example through political means such as reduction of taxes and duties on specific technologies, may have
positive effect on the Company either directly or indirectly through increase in demand for the Company’s
products.
102
10.8 INVESTMENTS
10.8.1 Historical investments
Prior to the acquisition of NEW Nel Hydrogen Holding AS, investments apart from R&D have historically been
limited. No incurred investments in 2013. In 2014 the Company invested NOK 0.1 million in fixed assets and
did not incur any R&D expenses.
R&D has prior to the acquisition of New Nel Hydrogen Holding AS been the core of the Company’s business
activities. Consequently R&D investments have accounted for a significant share of the Company’s total costs.
R&D investments (prior to deduction of grants) for the fiscal year 2013 amounted to NOK 22.3 million.
On 8 October 2014, the Company acquired 100% of the shares in New Nel Hydrogen Holding AS for a total
consideration of NOK 120 million. The acquisition was financed though NOK 40 million in cash and NOK 80
million in shares of Nel. The 123,076,923 consideration shares were issued at price of NOK 0.65 per share and
carried a par value of NOK 0.20.
On 20 April 2015 Nel announced that it has increased its ownership in Hyme AS from 31% to 56.8%, for a
consideration of NOK 900,000 The increase in ownership is part of Nel’s strategy to grow within the hydrogen
refuelling market.
On 31 May 2015, Nel acquired 100% of the shares in H2 Logic AS for a total consideration of NOK 300 million.
The acquisition was financed through NOK 100 million in cash and NOK 200 million in shares of Nel. The
148,148,148 share consideration was issued at a price of 1.35 NOK per share and carried a par value of 0.20.
On 13 August 2015, the Company acquired RotoBoost H2 AS which holds all assets related to the RotoLyzer®.
The base purchase price was NOK 8.0 million, whereas the conditioned fulfilment of 2 specific
conditions/milestones will increase the total consideration with respectively NOK 2.0 million and NOK 3.0
million to a total of NOK 13.0 million (as of the date of this Prospectus the conditions are not yet fulfilled). The
acquisition was financed through cash payment.
On 23 November 2015, Nel increased its ownership in Hyme AS from 56.8% to 100% for a total consideration
of NOK 1.725 million.
In 2016 Nel purchased a new factory building at Herning for a total consideration of DKK 14,501,520. In
addition, Nel purchased the neighbouring land for DKK 6,754,460 to secure the possibility for future expansion.
Nel also paid DKK 2,669,460.66 in connection to rebuildment and installations at Herning.
10.8.2 Investments in progress
In addition to the investment related to the Acquisition, the Company is in progress with investments related to
the contemplated growth of its operations. A major investment in progress is in the new Herning facility. The
investment activities in connection with acquisition and rebuild of the plant is estimated to be NOK 85 million in
total. As per the date of this prospectus the incurred investment is approximately NOK 40 million.
Further, in the course of business, the Company invests in the improvement of current, and development of new
technologies both related to electrolysers and hydrogen refueling stations. The Company expects the level of
investments and R&D cost in the near future to reflect the Company’s growth expectations to see a step-up in
capacity and technological position before levelling out (i.e. start to decrease in relation to top-line growth)”. An
example is the investment related to development of the RotoLyzer®, a pressurised, compact electrolyser, which
utilises a vertical, rotating cell pack, providing full operational flexibility, while allowing for low production
costs. This opens up new market segments for the Company, and provides an ideal solution for hydrogen fueling
stations where space is limited, or integration with renewable energy sources.
10.9 TANGIBLE FIXED ASSETS
The Group’s tangible fixed assets comprise of the tangible fixed assets associated with Nel Hydrogen and Nel
Hydrogen A/S.
Tangible fixed assets amounted to NOK 47.9 million as of 31 March 2017. Land, building and real estate
accounted for NOK 46.6 million of the Company’s total tangible fixed assets. Other fixed assets accounted for
103
NOK 1.2 million of the Company’s total tangible fixed assets of which the majority is related to production
equipment such as the electrolyser cell production lines, tools and assembly equipment.
10.9.1 Environmental issues
Nel’s operations are subject to numerous environmental requirements. Such laws and regulations govern, among
other matters, air pollution emissions, wastewater discharges, solid and hazardous waste management, and the
use, composition, handling, distribution and transportation of hazardous materials. Many of these laws and
regulations are becoming increasingly stringent (and may contain “strict liability”), and the cost of compliance
with these requirements can be expected to increase over time.
Nel’s electrolyser production depends on various discharge permits granted by various authorities. From time to
time, breaches of the allowed emission limits set out in such permits may occur. If such limits of the relevant
permits should be exceeded, this may have a significant effect on Nel’s operations and result, as Nel may be
ordered to temporarily halt production, be subject to fines and/or be ordered to undertake corrective measures.
Nel cannot predict the impact of new or changed laws or regulations relating to health, safety, the environment
or other concerns or changes in the ways that such laws or regulations are administered, interpreted or enforced.
The requirements to be met, as well as the technology and length of time available to meet those requirements,
continue to develop and change. To the extent that any of these requirements impose substantial costs or
constrain Nel’s ability to expand or change its processes, Nel’s business, prospects, financial results and results
of operations could suffer. Any breach of such requirements could in addition result in fines or other substantial
costs and/or constraint Nel’s ability to operate its production plant, which could have a significant adverse effect
on its business, prospects, financial results and results of operations.
10.10 CAPITALISATION AND INDEBTEDNESS
The following tables below set forth information about the Company’s unaudited capitalisation and indebtedness
as of 31 March 2017. The tables should be read together with the financial statements and the notes related
hereto, as well as the information included in section 10. The information provided in the capitalisation and
indebtedness statements below is extracted from the unaudited condensed interim financial statements for the
first quarter 2017.
NOK 1,000
31.03.17
unaudited
Shareholders’ equity
Share capital 149 732
Share premium 781 321
Treasury shares -1 377
Retained earnings -98 435
Total equity (A) 831 241
Indebtedness
Guaranteed 0
Secured1) 826
Unguaranteed / unsecured 0
Total current debt 826
Guaranteed2) 2 133
Secured1) 6 807
Unguaranteed / unsecured 0
Total non-current debt 8 940
Total indebtedness (B) 9 766
Total capitalisation (A+B) 841 007
1) Non-current loans and current portion of non current debt are secured in the account receivables, fixed asset, inventory and buildings amounting to NOK 38.4 million. Current portion of non-current debt reported under Other current liabilities on Nel’s balance sheet (total of
NOK 60.1 million),
2) Non-current warranties covering service liabilities on delivered projects
104
The tables below sets forth the Company’s unaudited net indebtedness as of 31 March 2017. There were no
material changes until date of this prospectus.
NOK 1,000
31.03.17
unaudited
A. Cash 368 349
B. Cash equivalents 0
C. Tradable securities 0
D. Liquidity (A+B+C) 368 349
E. Current financial receivables 0
F. Current bank debt 0
G. Current portion of non-current debt1) 826
H. Other current financial debt 0
I. Current financial debt (F+G+H) 826
J. Net current financial indebtedness (I-E-D) -367 523
K. Non-current bank loans1) 6 807
L. Bonds issued 0
M. Other non-current loans2) 2 133
N. Non-current financial indebtedness (K+L+M) 8 940
O. Net financial indebtedness (J+N) -358 583
1) Non-current debt and current portion of non-current debt is secured in the account receivables, fixed asset, inventory and buildings amounting to NOK 38.4 million. Current portion of non-current debt reported under Other current liabilities on Nel’s balance sheet (total of
NOK 60.1 million),
2) Non-current warranties covering service liabilities on delivered projects
Source of financial information for the Company as of 31 March 2017:
The financial information from the Company as of 31 March 2017 has been extracted from the Company’s
unaudited interim condensed financial information for Q1 2017.
For information regarding the effect of the Acquisition on the Company’s indebtedness please see the unaudited
pro forma condensed financial information in section 11.
In June 2017, the Company issued new shares to employees to fulfil its obligations under the Company’s
employee incentive plans, see section 12.5.4.
Besides the abovementioned events, the Company has not experienced any significant changes in its financial or
trading position since 31 March 2017. The Company does not consider itself to have any indirect or contingent
liabilities as of the date of this Prospectus.
10.11 LIQUIDITY AND CAPITAL RESOURCES
10.11.1 Sources and use of cash
The Company’s capital resources are primarily derived from:
i) the rights offering on 4 April 2014 whereby the Company raised gross proceeds of NOK 50 million
ii) the private placement on 10 October 2014 whereby the Company raised gross proceeds of NOK 35 million
iii) the rights issue on 5 November 2014 whereby the Company raised gross proceeds of NOK 35 million
iv) the private placement on 28 November 2014 whereby the Company raised gross proceeds of NOK 65 million
v) the subsequent offering on 23 January 2015 whereby the Company raised gross proceeds of NOK 13 million
vi) the private placement on 2 June 2015 whereby the Company raised gross proceeds of 69.3 million
vii) the subsequent offering on 8 July 2015 whereby the Company raised gross proceeds of 30 million
viii) the private placement on 14 August 2015 whereby the company raised gross proceeds of NOK 67.5 million
ix) the private placement on 15 June 2016 under the incentive scheme whereby the company raised gross
proceeds of NOK 7,619 million
105
x) the private placement on 27 February 2017 whereby the Company raised gross proceeds of NOK 176.7
million.
The Company’s cash balance was reduced by the NOK 40 million cash consideration paid to the shareholders of
New Nel Hydrogen Holding AS in October 2014 as part of the acquisition of New Nel Hydrogen Holding, by
NOK 100 million in cash paid to the shareholders of H2 Logic AS in May 2015 as part of the acquisition of H2
Logic A/S, and an additional reduction in cash balance by NOK 8 million cash consideration paid to
shareholders of RotoBoost H2 AS in August 2015 as part of the acquisition of RotoBoost H2 AS.
Cash and cash equivalents comprised the following as of 31 March 2017:
NOK 1,000 31.03.2017 (unaudited) 31.03.2016 (unaudited)
Cash and cash equivalents ............................................................................... 368,349 288,993
Total cash and cash equivalents ................................................................... 368,349 288,993
The cash at banks is held in Norwegian kroner.
Other than the Acquisition of Proton OnSite there has been no material change in the Company’s capital
resources as of the date of this Prospectus.
The Group's solidity was 89% as of Q1 2017. The Group's interest rate coverage was -1 858% as of Q1 2017.
Note that the Company has sufficient cash to cover their interest payments.
Besides debt and interest payments, the Group primarily uses cash to fund its operations seasonal working
capital swings, maintenance and expansion investments related to support and expand the business operations.
10.12 DEBT STRUCTURE
As of 31 March 2017 the Company had current liabilities of NOK 80.4 million consisting of the following:
NOK 1,000 31.03.2017 (unaudited) 31.03.2016 (unaudited)
Trade payables ................................................................................................ 19,564 6,592
Public duties payable ....................................................................................... 389 1,003
Tax payable ..................................................................................................... 373 383
Other current liabilities .................................................................................... 60,106 23,471
Total current liabilities .................................................................................. 80,432 31,449
The following table outlines the interest payments and maturity schedule for all interest bearing securities held
by Nel as of 31 March 2017.
NOK 1,000 New Nel Hydrogen AS loan from
Innovasjon Norge
Nel Hydrogen A/S mortgage loan
from Nykredit
Principal amount .................................................................................................................................................................... 2 500 6,371
Amount outstanding ............................................................................................................................................................... 1 563 5 244
Nominal interest ..................................................................................................................................................................... 5.75% 1.18%
Contract date .......................................................................................................................................................................... Jul. 2013 Feb. 2009
Duration (years)...................................................................................................................................................................... 6 20
Maturity.................................................................................................................................................................................. Jul. 2019 Feb. 2029
106
Maturity analysis for long term loans:
NOK 1,000 2017 2018 2019 2020 2021 2021 › Total
Innovasjon Norge 416 668 416 668 416 668 416 668 0 0 1 666 667
Nykredit 409 050 409 050 409 050 409 050 409 050 3 257 895 5 303 143
1) Based on prevailing debt installment agreements and interest rates.
The interest bearing securities outlined in the table above are secured against pledged assets. As of 31 March
2017 the carrying amount of total pledged assets amounted to NOK 38.4 million, consists of NOK 21.9 million
account receivables, NOK 1.0 million in fixed asset, NOK 11.9 million in inventory and NOK 3.6 million in
buildings. The mortgage loan from Nykredit is secured against the value of the building.
Note that as mentioned above, the figures in the table have been converted into NOK using the exchange rate as
of 31 March 2017 whereby 1 DKK is equal to 1.2326 NOK. The loans are not subject to any covenants.
The Company’s subsidiary Nel Hydrogen A/S is additionally subject to a long-term warranty, covering service
liabilities on delivered project. The duration is normally from 12 to 24 months after delivery. As of 31 March
Nel Hydrogen A/S is subject to a warrant with an outstanding amount of NOK 2.1 million with a maximum
maturity until December 2017.
10.13 WORKING CAPITAL
The Company is of the opinion that it has sufficient working capital for its present requirements for the next 12
months).
10.14 TAX LOSS CARRYFORWARDS
As of 31 December 2016 the Company had a total tax loss carry forward of NOK 415.1 million. The Company
does not calculate their tax loss carry forward quarterly. In addition the Company had a net loss of NOK -55.8
million for the quarter ended December 2016. As of 31 December 2016 it is deemed uncertain whether it can be
utilized because there is uncertainty with respect to whether the Company will generate an adequate tax profit in
the future which would allow the deferred tax asset to be utilized. Thus the deferred tax asset has not been
recognised.
10.15 COMPANY POLICIES REGARDING CAPITAL STRUCTURE AND LIQUIDITY
MANAGEMENT
The Company’s objective is to manage the capital structure to safeguard the Company’s ability to continue as a
going concern, so that it can provide returns for shareholders and benefits for other shareholders. The Company
sets the size of capital in proportion to business strategy, risk and financial market conditions. The Company
manages the capital structure and makes adjustments to it in the light of changes in economic conditions,
perceived risk associated with product development and risk characteristics of the underlying assets. In order to
maintain or adjust the capital structure, the company may adjust the amount of new share issue, dividends paid to
shareholders, return capital to shareholders, and sell assets to reduce debt or increase the debt by taking up loans.
The Group strengthened its financial position in 2015 through several share issues and reducing the Group’s
liquidity risk. The Group monitors its risk for lack of capital up against the company’s planned activities. The
Group will if necessary attempt to raise capital through private placements, debt financing, partnerships, and
strategic alliances or from other sources. The Company does not use financial instruments in connection with the
management of financial risk. The Company uses financial instruments such as bank loans. The key financial
risks the Company is exposed to are related to interest rate risk, liquidity risk, currency risk and credit risk.
107
11. UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
11.1 GENERAL INFORMATION AND PURPOSE OF THE UNAUDITED PRO FORMA
STATEMENT OF FINANCIAL CONDITION
On 28 April 2017, the Company announced that they had signed a final share purchase agreement to acquire
100% in Proton OnSite for a cash consideration of USD 20 million and 158 908 088 shares to be settled through
the issuance of 147 659 456 Consideration Shares and 11 248 632 share options in Nel ASA on a cash and debt
free basis and assuming normalized working capital. HWorld, a variable interest entity of Proton OnSite will not
be a part of the transaction. Closing of the Acquisition is subject to certain conditions, including relevant public
approvals as described in section 5, absence of material adverse effects and correctness of representations. The
timing of Closing of the Acquisition depends on the public approval process, but is expected to occur around
June / July 2017. The 27 February 2017 Private Placement of NOK 176.7 million was completed to finance the
cash consideration and is therefore taken into account when compiling the unaudited pro forma condensed
financial information. The unaudited pro forma financial information has been prepared assuming the
Acquisition will be approved.
The unaudited pro forma condensed financial information has been prepared for illustrative purposes to show
how the Acquisition of Proton Onsite and the 27 February 2017 Private Placement (the “Transaction”), described
above, might have affected the Company’s consolidated income statement for 2016 if the Transaction occurred
on January 1, 2016 and the consolidated statement of financial position as of 31 December 2016 if the
Transaction occurred at the balance sheet date. Because of its nature, the unaudited pro forma condensed
financial information addresses a hypothetical situation and, therefore, does not represent what the Group’s
actual financial position or results of operation or the financial position had been, if the Transaction had in fact
happened on those dates and is not representative of the results of operation for any future period. Investors are
cautioned not to place undue reliance on this unaudited pro forma condensed financial information.
The unaudited pro forma condensed financial information has been compiled in connection with listing of shares
of Nel ASA on Oslo Børs to comply with the Norwegian Securities Trading Act and the applicable EU-
regulations including EU Regulation No 809/2004 pursuant to section 7-7 of the Norwegian Securities Trading
Act. This information is not in compliance with SEC Regulation S-X, and had the securities been registered
under the U.S. Securities Act of 1933, this unaudited pro forma condensed financial information, including the
report by the auditor, would have been amended and/or removed from the Prospectus.
The unaudited pro forma condensed financial information for the Company does not include all of the
information required for financial statements under IFRS, and should be read in conjunction with the historical
financial information of Nel ASA
11.2 BASIS FOR PREPARATION
As of the date of this Prospectus, Nel ASA is the parent company, and 100% owner of New Nel Hydrogen
Holding AS, Nel Fuel AS, Nel Hydrogen A/S, Nel Hydrogen Inc. and Nel US Inc, as well as 33% owner of
Inceptum 999 AS (to be names Hyon AS). New Nel Hydrogen Holding AS owns 100% of the share capital in:
New Nel Hydrogen AS, New Nel Hydrogen P60 AS, New Nel Hydrogen Eiendom AS, as well as 37% of
SAGIM. New Nel Hydrogen AS additionally owns 100% of Rotoboost H2 AS. Nel Fuel AS owns 100% of
Everfuel US Inc, and Everfuel Denmark A/S. in addition to 37% of Uno-X Hydrogen AS. Nel Hydrogen A/S
owned 1.1% of Copenhagen Hydrogen Networks A/S and 51.5% of Danish Hydrogen Fuel A/S. Nel US Inc. will
own 100% of Proton Energy Systems, Inc. following Closing of the Acquisition.
The unaudited pro forma condensed income statement for the year ended 31 December 2016 has been compiled
based on the audited consolidated financial statements of the Company for the year ended 31 December 2016
which were prepared according to IFRS as adopted by EU and incorporated by reference into the Prospectus and
the audited consolidated financial statements of Proton OnSite for the year ended 31 December 2016 which were
prepared according to US GAAP and included as Appendix B to the Prospectus.
The unaudited condensed pro forma income statement is prepared in a manner consistent with the accounting
policies of Nel ASA (IFRS as adopted by EU) applied in 2016. Nel ASA will not adopt any new policies in 2017
as a result of the Acquisition or otherwise. Please refer to the financial statements for 2016 for description of the
accounting policies.
108
For the purpose of the unaudited pro forma condensed financial information, the financial statements of Proton
OnSite for 2016 have been converted to IFRS. The IFRS adjustments are disclosed in section 11.6
The unaudited proforma financial information has been prepared under the assumption of going concern.
The income statement for Proton OnSite along with corresponding pro forma and IFRS adjustments have been
converted from USD to NOK using the annual average exchange rate for 2016 of 8.399 NOK per 1 USD. For
the statement of financial position as of 31 December 2016, the exchange rate at the balance sheet date has been
applied, representing a rate of 8.62 NOK per 1 USD.
The Company has for the purposes of the unaudited pro forma financial information performed a preliminary
purchase price allocation for the Acquisition of Proton OnSite in which the identifiable assets, liabilities and
contingent liabilities of Proton Onsite have been identified. This allocation has formed the basis for the
amortization and depreciation charges in the pro forma income statement and the presentation in the pro forma
statements of financial position. The final allocation may significantly differ from this allocation and this could
materially have affected the depreciation and amortization of excess values in the pro forma income statement
and the presentation in the pro forma statement of financial position. The main uncertainty relates to the share
price of the acquiree, technology and customer contracts and relationships. For purposes of the unaudited
condensed pro forma financial information, the consideration has been estimated based on the share price of
NOK 2.72, whilst the final purchase price allocation will be based on the share price at the date of Closing.
11.3 PURCHASE PRICE ALLOCATION
For purposes of the unaudited pro forma financial information, the consideration for the shares in Proton Onsite
has been estimated based on 147 659 456 shares and 11 248 632 share options using a value of NOK 2.72 per
share (share options), a cash consideration of USD 20 million, a working capital adjustment of USD 0.1 million
and settlement of debt to former shareholder of USD 2.1 million and totals NOK 585.2 million.
The number of Consideration Shares is subject to Post Closing Adjustments described further in section 5.4 of
the Prospectus. Further, the fair value of the consideration will be based on the share price at the date of Closing.
The value of the options has been set equal to the value of the consideration shares assuming that the strike price
will be zero. The terms of the share options will be finalized at Closing.The Acquisition will be accounted for as
a business combination under IFRS 3 by Nel ASA when the Acquisition closes.
Proton OnSites’s assets and liabilities will be measured at fair value as of the date of Closing. The purchase price
allocation and useful lives of assets identified and depreciation/amortization methods are presented in note 3 and
4 to the pro forma adjustments below.
11.4 UNAUDITED PRO FORMA INCOME STATEMENT YEAR ENDED 31 DECEMBER 2016
IFRS adjustments
Pro forma
adjustments
Nel Proton
OnSite
Proton
OnSite Note
Pro
forma
NOK 1,000
IFRS US
GAAP unaudited unaudited unaudited
unless otherwise stated
Operating income 98 446 228 203 326 649
Other operating income 16 032 16 032
Total operating income 114 478 228 203 342 681
Cost of goods sold 60 841 176 653 4 061 2 241 555
Total cost of goods sold 60 841 176 653 4 061 241 555
109
Payroll and payroll related costs 60 266 60 266
Depreciation 10 431 44 472 3,4 54 903
Impairment
Other operating costs 38 253 75 176 4 825 6 148 1,2,5 124 403
Total operating expenses 108 950 75 176 4 825 50 620 239 572
Operating profit (loss) -55 312 -23 626 -4 825 -54 682 -138 445
Financial income 3 599 3 599
Financial expenses 7 993 3 538 -1 086 2 10 445
Share of profit and loss associate and joint venture
2 932 2 932
Net financial income/expense -7 326 -3 538 - 1 086 -9 778
Profit (loss) before taxes -62 637 -27 164 -4 825 -53 596 -148 222
Tax costs -6 808 -16 899 -23 707
Net income attributed to noncontrolling interest
-4 124 4 124 2 0
NET PROFIT (LOSS) -55 829 -31 288 -4 825 -32 572 -124 514
11.5 UNAUDITED PRO FORMA STATEMENT OF FINANCIAL POSITION AS OF 31
DECEMBER 2016
IFRS
adjustments Pro forma
adjustments
Nel Proton
OnSite
Proton
OnSite Note
Pro
forma
NOK 1,000 IFRS US
GAAP
unless otherwise stated unaudited unaudited unaudited
ASSETS
Intangible assets
Technology 57 854 4 952 233 378 3,1 296 184
Customer relationship 27 861 57 849 3 85 710
Customer contracts 20 516 3 20 516
Intangible development asset 0
Goodwill 317 629 332 460 3 650 088
Total intangible assets 403 344 0 4 952 644 201 1 052 498
Land, buildings and real estate
Land, buildings and real estate, property 44 778 88 541 -74 157 2 59 162
Total land, buildings and real estate 44 778 88 541
110
Other fixed assets
Fixtures and fittings, tools, etc. 1 025 1 025
Total other fixed assets 1 025 0 1 025
Financial fixed assets
Long term receivables 0 7 281 7 281
Other financial fixed assets 13 708 -3 164 2 10 544
Total financial fixed assets 13 708 7 281 -3 164 17 825
Total non-current assets 462 855 95 822 4 952 566 881 1 130 510
Current assets
Inventories 36 266 47 187 83 453
Receivables
Trade receivables 34 974 61 414 96 388
Other receivables 3 312 12 114 15 426
Financial current assets
Total Receivables 38 286 73 528 0 0 111 814
Cash and cash equivalents 225 467 33 244 -10 391 2, 6, 248 320
Total current assets 300 019 153 959 0 -10 391 443 587
TOTAL ASSETS 762 875 249 781 4 952 556 490 1 574 098
EQUITY AND LIABILITIES 31.12.16
Equity
Share capital 136 736 733 41 795 7 179 264
Share premium/Other paid equity 619 329 188 275 332 577 7 1 140 181
Treasury shares -1 377 -1 377
Retained earnings -83 468 -138 322 4 952 158 978 1,8 -57 860
Noncontrolling variable interest entity 47 972 -47 972 2
0
Total equity 671 220 98 657 4 952 485 378 1 260 208
Liabilities
Provisions
Deferred tax liability 13 551 118 462 3 132 013
Total provisions 13 551 0 0 118 462 132 013
111
Other long term liabilities
Other long term liabilities 12 550 78 498 -47 776 2,6 43 272
Total other long term liabilities 12 550 78 498 0 -47 776 43 272
Current liabilities
Accounts payable 16 790 22 817 39 607
Tax payable 370 370
Social security, VAT etc. payable 1 347 1 347
Other current liabilities 47 046 49 810 426 2,5 97 282
Total current liabilities 65 553 72 627 0 426 138 605
Total Liabilities 91 655 151 125 0 71 112 313 890
TOTAL EQUITY AND LIABILITIES 762 875 249 781 4 952 556 490 1 574 098
11.6 NOTES TO THE UNAUDITED CONDENSED PRO FORMA FINANCIAL INFORMATION
The notes to the unaudited pro forma financial information are an integral part of the unaudited pro forma
statement information.
IFRS adjustments:
1. According to US GAAP, costs to develop new and/or improved products may be expenses as incurred,
however under IFRS, these development costs shall be capitalized if the criterias for capitalization as an
intangible asset are satisfied. The IFRS adjustment is related to the capitalization of such development costs
incurred in relation to the development of the MegaWatt Electrolyser. NOK 4,952 of development costs in
relation to the MegaWatt Electrolyser were incurred and capitalized as intangible asset in 2016. Note that
the deviation between the development cost in the income statement and the capitalised development cost is
due to the different exchange rates applied in the income statement and balance sheet respectively.
Pro forma adjustments:
2. In the 2016 financial statements HWorld was consolidated by Proton OnSite as a variable interest entity.
HWorld is not part of the transaction, and for the purpose of the condensed pro forma financial information
the HWorld assets, liabilities, and results of operations consolidated by Proton OnSite have been excluded:
a. Income statement
i. Cost of goods sold NOK 4.1 million,
ii. Other operating cost NOK 1.1 million,
iii. Financial expenses NOK 1.1 million,
iv. Net income attributed to non controlling interest NOK 4.1 million
b. Statement of financial position
i. Land, buildings and real estate, property NOK 74.2 million,
ii. Other financial fixed assets NOK 3.2 million,
iii. Cash and cash equivalents NOK 1.0 million,
iv. Retained earnings NOK 3.8 million
v. Non controlling interest variable interest entity NOK 48.0 million,
vi. Other long term liabilities NOK 29.6 million, and
vii. Other current liabilities NOK 4.6 million.
3.
112
The table below provides a detailed breakdown of the purchase price allocation.
Cost of business combination Share
acquired
Amount
(NOK 1,000)
Agreed purchase price 100% 585 184
Cost of business combination
Book value equity 59 444
Excess value 525 740
Goodwill pre-acquisition -
Excess value to be allocated 525 740
Excess value is allocated to :
Customer contracts 20 516
Customer relationships 57 849
Technology 233 378
Deferred tax -118 462
Total allocated 193 281
Goodwill 332 460
4. The identified intangible assets will be depreciated over their useful lives. Customer relationships will be
depreciated over 7 years, (NOK 8.1 million per year), technology will be depreciated over 7 and 15 years,
(NOK 16.4 million per year) and customer contracts will be depreciated over 1 year (NOK 20,5 million.
The pro forma adjustment will have continuing impact.
5. Fees incurred related to the private placement of NOK 176.7 on 27 February 2017 and the issuance of
consideration shares amounts to NOK 15 million. These are in the unaudited condensed pro forma financial
information recorded against share premium. Costs incurred related to the Acquisition of Proton Onsite of
NOK 5 million have been recorded as other operating expense in the 2016 unaudited condensed pro forma
income statement, and other current liabilities in the consolidated statement of financial position. These pro
forma adjustments will not have a continuing impact.
6. The pro forma adjustment to cash and cash equivalents in the condensed pro forma statement of financial
position of NOK 10.4 million consists of the cash outflow of NOK 171.1 million related to the cash
consideration paid to the shareholders of Proton OnSite of which NOK 152.9 is payment for ownership,
while NOK 18.2 million is related to payment of debt to the former shareholder of Proton OnSite.
Additionally the proforma adjustment to cash consists of the net cash inflow of NOK 161.7 million related
to the Private Placement, and the exclusion of cash and cash equivalents held by variable interest entity
HWorld of NOK 1.0 million. These pro forma adjustments will not have a continuing impact.
7. The pro forma adjustment to share capital in the condensed pro forma statement of financial position of
NOK 41.8 million consists of the elimination of share capital of Proton OnSite of NOK 0.7 million, share
capital increase of NOK 13.0 million from the private placement and the share capital increase of NOK
29.5 million from the issue of consideration shares. The pro forma adjustment to share premium in the
unaudited condensed pro forma statement of financial position of NOK 332.6 million consist of the
elimination of share premium of Proton OnSite of NOK 188.3 million, net share premium part of NOK
148,8 million from the private placement and the share premium part of NOK 372.1 million from the
consideration share issue.
8. The pro forma adjustment to retained earnings in the unaudited condensed pro forma statement of financial
position of NOK 159.0 million consists of the excess value of NOK - 525.7 million from the purchase price
allocation, the elimination of share capital and share premium of Proton Onsite of NOK 0.7 and 188.3
million, the exclusion of negative equity of HWorld of NOK 3.8 million, less the cash consideration of
NOK 152.9 million and the increase in share capital and share premium from the consideration share issue
of NOK 29.5 and 372.1 million, and NOK 5.0 million related to cost of the Acquisition of Proton OnSite.
113
11.7 UNADJUSTED HISTORICAL FINANCIAL INFORMATION PROTON ONSITE IN
FUNCTIONAL CURRENCY (USD)
Proton OnSite consolidated statements of operations years ended December 31, 2016
USGAAP USD 1.000
functional currency
USGAAP
Presentation
NOK
Reclassifications
USGAAP
presentation
NOK 1,000
Revenues 27 170
228 203
228 203
Cost of revenues 21 033
176 653
176 653
Gross margin 6 138
51 550
51 550
Operating expenses:
Selling
3 749
31 489
31 489
Research and development 2 163
18 169
18 169
General and administrative 3 038
25 519
25 519
Total operating expenses 8 951
75 176
75 176
Loss from operations -2 813
-
23 626
-
23 626
Interest expense, net of interest income
of $1,888 and $1,726
421
3 538
3 538
Consolidated net loss -3 234
-
27 164
-
27 164 Net income attributed to noncontrolling
interest 491
4 124
4 124
Loss attributed to Proton Energy
Systems, Inc. -3 725
-
31 288
-
31 288
Loss per share:
Basic and diluted loss per share (0.44)
-3.44
-3.44
Weighted average shares outstanding 8 500 000
8 500 000
8 500 000
114
Proton OnSite consolidated balance sheet December 31, 2016
USGAAP
USD 1.000
functional
currency
USGAAP
Presentation
NOK
Reclassifications
USGAAP
presentation
NOK 1,000
ASSETS
Current assets:
Cash and cash equivalents
1 912
16 481
16 763
33 244
Accounts receivable, net of allowance of
$208,455 and $0 7 125
61 414
61 414
Unbilled accounts receivable 309
2 662
2 662
Inventories 5 474
47 187
47 187
Costs and estimated earnings in excess of
billings on contracts in progress 509
4 391
4 391
Other current assets 587
5 060
5 060
Total current assets 15 916
137 196
16 763
153 959
Property, plant and equipment, net ($8,602,891 and $8,822,846 for collateral of
variable interest entity debt)
10 272
88 541
88 541
Restricted cash 1 945
16 763
-16 763
-
Spare parts inventory 285
2 456
2 456
Due from related parties 537
4 626
4 626
Other assets 23
200
200
Total assets 28 977
249 781 -
249 781
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
2 647
22 817
22 817
Current portion of mortgage payable of
variable interest entity 531
4 574
4 574
Accrued expenses and warranty reserve 2 171
18 710
18 710
Deferred revenue and customer advances 2 793
24 074
24 074
Capital lease obligation, current portion 19
161
161
Billings in excess of costs and estimated
earnings on contracts in progress 266
2 292
2 292
Total current liabilities 8 425 72 627
72 627
Long-term liabilities:
Mortgage payable of variable interest entity, less current portion and deferred financing
costs of $56,735 and $64,331 3 437
29 623
29 623
Notes payable to stockholder 5 667
48 847
48 847
Capital lease obligation, less current portion 3
28
28
Total liabilities 17 532 151 125
151 125
Commitments
Equity:
Proton Energy Systems, Inc.:
115
Common stock, $.01 par value; 12,500,000
shares authorized;
8,500,000 shares issued and outstanding
85
733
733
Additional paid-in capital 21 842
188 275
188 275
Accumulated deficit -16 047
-138 322
-138 322
Total Proton Energy Systems, Inc. equity 5 880
50 685
50 685
Noncontrolling variable interest equity 5 565
47 972
47 972
Total equity 11 445
98 657
98 657
Total liabilities and equity 28 977
249 781
249 781
11.8 AUDITOR’S ASSURANCE REPORT ON THE UNAUDITED PRO FORMA CONDENSED
FINANCIAL INFORMATION
Ernst & Young AS has issued an Independent Assurance report on the unaudited pro forma condensed financial
information included in Appendix A to this Prospectus. Ernst & Young AS has not audited, reviewed or
produced any report on any other information provided in this Prospectus.
12. BOARD OF DIRECTORS, MANAGEMENT AND EMPLOYEES
12.1 BOARD OF DIRECTORS
12.1.1 Overview
In accordance with Norwegian law, the Board of Directors (“the Board”) is responsible for administering the
Company’s affairs and ensuring that the Company’s operations are organised in a satisfactory manner.
The Company’s Articles of Association provide that the Board of Directors shall consist of a minimum of three
and a maximum of seven members. As of the date of this Prospectus, the Company’s Board of Directors consists
of the following:
Four out of the five members of the Board of Directors, including the Chair of the Board, were elected on the
Company’s Annual General Meeting 15 May 2017, that is subsequent to the signing of the SPA which was done
28 April 2017.
12.1.2 Brief biographies of the Board members
Hanne Skaarberg Holen, Chair of the Board:
Ms. Holen is a partner at law firm Thommessen in Oslo. She has previously worked for Arntzen de Besche and
PricewaterhouseCoopers as lawyer/Partner and as audit manager at Price Waterhouse. Hanne Skaarberg Holen
has a law-degree from UiO and Economic/business education from University de Lausanne and St Clare’s Hall
in Oxford. She has board experience and been Chair of the Board of both listed and private companies. Ms. Holen is
a Norwegian citizen and lives in Oslo.
Ole Enger, Board member
Mr. Enger has worked as CEO in Nordsilmel, Elkem, SAPA, REC, REC Solar and he has been in the executive
management of Norsk Hydro and Orkla. Ole Enger has an educational background from Norges
Landbrukshøyskole, NHH and IMDE Business school. Ole Enger has board experience as both Chair of the Board
and board member of a number of private and public companies. Mr. Enger is a Norwegian citizen and lives in
Oslo.
Current directorships and senior management
position ..........................................................................................................................................
Vistin Pharma ASA (Chair of the Board), Norsk Gjenvinning
Norge AS (Chair of the Board), BetonmastHæhre (Chair of the
Board), Ole-Invest AS (Chair of the Board), Oso Hotwater Group
AS (Chair of the Board), Rec Wafer Norway AS (Chair of the
Board)
Previous directorships and senior management
positions last five years .................................................................................................................
REC Solar ASA (Chairma ), REC (CEO), University of oslo (board
member), Norske Skog ASA (board member)
Name of director Director since Current term
expires Business address:
Hanne Skaarberg Holen, Chair of the
Board
15 May. 2017 Annual general
meeting in 2018
Haakon VIIs gate 10, PB 1484 Vika, Oslo
Ole Enger 15 May. 2017 Annual general
meeting in 2018
Karenslyst Allé 20, PB: 199 Skøyen 0212 Oslo
Beatriz Malo de Molina 15 May. 2017 Annual general
meeting in 2018
Karenslyst Allé 20, PB: 199 Skøyen 0212 Oslo
Finn Jebsen 15 May. 2017 Annual general
meeting in 2018
Engebrets vei 5, 0275 Oslo
Mogens Filtenborg 20 May. 2016 Annual general meeting in 2018
Karenslyst Allé 20, PB: 199 Skøyen 0212 Oslo
Current directorships and senior management
position ............................................................................................................................
Thommessen (Partner), Supreme Court Lawyer, Head of
Norwegian Bar Association’s Tax Law Committee, Nel ASA
(Chair of the Board)
Previous directorships and senior management
positions last five years .................................................................................................
Arntzen de Besche (Managing Partner), Arntzen de Besche
(Partner) PricewaterhouseCoopers (Partner)
117
Beatriz Malo de Molina, Board member
Through 2016, Ms. Malo de Molina worked as Senior Vice President and Head of Mergers and Acquisitions at
Orkla ASA. Prior to joining Orkla in 2012, she was Investment Director for Kistefos AS private equity, and
Associate Director in McKinsey & Co, both in Oslo. Prior to moving to Norway, Ms. Malo de Molina worked
for 10 years in Goldman Sachs & Co.’s Investment Banking Division in New York City, Mexico City, Frankfurt,
and London. Ms. Malo de Molina began her career in the financial advisory arm of Ernst & Young in New York
City and is a graduate of Georgetown University in Washington DC, and Vienna’s Haupt- und
Wirtschaftsuniversitaet, . Ms. Malo de Molina holds an M.Phil degree from the University of Oslo. Beatriz Malo
de Molina has board experience from several listed and private companies, both domestic and international. Ms.
Malo de Molina is a Spanish Citizen and resides permanently in Norway.
Current directorships and senior management
position ..........................................................................................................................................
Investinor (board member and Audit Committee), Nordic
Semiconductor (board member and Audit Committee), Energy Nest
(board member)
Previous directorships and senior management
positions last five years .................................................................................................................
Orkla ASA (Senior Vice President, Head of Mergers &
Acquisition, Treasury Committee member), Kistefos Private Equity
(Investment Director), Agasti Holding (board member and Audit
Committee), Jotun Bedriftsforsamling (member), Sapa Heat
Transfer/Gränges (board member), Advanzia Bank S.A (Chair of
the Board); Springfondet (board member); Alliance Venture (board
member); Protia A.S. (board member); yA Bank (Director &
Compensation Committee Member), Atex Group Ltd. (board
member)
Finn Jebsen, Board member
Mr Finn Jebsen has worked for Orkla ASA and several of Orkla’s main division/business areas including
Borregaard, Denofa Lilleborg, Ringnes-Carlsberg and Orkla Brands. Mr. Jebsen worked for Orkla ASA for
almost 25 years and the last 5 years he was the CEO of Orkla ASA. From 2005 he has been working as a
professional board and chair-person for several private and listed companies. Finn Jebsen has a Master degree
from NHH and from UCLA in Business.
Current directorships and senior management
position ..........................................................................................................................................
Kavli Holding AS (Chair of the Board), AWilhelmesen AS (board
member and Chair of Board Compensation Committee), Norsk
Hydro ASA (board member and Chair of Board Audit Committee),
Future Technology AS (board member), Norfund (board member),
Nel ASA (board member)
Previous directorships and senior management
positions last five years .................................................................................................................
Kongsberg Gruppen ASA (Chair of the Board, and Chair of Board
Compensation Committee), KLP Insurance (Deputy Chair of the
Board and Chair of the Board Audit Committee), Berner Gruppen
AS (board member)
Mogens Filtenborg
Mr. Mogens Filtenborg is the Owner and Director of the investment and consultancy company Zuns ApS. Mr.
Filtenborg joined Vestas Wind Systems A/S in 1997 and served as its Executive Vice President, Member of
Management Board and Director of Operations/Chief Technology Officer of Vestas Wind Systems A/S until
2005; Managing Director of SKOV A/S from 1992 to 1997; Production manager of SKOV A/S from 1986 to
1992. Mr. Filtenborg is educated at the University of Aalborg, Denmark as an engineer. He is a Danish citizen
and resides in Sunds, Denmark.
Current directorships and senior management
position ..........................................................................................................................................
Zuns ApS (director and owner), DEIF A/S (Chair of the Board),
Heta A/S (Chair of the Board), OJM A/S (Chair of the Board),
Sonne A/S (Chair of the Board), Kemp & Lauritzen A/S (board
member), Niebuhr Gears A/S ( board member), Fleksi A/S (board
member)
Previous directorships and senior management
positions last five years .................................................................................................................
Frontmatec A/S (boardmember), H2 Logic A/S (boardmember),
Airtec A/S (Chair of the Board), VM Tarm A/S (board member),
Top Team A/S (Chair of the Board), EP Tools A/S (Chair of the
Board), Bladena A/S (Chair of the Board)
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12.2 EXECUTIVE MANAGEMENT
12.2.1 Overview
The table below sets forth the members of the Executive Management as of the date of this Prospectus. Name Position Business address:
Jon André Løkke Chief Executive Officer Karenslyst Allé 20, 0278 Oslo, Norway
Bent Skisaker Chief Financial Officer Karenslyst Allé 20, 0278 Oslo, Norway
Bjørn Simonsen VP Market Development and Public Relations Karenslyst Allé 20, 0278 Oslo, Norway
Anders Søreng Chief Technology Officer Karenslyst Allé 20, 0278 Oslo, Norway
Lars Marcus Solheim SVP Nel Hydrogen Electrolyser Heddalsvegen 11, 3674 Notodden
Jørn Rosenlund SVP Nel Hydrogen Fueling Industriparken 348, 7400 Herning, Denmark
Jacob Krogsgaard SVP Nel Hydrogen Solutions Industriparken 348, 7400 Herning, Denmark
Mikael Sloth VP Business Development Industriparken 348, 7400 Herning, Denmark
On 28 October 2013 Nel initiated a process to give notice of termination to all of the staff, a process which was
executed during the month of October 2013. Lars Christian Stugaard was appointed CEO of Nel effective 1
April 2014. Between the 28 October 2013 and 1 April 2014, Ruben Ekbåten (former CFO) was appointed the
acting CEO of Nel. On December 11 2015 Jon Andrè Løkke was appointed CEO of Nel and Lars Christian
Stugaard was appointed CFO effective 4 January 2016. Bjørn Simonsen, Director of Market Development and
Public Relations was also appointed to the executive management.
In May 2016 Anders Søreng joined Nel’s executive management as CTO. In June 2016 Nel expanded their
management team with Mikael Sloth (Director of Business Development), Jørn Rosenlund (Manager of Nel
Hydrogen Fueling), Jacob Krogsgaard (Manager of Nel Hydrogen Solutions) and Lars Markus Solheim (SVP
Nel Hydrogen Electrolyser). Bent Skiaker was appointed new CFO effective as of 1 September 2016.
12.2.2 Brief biographies of the Executive Management
Jon André Løkke, Chief Executive Officer
Jon André Løkke was appointed Chief Executive Officer (CEO) of Nel ASA effective 4 January 2016. Mr.
Løkke comes from the position as CEO of Norsk Titanium AS, developing and industrializing 3D printing
technology for the production of titanium components for the aerospace and other industries. He has ten years of
experience from the REC Group, including positions as senior vice president in REC Wafer, investor relations
officer in REC ASA and CFO in REC ASA. Mr Løkke has also worked for the ABB Group and holds an
International MBA degree from Glasgow University and a Bachelor degree in business and economics from
Southampton University.
Current directorships and senior management
position ..........................................................................................................................................
Nel ASA (CEO), Ludens II AS (CEO and Chair of the Board),
Maskinen AS (Chair of the Board), Ludens AS (Chair of the
Board), NTI MH AS (board member), Nel US, Inc.(board member),
Nel Hydrogen A/S (board member), Nel Hydrogen Inc.(board
member), Glomfjord Hydrogen AS (Chair of the Board), New
Hydrogen AS (Chair of the Board), New Nel Hydrogen P60 AS
(Chair of the Board), New Nel Hydrogen Eiendom AS (Chair of the
Board)
Previous directorships and senior management
positions last five years .................................................................................................................
Norsk Titanium AS (CEO), XO Charter AS (Chair of the Board),
Tempo AS (board member)
Bent Skisaker, Chief Financial Officer
Bent Skisaker was appointed Chief Financial Officer (CFO) of Nel ASA effective 1 September 2016. Mr
Skisaker comes from the position as CFO of Eureka Pumps AS. Before that he has ten years of experience also
from other CFO positions in the Aker Group. Mr. Skisaker has also served eight years as an auditor and financial
advisor at Ernst & Young/Arthur Andersen. Skisaker holds a Master in Accounting and Auditing from the
Norwegian School of Economics (NHH), a B.A. of Business Organisation from Heriot-Watt University, and is
qualified as a State Authorised Public Accountant in Norway.
119
Current directorships and senior management
position .......................................................................................................................................... Nel ASA (CFO), Swiss Real Estate AS (board member), Nel US,
Inc. (board member), Nel Hydrogen A/S (board member), Nel
Hydrogen Inc. (board member)
Previous directorships and senior management
positions last five years .................................................................................................................
Eureka Pumps AS (CFO), Epax AS (CFO),
Bjørn Simonsen, VP, Market Development and Public Relations
Bjørn Simonsen has been with Nel since September 2014. Mr. Simonsen has experience within the hydrogen
sector since 2008, and began as a researcher at Institute for Energy Technology (IFE), followed by key positions
in the HyNor-project, The Norwegian Hydrogen Council and Norwegian Hydrogen Forum. He holds a MSc in
Energy and Environmental Science from NTNU.
Current directorships and senior management
position ..........................................................................................................................................
Nel ASA (VP Market Development and Public Relations),
Inceptum 999 AS (to be named Hyon AS) (Chair of the Board),
Simonsen Invest (Chair of the Board), OREEC (board member),
Norwegian Hydrogen Forum (board member)
Previous directorships and senior management
positions last five years .................................................................................................................
Hyme AS (managing director), Norwegian Hydrogen Forum
(secretary general), The Norwegian Hydrogen Council (secretary)
Anders Søreng, Chief Technology Officer
Anders Søreng joined Nel from May 2016. He has previously served as Senior Vice President in REC Solar,
where he held various management positions since 2008. He has recently worked as SVP & CTO of Norsk
Titanium and holds a PhD from the Norwegian University of Science and Technology (NTNU).
Current directorships and senior management
position .......................................................................................................................................... Nel ASA (CTO), Nel US, Inc. (board member)
Previous directorships and senior management
positions last five years .................................................................................................................
REC Solar ASA (Vice President Solar and Wafer Technology and
REC Business System), REC Solar ASA (Senior Vice President
Performance Management, HSE and Quality) Norsk Titanium AS
(Senior Vice President Technology Center and CTO)
Lars Marcus Solheim, SVP Nel Hydrogen Electrolyser
Lars Markus Solheim has been with Nel since 2005. He has extensive experience from employment in Nel
Hydrogen, with previous positions as Lead Automation Engineer and Director of Operations. He has experience
in Nel Hydrogen both from engineering, site activity and administrative work. He holds a BSc in System
Engineering from Buskerud University College.
Current directorships and senior management
position ..........................................................................................................................................
Nel ASA (SVP Nel Hydrogen Electrolyser), New Nel Hydrogen
AS (board member), New Nel Hydrogen Holding AS (board
member), New Nel Hydrogen Eiendom AS (board member), New
Nel Hydrogen P60 AS (Board member), LMS Holdco AS (Chair of
the Board), Rotoboost H2 AS (board member)
Previous directorships and senior management
positions last five years .................................................................................................................
Nel ASA (Director of Operations), New Nel Hydrogen AS (CEO),
New Nel Hydrogen AS (Director of Operations), New Nel
Hydrogen AS (Chair of the Board), New Nel Hydrogen Holding
AS (Chair of the Board), New Nel Hydrogen Eiendom AS (Chair of
the Board), New Nel Hydrogen P60 AS (Chair of the Board),
ELMO Holding AS (Chair of the Board), ELMO Holding AS
(board member), Hyme AS (board member)
Jørn Rosenlund, SVP Nel Hydrogen Fueling
Jørn Rosenlund was appointed SVP of Nel Hydrogen Fueling as of June 2016. Previously he held the a position
as COO in H2 Logic. He has a background of 15 years in senior management positions on operations and supply
chain management in EagleBurgmann (2013-2015) and Danfoss (2000-2013) with several years working in
120
Denmark, USA, Canada and Germany. Jørn holds a master in manufacturing technology from Aalborg
University and an MBA from Henley Management College in UK.
Current directorships and senior management
position ..........................................................................................................................................
Nel ASA (Manager of Nel Hydrogen Fueling)
Previous directorships and senior management
positions last five years .................................................................................................................
Nel Hydrogen A/S (COO), EagleBurgmann (supply chain
management), Danfoss (supply chain management)
Jacob Krogsgaard, SVP Nel Hydrogen Solutions
Jacob Krogsgaard was appointed SVP of Nel Hydrogen Solutions as of June 2016. He is one of the co-founders
and was Managing Director of H2 Logic since 2003. Mr. Krogsgaard also serves as CEO and board member of
Danish Hydrogen Fuel A/S as well as board member of Copenhagen Hydrogen Network A/S – both are joint
venture companies with energy and gas companies.
Current directorships and senior management
position ..........................................................................................................................................
Nel ASA (SVP Nel Hydrogen Solutions), Danish Hydrogen Fuel
A/S (CEO and board member), Copenhagen Hydrogen Network
A/S (board member), Icelandic Hydrogen (board member), Nel
Hydrogen Inc.(board member)
Previous directorships and senior management
positions last five years .................................................................................................................
n.a.
Mikael Sloth, VP Business Development
Mikael Sloth was appointed VP of Business Development in Nel as of June 2016. He is co-founder and served as
Business Development Manager in H2 Logic since 2003. Mikael holds positions of trusts in various European
and international hydrogen forums. Mikael served as board member of the €2,5 billion European Joint
Technology Initiative for Hydrogen and Fuel Cells during 2008-2015.
Current directorships and senior management
position .......................................................................................................................................... Nel (VP Business Development), Nel Hydrogen A/S (board
member), Nel Hydrogen Inc.(board member)
Previous directorships and senior management
positions last five years .................................................................................................................
Nel ASA (board member), H2 Logic (Cofounder and Business
Development Manager), European Joint Technology Initiatice for
Hydrogen and Fuel Cells (board member)
12.3 CONFLICT OF INTERESTS, FAMILY RELATIONSHIP, DIRECTORSHIPS ETC.
There are currently no other potential conflicts of interests between any duties to the Company and private
interest or other duties of the Board or the senior management, except as described below. Furthermore, there are
no family relations between any of the Company’s board members or management.
There is no arrangement or understanding with major shareholders, customers, suppliers or others, pursuant to
which any member of the administrative, management, supervisory bodies or executive management has been
selected as a member of the administrative, management or supervisory bodies or member of senior
management.
Finn Jebsen, member of the Board:
Fateburet AS, a company controlled by Finn Jebsen holds 250,000 shares or approximately 0.03% of the shares
(based on 751,176,219 shares outstanding as of the date of this Prospectus).
Ole Enger, member of the Board:
Ole Enger holds 90,000 shares or approximately 0.01% of the shares (based on 751,176,219 shares outstanding
as of the date of this Prospectus).
Mogens Filtenborg, member of the Board:
Zuns ApS, a company controlled by Filtenborg holds 1,813,493 shares or approximately 0.24% of the shares
(based on 751,176,219 shares outstanding as of the date of this Prospectus).
121
Jon André Løkke, Chief Executive Officer
Jon André Løkke and related parties own 647,942 shares or approximately 0.09 % of total shares outstanding in
the Company (based on 751,176,219 shares outstanding as of the date of this Prospectus). Ludens AS, a
company controlled by Mr. Løkke owns 142,000 of the said shares. Of the remaining shares 420,942 shares is
personally owned by Mr. Løkke, 42,500 shares is owned by Maria Wathne Løkke and 42,500 shares is owned by
Philip André Wathne Løkke.
Mr. Løkke additionally owns 6 million options in the Company, with a strike price of NOK 3.00 per share, and
expiration date on 4. January 2020.
Bent Skisaker, Chief Financial Officer
Bent Skisaker owns 420,942 shares or approximately 0.06% of the total shares outstanding (based on
751,176,219 shares outstanding as of the date of this Prospectus).
Bjørn Simonsen, VP Marketing and Public Relations:
Simonsen Invest, a company controlled by Mr. Simonsen holds 2,126,711 shares or approximately 0.28% of the
shares (based on 751,176,219 shares outstanding as of the date of this Prospectus).
Anders Søreng, Chief Technology Officer
Anders Søreng owns 420,942 shares of approximately 0.06% of the total shares outstanding (based on
751,176,219 shares outstanding as of the date of this Prospectus).
Lars Marcus Solheim, SVP Nel Hydrogen Electrolyser
Lars Marcus Solheim controls and owns 100% of LMS Holdco AS, which owns 15,500,000 shares in the
Company. In additional Mr. Solheim owns 420,942 shares personally. In total he owns 15,920,942 shares or
approximately 2.12% of the total shares outstanding in the Company (based on 751,176,219 shares outstanding
as of the date of this Prospectus).
Jørn Rosenlund, SVP Nel Hydrogen Fueling
Jørn Rosenlund owns 447,829 shares or approximately 0.06% of the total shares outstanding in the Company
(based on 751,176,219 shares outstanding as of the date of this Prospectus).
Jacob Krogsgaard, SVP Nel Hydrogen Solutions
Jacob Krogsgaard controls 25% of H2 Holding ApS, which owns 127,405,781 shares or approximately 16.96%
of the total shares outstanding in the Company (based on 751,176,219 shares outstanding as of the date of this
Prospectus). This includes 650.224 shares allocated to H2 Holding ApS in the 27. February private placement.
Mikael Sloth, VP Business Development
Mikael Sloth controls 25% of H2 Holding ApS, which owns 127,405,781 shares or approximately 16.96% of the
total shares outstanding in the Company (based on 751,176,219 shares outstanding as of the date of this
Prospectus). This includes 650.224 shares allocated to H2 Holding ApS in the 27. February private placement.
12.4 DETAILS OF ANY CONVICTIONS FOR FRAUDULENT OFFENCES, BANKRUPTCY ETC.
During the last five years preceding the date of this Prospectus, no members of the Company’s Board or the
executive management, have any convictions in relation to indictable offences or convictions in relations to
fraudulent offence, received any official public incrimination and/or sanctions by any statutory or regulatory
authorities (including designated professional bodies) or even been disqualified by a court from acting as a
member of the administrative, management or supervisory bodies of a company or from acting in the
management or conduct of the affairs of any company. No members of the Company’s Board or the executive
management, have been declared bankrupt or been with bankruptcy, receiverships or liquidations in his or hers
capacity as a founder, board member, director or manager of a company, during the last five years preceding the
date of this Prospectus, except for Øystein Stray Spetalen who was a board member of Nel Hydrogen AS which
declared bankruptcy in June 2013 and Jon André Løkke who was Chair of the Board in Xo Charter AS which
declared bankruptcy in October 2012.
122
12.5 REMUNERATION AND BENEFITS
12.5.1 Remuneration of the Board
The table below seths out the remuneration to be paid to the current Board of Directors for the period from the
annual general meeting of 2017 to the annual meeting in 2018:
Name Board fee (NOK)
Hanne Skaarberg Holen (Chair of the Board) ......................................................................................................................... 400,000
Ole Enger ............................................................................................................................................................................... 250,000
Beatriz Malo de Molina .......................................................................................................................................................... 250,000
Finn Jebsen ............................................................................................................................................................................. 250,000
Mogens Filtenborg ................................................................................................................................................................. 250,000
Total ...................................................................................................................................................................................... 1,400,000
The table below sets out the remuneration paid to the former Board of Directors in the period 20 May 2016 to the
annual meeting 15 May 2017.
Name Board fee (NOK)
Martin Nes (Chair of the Board) ............................................................................................................................................. 260,000
Øystein Stray Spetalen ........................................................................................................................................................... 130,000
Jan Christian Opsahl ............................................................................................................................................................... 130,000
Eva Karin Sandanger Dugstad ............................................................................................................................................... 130,000
Anne Marie Gohli Russell ...................................................................................................................................................... 130,000
Kristin Hellebust .................................................................................................................................................................... 119,166
Mogens Filtenborg ................................................................................................................................................................. 130,000
Harald Arnet ........................................................................................................................................................................... 15,000
Total ...................................................................................................................................................................................... 1,044,166
Note that Harald Arnet acted as a deputy board member until 20 May 2016, and thus received remuneration in
2016.
12.5.2 Remuneration of the Executive Management
The Board of Directors prepares guidelines on the remuneration of the Company’s senior management. These
guidelines, as well as details of the remuneration packages of the CEO and other senior executives, are set out in
the notes to the annual accounts.
The guidelines on the remuneration of senior management must be submitted to the general meeting. The Board
of Directors considers that the remuneration paid to senior management reflects market practice and that the
remuneration packages do not include any unreasonable terms, for example in connection with resignation or
termination of employment.
Incentive schemes for the CEO and other employees are set out in the notes to the annual accounts. The
incentive schemes cover all non-temporary employees, and have been submitted in detail for the general
meeting’s approval.
The table below sets out the remuneration to leading personnel in 2016.
Name
Salary (NOK)
Bonus (NOK)
Pension
expense1
(NOK)
Other
remuneration (NOK)
Total (NOK)
Jon André Løkke 2,298,108 2,298,108
Bent Skisaker 666,667 666,667
Bjørn Simonsen 895,902 895,902
Anders Søreng 740,770 740,770
Lars Marcus Solheim 1,075,868 56,703 1,132,571
Jørn Rosenlund 1,654,205 115,642 133,122 1,902,959
Jacob Krogsgaard 1,925,344 143,023 86,877 2,155,244
Mikael Sloth 1,329,432 104,020 133,486 1,566,939
Total ...................................................................................................................................................................................... 10,586,296 419,388 353,485 11,359,160
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12.5.3 Termination benefits
Term of notice is 3 months for all employees, except for the CEO and the CFO which have 6 months’ notice
period. In addition the CEO is entitled to 6 months’ severance if dismissed by the Company. No other employees
are entitled to severance pay.
12.5.4 Share option plan
In December 2015, in connection with the announcement of the Nel’s new CEO Jon André Løkke, the Board of
Directors of Nel ASA proposed that Mr Løkke were to participate in a share option scheme and be granted 6
million share options exercisable 24 months after commencement of employment at an exercise price based on
the listed share price of the Nel share at commencement plus 20%. On 30 August 2016, the Board of resolved to
amend the terms of the share options, so that the options shall be exercisable 24 months after 1 April 2016, and
that the exercise price shall be NOK 3.00 per share. All other terms of the options remained un-amended.
On 17 February 2016, the Board of Directors of Nel ASA proposed the implementation of a share incentive
program for the employees of Nel ASA. The Incentive Program will be a recurrent program, subject to approval
by the Board of Directors. Allocation of shares under the Incentive Program will be made by the Board of
Directors, and the annual amount of shares granted shall not in any year exceed a total of 0.5% of the
outstanding shares of the Company in any year.
The price payable for the shares was set to the average price for the last 10 trading days prior to grant, but for the
first grant the strike price was set at a 20% discount to the last 10 trading days prior to the announcement of the
Q4 2015 financial results of the Company.
Each share subscribed for in the Incentive Program is freely transferrable, but shall entitle the employee to
subscribe for two further matching shares (i.e. gratuitously), one after 12 months and one after 24 months,
provided that (i) the original share is still held by the employee and (ii) the employee has not terminated his/her
employment, at the relevant time.
The Company announced on 15 June 2016, the issuance of 3,076,926 new shares under the incentive scheme.
The new shares were subscribed for at NOK 2.476 by in total 56 employees of the Company. Additionally the
company announced on 2 September 2016 that Bent Skisaker, CFO of Nel purchased 200,000 shares from Nel
ASA at a price of NOK 2.476 per share. The share will be a part of the share incentive program, and thus subject
to the terms proposed on 17 February 2016. Of the shares issued, 2,231,655 were granted under performance
awards.
2016 2015
NOK Exercise
price
Fair value of
options
Number of
options
Exercise
price
Fair value
of options
Number of
options
Outstanding at the beginning of the year ................................................................................................................................ 0 0 0 0 0 0
Granted ................................................................................................................................................................................... 2.476 7,078,160 3,276,926 0 0 0
Forfeited ................................................................................................................................................................................. 0 0 0 0 0 0
Expired ................................................................................................................................................................................... 0 0 0 0 0 0
Exercisable at the end of period........................................................................................................................................... 0 0 0 0 0 0
The below table provides an overview of the number of matching shares as per 31.12.2016 to management and
employees:
Name Number of matching
shares
Expiry
Strike price (NOK)
Fair value1)
Cost of period2)
Jon André Løkke
200 000
15.06.2017
2.13
233 425
Jon André Løkke 200 000 15.06.2018 2.13 116 712
Bent Skisaker 200 000 15.06.2017 2.62 221 692
Bent Skisaker 200 000 15.06.2018 2.62 97 395
Bjørn Simonsen 200 000 15.06.2017 2.13 233 425
Bjørn Simonsen 200 000 15.06.2018 2.13 116 712
Anders Søreng 200 000 15.06.2017 2.13 233 425
Anders Søreng 200 000 15.06.2018 2.13 116 712
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Total 1 369 498
1) The fair value is equal to the share price at grant; 2) The cost of the services is measured only once, at grant date, unless the arrangement is
modified. The cost of the period is recognized on a straight line basis over the vesting period
Note that the matching shares in the above table subject to expiration in June 2017 was issued on 1 June 2017.
The Company issued in total 2,517,967 new shares to employees to fulfil the Company’s obligations under the
Company’s employee incentive plans. The following employees who are primary insiders subscribed for
matching shares under the Company's existing share option program:
Name
Number of
matching shares
Exercise price per
share
Holding after the
subscription
Jon André Løkke 220 942 NOK 0.20 647 942
Bent Skisaker 220 942 NOK 0.20 420 942
Anders Søreng 220 942 NOK 0.20 420 942
Bjørn Simonsen 220 942 NOK 0.20 2 126 711
Lars Markus Solheim 220 942 NOK 0.20 15 920 942
Audun Dale 93 901 NOK 0.20 178 901
Additionally, Nel ASA transferred treasury shares for no consideration to the following employees who are
primary insiders, to provide the employees with matching shares under the Company's existing share option
program:
Name of recipient
Number of
matching shares
Holding of the employee
after the acquisition
Jørn Rosenlund 223 829 447 829
Martin B. Pedersen 153 554 318 067
12.6 CORPORATE GOVERNANCE
12.6.1 Corporate governance principles
The Norwegian Code of Practice for Corporate Governance is intended to strengthen confidence in listed
companies and thereby promote the best possible value creation over time, for the benefit of shareholders,
employees and other stakeholders. Observance of the recommendations is based on the “comply or explain”
principle. Nel’s Board of Directors and management have resolved to follow the recommendations of the Code
to the extent deemed reasonable in view of the Company’s size.
Nel has introduced a set of corporate values, and the Board of Directors has adopted ethical guidelines. The
guidelines provide that the Company’s Board and employees should follow a high ethical standard in carrying
out their work and duties. Although Nel’s guidelines discuss the Company’s dealings with various interest
groups, the Company has not established guidelines dealing specifically with social responsibility.
12.6.2 Nomination committee
In accordance with Nel’s articles of association, the general meeting has established a nomination committee
comprising three members. These must be shareholders or representatives of shareholders. The nomination
committee evaluates and proposes board members to the general meeting, and makes recommendations on
director remuneration. No board members or representatives of Company management are members of the
nomination committee.
Nomination committee members are elected for a one-year term. At the general meeting on 15 May 2017, the
following persons were elected to the nomination committee and serve until the 2018 annual general meeting:
Leif Eriksrød (Chair)
Magne Myrehaug
Jesper Boisen
Remuneration to the nomination committee from May 2017 to the Annual General Meeting in 2018 was
resolved by the general meeting on 15 May 2017. The Annual General Meeting set the remuneration to NOK 40
000 for the Chair person and NOK 20 000 to each of the members.
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12.6.3 Audit and remuneration committee
The Company has established an audit committee consisting of Hanne Skaarberg Holen and Beatriz Malo de
Molina. The Board’s audit committee is appointed by the Board of Directors of Nel ASA and is a sub-committee
of the Board. The audit committee shall on behalf of the Board supervise the financial reporting process to
ensure the integrity of the financial statements. For such purpose, the audit committee shall monitor the
Company's internal supervisory/control routines and risk management system, the Company's routines regarding
compliance with laws and regulations affecting the financial reporting, the Company's external audit process,
and shall also prepare recommendations concerning the election of the external auditor. The primary function of
the audit committee is to prepare matters for consideration by the Board of Directors, to support the Board in its
supervisory responsibilities and to ensure that the Company's requirements relating to financial reporting in
connection with its listing on the stock exchange are complied with.
The Board of Directors has considered establishing a Remuneration Committee. Thorough and independent
assessment of the remuneration of senior management has been ensured by matters being considered by all the
board members, with all members being considered independent of the day-to-day management. The Board of
Directors evaluates its composition and the Board’s work at least once a year. The evaluation also covers the
way in which the Board functions, both individually and as a group, in relation to the objectives that have been
set for its work. The evaluation report is presented to the Nomination Committee annually.
12.6.4 Corporate governance compliance
Nel’s Board and management have resolved as a main principle to follow the recommendations of the
Norwegian Corporate Governance Code to the extent not considered unreasonable due the company size. The
Norwegian Code of Practice for Corporate Governance can be found on www.nues.no. Nel will provide
explanations of non-compliance of the code if not fully implemented.
12.7 EMPLOYEES
12.7.1 Number of employees
As of the date of this Prospectus, the Group has 83 employees; 20 employees realated to Nel Hydrogen
Electrolyser all located in Norway, 53 employees related to the Nel Hydrogen Fueling all located in Denmark, 7
employees related to Nel Hydrogen Solutions all located in Denmark, and 4 employees related to the
administration and executive management all located in Norway. The later 4 employees are the only employees
in Nel ASA.
At year end in 2015 and 2014 the corresponding numbers of employees were 75 and 23.
12.8 PENSIONS AND OTHER OBLIGATIONS
12.8.1 Pensions
The Company is obliged by law to have a pension plan. The Company's pension plan meets the requirements in
this Act.
The Company has defined contribution pension scheme for its employees. This scheme is funded through
payments to insurance companies. A defined contribution plan is one under which the Group pays fixed
contributions to a separate legal entity. The Group has no legal or constructive obligations to pay further
contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee
service in the current and prior periods. For defined contribution plans, the Group pays contribution to publicly-
or privately administered pension insurance plans on an obligatory, contractual or voluntary basis. The Group
has no further payment obligations once the contributions have been paid. The contributions are recognized as a
payroll expense when they fall due.
Total expenses in relation to Nel ASA’s pension plan amounted to NOK 0.063 million for 2016, NOK 0.0
million for 2015, NOK 0.2 million for 2014 and NOK 0.7 million for 2013. There were no expensed realted to
pension in 2015, as the expenses were not expended on Nel ASA.
12.8.2 Loans and guarantees
The Company has no outstanding loans or guarantees to any member of the Executive Management.
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12.9 SHAREHOLDINGS
12.9.1 Board of Directors
The table below presents the overview of Shares and options owned by the Board of Directors as of the date of
this Prospectus:
Number of Shares Number of options
Hanne Skaarberg Holen .................................................................................................................................. 0 0
Ole Enger ......................................................................................................................................................... 90,000 0
Beatriz Malo de Molina ................................................................................................................................... 0 0
Finn Jebsen ...................................................................................................................................................... 250,0001 0
Mogens Filtenborg ........................................................................................................................................... 1,813,4932 0
(1) Consisting of shares held through Fateburet AS
(2) Consisting of shares held through Zuns ApS
12.9.2 Executive Management
The table below presents the overview of Shares and options owned by the Executive Management as of the date
of this Prospectus:
Number of Shares Number of options
Jon André Løkke.............................................................................................................................................. 647,9421 6.000.000
Bent Skisaker ................................................................................................................................................... 420,942 0
Bjørn Simonsen ............................................................................................................................................... 2,126,7112 0
Anders Søreng ................................................................................................................................................. 420,942 0
Lars Marcus Solheim ....................................................................................................................................... 15,920,9423 0
Jørn Rosenlund ................................................................................................................................................ 447,829 0
Jacob Krogsgaard ............................................................................................................................................. 127,405,7814 0 Mikael Sloth .................................................................................................................................................... 127,405,7814 0
(1) Consisting of shares held through Ludens AS controlled by the Company’s CEO Mr. Løkke and related parties
(2) Consisting of shares held through Simonsen Invest AS, a company controlled by the Company’s VP for Market Development and Public Relations Mr. Simonsen
(3) Consisting of shares held through LMS Holdco AS, a company controlled by Lars Markus Solheim, of which 420,942 of the shares are
held personally. (4) Consisting of shares held through H2 Holding ApS, a company partially owned by leading employees Jacob Krogsgaard (25.0%) and
Mikael Sloth (25.0%)
The Executive Management are subject to the following lock-up restrictions on current Shares:
Lars Markus Solheim received in October 2014, 13,846,154 shares in Nel ASA, in which 50% of the shares are
subject to a four years lock up period with expiration 9. October 2018. The remaining 50% were subject to a
lock-up period of two years, which expired October 2016.
Jacob Krogsgaard and Mikael Sloth control the company H2 Logic ApS, which received 126,755,555
consideration shares in connection to the acquisition of H2 Logic A/S on 25 June 2015. These shares were
subject to a lock-up period of two years from the time of acquisition. In the period between two years and four
years, H2 Holding ApS agreed not to transfer or place any encumbrances on more than 50% of the Consideration
Shares it has received. After four years H2 Holding ApS may freely divest the Consideration Shares it has
received.
12.9.3 Other employees
Ole Arnt Lindgren, Magne Myrehaug and Erik Evju received in October 2014, 13,846,154 shares each in Nel
ASA, in which 50% of the shares are subject to a four years lock up period with expiration 9. October 2018. The
remaining 50% were subject to a lock-up period of two years, which expired October 2016.
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13. SHARE CAPITAL
13.1 OVERVIEW
The following description includes certain information concerning the Company’s share capital, a brief
description of certain provisions contained in the Company’s Articles of Association as they are in effect at the
date of this Prospectus and a brief description of certain applicable Norwegian law, hereunder the Public
Limited Companies Act and the Securities Trading Act. The summary does not purport to be complete and is
qualified in its entirety by the Company’s Articles of Association and Norwegian law. Any change in the Articles
of Association is subject to approval by a general meeting of the Company’s shareholders.
13.2 SHARE CAPITAL HISTORY
The following table sets out the development of the Company's share capital since the Company merged with
Mefjorden on 27 August 2004 and until the date of this Prospectus. The Company’s current share capital is NOK
150,235,243.8 divided into 751,176,219 ordinary Shares, each with a par value of NOK 0.20. All the Shares are
validly issued and fully paid.
Date Type of change Share capital
(NOK)
Issue price
(NOK)
Par value per
share (NOK)
Issued shares Total shares
Apr. 2005 Share issue 1,785,826 6.50 0.05 3 129 384 35 716 520 Jul. 2005 Exercise of option 1,786,326 3.00 0.05 10 000 35 726 520 Aug. 2005 Exercise of option 1,786,826 3.00 0.05 10 000 35 736 520 Mar. 2006 Share issue 1,961 826 9.50 0.05 3 500 000 39 236 520 Sep. 2006 Exercise of option 1,964 076 3.00 0.05 45 000 39 281 520 Nov. 2006 Share issue 1,968 076 6.22 0.05 80 000 39 361 520
Nov. 2006 Exercise of option 1,988 326 3.00 0.05 405 000 39 766 520
May. 2007 Share issue 2,186 826 6.50 0.05 3 970 000 43 736 520
May. 2008 Share issue 2,586 826 5.60 0.05 8 000 000 51 736 520
Jul. 2009 Share issue 2,711 826 3.74 0.05 2 500 000 54 236 520
Nov. 2009 Share issue 3,336 826 2.75 0.05 12 500 000 66 736 520
Feb. 2010 Share issue 3,511 826 2.75 0.05 3 500 000 70 236 520
Nov. 2010 Share issue 10,511 826 0.50 0.05 140 000 000 210 236 520
Dec. 2010 Share issue 13,511 826 0.50 0.05 60 000 000 270 236 520
May. 2011 Reverse share spit (10:1) 13,511 826 - 0.50 - 27 023 652
Apr. 2013 Share issue 38,511 826 0.60 0.50 50 000 000 77 023 652
May. 2013 Share issue 40,799 365 0.60 0.50 4 575 078 81 598 730
Aug. 13 Reverse share spit (10:1) and
share capital reduction 1,631 975 - 0.20 - 8 159 873
Apr. 2014 Share issue 21,631 975 0.50 0.20 100 000 000 108 159 873
Oct. 2014 Consideration Shares 46,247 359 - 0.20 123 076 923 231 236 796
Oct. 2014 Share issue 57,016 590 0.65 0.20 53 846 154 285 082 950
Nov. 2014 Share issue 67,785 821 0.65 0.20 53 846 154 338 929 104
Nov. 2014 Share issue 77,785 821 1.30 0.20 50 000 000 388 929 104
Feb. 2015 Share issue 79,785 820 1.30 0.20 10 000 000 398 929 104
Jun. 2015 Share issue 90,046 191 1.35 0.20 51 301 852 450 230 956
Jun. 2015 Consideration Shares 119,675 821 1.35 0.20 148 148 148 598 379 104
Jul. 2015 Share issue 124,120 265 1.35 0.20 22 222 222 620 601 326
Jul. 2015 Share issue 130,120 265 2.25 0.20 30 000 000 650 601 326
Dec. 2015 Share issue 136,120 265 3.70 0.20 30 000 000 680 601 326
Jun. 2016 Share issue – Incentive scheme 136,735 650 2.476 0.20 3 076 926 683 678 252
Feb. 2017 Share issue 149,731,650 2.72 0.20 64 980 000 748 658 252
June 2017 Share issue – Incentive scheme 150,079,486 0.20 0.20 1 739 180 750 397 432
June 2017 Share issue – Incentive scheme 150,235,244 2.10 0.20 778 787 751 176 219
128
The two reverse share splits conducted in May 2011 and August 2013 were conducted in order to preserve the
value of the Company’s share price to an acceptable level with regards to the listing requirements set forth by
Oslo Børs.
13.3 OWN SHARES
As of the date of this Prospectus the Company holds 502,707 treasury shares owned through Nel Hydrogen AS.
At the Annual General Meeting held on 15 May 2017, the following resolution was proposed and approved:
“The Board is granted authorization to acquire shares in Nel ASA on behalf of the Company for one or more of
the following purposes:
1. in connection with the Company’s share option program for its employees, and/or
2. to increase return on investment for the Company’s shareholders.
The authorization covers purchase(s) of up to 10% of the face value of the share capital of the Company, cf. the
public limited liability companies act §§ 9-2 and 9-3. Shares may be acquired at minimum NOK 0.10 per share
and maximum NOK 10 per share. These limitations shall be adjusted in the event of share consolidation, share
splits, and similar transactions. The shares shall be acquired through ordinary purchase on the stock exchange.
The Board’s authorization is valid until the annual general meeting in 2018, but shall in any event expire at the
latest 15 months from the date of this General Meeting. The decision shall be notified to and registered by the
Norwegian Register of Business Enterprises prior to acquiring any shares pursuant to this authorization.”
13.4 SHAREHOLDER AGREEMENTS
The Company is not aware of its shareholders having entered into any shareholders agreements.
13.5 STOCK EXCHANGE LISTING, SHARE REGISTRAR AND SECURITIES NUMBER
Nel ASA is a Norwegian public limited liability company and the Shares are issued pursuant to the Norwegian
Public Limited Companies Act.
The Shares are listed on Oslo Børs under the ticker symbol “NEL”. The Shares belong to the OB Match liquidity
category and they are registered in the Norwegian Central Securities Depository (VPS). The Company's registrar
is DNB Bank ASA. The Shares carry the securities number ISIN NO0010081235. All Shares hold the same
rights and no major shareholders have different voting rights.
13.6 OUTSTANDING AUTHORIZATIONS
At the AGM held on 15 May 2017, the following resolution was proposed and approved:
"The Board is granted authorization to increase the share capital with up to NOK 37,432,912.60 through one or
several share capital increases. The authorization may be used for one or more of the following purposes:
1. for issuance of shares in connection with the Company's share/option plan for employees; and/or
2. to provide the Company with financial flexibility, including in connection with investments, mergers
and acquisitions.
Price and conditions for subscription will be determined by the Board on issuance, according to the Company's
needs and the shares' market value at the time. Shares may be issued in exchange for cash settlement or
contribution in kind.
The existing shareholders preemptive rights to subscribe shares can be deviated from in connection with the
effectuation of this authorization.
The Board’s authorization is valid until the Annual General Meeting in 2018, but shall in any event expire at the
latest 15 months from the date of this annual general meeting.
129
The Board is at the same time given authorization to make the necessary amendments to the articles of
association on execution of the authorization. This replaces all previously granted authorizations to increase the
share capital."
As of the date of this prospectus, the Company has 184,164,596 shares remaining on the above mentioned
authorization. The Consideration Shares in connection with the Acquisition, which will amount to 147,659,456
Shares, subject to the Closing occurring (prior to the Post Closing Adjustments) was approved by the Board on
11 May 2016, and will be issued based on the authorization granted on the general meeting 20 May 2016 (see
section 5.6 for Consideration Shares resolved to be issued by the Board of Director, ex options to be issued to
Nel Option Recipients).
13.7 CONVERTIBLE INSTRUMENTS AND WARRANTS
The Company has granted options to employees as part of an incentive program. The incentive program is
described in section 12.5.4.
13.8 DIVIDEND POLICY
Under the Company’s strategy, and following the strengthening of the balance sheet in February 2017, dividends
are not currently part of the plan for this stage of the business development process
The Company has not paid any dividend for the financial years 2016, 2015 or 2014.
130
13.9 SHAREHOLDERS
The table below sets out the Company’s 20 largest shareholders as reflected in VPS as of 9 June 2017.
Name Number of shares Percentage (%)
H2 Holding Aps 126 755 557 16.87%
Nordnet Livsforsikring AA 27 651 603 3.68%
Verdipapirfondet Alfred Berg Gamba 19 126 581 2.55%
Dallas Asset Management AA 16 443 511 2.19%
Lms Holdco AS 15 500 000 2.06%
Jemo Invest AA 15 500 000 2.06%
Mamy Invest AS 15 398 340 2.05%
Elmo Holding AS 14 080 000 1.87%
Storebrand Vekst Verdipapirfond 10 719 268 1.43%
Seb Prime Solutions Sissener Canop 10 000 000 1.33%
Nordnet Bank AB 9 936 785 1.32%
Carnegie Investment Bank AB 8 207 414 1.09%
Netfonds Livsforsikring AS 8 037 314 1.07%
Statoil Pensjon 7 004 311 0.93%
Jpmorgan Chase Bank, N.A., London 6 000 002 0.80%
Verdipapirfondet Delphi Norge 5 000 000 0.67%
Toluma Norden AS 4 906 404 0.65%
Danske Bank A/S 4 476 928 0.60%
Nordea Bank AB 4 198 991 0.56%
Verdipapirfondet Storebrand Optima 3 924 447 0.52%
As of the date of this Prospectus, the following shareholder owns or controls more than 5% of the issued share
capital in the Company:
- H2 Holding ApS (16.96%), of which 126,755,557 and 650,224 shares respectively is held through two
separate VPS accounts, hence the total shareholdings of H2 Holding ApS (i.e. 127,405,781 shares) is not
reflected under the same account in VPS’ top 20 largest shareholder list, i.e. in the table above.
H2 Holding ApS, a company partially owned by leading employees Jacob Krogsgaard (25.0%) and Mikael Sloth
(25.0%) owns in total 127,405,781 shares representing 16.96% of the Company’s share capital (based on
751,176,219 shares outstanding).
As far as the Company is aware of, there is no other natural or legal person other than those mentioned above,
which directly or indirectly has a shareholding in the Company which is noticeable under Norwegian law.
To the knowledge of the Company, no person, entity or group directly or indirectly controls the issuer to such
extent that special measures are considered necessary to ensure abuse of such control.
131
14. SHAREHOLDER MATTERS AND NORWEGIAN COMPANY AND SECURITIES LAW
The following is a summary of certain information relating to the Shares and certain shareholder matters,
including the Company’s Articles of Association and a summary of applicable Norwegian corporate and
securities law in effect as of the date of this Prospectus. The summary does not purport to be complete and is
qualified in its entirety by the Company’s Articles of Association and Norwegian law.
Under Norwegian law, all shares are to provide equal rights in a company. However, Norwegian law permits a
company’s articles of association to provide for different types of shares (e.g., several classes of shares). In such
case, a company’s articles of association must specify the different rights, preferences and privileges of the
classes of shares and the total par value of each class of shares. The Company’s Articles of Association provide
for a single class of shares with equal rights.
There are no restrictions affecting the right of Norwegian or non-Norwegian residents or citizens to own the
Shares. The Company’s Articles of Association do not contain any provisions restricting the transferability of
Shares.
14.1 THE GENERAL MEETING OF SHAREHOLDERS
The Company’s shareholders exercise supreme authority in the Company through the general meeting. A
shareholder may attend the general meeting either in person or by proxy. The Company is required to include a
proxy form with notices of general meetings.
In accordance with Norwegian law, the annual general meeting of the Company’s shareholders is required to be
held each year on or prior to 30 June. Pursuant to article 8 of the Company's Articles of Association, the
following business must be dealt with and decided at the annual general meeting:
1. The Directors’ Report.
2. Approval of the Annual Accounts and Annual Report.
3. Determination of the fees to the Board and the auditor.
4. Application of the profit or covering of the loss in accordance with the approved accounts, as well as
payment of a dividend.
5. Election of the Board and, if appropriate, the auditor.
6. Other matters that by statute or the Articles fall to be considered by the General Meeting.
Norwegian law requires that written notice of general meetings are sent to all shareholders whose addresses are
known at least 21 days prior to the date of the meeting, unless the Company’s Articles of Association stipulate a
longer period. The Company’s Articles of Association do not include any provisions on this subject. Pursuant to
article 12 of the Company’s Articles of Association, documents concerning matters to be considered at the
general meeting are not required to be sent to the shareholders, provided that the documents are made available
for the shareholders at the Company’s website. The same applies for documents which according to law shall be
included in or attached to the notice of the general meeting. A shareholder is entitled to request that documents
concerning matters to be handled at the general meeting are sent to him/her.
Any shareholder is entitled to have an issue discussed at a scheduled general meeting if such shareholder
provides the Board with notice of the issue within seven days prior to the deadline for the notice to the general
meeting, along with a proposal to a draft resolution or a justification for the matter having been put on the
agenda. If the notice has been issued when such a written demand is presented, a renewed notice must be issued
if the deadline for issuing notice of the general meeting has not expired.
In addition to the annual general meeting, extraordinary general meetings of shareholders may be held if deemed
necessary by the Board. An extraordinary general meeting shall also be convened for the consideration of
specific matters at the written request of the Company’s auditor or shareholders representing a total of at least
5% of the share capital.
14.2 VOTING RIGHTS
The Articles of Association do not set forth additional conditions with regard to changing the rights of
shareholders than required by the Norwegian Public Limited Companies Act.
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Each Share carries the right to one vote at the Company’s general meetings. No voting rights can be exercised
with respect to treasury Shares held by the Company.
Decisions that the general meeting is entitled to make under Norwegian law or the Company’s Articles of
Association are in general made by a simple majority of the votes cast. In the case of elections, the persons who
obtain the most votes cast are elected.
Certain decisions, including but not limited to increase or reduction of the Company’s share capital, approval of
merger or demerger, and amendment of the Company’s Articles of Association, require the approval of at least
two-thirds of the aggregate number of votes cast at the general meeting, as well as at least two-thirds of the share
capital represented at the meeting.
Decisions that (i) would reduce any shareholder’s right in respect of dividend payments or other rights to the
assets of the Company or (ii) restrict the transferability of the Shares through introduction of a consent
requirement, a right of first refusal upon transfers or a requirement that shareholders must have certain
qualifications, require a majority vote of at least 90% of the share capital represented at the general meeting in
question as well as the majority required for amendments to the Company’s Articles of Association. Certain
other types of changes in the rights of shareholders require the consent of all shareholders affected thereby as
well as the majority required for amendments to the Company’s Articles of Association.
There are no quorum requirements at general meetings.
In general, in order to be entitled to vote, a shareholder must be registered as the owner of Shares in the
Company’s share register in the VPS or, in the case of a share transfer, report and show evidence of the
shareholder’s share acquisition to the Company prior to the general meeting. Beneficial owners of Shares that are
registered in the name of a nominee are generally not entitled to vote under Norwegian law, nor are any persons
who are designated in the register as holding such Shares as nominees. Readers should note that there are
varying opinions as to the interpretation of Norwegian law in respect of the right to vote for nominee registered
Shares.
14.3 ADDITIONAL ISSUANCES AND PREFERENTIAL RIGHTS
If the Company issues any new shares the Company’s Articles of Association must be amended, which requires
a two-thirds majority of the aggregate number of votes cast at the general meeting, as well as at least two-thirds
of the share capital represented at the general meeting. In connection with an increase in the Company’s share
capital by a subscription for Shares against cash contributions, Norwegian law provides the Company’s
shareholders with a preferential right to subscribe for the new shares on a pro rata basis in accordance with their
then-current shareholdings in the Company. The preferential rights may be waived by the general meeting by the
same majority vote as required for amendments to the Company’s Articles of Association.
The general meeting may, with a two-thirds majority vote as described above, authorise the Board to issue new
shares. Such authorisation may be effective for a maximum of two years, and the par value of the Shares to be
issued may not exceed 50% of the share capital at the time the authorisation is registered with the Norwegian
Register of Business Enterprises. The preferential right to subscribe for Shares against consideration in cash may
be set aside by the Board only if the authorisation includes such possibility for the Board.
Under Norwegian law, bonus shares may be issued, subject to shareholder approval and by transfer from funds
that are allowed to be used to distribute dividend cf. section 14.5 below. Any bonus issues may be affected either
by issuing Shares or by increasing the par value of the shares outstanding. If the increase in share capital is to
take place by new shares being issued, these new shares must be allocated to the shareholders of the Company in
proportion to their current shareholdings in the Company.
14.4 MINORITY RIGHTS
Norwegian law contains a number of protections for minority shareholders, including but not limited to those
described in this and preceding paragraphs. Any shareholder may petition the courts to have a decision of the
Board or general meeting of shareholders declared invalid on the grounds that it unreasonably favours certain
shareholders or third parties to the detriment of other shareholders or the company itself. In certain
circumstances shareholders may require the courts to dissolve the company as a result of such decisions to the
extent particularly strong reasons are considered by the court to make necessary dissolution of the Company.
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Minority shareholders holding 5% or more of the Company’s share capital have a right to demand in writing that
the Company’s Board of Directors convene an extraordinary general meeting to discuss or resolve specific
matters.
14.5 LEGAL CONSTRAINTS ON THE DISTRIBUTION OF DIVIDENDS
Dividends in respect of a fiscal year, if any, will be declared at the Company’s annual general meeting in the
following year. Under Norwegian law, dividends may be paid in respect of a fiscal year for which audited
financial statements have been approved by a majority vote at the annual general meeting, and any proposal to
pay a dividend must be recommended by the Company’s Board of Directors and approved by its shareholders at
a general meeting. The shareholders at the Company’s annual general meeting may vote to reduce, but may not
adopt a resolution to increase, the dividend proposed or accepted by the Company’s Board of Directors.
Dividends declared and approved in this manner accrue to those shareholders who were shareholders at the time
the resolution was adopted, unless otherwise stated in the resolution.
Dividends may be paid in cash or in some instances in kind. The Norwegian Public Limited Companies Act
provides several constraints on the distribution of dividends:
Pursuant to section 8-1 of the Norwegian Public Limited Liability Companies Act the Company may only
distribute dividend to the extent that the Company’s net assets following the distribution covers (i) the
Company's share capital, (ii) the reserve for valuation differences and (iii) the reserve for unrealized
gains. In the amount that may be distributed, a deduction shall be made for the aggregate nominal value
of treasury shares that the Company has purchased for ownership or as security before the balance day. It
shall also be made a deduction for credit and collateral etc. according to sections 8-7 to 8-10 from before
the balance day which after these provisions shall lie within the scope of the funds the company may
distribute as dividend. It shall however not be made a deduction for credit and collateral etc. that is
reimbursed or settled before the time of decision, or credit to a shareholder to the extent that the credit is
settled by a netting in the dividend. Transactions after year end which according to law shall require free
equity, reduce the dividend basis.
The calculation of the distributable equity shall be made on the basis of the balance sheet in the approved
annual accounts for the last fiscal year, however so that the registered share capital as of the date of the
resolution to distribute dividend shall apply. Following the approval of the annual accounts for the last
fiscal year, the General Meeting may also authorise the Board of Directors to declare dividend on the
basis of the Company’s annual accounts.
Dividend may also be distributed by the General Meeting based on an interim balance sheet which has
been prepared and audited in accordance with the provisions applying to the annual accounts and with a
balance sheet date not further into the past than six months before the date of the General Meeting’s
resolution.
Dividend may only be distributed to the extent that the Company after the distribution has a sound equity
and liquidity.
According to the Norwegian Public Limited Companies Act, there is no time limit after which entitlement to
dividends lapses. Further, said Act contains no dividend restrictions or specific procedures for non-Norwegian
resident shareholders. For a description of withholding tax on dividends that is applicable to non-Norwegian
residents, see section 16.1.3.
Under Norwegian foreign exchange controls currently in effect, transfers of capital to and from Norway are not
subject to prior government approval. However, all payments to and from Norway shall be registered with the
Norwegian Currency Registry. Such registration is made by the entity performing the transaction. Further, each
physical transfer of payments in currency shall be notified to the Norwegian customs. Consequently, a non-
Norwegian resident may receive dividend payments without Norwegian exchange control consent if such
payment is made through a licensed bank.
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14.6 DISCLOSURE OBLIGATIONS
If a person’s, entity’s or consolidated group’s proportion of the total issued shares and/or rights to shares in a
company listed on a regulated market in Norway (with Norway as its home state, which is the case for the
Company) reaches, exceeds or falls below the respective thresholds of 5%, 10%, 15%, 20%, 25%, 1/3, 50%, 2/3
or 90% of the share capital or the voting rights of that company, the person, entity or group in question has an
obligation under the Norwegian Securities Trading Act to notify Oslo Børs and the issuer immediately. The same
applies if the disclosure thresholds are passed due to other circumstances, such as a change in the Company’s
share capital.
The disclosure obligation also requires an investor to disclose agreements giving an investor voting rights over
another party’s shares if the total holding of shares and voting rights cross any of the mentioned thresholds.
14.7 MANDATORY TAKEOVER BIDS, SQUEEZE OUT, ETC.
The Norwegian Securities Trading Act requires any person, entity or consolidated group who becomes the owner
of Shares representing more than 1/3 of the voting rights of the Company to, within four weeks, make an
unconditional general offer for the purchase of the remaining Shares in the Company. A mandatory offer
obligation may also be triggered where a party acquires the right to become the owner of Shares which,
aggregated with the party's own shareholding, represent more than 1/3 of the voting rights in the Company, and
Oslo Børs decides that acquiring such rights must be regarded as effectively being an acquisition of the Shares in
question.
The mandatory offer obligation ceases to apply if the person, entity or consolidated group sells the portion of the
Shares that exceeds the relevant threshold within four weeks of the date on which the mandatory offer obligation
was triggered.
When a mandatory offer obligation is triggered, the person subject to the obligation is required to immediately
notify Oslo Børs and the company in question accordingly. The notification is required to state whether an offer
will be made to acquire the remaining shares in the company or whether a sale will take place. As a starting
point, a notification to the effect that an offer will be made cannot be retracted. The offer and the offer document
required are subject to approval by Oslo Børs before the offer is submitted to the shareholders or made public.
In the mandatory offer, all shareholders shall be treated equally and the price to be paid per share shall be at least
as high as the highest price paid or agreed by the acquirer during the last 6 months prior to the date the threshold
was exceeded. However, if it is clear that the market price was higher when the mandatory offer obligation was
triggered, the Norwegian Securities Trading Act states that the offer price shall be at least as high as the market
price. If the acquirer acquires or agrees to acquire additional shares at a higher price prior to the expiration of the
mandatory offer period, the acquirer is obliged to restate its offer at such higher price. The offer must be made in
cash or contain a cash alternative at least equal in value to any non-cash offer. Pursuant to the Norwegian
Securities Trading Act section 6-6, a repeated bid obligation applies when passing 40% and 50% of the votes of
the Company.
In the event of a failure to make a mandatory offer or to sell the portion of the Shares that exceeds the threshold
within four weeks, Oslo Børs may force the acquirer to sell the Shares exceeding the threshold by public auction.
Moreover, a shareholder who fails to make an offer may not, as long as the mandatory offer obligation remains
in force, exercise rights in the Company, such as voting at a general meeting, without the consent of a majority
of the remaining shareholders. The shareholder may, however, exercise its rights to dividends and pre-emption
rights in the event of a share capital increase. If the shareholder neglects its duty to make a mandatory offer, Oslo
Børs may impose a cumulative daily fine that runs until the circumstance has been rectified.
Any person, entity or consolidated group who has passed any of the above-mentioned relevant thresholds for a
mandatory offer without triggering such an obligation due to an applicable exemption, and who has therefore not
previously made an offer for the remaining Shares in the Company in accordance with the mandatory offer rules,
is, as a main rule, obliged to make a mandatory offer in the event of a subsequent acquisition of Shares in the
Company (subsequent offer obligation).
14.8 COMPULSORY ACQUISITION
Pursuant to the Norwegian Public Limited Companies Act and the Norwegian Securities Trading Act, a
shareholder who, directly or through subsidiaries, acquires shares representing 90% or more of the total number
of issued shares in a Norwegian public limited liability company, as well as 90% or more of the total voting
rights, has a right, and each remaining minority shareholder of the company has a right to require such majority
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shareholder, to effect a compulsory acquisition for cash of the shares not already owned by such majority
shareholder. Through such compulsory acquisition, the majority shareholder becomes the owner of the
remaining shares with immediate effect.
If a shareholder acquires shares representing more than 90% of the total number of issued shares, as well as more
than 90% of the total voting rights, through a voluntary offer in accordance with the Securities Trading Act, a
compulsory acquisition can, subject to the following conditions, be carried out without such shareholder being
obliged to make a mandatory offer: (i) the compulsory acquisition is commenced no later than four weeks after
the acquisition of shares through the voluntary offer, (ii) the price offered per share is equal to or higher than
what the offer price would have been in a mandatory offer, and (iii) the settlement is guaranteed by a financial
institution authorised to provide such guarantees in Norway.
A majority shareholder who effects a compulsory acquisition is required to offer the minority shareholders a
specific price per share, the determination of which is at the discretion of the majority shareholder. However,
where the offeror, after making a mandatory or voluntary offer, has acquired more than 90% of the voting shares
of a company and a corresponding proportion of the votes that can be cast at the general meeting, and the offeror
pursuant to section 4-25 of the Norwegian Public Limited Companies Act completes a compulsory acquisition of
the remaining shares within three months after the expiry of the offer period, it follows from the Norwegian
Securities Trading Act that the redemption price shall be determined on the basis of the offer price for the
mandatory/voluntary offer unless specific reasons indicate another price.
Should any minority shareholder not accept the offered price, such minority shareholder may, within a specified
deadline of not less than two months, request that the price be set by a Norwegian court. The cost of such court
procedure will, as a general rule, be the responsibility of the majority shareholder, and the relevant court will
have full discretion in determining the consideration to be paid to the minority shareholder as a result of the
compulsory acquisition.
Absent a request for a Norwegian court to set the price or any other objection to the price being offered, the
minority shareholders will be deemed to have accepted the offered price after the expiry of the specified
deadline.
14.9 LIABILITY OF DIRECTORS
Members of the Board owe a fiduciary duty to the Company and its shareholders. Such fiduciary duty requires
that the board members act in the best interests of the Company when exercising their functions and exercise a
general duty of loyalty and care towards the Company. Their principal task is to safeguard the interests of the
Company.
Each member of the Board may be held liable by the Company for any damage they negligently or wilfully
cause the Company. Norwegian law permits the general meeting to exempt any such person from liability
towards the Company, but the exemption is not binding if substantially correct and complete information was not
provided at the general meeting when the decision was made. If a resolution to grant such exemption from
liability or not to pursue claims against such a person has been passed by a general meeting with a majority
below that required to amend the Company’s Articles of Association, shareholders representing more than 10%
of the share capital or, if there are more than 100 shareholders, more than 10% of the shareholders may pursue
the claim on the Company’s behalf and in its name. The cost of any such action is not the Company’s
responsibility, but can be recovered from any proceeds that the Company receives as a result of the action. If the
decision to grant an exemption from liability or not to pursue claims is made by a majority required to amend the
Articles of Association, the minority shareholders cannot pursue the claim in the Company’s name.
14.10 INDEMNIFICATION OF DIRECTORS
Neither Norwegian law nor the Articles of Association contain any provision concerning indemnification by the
Company of the Board. The members of the Board are, as part of an insurance coverage, covered against certain
liabilities that they may incur in their capacity as such.
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14.11 DISTRIBUTION OF ASSETS ON LIQUIDATION
Under Norwegian law, a company may be wound-up by a resolution of the company’s shareholders in a general
meeting passed by the same majority as required to amend the Articles of Association. The shares rank equally
in the event of a return on capital by the Company upon a winding-up or otherwise.
14.12 RIGHTS OF REDEMPTION AND REPURCHASE OF SHARES
The share capital may be reduced by decreasing the par value of the Shares or by redemption of issued Shares.
Such a decision requires the same majority as required to amend the Articles of Association. Redemption of
individual Shares requires the consent of the holders of the Shares to be redeemed.
A Norwegian company may purchase its own shares if an authorisation for the board of directors of the company
to this effect has been given by a general meeting with the approval of at least two-thirds of the aggregate
number of votes cast and Shares represented at the meeting. The aggregate par value of treasury shares so
acquired and held by the company must not exceed 10% of the company’s share capital, and treasury shares may
only be acquired if the company’s distributable equity, according to the latest adopted balance sheet, exceeds the
consideration to be paid for the shares. The authorisation by the general meeting cannot be given for a period
exceeding 18 months.
14.13 ARTICLES OF ASSOCIATION
The Memorandum and Articles of Association of Nel ASA as last amended on 6 March 2017 are as follows:
§ 1 The Company’s name is Nel ASA. The company is a public limited company.
§ 2 The Company’s registered office is in the City of Oslo.
§ 3 The Company's business is to conduct business, invest in and/or own rights in
biotech/pharmaceuticals, production and sale of hydrogen plants, or other areas.
§ 4 The Company’s share capital is NOK 149,731,650.40 divided into 748,658,252 shares each with a
par value of NOK 0.20. The company’s shares shall be registered in the Norwegian Registry of
Securities (VPS).
§ 5 The Company’s Board shall consist of 3-7 members. The Chairman of the Board shall be elected by
the general meeting. The Board may have a deputy chairman who is elected by the Board. The Board
is to be elected for one year at a time. Board members may be re-elected. In the event of votes being
tied in the Board, the Chairman shall have a casting vote.
§ 6 Documents shall be signed on behalf of the company by the Chairman of the Board together with one
Board member, or by three Board members jointly. The Board may appoint authorised signatories.
§ 7 The Annual General Meeting shall be held by the end of June each year. Not less than 21 days written
notice of the Annual General Meeting shall be given. The notice shall specify the matters to be
considered.
General Meetings shall be chaired by the Chairman of the Board if no other chairman is chosen.
Each share shall carry 1 vote at General Meetings. Shareholders may be represented by proxies
authorised in writing.
§ 8 The Annual General Meeting shall consider:
1. The Directors’ Report.
2. Approval of the Annual Accounts and Annual Report.
3. Determination of the fees to the Board and the auditor.
4. Application of the profit or covering of the loss in accordance with the approved accounts, as well
as payment of a dividend.
5. Election of the Board and, if appropriate, the auditor.
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6. Other matters that by statute or the Articles fall to be considered by the General Meeting.
§ 9 Extraordinary General Meetings shall be held when the Board considers it necessary, or when
shareholders representing at least 5 % of the share capital so require.
Extraordinary General Meetings must be convened on not less than 21 days notice.
An Extraordinary General Meeting may only consider the matters stated in the notice of meeting.
§ 10 Shareholders who will attend a General Meeting shall give notice of this to the company no later than 2
business days before the General Meeting is to be held.
§ 11 The Company shall have a Nomination Committee consisting of three to five members; the number of
members to be decided by the general meeting. The member of the Committee, including the leader,
shall be elected by the general Meeting. The Nomination Committee shall make proposals to the
general meeting with regards to candidates and remunerations to Board Members. The general meeting
may decide to adopt rules regarding the mandate of operation for the Nomination Committee.
§ 12 Documents concerning matters to be considered at the general meeting are not required to be sent to
the shareholders if the documents are made available for the shareholders at the company’s websites.
This also applies for documents which pursuant to law shall be included in or attached to the notice of
the general meeting. A shareholder may nonetheless require that documents concerning matters to be
considered at the general meeting are sent to him/her.
§ 13 The shareholders shall be allowed to cast their vote in writing in matters on the agenda for general
meetings in a period preceding general meetings, including by the use of electronic means, to the extent
the Board of Directors finds adequate methods for authenticating the sender and in accordance with the
provisions of the Public Limited Liability Companies Act.
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15. LEGAL MATTERS
15.1 LEGAL PROCEEDINGS
The Company and/or the Group is not aware of any governmental, legal or arbitration proceedings, including
any such proceedings which are pending or threatened, during a period covering at least the previous 12 months
which may have, or have had in the recent past significant effects on the Company’s and/or the Group’s financial
position or profitability.
15.2 RELATED PARTY TRANSACTIONS
15.2.1 Transaction assistance
Ferncliff provided transaction assistance in connection with Nel ASA’s acquisition of H2 Logic A/S in 2015,
including assistance in negotiations with the seller, and was paid a success fee of NOK 3.0 million. Since the
assistance was supplied to help existing shareholders of Nel ASA prior to the acquisition of H2 Logic realise the
value of the company’s hydrogen operations, the agreement was entered into with the Company (thus the same
shareholder base). The transaction assistance has been provided on normal market terms.
15.2.2 Guarantee
As part of the agreement with Nel’s landlord to terminate a long term facility lease, in January 2014 Tycoon
Industrier AS provided an on demand guarantee for invalidation of NOK 1.5 million with Nel’s landlord. In
January 2014, Nel compensated Tycoon Industrier AS with NOK 100 000 for putting up the guarantee. Nel
board member Øystein Stray Spetalen is chairman of Tycoon Industrier AS and Nel board member Martin Nes is
managing director of Tycoon Industrier AS. The guarantee was made on commercial terms on arm length basis.
15.2.3 Facility lease
Nel formerly had a facility lease contract (including parking, canteen- and reception services) for its previous
office premises at Sjølyst plass 2, 0278 Oslo with Tycoon Industrier AS. Nel board member Øystein Stray
Spetalen is chairman of Tycoon Industrier AS and Nel board member Martin Nes is managing director of
Tycoon Industrier AS. The lease paid in 2016 was NOK 247,000. The lease agreement was terminated in
November 2016.
15.2.4 Consulting – restructuring process
Ferncliff TIH 1 AS has been compensated for consultancy work regarding review of patent portfolio and
handling of facility lease in connection with the restructuring process of Nel for the amount of NOK 250,000.
Nel board member Øystein Stray Spetalen is chairman of Ferncliff TIH 1 AS and Nel board member Martin Nes
is managing director Ferncliff TIH 1 AS. The agreement is made on commercial terms on arm length basis.
15.2.5 Management for hire
Lars Christian Stugaard was employed on a management-for-hire contract with Ferncliff TH AS. For 2014, the
company was invoiced a total of NOK 950,000 for the acting CEO’s services, and NOK 2,400,000 for services
in 2015. When appointed CFO of Nel effective 4 January 2016, Mr. Stugaard continued to be employed under a
management-for-hire contract at an annual cost of NOK 2,400,000 million on an annual basis. Mr. Stugaard was
retired from his duties as CFO 1 September 2016.
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16. NORWEGIAN TAXATION
The following is a brief summary of certain Norwegian tax considerations relevant to the acquisition, ownership
and disposition of Shares by holders that are residents of Norway for purposes of Norwegian taxation (resident
or Norwegian shareholders) and holders that are not residents of Norway for such purposes (non-resident or
foreign shareholders).
The summary is based on applicable Norwegian laws, rules and regulations as at the date of this Prospectus.
Such laws, rules and regulations may be subject to changes after this date, possibly on a retroactive basis for the
same tax year. The summary is of a general nature and does not purport to be a comprehensive description of all
tax considerations that may be relevant and does not address taxation in any other jurisdiction than Norway.
The summary does not concern tax issues for the Company and the summary only focuses on the shareholder
categories explicitly mentioned below. Special rules may apply to shareholders who are considered transparent
entities for tax purposes, for shareholders holding shares through a Norwegian permanent establishment and for
shareholders that have ceased or cease to be resident in Norway for tax purposes.
Each shareholder, and specifically non-resident shareholders, should consult with and rely upon their own tax
advisers to determine their particular tax consequences.
16.1 TAXATION OF DIVIDENDS
16.1.1 Resident corporate shareholders
Dividends distributed from the Company to Norwegian corporate shareholders (i.e. limited liability companies
and certain similar entities) are generally exempt from tax pursuant to the participation exemption method
(Norwegian: Fritaksmetoden). However, 3 pct. of such dividends are taxable as general income at a current rate
of 24 pct., implying that dividends distributed from the Company to resident corporate shareholders are
effectively taxed at a rate of 0.72 pct.
16.1.2 Resident personal shareholders
Dividends distributed from the Company to Norwegian personal shareholders are taxed as ordinary income at a
current rate of 24 pct. to the extent the dividends exceed a statutory tax-exempt allowance (Norwegian:
Skjermingsfradrag). The tax basis is upward adjusted with a factor of 1.24 before taxation, implying that
dividends exceeding the tax free allowance are effectively taxed at a rate of 29.76 pct.
The tax-exempt allowance is calculated and applied on a share-by-share basis. The allowance for each share
equals the cost price of the share multiplied by a risk-free interest rate determined based on the interest rate on
Norwegian treasury bills with three months maturity plus 0.5 percentage point, and adjusted downwards with the
tax rate. . The allowance one year is allocated to the shareholder owning the share on 31 December. Norwegian
personal shareholders who transfer Shares during an income year will thus not be entitled to deduct any
calculated allowance related to the transaction year. The Directorate of Taxes announces the risk free-interest
rate in January the year after the income year.
Any part of the calculated allowance one year exceeding distributed dividend on a Share (excess allowance) can
be carried forward and set off against future dividends (or capital gains) on the same Share (but may not be set
off against taxable dividends or capital gains on other Shares). Furthermore, for the purpose of calculating the
allowance the following years, any excess allowance is added to the cost price of the share and thereby included
in the basis for the calculation of allowance the following years.
16.1.3 Non-resident corporate shareholders
Dividends distributed from the Company to non-resident shareholders are in general subject to Norwegian
withholding tax at a rate of currently 25 pct., unless otherwise provided for in an applicable tax treaty or the
recipient is tax resident within the European Economic Area (the EEA) (ref. section 16.1.4 below for more
information on the EEA exemption). Norway has entered into tax treaties with approximately 80 countries. In
most tax treaties the withholding tax rate is reduced to 15 pct. or lower.
In accordance with the present administrative system in Norway, the Company shall withhold tax at the regular
rate or reduced rate according to an applicable tax treaty or the EEA exemption, based on the tax residency
information registered with the VPS. Dividends paid to nominees will always be subject to withholding tax at the
general rate of 25 pct. unless the nominee, by agreeing to provide certain information regarding beneficial
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owners, has obtained approval for a reduced or zero rate from the Norwegian Central Office for Foreign Tax
Affairs (Norwegian: Sentralskattekontoret for utenlandssaker).
Shareholders, who have been subject to a higher withholding tax than applicable, may apply to the Central
Office for Foreign Tax Affairs for a refund of the excess withholding tax.
If foreign shareholders are engaged in business activities in Norway, and their Shares are effectively connected
with such business activities, dividends distributed on their Shares will generally be subject to the same taxation
as that of Norwegian shareholders.
Foreign shareholders should consult their own advisers regarding the availability of treaty benefits in respect of
dividend payments, including the possibility of effectively claiming refund of withholding tax.
16.1.4 Shareholders tax resident within the EEA
Dividends distributed from the Company to personal shareholders tax-resident within the EEA are upon request
entitled to a deductible allowance. The shareholder shall pay the lesser amount of (i) withholding tax according
to the rate in the applicable tax treaty or (ii) withholding tax at 25 pct. after deduction of the tax-free allowance.
Any excess allowance may be carried forward.
Dividends distributed from the Company to corporate shareholders tax resident within the EEA are exempt from
Norwegian withholding tax, provided the shareholder is the beneficial owner of the Shares and is genuinely
established and performs genuine economic business activities within the EEA.
16.2 TAXATION UPON REALIZATION OF SHARES
16.2.1 Resident corporate shareholders
For Norwegian corporate shareholders capital gains upon realization of Shares are generally exempt from tax.
Losses are not deductible. Special exit rules apply for resident corporate shareholders that cease to be tax
resident in Norway.
16.2.2 Resident personal Shareholders
For Norwegian personal shareholders capital gains upon realization of Shares are taxable as general income in
the year of realization, and have a corresponding right to deduct losses that arise upon such realization. The tax
liability applies irrespective of time of ownership and the number of Shares realised. The tax rate for general
income is currently 24 pct. The tax basis is adjusted upward with a factor of 1.24 before taxation/deduction,
implying an effective taxation at a rate of 29.76 pct.
The taxable gain or loss is calculated per Share as the difference between the consideration received and the cost
price of the Share, including any costs incurred upon acquisition or realization of the Share. Any unused
allowance on a Share (see above) may be set off against capital gains on the same Share, but will not lead to or
increase a deductible loss. I.e. any unused allowance exceeding the capital gain upon realization of the Share will
be annulled. Any unused allowance on one Share may not be set of against gains on other Shares.
If a shareholder disposes of Shares acquired at different times, the Shares that were first acquired will be deemed
as first disposed (the FIFO-principle) when calculating a taxable gain or loss.
Special exit tax rules apply for resident personal shareholders that cease to be tax resident in Norway.
16.2.3 Non-resident shareholders
Gains from realization of Shares by non-resident shareholders will not be subject to taxation in Norway unless (i)
the Shares are effectively connected with business activities carried out or managed in Norway, or (ii) the Shares
are held by an individual who has been a resident of Norway for tax purposes with unsettled/postponed exit tax.
16.3 RIGHT TO SUBSCRIBE FOR SHARES
The right to subscribe for Shares is not subject to Norwegian taxation. Costs related to subscription for Shares
will be added to the cost price of the Shares.
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16.4 NET WEALTH TAX
Norwegian corporate shareholders are not subject to net wealth tax.
Norwegian personal shareholders are generally subject to net wealth taxation at a current rate of 0.85 pct. on net
wealth exceeding NOK 1,480,000. The Shares will be included in the net wealth with 90 pct. of their listed value
as of 1 January in the assessment year.
Non-resident shareholders are generally not subject to Norwegian net wealth tax, unless the Shares are held in
connection with business activities carried out or managed from Norway.
16.5 STAMP DUTY / TRANSFER TAX
Norway does not impose any stamp duty or transfer tax on the transfer or issuance of Shares.
Norway does not impose any inheritance tax. However, the heir continues the giver's tax positions, including the
input values, based on principles of continuity.
16.6 THE COMPANY’S RESPONSIBILITY FOR THE WITHHOLDING OF TAXES
The Company is responsible for and shall deduct, report and pay any applicable withholding tax to the
Norwegian tax authorities.
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17. ADDITIONAL INFORMATION
17.1 DOCUMENTS ON DISPLAY
The following documents (or copies thereof) will be available for inspection for the life of this Prospectus on the
Company’s homepage www.nelhydrogen.com or at the Company’s headquarters at Karenslyst Allé 20, N-0278
Oslo, Norway:
• The Company’s Articles of Association and Certificate of Incorporation
• The Company’s audited financial statements for the years ended, 31 December 2016, 2015 and 2014
• Interim financial statements for the Company for Q1 2016 and Q1 2017
• Independent assurance report on pro forma financial information
17.2 DOCUMENTS INCORPORATED BY REFERENCE
The information incorporated by reference in this Prospectus should be read in connection with the cross
reference list as set out in the table below. Except as provided in this section, no other information is
incorporated by reference into this Prospectus.
Section in
Prospectus Incorporated by reference Reference document and link
10.2 The Company’s financial statement for the year ended 31 December 2014
http://mb.cision.com/Public/115/9766720/b651635441f7f264.pdf
10.2 The Company’s financial statement for the year ended 31 December 2015
http://mb.cision.com/Public/115/2005169/b3bd2c37926e5a54.pdf
10.2 The Company’s financial statement for the
year ended 31 December 2016
http://mb.cision.com/Public/115/2248379/aa91abf4c2d1e856.pdf
10.2 The Company’s interim financial statement for Q1 2016
http://mb.cision.com/Public/115/2001988/843ea580035a10d7.pdf
10.2 The Company’s interim financial statement
for Q1 2017
http://mb.cision.com/Public/115/2262807/ad7ef0a98bddc63a.pdf
17.3 STATEMENT REGARDING SOURCES
The Company confirms that when information in this Prospectus has been sourced from a third party it has been
accurately reproduced and as far as the Company is aware and is able to ascertain from the information
published by that third party, no facts have been omitted which would render the reproduced information
inaccurate or misleading.
18. UNITED STATES INFORMATION
The Consideration Shares have not been approved or disapproved by the United States Securities and Exchange
Commission, any state securities commission in the United States or any other United States regulatory authority
nor have any of the foregoing authorities passed upon or endorsed the merits of the offering of the Consideration
Shares or the accuracy or adequacy of this document. Any representation to the contrary is a criminal offense in
the United States. The Consideration Shares have not been and will not be registered under the US Securities Act
or with any securities regulatory authority of any state or other jurisdiction of the United States.
143
19. DEFINITIONS AND GLOSSARY OF TERMS
The following definitions and glossary apply in this Prospectus unless otherwise dictated by the context,
including the foregoing pages of this Prospectus.
Term Definition
Acquisition Acquisition of Proton Energy Systems Inc.
Aggregate Option Cancellation Amount Consideration payable by Proton OnSite to employees for cancellation of a number
of employee options
AL Air Liquide Danmark A/S
Arctic Arctic Securities AS
Board The board of directors of the Company
Bygg 160 New Nel Hydrogen Holding production building at Notodden
Carnegie Carnegie AS
CEO Chief Executive Officer
CFO Chief Financial Officer
CHN Copenhagen Hydrogen Network A/S
Closing Closing of the Acquisition, dependent on the public approval process
Closing Date Seller Transaction Expenses Transaction expenses payable by Proton OnSite on closing
CNS Christian Nielsen Strandmøllen A/S
Commercial Market Study Market study dated April 2016, prepared by Arkwright at the request of the
Company
Commission Regulation (EC) No 809/2004
Commission Regulation (EC) No 809/2004 of 29 April 2004 implementing
Directive 2003/71/EC of the European Parliament and of the Council, as amended from time to time
Companies Act The Norwegian Public Limited Liability Companies Act of 13 June 1997 no. 45, as
amended from time to time (Allmennaksjeloven)
Company Nel ASA
Consideration Shares USD 50 million in Consideration Shares from Nel, to be adjusted for the number of options issued to the Nel Option Recipients
DHF Danish Hydrogen Fuel A/S
DKK Danish Kroner, the lawful currency of the of the Kingdom of Denmark.
EEA European Economic Area
EGM Extraordinary General Meeting
Electrolysis Water electrolysis
EU European Union
EUDP Energistyrelsen
EUR Euro, the single currency of the European Union member states participating in the
European Monetary Union
FCEV Fuel cell electric vehicle
FCH-JU The Fuel Cells and Hydrogen Joint Undertaking
FCV Fuell cell vehicle
Forward-looking statements Projections and expectations regarding the Group’s future financial position,
business strategy, plans and objectives
Group
The combined company consisting of the holding company Nel ASA and the wholly
owned subsidiaries New Nel Hydrogen Holding AS, Nel Fuel AS, Nel Hydrogen A/S, Nel Hydrogen Inc. and Nel US Inc.
HRS Hydrogen refueling stations
HWorld HWorld Real Estate LLC
IFRS International Financial Reporting Standards
ISIN Securities number in the Norwegian Central Securities Depository (VPS)
Manager (The acquisition) Carnegie AS
Managers (Private Placement) Arctic Securities AS and Carnegie AS
MKK M Mitsubishi Kakoki Kaisha, Ltd.
Nel Nel ASA
Nel A Nel A-series product line
Nel ASA The Company whose registration number is 979 938 799
Nel Hydrogen New Nel Hydrogen Holding AS
Nel Hydrogen group of companies The subsidiaries of New Nel Hydrogen Holdings AS
Nel Option Recipients Certain Proton OnSite employee option holders that will receive Nel options as
consideration for cancellation of their Proton OnSite options
144
Nm3/h Normal cubic meters per hour, a measure of flow
NOK Norwegian Kroner, the lawful currency of the Kingdom of Norway.
Non-resident Shareholders Shareholders that are not residents of Norway
Northern Power Systems Northern Power Systems, Inc.
Norwegian Public Limited The Norwegian Public Limited Liability Companies Act of 13 June 1997 no. 45, as amended from time to time (Allmennaksjeloven)
Norwegian Securities Trading Act The Norwegian Securities Trading Act of June 29, 2007 no. 75
Oslo Børs Oslo Børs ASA (the Oslo Stock Exchange)
Post Closing Adjustments Adjustment of the Purchase Price based on the actual levels of cash and debt, and to
adjust for deviation between the actual and the agreed normalised working capital
Private Placement The private placement of 64,980,000 new shares at a price of NOK 2.72
Prospectus This Prospectus dated 12 June 2017
Prospectus Directive Directive 2003/71/EC of the European Parliament and of the Council of 4 November
2003, as amended from time to time
Proton OnSite Proton Energy Systems, Inc.
PSA Pressure swing adsorption
Purchase Price The consideration for the purchase of Proton Energy Systems, Inc.
R&D Research and Development
Registrar DNB Bank ASA Issuer Services
Resident Shareholders Shareholders that are residents of Norway for purposes of Norwegian taxation
Securities Trading Act The Norwegian Securities Trading Act of 29 June 2007 no. 75 as amended from time to time (“Verdipapirhandelloven”)
Seller Debt Payoff Amount Amounts owed by Proton OnSite to its previous shareholder as of closing
Senior Executives Chief Executive Officer and other senior executives of Nel ASA
Shareholder A holder of a Share
Shares The ordinary shares in the capital of Nel, each with a par value of NOK 0.20
Shell Royal Dutch Shell Plc
Sophisticated Eligible Shareholders Persons who are within the meaning of section 708(8) of the Australian Corporations
Act.
SPA Share Purchase Agreement
SunHydro SunHydro LLC
Tingsinnskudd formal share issue and capital increase
US United States of America
USD United States Dollars, the lawful currency of the United States of America.
VPS The Norwegian Central Securities Depository, which organises the Norwegian
paperless securities registration system (Verdipapirsentralen)
VPS account An account with VPS for the registration of holdings of securities
145
Nel ASA
Karrenlyst allé 20
NO-0278 Oslo
Norway
Carnegie AS
Fjordalleen 16
PO Box 684 Sentrum
N-0106 Oslo
Norway
APPENDICES
APPENDIX A: INDEPENDENT ASSURANCE REPORT ON THE PRO FORMA FINANCIAL
INFORMATION……………………………………………………………………
APPENDIX B: PROTON ENERGY SYSTEMS, INC. CONSOLIDATED FINANCIAL
STATEMENTS, DECEMBER 31, 2016, 2015 AND 2014…………………….......
APPENDIX A: INDEPENDENT ASSURANCE REPORT ON THE PRO FORMA FINANCIAL
INFORMATION
APPENDIX B: PROTON ENERGY SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS,
DECEMBER 31, 2016, 2015 AND 2014
Proton Energy Systems, Inc.
Consolidated Financial Statements
December 31, 2016 and 2015
1
PROTON ENERGY SYSTEMS, INC.
INDEX
Page
Independent Auditor’s Report 2 to 3 Consolidated Balance Sheets 4 Consolidated Statements of Operations 5 Consolidated Statements of Changes in Equity 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8 to 21
2
INDEPENDENT AUDITOR’S REPORT
To the Shareholder Proton Energy Systems, Inc. We have audited the accompanying consolidated financial statements of Proton Energy Systems, Inc. (the “Company”), which comprise the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in equity and cash flows for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
3
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Proton Energy Systems, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, in 2016 the Company changed the classification of the deferred financing costs as a result of the adoption of the amendments to FASB Accounting Standards Codification resulting from Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. Our opinion is not modified with respect to that matter.
C Hartford, Connecticut March 3, 2017
PROTON ENERGY SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2016 and 2015
See Notes to Consolidated Financial Statements. 4
2016
2015
ASSETS
Current assets:
Cash and cash equivalents $ 1,911,963 $ 1,298,297 Accounts receivable, net of allowance of $208,455 and $0 7,124,610 5,578,971 Unbilled accounts receivable 308,851 257,864 Inventories 5,474,180 6,149,291 Costs and estimated earnings in excess of billings on contracts in progress 509,399 2,481,147 Other current assets 587,047 651,043 Total current assets 15,916,050 16,416,613
Property, plant and equipment, net ($8,602,891 and $8,822,846 for collateral of variable interest entity debt)
10,271,576 10,679,562 Restricted cash 1,944,623 1,603,086 Spare parts inventory 284,898 439,426 Due from related parties 536,638 142,108 Other assets 23,182 26,273 Total assets $ 28,976,967 $ 29,307,068
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 2,646,949 $ 2,853,648 Current portion of mortgage payable of variable interest entity 530,622 530,622 Accrued expenses and warranty reserve 2,170,530 2,521,983 Deferred revenue and customer advances 2,792,784 1,239,455 Capital lease obligation, current portion 18,647 16,933 Billings in excess of costs and estimated earnings on contracts in progress 265,842 194,926 Total current liabilities 8,425,374 7,357,567
Long-term liabilities:
Mortgage payable of variable interest entity, less current portion and deferred financing costs of $56,735 and $64,331
3,436,530
3,959,557
Notes payable to stockholder 5,666,674 3,334,600 Capital lease obligation, less current portion 3,286 21,933 Total liabilities 17,531,864 14,673,657
Commitments
Equity:
Proton Energy Systems, Inc.: Common stock, $.01 par value; 12,500,000 shares authorized; 8,500,000 shares issued and outstanding 85,000 85,000 Additional paid-in capital 21,841,626 21,775,778 Accumulated deficit (16,046,675) (12,321,524) Total Proton Energy Systems, Inc. equity 5,879,951 9,539,254 Noncontrolling variable interest equity 5,565,152 5,094,157 Total equity 11,445,103 14,633,411 Total liabilities and equity $ 28,976,967 $ 29,307,068
PROTON ENERGY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2016 and 2015
See Notes to Consolidated Financial Statements. 5
2016 2015
Revenues $ 27,170,276 $ 27,788,748
Cost of revenues 21,032,618 18,638,730
Gross margin 6,137,658 9,150,018
Operating expenses: Selling 3,749,108 3,582,950 Research and development 2,163,197 2,913,769 General and administrative 3,038,305 2,742,662 Total operating expenses 8,950,610 9,239,381
Loss from operations (2,812,952) (89,363)
Interest expense, net of interest income of $1,888 and $1,726 421,204 848,801 Consolidated net loss (3,234,156) (938,164)
Net income attributed to noncontrolling interest 490,995 488,464
Loss attributed to Proton Energy Systems, Inc. $ (3,725,151) $ (1,426,628)
Loss per share: Basic and diluted loss per share $ (0.44) $ (0.17)
Weighted average shares outstanding 8,500,000 8,500,000
PROTON ENERGY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 2016 and 2015
See Notes to Consolidated Financial Statements. 6
Additional Total Common stock Paid-in Accumulated Proton Energy Noncontrolling Total Shares Amount Capital Deficit Systems, Inc. Interest Equity
Balance at December 28, 2014 8,500,000 $ 85,000 $ 9,702,481 $ (10,894,896) $ (1,107,415) $ 4,605,693 $ 3,498,278 Stock-based compensation expense - - 82,152 - 82,152 - 82,152 Conversion of Notes Payable Net (loss) income
- -
- -
11,991,145 - -
(1,426,628) 11,991,145
(1,426,628) -
488,464 11,991,145
(938,164) Balance at December 31, 2015 8,500,000 85,000 21,775,778 (12,321,524) 9,539,254 5,094,157 14,633,411 Distribution
-
-
-
-
-
(20,000)
(20,000) Stock-based compensation expense - - 65,848 - 65,848 - 65,848
Net (loss) income - - - (3,725,151) (3,725,151) 490,995 (3,234,156) Balance at December 31, 2016 8,500,000 $ 85,000 $ 21,841,626 $ (16,046,675) $ 5,879,951 $ 5,565,152 $ 11,445,103
PROTON ENERGY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2016 and 2015
See Notes to Consolidated Financial Statements. 7
2016 2015
Operating activities: Consolidated net loss $ (3,234,156) $ (938,164) Adjustments to reconcile consolidated net loss to net cash used in operating activities: Depreciation and amortization 638,826 626,565 Stock-based compensation expense 65,848 82,152 Bad debt expense 208,489 522 Changes in operating assets and liabilities: Accounts receivable (1,754,128) (794,653) Unbilled accounts receivable (50,987) (73,367) Inventories 829,639 (455,520) Costs and estimated earnings in excess of billings on contracts in progress 1,971,748 (2,408,416) Other current assets 63,996 65,827 Due from related parties (394,530) (11,742) Other assets 3,091 3,090 Accounts payable (206,699) 541,880 Accrued expenses and warranty reserve (351,453) 673,106 Deferred revenue and customer advances 1,553,329 (1,808,523) Billings in excess of costs and estimated earnings on contracts in progress 70,916 132,574 Net cash used in operating activities (586,071) (4,364,669) Investing activities: Purchases of equipment (223,244) (401,133) Increase in restricted cash (341,537) (562,975) Net cash used in investing activities (564,781) (964,108) Financing activities: Mortgage payments Loan proceeds from stockholder Distribution
(530,623) 3,447,324
(20,000)
(530,622) 6,086,804
- Payment of notes payable to stockholder (1,115,250) (165,000) Payment of capital lease obligation (16,933) (12,916) Net cash provided by financing activities 1,764,518 5,378,266 Net change in cash and cash equivalents 613,666 49,489 Cash and cash equivalents, beginning of year 1,298,297 1,248,808 Cash and cash equivalents, end of year $ 1,911,963 $ 1,298,297 Supplemental disclosure of cash flow information
Cash paid for interest $ 421,340 $ 402,734 Purchase of equipment financed through capital lease obligation $ - $ 51,782 Conversion of notes payable to additional paid-in capital $ - $11,191,145 See Notes to Consolidated Financial Statements.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
Note 1 – Business activity and summary of significant accounting policies: Business activity:
Proton Energy Systems, Inc. (the “Company”) is a global provider of proton exchange membrane (PEM) water electrolysis products, which produce ultra-high purity hydrogen for industrial purposes. The Company’s products generate hydrogen gas from water and electricity and are sold in approximately 75 countries. The Company expanded its suite of principal products beyond hydrogen generators to include nitrogen and zero air generators, which are essential to expanding our customer base in the analytical laboratory market. Additionally, the Company has a proprietary control system product called the StableFlow™ Hydrogen Control System that is used in conjunction with its hydrogen generators to improve performance of electric generators in power plants by actively monitoring and controlling the purity, pressure and dew point to optimize the conditions in the electric generator. The Company also provides the associated service and spare parts to ensure that its products meet the high reliability requirements its customers demand.
Variable interest entity: During 2009, the Company sold its membership interest in its previously consolidated wholly-owned subsidiary, HWorld Real Estate LLC (“HWorld”), to the single member of F9 Investments, LLC for $10.0 million. There was no gain or loss recognized on the sale. The single member of F9 Investments, LLC is also the Company’s sole stockholder. HWorld has no other operating revenue other than the operating lease income from the Company. Management has determined that HWorld is a variable interest entity in which the Company has provided certain financial support in the form of a loan guarantee (referred to as variable interests) and of which the Company is the primary beneficiary as the Company has the power to direct the activities of HWorld and the obligation to absorb its losses. As such, the Company has consolidated the accounts of HWorld commencing for the year ended December 31, 2009. The consolidated financial statements include the accounts of the Company and HWorld. All intercompany transactions between the Company and HWorld have been eliminated in consolidation.
Use of estimates: The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from these estimates.
Cash and cash equivalents: All highly liquid investments with maturity of three months or less when purchased are considered to be cash equivalents. As of December 31, 2016 and 2015, there was $18,957 and $18,476, respectively, of cash equivalents.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
Restricted cash: As of December 31, 2016 and 2015, the Company has classified $1,944,623 and $1,603,086, respectively, as long-term restricted cash. On December 31, 2016 and 2015, the Company had eleven and eight outstanding irrevocable standby letters of credit with a bank for a total of $1,518,678 and $1,087,325, respectively, maturing between March 30, 2017 and December 5, 2020. The letters of credit were issued as an assurance for contractual and bid performance. At December 31, 2016, the customers had not drawn on the letters of credit. On June 18, 2009, the Company entered into an agreement with Peoples Bank as the corporate guarantor, along with HWorld, on the loan for the sale of the Wallingford Connecticut facility to HWorld. Under this agreement, the Company must hold certain amounts in escrow. The balance of restrictive funds held in escrow for debt service was $349,200 on December 31, 2016 and 2015.
Allowance for doubtful accounts: The Company evaluates credit risk on its accounts receivable and estimates an allowance for doubtful accounts. The Company evaluates the adequacy of the allowance for doubtful accounts on a periodic basis. The evaluation includes historical loss experience, adverse situations that may affect a customer’s ability to repay and prevailing economic conditions. The Company makes adjustments to its allowance if the evaluation of allowance requirements differs from the actual aggregate reserve. This evaluation is inherently subjective and estimates may be revised as more information becomes available.
Inventories: The Company records inventories at the lower of the cost or market value. The Company determines cost by the average cost method. This policy requires the Company to write down the inventories for the excess of the carrying value, which is typically the original cost, over the amount the Company expects to realize from the ultimate sale or other disposal of the inventories based upon its assumptions regarding forecasted consumer demand, market conditions, inventory aging and technological obsolescence. If any of its estimates are inaccurate, for example because of changes in technology that affect demand for certain products in an unforeseen manner, the Company may be exposed to losses in excess of its established reserve and those losses could be material. The Company maintains spare parts inventory for fielded products which is recorded at cost.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10
Property, plant and equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are calculated using the straight-line method over the following estimated useful lives: Estimated Useful Lives Building 40 years Building improvements 15 years Machinery and equipment 5 – 7 years Computer equipment 3 – 5 years When assets are sold or retired, the related cost and accumulated depreciation are removed from their respective accounts and any resulting gain or loss is included in income. The Company and HWorld periodically review the carrying value of their property, plant and equipment to assess recoverability based upon the expectation of undiscounted future cash flows. Expenditures for maintenance and repairs which do not improve or extend the useful lives of the respective fixed assets are expensed as incurred.
Impairment of long-lived assets: The Company reviews its long-lived assets for impairment of whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing a review for impairment, the Company compares the carrying value of the assets with their estimated future undiscounted cash flows. If it is determined that an impairment has occurred, the loss is recognized during that period. The impairment loss is calculated as the difference between the assets’ carrying values and the present value of estimated net cash flows or comparable market values, giving consideration to recent operating performance and pricing trends. There was no impairment in 2016 and 2015.
Deferred financing costs: HWorld capitalized costs incurred with its debt financing and is amortizing the costs to interest expense, using the effective interest method, over the term of the agreement. As of December 31, 2016, net deferred financing costs were $56,735. Amortization expense was $7,596 for the full year in 2016 and 2015 and is expected to approximate $7,600 annually through July 7, 2024. In 2016, the Company adopted FASB’s Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In connection with the adoption of ASU 2015-03, the Company has reclassified $56,735 and $64,331 of deferred financing costs as of December 31, 2016 and 2015, respectively, from other non-current assets to a reduction in the mortgage payable of variable interest entity.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11
Revenue recognition: The Company generates revenue from three principal sources: product sales, long-term contracts and service contracts.
Product revenue:
Product revenue is recorded when a firm sales agreement is in place, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. If customer acceptance of products is not assured, revenue is recorded only upon formal customer acceptance. Customer acceptance provisions included in the product sales agreements may include written acceptance from the customer, acceptance upon servicing and installation of the equipment and acceptance after a period of time. Revenue for product sales to distributors, for which there are no rights of return or price adjustments on unsold inventories is recognized on a gross basis upon shipment to the distributors, as they assume title and risk of loss.
Contract revenue: The Company derives contract revenues from government-sponsored research and development contracts and from commercial customers. For government-sponsored research and development contracts that are fixed-price, revenue is recognized using the percentage-of-completion method. For fixed-price-incentive, or cost-reimbursement contract that do not require the Company to meet specific obligations, revenue is recorded as the work is performed. For those research and development contracts that require the Company to meet specific obligations, including delivery and acceptance obligations, the Company recognizes amounts advanced as contract liabilities until such obligations are met. Once the obligations are met, the Company recognizes the amounts as contract revenue. For commercial contracts with a duration of less than one year, revenue is recognized under the completed contract method and revenue and cost is deferred until contract completion. For commercial contract with a duration greater than one year, revenue is recognized under the percentage of completion method.
Service revenue: For service and repair contracts, revenue is recognized as work is performed. For operating and maintenance contracts where the Company has agreed to provide routine maintenance services over a period of time for a fixed price, revenue is recognized ratably over the service period. The Company periodically enters into arrangements with customers that involve multiple elements. We assess such contracts to evaluate whether there are multiple deliverables, and whether the consideration under the arrangement is being appropriately allocated to each of the deliverables.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12
Cost of revenues: Adjustments to cost estimates are made periodically and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. The aggregate of costs incurred and income recognized on uncompleted contracts accounted for under percentage-of-completion method in excess of related billings and deferred costs on contracts accounted for under the completed contract method of accounting are shown as current assets. The aggregate of billings on uncompleted contracts accounted for under percentage-of-completion method in excess of relate costs incurred and income recognized and deferred revenue are shown as current liabilities. All costs incurred in the shipping and handling of customer goods are included in cost of revenues in the consolidated statements of operations.
Deferred revenue:
Deferred revenue represents the unearned portion of advance billings, which have been collected from customers but not yet earned or included as revenue. Such amounts are anticipated to be recorded as revenue as goods are delivered in subsequent periods.
Research and development: Research and development costs are expensed as incurred.
Warranty costs: The Company’s warranty to customers is limited to replacement parts and services and generally expires one year from the date of shipment or contract completion. The warranty period for hydrogen cell stacks in laboratory equipment is five years. Estimated warranty obligations are recorded in the period in which the related revenue is recognized or when a project is installed or commissioned. The Company quantifies and records an estimate for warranty related costs, which is principally based on historical experience. The accounting for warranties requires the Company to make assumptions and apply judgments when estimating product failure rates and expected material and labor costs. The Company makes adjustments to accruals as warranty claim data and historical experience warrant. If actual results are not consistent with the assumptions and judgments used to calculate the warranty liability because either failure rates or repair costs differ from the Company’s assumptions, the Company may be exposed to gains or losses that could be material. The changes in accrued product and service warranties for the years ended December 31, 2016 and 2015 are as follows: 2016 2015 Balance at beginning of year $ 613,416 $ 503,215 Warranties issued during the year 319,702 455,992 Adjustments to provision (309,256) (242,229) Warranty claims and adjustments (189,451) (103,562) Balance at end of year $ 434,411 $ 613,416
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
Stock-based compensations:
In October 2009, the Company established the 2009 Stock Incentive Plan. The compensation costs resulting from stock-based payment transactions are recognized in the financial statements. Fair value is the measurement objective in accounting for stock-based payment arrangements and requires the application of a fair-value measurement method of accounting for stock-based payment transactions with employees and non-employees. The Company uses a fair value model combined with a Black-Scholes option-pricing model to determine the value of its stock Incentive Plan share awards. The option pricing models include various assumptions, including comparable companies and the expected life of stock awards. These assumptions reflect the Company’s best estimates, but they involve inherent uncertainties based on market conditions generally outside of the control of the Company. Expected stock price volatility is determined using the average stock price volatility of peer group public companies with similar attributes to the Company. Risk-free interest rate is determined using interest rates on U.S. Government Treasury Securities at the date of grant of the awards. The average expected life of the awards is determined based on the weighted average of the remaining life of the exercisable shares. The Company uses the simplified method for estimating the expected term which represents the average of the vesting period and the contractual life of the option. The Company uses the simplified method as it does not have sufficient historic exercise experience to provide a reasonable basis to estimate the term.
Income taxes: With the consent of its stockholder, the Company has elected under the Internal Revenue Code and state statutes to be recognized as an “S” Corporation. In lieu of Federal or state corporate income taxes, the stockholders of an “S” Corporation are taxed on their proportionate share of the corporation’s taxable income. Therefore, no provision or liability for Federal or state income taxes has been included in the accompanying financial statements. HWorld is a limited liability company. In lieu of Federal and state income taxes, members of a limited company are taxed on their proportionate share of the company’s taxable income. Therefore, no provision or liability for Federal or state income taxes has been included in the accompanying financial statements related to HWorld. The Company and HWorld have no unrecognized tax benefits at December 31, 2016 or 2015. The Company’s and HWorld’s Federal and state income tax return prior to 2013 are closed and management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. The Company and HWorld recognize interest and penalties, if any, associated with any tax matters as part of the income tax expense and include accrued interest and penalties with the related tax liability in the consolidated balance sheets.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14
Sales taxes: The various states that the Company operates in impose sales tax on certain sales to nonexempt customers. The Company collects sales tax from customers and remits the entire amount to the appropriate state. The Company’s accounting policy is to exclude the tax collected and remitted to the state from revenues and cost of revenues in the consolidated statement of operations.
Recent accounting pronouncements: In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue From Contracts with Customers. In 2016, the FASB issued ASU No. 2016-08, 2016-10 and 2016-12 that do not change ASU 2014-09’s core principle but enhance implementation guidance. The Company will now be required to adopt the new standard in its 2019 Fiscal year. The purpose of this new standard is to clarify the principles for recognizing revenue so they can be applied consistently across various transactions, industries and capital markets. The Company has not completed its assessment of ASU No. 2014-09. The FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of
Inventory. ASU No. 2015-11 will require companies to measure inventories at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Current accounting standards require companies to measure inventory at the lower of cost or market. Market can be net realizable value, replacement cost, or net realizable value less a normal profit margin when measuring inventory. The Company will be required to adopt ASU No. 2015-11 in its 2017 fiscal year. The Company has not completed its assessment of ASU No. 2015-11.
Subsequent events: Management has evaluated events and transactions for potential recognition or disclosure through March 3, 2017, which is the date the financial statements were available to be issued.
Note 2 – Inventories: Inventories consist of the following as of December 31, 2016 and 2015: 2016 2015 Raw Materials, net $ 4,182,681 $ 4,775,896 Work in progress 1,105,786 1,308,065 Finished goods 185,713 65,330 $ 5,474,180 $ 6,149,291
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15
Note 3 – Costs in excess of billings and billings in excess of costs on contracts in progress: Information concerning costs and billings on contracts in progress accounted for under the percentage-of-completion as of December 31, 2016 and 2015 is as follows:
2016 2015 Costs incurred and estimated earnings on contracts in
progress
$ 957,479
$ 10,141,441 Less billings to date 448,080 7,660,294 Costs and estimated earnings in excess of billings, net $ 509,399 $ 2,481,147 Costs incurred and estimated earnings on contracts in
progress
$ 4,786,997
$ 2,931,604 Less billings to date 5,052,839 3,126,530 Billings in excess of costs and estimated earnings, net $ (265,842) $ (194,926) Costs and estimated earnings in excess of billings on
contracts in progress
$ 509,399
$ 2,481,147 Billings in excess of costs and estimated earnings on
contracts in progress
(265,842)
(194,926) Cost and estimated earnings in excess of billings,
(billings and estimated earnings in excess of costs), net
$ 243,557
$ 2,286,221
Note 4 – Property, plant and equipment:
Property, plant and equipment at December 31, 2016 and 2015 was comprised of the following:
2016 2015 Land $ 2,000,000 $ 2,000,000 Building 8,000,000 8,000,000 Building improvements 565,844 565,844 Machinery and equipment 1,716,508 1,688,134 Computer equipment 670,819 661,734 Construction in process 422,358 236,573 Totals 13,375,529 13,152,285 Less accumulated depreciation 3,103,953 2,472,723 Property, plant and equipment, net $ 10,271,576 $ 10,679,562
Depreciation expense on property, plant and equipment totaled $623,634 and $618,969 for the years ended December 31, 2016 and 2015, respectively.
The Company leases equipment under a non-cancelable capital lease agreement that expires on February 28, 2018. The assets are amortized over their estimated productive lives. Amortization of assets under capital leases is included in depreciation expense. The cost of equipment under the capital lease agreement, included in the consolidated balance sheets was $51,781 as of December 31, 2016 and 2015. Accumulated amortization of the leased equipment as of December 31, 2016 and 2015 was $31,644 and $14,384, respectively.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16
Amortization of assets under capital lease is included in depreciation and amortization expense.
The future minimum lease payments due under the non-cancelable capital leases are as follows:
Year ending December 31 Amount 2017 $ 19,957 2018 3,326 Total minimum lease payments 23,283 Less amount representing interest 1,350 Present value of minimum lease payments 21,933 Less current portion 18,647 Long-term portion $ 3,286
Note 5 – Employee benefit plan:
The Company maintains a 401(k) plan covering substantially all of its employees, subject to certain eligibility requirements. Participants have the option of contributing up to 15% of their annual compensation. The Company makes matching contributions to the 401(k) plan at 35% of the first 6% of the eligible employees’ contribution. The Company’s 401(k) match expense for the years ended December 31, 2016 and 2015 was $142,697 and $154,221, respectively.
Note 6 – Concentrations of credit risk:
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains is cash and cash equivalents with high-credit quality financial institutions. At times, such amounts may exceed Federal insured limits. As of December 31, 2016, the Company had cash and cash equivalent balances in excess of Federally insured limits in the amount of approximately $3.3 million. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company’s customer base, their dispersion across different geographic areas and generally short payment terms. In 2015 the Company’s two largest customers accounted for 34% of sales for the year. In 2016, no customer had sales in excess of 10%. The Company closely monitors the extension of credit to its customers while maintaining allowances for potential credit losses. On a periodic basis, the Company evaluates its trade accounts receivable and establishes allowances for doubtful accounts, based on a history of past write-offs and collections and current credit considerations.
Note 7 – Stock incentive plan:
In October 2009, the Company established the 2009 Stock Incentive Plan (the “Plan”), under which selected employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock awards, or other stock-based awards under the Plan. The option or purchase price is determined by the Board of Directors. The total number of shares
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17
of common stock for which options or restricted stock may be granted or issued under the Plan cannot exceed 1,500,000. Under the Plan, options and restricted stock generally vest over a five-year period, with 20% vesting on each year anniversary of the grant date. One grant contains different vesting; specifically, 40% on the grant date and 20% on each year anniversary of the grant date with full vesting over three years. The maximum term is 10 years for all options granted and there is no maximum term for restricted stock. The weighted-average grant date fair value of options granted was $0.99 and $1.06 in 2016 and 2015, respectively. Fair value was determined using the Black Scholes option pricing model with the following assumptions:
December 31, 2016 December 31, 2015 Risk free interest rate 1.45% 2.00% Expected dividend rate 0.0% 0.0% Expected term 6.5 years 6.5 years Expected volatility 83.5% 80.4%
For the years ended December 31, 2016 and 2015, the Company recorded stock-based compensation expense of $65,848 and $82,152, respectively. Stock compensation is recorded as a component of general and administrative expense. As of December 31, 2016, there was $155,356 of unrecognized compensation cost related to non-vested stock-based compensation awards granted under the Plan. The unrecognized cost is expected to be recognized over a weighted average period of 2.28 years.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18
A summary of stock option activity for the years ended December 31, 2016 and 2015 is as follows:
Options
Outstanding
Weighted Average
Exercise Price
Weighted Average Remaining
Contractual Life Balance at December 31, 2014 1,370,400 $1.47 6.08 years Options granted 48,600 $4.00 Options exercised - - Options forfeited (56,000) $1.19 Balance at December 31, 2015 1,363,000 $1.57 5.17 years Options granted 20,000 $4.00 Options exercised - - Options forfeited (47,700) $1.73 Balance at December 31, 2016
1,335,300
$1.60
4.25 years
At December 31, 2015: Options vested and expected to vest
1,363,000
$1.57
5.17 years
Options exercisable
1,044,120
$1.13
4.22 years
Balance at December 31, 2016
Options vested and expected to vest
1,335,300
$1.60
4.25 years
Options exercisable
1,093,040
$1.26
3.52 years
Note 8 – Related party transactions:
The Company provides administrative and accounting services, at cost, to related parties. The cash payments received from related parties for these services were $14,317 and $101,071 for the years ended December 31, 2016 and 2015, respectively, and are reported as a reduction of general and administrative expense in the consolidated statements of operations. The amounts due from related parties were $536,638 and $142,108 at December 31, 2016 and 2015, respectively.
The Company is engaged to provide certain product development service to Sun Hydro, LLC, wholly-owned by the Company’s sole shareholder. The Company was reimbursed for its direct costs associated with this arrangement and such reimbursements are netted against the related development costs in the accompanying financial statements. Total
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19
reimbursements under this arrangement were $72,965 and $97,148 in 2016 and 2015, respectively. The Company leases its operating facility from HWorld under an operating lease agreement that expires in June 2024. The Company has the right to extend this lease for two consecutive terms of five years each. The lease is an absolute net lease with all costs, real estate taxes, expenses and obligations being the responsibility of the Company. The Company subleases a portion of its office building under the terms of an agreement dated June 18, 2009 and amended in February 2014, which provides for monthly payments of approximately $16,000 through June 2019. Future minimum rental payments, reduced by rents to be received under the existing sublease agreement, are as follows:
2017 $ 647,844 2018 659,149 2019 780,237 2020 905,511 2021 923,622 Thereafter 2,388,255 $ 6,304,618
HWorld recognized $836,553 and $820,150 of rental income from Proton Energy Systems, Inc. in 2016 and 2015, respectively. Rental income and the associated rental expense recognized by the Company have been eliminated in consolidation. The Company recognized $206,218 and $198,318 of sub-lease income in 2016 and 2015, respectively, which is reported as a reduction of general and administrative expense in the consolidated statements of operations. The Company has two outstanding subordinated unsecured promissory notes due to the stockholder that provided borrowings of up to $11,000,000 as amended. The outstanding balances were $5,666,674 and $3,334,600 as of December 31, 2016 and 2015, respectively. The notes provide for periodic draws up to the maximum value of the note. The proceeds of these notes were used for working capital and new product development. The notes have an interest rate of 6% with interest accrued on the new product note and payable at maturity. Interest is due monthly in arrears for the working capital note. Interest expense related to these loans was $283,185 and $713,984 in 2016 and 2015, respectively. Accrued interest payable was $674,920 and $655,315 in 2016 and 2015, respectively. The notes are due and payable no later than December 31, 2018.
Effective December 31, 2015, the stockholder converted $11,991,145 of outstanding advances against these notes payable to additional paid-in-capital.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20
Note 9 – Loss per share: Basic and diluted loss per share are determined by dividing the net loss attributable to the Company by the weighted average outstanding shares of the Company’s common stock. Common stock options totaling 1,335,300 and 1,363,000 as of December 31, 2016 and 2015, respectively, have been excluded from determining the diluted loss per share as the impact would have been anti-dilutive.
Note 10 – Mortgage payable:
HWorld has an outstanding mortgage payable with a financial institution with an outstanding balance of $4,023,887 and $4,554,510 at December 31, 2016 and 2015, respectively. The mortgage has a variable interest rate set at 250 basis points above the bank’s cost of funds or 3.27% as of December 31, 2016 and requires monthly payments through July 7, 2024. The Company is required to meet a debt service coverage ratio annually. As of December 31, 2016, the Company was in compliance with this coverage. The mortgage is secured by the land and building and Company’s operating assets. Further, the Company has provided a guarantee to the financial institution.
The Company has recorded debt financing costs as a debt discount. As of December 31, 2016 and 2015, unamortized debt financing costs were $56,735 and $64,331, respectively. Amortization of $7,596 in 2016 and 2015 is included with interest expense.
Minimum future mortgage payments are:
2017 $ 530,622 2018 530,622 2019 530,622 2020 530,622 2021 530,622 Thereafter 1,370,777 $4,023,887
Note 11 – Segment information: The Company has determined that it has two operating segments: Commercial Product and Development Contracts. The Company’s chief operating decision makers measure operating segment performance and allocate balances based on revenues and gross margin less selling expenses. Research and development and general and administrative expenses are primarily for the benefit of all segments and are not specifically allocated. Identifiable assets of the Company are not segregated by operating segment and are located in the United States.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21
Revenue for the year ended December 31, 2016 and 2015 by segment is as follows:
2016 2015 Commercial Product $ 23,345,142 $ 24,978,367 Development Contracts 3,825,134 2,810,381 Total revenues $ 27,170,276 $ 27,788,748
Gross margin less selling expenses by segment for the year ended December 31, 2016 and 2015 by segment is as follows:
2016 2015 Commercial Product $ 1,971,369 $ 5,256,494 Development Contracts 417,181 310,574 Gross margin less selling expenses 2,388,550 5,567,068 Unallocated costs and expenses: Research and development 2,163,197 2,913,769 General and administrative 3,045,901 2,742,662 Loss from operations $ (2,820,548) $ (89,363) Revenue for the year ended December 31, 2016 and 2015 by geographic region is as follows: 2016 2015 United States $ 13,613,138 $ 16,400,835 Remainder of North America 370,799 219,773 Africa 3,833,647 454,124 Asia 4,062,263 1,949,483 Middle East 2,009,299 5,591,563 Europe 3,156,599 2,893,692 South America 83,343 143,986 Oceania 41,188 135,292 Total Revenues $ 27,170,276 $ 27,788,748 Note 12 – Contingencies:
The Company is involved, from time to time, in disputes and other litigation in the ordinary course of business. The Company presently believes that the resolution of these matters would not have a material adverse effect on its financial position, results of operations or liquidity.
Proton Energy Systems, Inc.
Consolidated Financial Statements
December 31, 2015 and 2014
1
PROTON ENERGY SYSTEMS, INC.
INDEX
Page
Independent Auditor’s Report 2 to 3 Consolidated Balance Sheets 4 Consolidated Statements of Operations 5 Consolidated Statements of Changes in Equity 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8 to 20
2
INDEPENDENT AUDITOR’S REPORT To the Shareholder Proton Energy Systems, Inc. We have audited the accompanying consolidated financial statements of Proton Energy Systems, Inc. (the “Company”), which comprise the consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in equity and cash flows for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
3
Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Proton Energy Systems, Inc. as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
C
Hartford, Connecticut February 22, 2016
4
PROTON ENERGY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2015 and 2014
2015
2014
ASSETS
Current assets:
Cash and cash equivalents $ 1,298,297 $ 1,248,808 Accounts receivable 5,578,971 4,784,840 Unbilled accounts receivable 257,864 184,497 Inventories 6,149,291 5,662,246 Costs and estimated earnings in excess of billings on contracts in progress 2,481,147 72,731 Other current assets 651,043 716,870 Total current assets 16,416,613 12,669,992
Property, plant and equipment, net ($8,822,846 and $9,082,801 for collateral of variable interest entity debt)
10,679,562 10,845,616 Restricted cash 1,603,086 1,040,111 Spare parts inventory 439,426 470,951 Due from related parties 142,108 130,366 Other assets 90,604 101,290 Total assets $ 29,371,399 $ 25,258,326
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 2,853,648 $ 2,311,768 Current portion of mortgage payable of variable interest entity 530,622 530,622 Accrued expenses and warranty reserve 2,521,983 1,848,877 Deferred revenue and customer advances 1,239,455 3,047,978 Capital lease obligation, current portion 16,933 - Billings in excess of costs and estimated earnings on contracts in progress 194,926 62,352 Total current liabilities 7,357,567 7,801,597
Long-term liabilities:
Mortgage payable of variable interest equity, less current portion 4,023,888 4,554,510 Notes payable to stockholder 3,334,600 9,403,941 Capital lease obligation, less current portion 21,933 - Total liabilities 14,737,988 21,760,048
Commitments
Equity:
Proton Energy Systems, Inc.: Common stock, $.01 par value; 12,500,000 shares authorized; 8,500,000 shares issued and outstanding 85,000 85,000 Additional paid-in capital 21,775,778 9,702,481 Accumulated deficit (12,321,524) (10,894,896) Total Proton Energy Systems, Inc. equity (deficit) 9,539,254 ( 1,107,415) Noncontrolling variable interest equity 5,094,157 4,605,693 Total equity 14,633,411 3,498,278
Total liabilities and equity $ 29,371,399 $ 25,258,326
See Notes to Consolidated Financial Statements.
5
PROTON ENERGY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2015 and 2014
2015 2014
Revenues $ 27,788,748 $ 23,658,792
Cost of revenues 18,638,730 16,317,747
Gross margin 9,150,018 7,341,045
Operating expenses: Selling 3,582,950 3,231,172 Research and development 2,913,769 5,849,518 General and administrative 2,742,662 4,033,714
Total operating expenses 9,239,381 13,114,404
Loss from operations (89,363) (5,773,359)
Interest expense, net of interest income of $1,726 and $1,794 848,801 565,407
Consolidated net loss (938,164) (6,338,766)
Net income attributed to noncontrolling interest 488,464 355,138
Loss attributed to Proton Energy Systems, Inc. $ (1,426,628) $ (6,693,904)
Loss per share: Basic and diluted loss per share $ (0.17) $ (0.79)
Weighted average shares outstanding 8,500,000 8,500,000
See Notes to Consolidated Financial Statements.
6
PROTON ENERGY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 2015 and 2014 Additional Total Common stock Paid-in Accumulated Proton Energy Non-controlling Total Shares Amount Capital Deficit Systems, Inc. Interest Equity
Balance at December 28, 2013 8,500,000 $ 85,000 $ 9,610,854 $ (4,200,992) $ 5,494,862 $ 4,250,555 $ 9,745,417 Stock-based compensation expense - - 91,627 - 91,627 - 91,627 Net (loss) income - - - (6,693,904) (6,693,904) 355,138 (6,338,766)
Balance at December 31, 2014 8,500,000 85,000 9,702,481 (10,894,896) (1,107,415) 4,605,693 3,498,278 Stock-based compensation expense - - 82,152 - 82,152 - 82,152 Conversion of notes payable - - 11,991,145 - 11,991,145 - 11,991,145
Net (loss) income - - - (1,426,628) (1,426,628) 488,464 (938,164) Balance at December 31, 2015 8,500,000 $ 85,000 $ 21,775,778 $ (12,321,524) $ 9,539,254 $ 5,094,157 $ 14,633,411
See Notes to Consolidated Financial Statements.
7
PROTON ENERGY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2015 and 2014
2015 2014
Operating activities: Consolidated net loss $ (938,164) $ (6,338,766) Adjustments to reconcile consolidated net loss to net cash used in operating activities: Depreciation and amortization 626,565 427,360 Stock-based compensation expense 82,152 91,627 Bad debt expense 522 65 Changes in operating assets and liabilities: Accounts receivable (794,653) (2,679,952) Unbilled accounts receivable (73,367) 69,840 Inventories (455,520) 229,708 Costs and estimated earnings in excess of billings on contracts in progress (2,408,416) (72,445) Other current assets 65,827 (132,874) Due from related parties (11,742) 15,237 Other assets 3,090 7,852 Accounts payable 541,880 1,089,368 Accrued expenses and warranty reserve 673,106 478,680 Deferred revenue and customer advances (1,808,523) 1,856,056 Billings in excess of costs and estimated earnings on contracts in progress 132,574 21,253 Net cash used in operating activities (4,364,669) (4,936,991) Investing activities: Purchases of equipment (401,133) (1,149,759) Increase in restricted cash (562,975) (189,977) Net cash used in investing activities (964,108) (1,339,736) Financing activities: Mortgage payments Loan proceeds from stockholder Loan repayments to affiliate
(530,622) 6,086,804
-
(445,983) 6,605,066
(10,000) Payment of notes payable to stockholder (165,000) - Payment of capital lease obligation (12,916) -
Net cash provided by financing activities 5,378,266 6,149,083 Net change in cash and cash equivalents 49,489 (127,644) Cash and cash equivalents, beginning of year 1,248,808 1,376,452 Cash and cash equivalents, end of year $ 1,298,297 $ 1,248,808 Supplemental disclosure of cash flow information: Cash paid for interest $ 402,734 $ 385,492 Purchase of equipment financed through capital lease obligation
$ 51,782
$ -
Conversion of notes payable to additional paid-in capital $ 11,991,145 $ - See Notes to Consolidated Financial Statements.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
Note 1 - Business activity and summary of significant accounting policies:
Business activity: Proton Energy Systems, Inc. (the “Company”) is a global provider of proton exchange membrane (PEM) water electrolysis products, which produce ultra-high purity hydrogen for industrial purposes. The Company’s products generate hydrogen gas from water and electricity and are sold in approximately 75 countries. The Company expanded its suite of principal products beyond hydrogen generators to include nitrogen and zero air generators, which are essential to expanding our customer base in the analytical laboratory market. Additionally, the Company has a proprietary control system product called the StableFlowTM Hydrogen Control System that is used in conjunction with its hydrogen generators to improve performance of electric generators in power plants by actively monitoring and controlling the purity, pressure and dew point to optimize the conditions in the electric generator. The Company also provides the associated service and spare parts to ensure that its products meet the high reliability requirements its customers’ demand.
Variable interest entity:
During 2009, the Company sold its membership interest in its previously consolidated wholly-owned subsidiary, HWorld Real Estate LLC ("HWorld"), to the single member of F9 Investments, LLC for $10.0 million. There was no gain or loss recognized on the sale. The single member of F9 Investments, LLC is also the Company’s sole stockholder. HWorld’s assets consisted of land and a building. HWorld entered into a $7.0 million bank promissory note, which has been guaranteed by the Company. Subsequent to the sale, the Company entered into an operating lease with HWorld. HWorld has no other operating revenue other than the operating lease income from the Company. Management has determined that HWorld is a variable interest entity in which the Company has provided certain financial support in the form of a loan guarantee (referred to as variable interests) and of which the Company is the primary beneficiary as the Company has the power to direct the activities of HWorld and the obligation to absorb its losses. As such, the Company has consolidated the accounts of HWorld commencing for the year ended December 31, 2009.
The consolidated financial statements include the accounts of the Company and HWorld. All intercompany transactions between the Company and HWorld have been eliminated in consolidation.
Use of estimates: The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from these estimates.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
Cash and cash equivalents: All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. As of December 31, 2015 and 2014, there was $18,476 and $192,659, respectively, of cash equivalents.
Restricted cash:
As of December 31, 2015 and 2014, the Company has classified $1,603,086 and $1,040,111, respectively, as long-term restricted cash. On December 31, 2015 and 2014, the Company had eight and six outstanding irrevocable standby letters of credit with a bank for a total of $1,087,325 and $690,882, respectively, maturing between January 4, 2016 and August 31, 2019. The letters of credit were issued as an assurance for contractual and bid performance. At December 31, 2015, the customers had not drawn on the letters of credit. On June 18, 2009, the Company entered into an agreement with Peoples Bank as the corporate guarantor, along with HWorld, on the loan for the sale of the Wallingford, Connecticut facility to HWorld. Under this agreement, the Company must hold in escrow $702,000 as twelve months debt service on the loan and $150,000 as an environmental escrow. On May 7, 2013, the amount escrowed for debt service was reduced. On September 27, 2013, the environmental escrow was fully released. The balance of restricted funds held in escrow for debt service was $349,200 on December 31, 2015 and 2014.
Allowance for doubtful accounts: The Company evaluates credit risk on its accounts receivable and estimates an allowance for doubtful accounts. The Company evaluates the adequacy of the allowance for doubtful accounts on a periodic basis. The evaluation includes historical loss experience, adverse situations that may affect a customer’s ability to repay and prevailing economic conditions. The Company makes adjustments to its allowance if the evaluation of allowance requirements differs from the actual aggregate reserve. This evaluation is inherently subjective and estimates may be revised as more information becomes available.
Inventories: The Company records inventories at the lower of cost or market value. The Company determines cost by the average cost method. This policy requires the Company to write down the inventories for the excess of the carrying value, which is typically the original cost, over the amount the Company expects to realize from the ultimate sale or other disposal of the inventories based upon on its assumptions regarding forecasted consumer demand, market conditions, inventory aging and technological obsolescence. If any of its estimates are inaccurate, for example because of changes in technology that affect demand for certain products in an unforeseen manner, the Company may be exposed to losses in excess of its established reserve and those losses could be material. The Company maintains spare parts inventory for fielded products which is recorded at cost.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10
Property, plant and equipment:
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are calculated using the straight-line method over the following estimated useful lives:
Estimated Useful Lives Building Building improvements Machinery and equipment Computer equipment
40 years 15 years
5 – 7 years 3 – 5 years
When assets are sold or retired, the related cost and accumulated depreciation are removed from their respective accounts and any resulting gain or loss is included in income. The Company and HWorld periodically review the carrying value of their property, plant and equipment to assess recoverability based upon the expectation of undiscounted future cash flows. Expenditures for maintenance and repairs which do not improve or extend the useful lives of the respective fixed assets are expensed as incurred.
Impairment of long-lived assets: The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing a review for impairment, the Company compares the carrying value of the assets with their estimated future undiscounted cash flows. If it is determined that an impairment has occurred, the loss is recognized during that period. The impairment loss is calculated as the difference between the assets' carrying values and the present value of estimated net cash flows or comparable market values, giving consideration to recent operating performance and pricing trends. There was no impairment in 2015 and 2014.
Deferred financing costs: HWorld capitalized costs incurred with its debt financing and is amortizing the costs to interest expense, using the effective interest method, over the term of the agreement. As of December 31, 2015, net deferred financing costs were $64,331. Amortization expense was $7,596 for the full year in 2015 and 2014 and is expected to approximate $7,600 annually through July 7, 2024.
Revenue recognition:
The Company generates revenue from three principal sources: product sales, long-term contracts and service contracts.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11
Product revenue:
Product revenue is recorded when a firm sales agreement is in place, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. If customer acceptance of products is not assured, revenue is recorded only upon formal customer acceptance. Customer acceptance provisions included in the product sales agreements may include written acceptance from the customer, acceptance upon servicing and installation of the equipment and acceptance after a period of time. Revenue for product sales to distributors, for which there are no rights of return or price adjustments on unsold inventories, is recognized on a gross basis upon shipment to the distributors, as they assume title and risk of loss.
Contract revenue: The Company derives contract revenues from government-sponsored research and development contracts and from commercial customers. For government-sponsored research and development contracts that are fixed-price, revenue is recognized using the percentage-of-completion method. For fixed-price-incentive, or cost-reimbursement contracts that do not require the Company to meet specific obligations, revenue is recorded as the work is performed. For those research and development contracts that require the Company to meet specified obligations, including delivery and acceptance obligations, the Company recognizes amounts advanced as contract liabilities until such obligations are met. Once the obligations are met, the Company recognizes the amounts as contract revenue. For all other commercial contracts, revenue is recognized under the completed contract method and revenue and cost is deferred until contract completion.
Service revenue:
For service and repair contracts, revenue is recognized as work is performed. For operating and maintenance contracts where the Company has agreed to provide routine maintenance services over a period of time for a fixed price, revenue is recognized ratably over the service period. The Company periodically enters into arrangements with customers that involve multiple elements. We assess such contracts to evaluate whether there are multiple deliverables, and whether the consideration under the arrangement is being appropriately allocated to each of the deliverables.
Cost of revenues: Adjustments to cost estimates are made periodically and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. The aggregate of costs incurred and income recognized on uncompleted contracts accounted for under percentage-of-completion method in excess of related billings and deferred costs on contracts accounted for under the completed contract method of accounting are shown as current assets. The aggregate of billings on uncompleted contracts accounted for under percentage-of-completion method in excess of related costs incurred and income recognized and deferred revenue are shown as current liabilities. All costs incurred in the shipping and handling of customer goods are included in cost of revenues in the consolidated statements of operations.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12
Deferred revenue:
Deferred revenue represents the unearned portion of advance billings, which have been collected from customers but not yet earned or included as revenue. Such amounts are anticipated to be recorded as revenue as goods are delivered in subsequent periods.
Research and development: Research and development costs are expensed as incurred.
Warranty costs:
The Company's warranty to customers is limited to replacement parts and services and generally expires one year from the date of shipment or contract completion, except with respect to laboratory hydrogen generators, where the warranty period is two years. Estimated warranty obligations are recorded in the period in which the related revenue is recognized or when a project is installed or commissioned. The Company quantifies and records an estimate for warranty related costs, which is principally based on historical experience. The accounting for warranties requires the Company to make assumptions and apply judgments when estimating product failure rates and expected material and labor costs. The Company makes adjustments to accruals as warranty claim data and historical experience warrant. If actual results are not consistent with the assumptions and judgments used to calculate the warranty liability because either failure rates or repair costs differ from the Company's assumptions, the Company may be exposed to gains or losses that could be material. The changes in accrued product and service warranties for the years ended December 31, 2015 and 2014 are as follows:
2015 2014 Balance at beginning of period $ 503,215 $ 270,633 Warranties issued during the period 455,992 376,458 Adjustments to provision (242,229) 40,901 Warranty claims and adjustments (103,562) (184,777) Balance at end of period $ 613,416 $ 503,215
Stock-based compensation:
In October 2009, the Company established the 2009 Stock Incentive Plan. The compensation costs resulting from stock-based payment transactions are recognized in the financial statements. Fair value is the measurement objective in accounting for stock-based payment arrangements and requires the application of a fair-value measurement method of accounting for stock-based payment transactions with employees and non-employees. The Company uses a fair value model combined with a Black-Scholes option-pricing model to determine the value of its Stock Incentive Plan share awards. The option pricing models includes various assumptions, including comparable companies and the expected life of stock awards. These assumptions reflect the Company's best estimates, but they involve inherent uncertainties based on market conditions generally outside of the control of the Company.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
Expected stock price volatility is determined using the average stock price volatility of peer group public companies with similar attributes to the Company. Risk-free interest rate is determined using interest rates on U.S. Government Treasury Securities at the date of grant of the awards. The average expected life of the awards is determined based on the weighted average of the remaining life of the exercisable shares. The Company uses the simplified method for estimating the expected term which represents the average of the vesting period and the contractual life of the option. The Company uses the simplified method as it does not have sufficient historic exercise experience to provide a reasonable basis to estimate the term.
Income taxes: With the consent of its stockholder, the Company has elected under the Internal Revenue Code and state statutes to be recognized as an "S" Corporation. In lieu of Federal or state corporate income taxes, the stockholders of an "S" Corporation are taxed on their proportionate share of the corporation's taxable income. Therefore, no provision or liability for Federal or state income taxes has been included in the accompanying financial statements. HWorld is a limited liability company. In lieu of Federal and state income taxes, members of a limited liability company are taxed on their proportionate share of the company's taxable income. Therefore, no provision or liability for Federal or state income taxes has been included in the accompanying financial statements related to HWorld. The Company and HWorld have no unrecognized tax benefits at December 31, 2015 or 2014. The Company’s and HWorld's Federal and state income tax returns prior to 2012 are closed and management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.
The Company and HWorld recognize interest and penalties, if any, associated with any tax matters as part of the income tax expense and includes accrued interest and penalties with the related tax liability in the consolidated balance sheets.
Sales taxes: The various states that the Company operates in impose sales tax on certain sales to nonexempt customers. The Company collects sales tax from customers and remits the entire amount to the appropriate state. The Company’s accounting policy is to exclude the tax collected and remitted to the state from revenues and cost of revenues in the consolidated statement of operations.
Recent accounting pronouncements:
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue From Contracts with Customers. The purpose of this new standard is to clarify the principles for recognizing revenue so they can be applied consistently across various transactions, industries and capital markets. The Company has not completed its assessment of ASU No. 2014-09.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14
The FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory. ASU No. 2015-11 will require companies to measure inventories at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Current accounting standards require companies to measure inventory at the lower of cost or market. Market can be net realizable value, replacement cost, or net realizable value less a normal profit margin when measuring inventory. The Company will be required to adopt ASU No. 2015-11 in its 2017 fiscal year. The Company has not completed its assessment of ASU No. 2015-11.
Subsequent events:
Management has evaluated events and transactions for potential recognition or disclosure through February 22, 2016, which is the date the financial statements were available to be issued.
Note 2 - Inventories: Inventories consist of the following as of December 31, 2015 and 2014:
2015 2014 Raw materials, net $ 4,775,896 $ 4,110,226 Work in process 1,308,065 1,356,022 Finished goods 65,330 195,998 $ 6,149,291 $ 5,662,246
Note 3 - Costs in excess of billings and billings in excess of costs on contracts in progress:
Information concerning costs and billings on contracts in progress accounted for under the percentage-of-completion as of December 31, 2015 and 2014 is as follows:
2015 2014 Costs incurred and estimated earnings on contracts in progress $ 10,141,441 $ 497,721Less billings to date 7,660,294 424,990Costs and estimated earnings in excess of billings, net $ 2,481,147 $ 72,731
Costs incurred and estimated earnings on contracts in progress $ 2,931,604 $ 3,458,975Less billings to date 3,126,530 3,521,327Billings in excess of costs and estimated earnings, net $ (194,926) $ (62,352)
Costs and estimated earnings in excess of billings on contracts in progress $ 2,481,147
$ 72,731
Billings in excess of costs and estimated earnings on contracts in progress (194,926)
(62,352)
Cost and estimated earnings in excess of billings, (billings and estimated earnings in excess of costs), net $ 2,286,221
$ 10,379
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15
Note 4 - Property, plant and equipment: Property, plant and equipment at December 31, 2015 and 2014 was comprised of the following: 2015 2014 Land Building Building improvements Machinery and equipment
$ 2,000,000 8,000,000 565,844 1,688,134
$ 2,000,000 8,000,000 430,161 820,611
Computer equipment 661,734 549,738 Construction in process 236,573 898,861 Totals 13,152,285 12,699,371 Less accumulated depreciation 2,472,723 1,853,755 Property, plant and equipment, net $ 10,679,562 $ 10,845,616
Depreciation expense on property, plant and equipment totaled $618,969 and $419,764 for the years ended December 31, 2015 and 2014, respectively.
The Company leases equipment under a non-cancelable capital lease agreement that expires on February 28, 2018. The assets are amortized over their estimated productive lives. Amortization of assets under capital leases is included in depreciation expense. Accordingly, the assets were capitalized and have the following book value at December 31, 2015:
Machinery and equipment $ 51,781 Less accumulated amortization (14,384) $ 37,397
The future minimum lease payments due under the non-cancelable capital leases are as follows:
Year ending December 31 Amount 2016 $19,957 2017 19,957 2018 3,326 Total minimum lease payments 43,240 Less amount representing interest 4,394 Present value of minimum lease payments
38,846
Less current portion 16,933 Long-term portion $21,913
Note 5 - Employee benefit plan:
The Company maintains a 401(k) plan covering substantially all of its employees, subject to certain eligibility requirements. Participants have the option of contributing up to 15% of their annual compensation. The Company makes matching contributions to the 401(k) plan of 35% of the first 6% of the eligible employees’ contribution. The Company’s 401(k) match expense for the years ended December 31, 2015 and 2014 was $154,221 and $123,854, respectively.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16
Note 6 - Concentrations of credit risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with high-credit quality financial institutions. At times, such amounts may exceed Federally insured limits. As of December 31, 2015, the Company had cash and cash equivalent balances in excess of Federally insured limits in the amount of approximately $2.2 million. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, their dispersion across different geographic areas and generally short payment terms. The Company's two largest customers accounted for 34% and 12% of sales for the years ended December 31, 2015 and 2014 respectively. In addition the Company closely monitors the extension of credit to its customers while maintaining allowances for potential credit losses. On a periodic basis, the Company evaluates its trade accounts receivable and establishes allowances for doubtful accounts, based on a history of past write-offs and collections and current credit considerations.
Note 7 - Stock incentive plan:
In October 2009, the Company established the 2009 Stock Incentive Plan (the “Plan”), under which selected employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock awards, or other stock-based awards under the Plan. The option or purchase price is determined by the Board of Directors. The total number of shares of common stock for which options or restricted stock may be granted or issued under the Plan cannot exceed 1,500,000. Under the Plan, options and restricted stock generally vest over a five year period, with 20% vesting on each year anniversary of the grant date. One grant contains different vesting; specifically 40% on the grant date and 20% on each year anniversary of the grant date with full vesting over three years. The maximum term is 10 years for all options granted and there is no maximum term for restricted stock.
The weighted-average grant date fair value of options granted was $1.06 and $0.77 in 2015 and 2014, respectively. Fair value was determined using the Black Scholes option pricing model with the following assumptions: December 31, 2015 December 31, 2014 Risk free interest rate 2.00% 2.24% Expected dividend rate 0.0% 0.0% Expected term 6.5 years 6.5 years Expected volatility 80.4% 122%
For the years ended December 31, 2015 and 2014, the Company recorded stock-based compensation expense of $82,152 and $91,627, respectively. Stock compensation is recorded as a component of general and administrative expense. As of December 31, 2015, there was $210,638 of unrecognized compensation cost related to nonvested stock-based compensation awards granted under the Plan. The unrecognized cost is expected to be recognized over a weighted average period of 3.18 years.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17
A summary of stock option activity for the years ended December 31, 2015 and 2014 is as follows:
Options
OutstandingWeighted Average
Exercise Price
Weighted Average Remaining
Contractual Life Balance at December 28, 2013 1,181,000 $1.04 6.67 years
Options granted 204,100 $4.00 Options exercised - - Options forfeited (14,700) $2.31
Balance at December 31, 2014 1,370,400 $1.47 6.08 years Options granted 48,600 $4.00 Options exercised - - Options forfeited (56,000) $1.19 Balance at December 31, 2015 1,363,000 $1.57 5.17 years Balance at December 31, 2014 Options vested and expected to vest 1,370,400 $1.47 6.08 years Options exercisable 986,300 $1.01 4.93 years At December 31, 2015:
Options vested and expected to vest 1,363,000 $1.57 5.17 years
Options exercisable 1,044,120 $1.13 4.22 years
Note 8 - Related party transactions:
The Company provides administrative and accounting services, at cost, to related parties. The cash payments received from related parties for these services were $101,071 and $135,491 for the years ended December 31, 2015 and 2014, respectively, and are reported as a reduction of general and administrative expense in the consolidated statements of operations. The amounts due from related parties were $142,108 and $130,366 at December 31, 2015 and 2014, respectively. The Company is engaged to provide certain product development service to Sun Hydro, LLC, wholly-owned by the Company’s sole shareholder. The Company was reimbursed for its direct costs associated with this arrangement and such reimbursements are netted against the related development costs in the accompanying financial statements. Total reimbursements under this arrangement were $97,148 and $290,584 in 2015 and 2014, respectively.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18
The Company leases its operating facility from HWorld under an operating lease agreement that expires in June 2024. The Company has the right to extend this lease for two consecutive terms of five years each. The lease is an absolute net lease with all costs, real estate taxes, expenses and obligations being the responsibility of the Company. The Company subleases a portion of its office building under the terms of an agreement dated June 18, 2009 and amended in February 2014, which provides for monthly payments of approximately $16,000 through June 2019.
Future minimum rental payments, reduced by rents to be received under existing sublease agreements, are as follows:
2016 $ 634,953 2017 647,844 2018 659,149 2019 780,237 2020 905,511 Thereafter 3,311,877
$ 6,939,571
HWorld recognized $820,150 and $804,068 of rental income from Proton Energy Systems, Inc. in 2015 and 2014, respectively. Rental income and the associated rental expense recognized by the Company have been eliminated in consolidation. The Company recognized $198,318 and $188,160 of sub-lease income in 2015 and 2014, respectively, which is reported as a reduction of general and administrative expense in the consolidated statements of operations. The Company has two outstanding subordinated unsecured promissory notes due to the stockholder that provide borrowings of up to $11,000,000 as amended. The outstanding balances were $3,334,600 and $9,403,941 as of December 31, 2015 and 2014, respectively. The notes provide for periodic draws up to the maximum value of the note. The proceeds of these notes were used for working capital and new product development. The notes have an interest rate of 6% with interest accrued on the new product note and payable at maturity. Interest is due monthly in arrears for the working capital note. Interest expense related to these loans was $713,984 and $321,895 in 2015 and 2014, respectively. Accrued interest payable was $655,315 and $207,522 in 2015 and 2014, respectively. The notes are due and payable no later than December 31, 2017. Effective December 31, 2015, the stockholder converted $11,991,145 of outstanding advances against these notes payable to additional paid-in-capital.
Note 9 - Loss per share:
Basic and diluted loss per share are determined by dividing the net loss attributable to the Company by the weighted average outstanding shares of the Company's common stock. Common stock options totaling 1,363,000 and 1,370,400 as of December 31, 2015 and 2014 have been excluded from determining the diluted loss per share as the impact would have been anti-dilutive.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19
Note 10 - Mortgage payable: HWorld has an outstanding mortgage payable with a financial institution with an outstanding balance of $4,554,510 and $5,085,132 at December 31, 2015 and 2014, respectively. The mortgage has a variable interest rate set at 250 basis points above the bank's cost of funds or 2.93% as of December 31, 2015 and requires monthly payments through July 7, 2024. The Company is required to meet a debt service coverage ratio annually. As of December 31, 2015, the Company was in compliance with this coverage. The mortgage is secured by the land and building and the Company’s operating assets. Further, the Company has provided a guarantee to the financial institution. Minimum future mortgage payments are:
2016 $ 530,622 2017 530,622 2018 530,622 2019 530,622 2020 530,622 Thereafter 1,901,400 $ 4,554,510
Note 11 - Segment information:
The Company has determined that it has two operating segments: Commercial Product and Development Contracts.
The Company measures operating segment performance based on revenues and gross margin less selling expenses. Research and development and general and administrative expenses are primarily for the benefit of all segments and are not specifically allocated. Identifiable assets of the Company are not segregated by operating segment and are located in the United States.
Revenue for the year ended December 31, 2015 and 2014 by segment is as follows:
2015 2014 Commercial Product $ 24,978,367 $ 20,282,482 Development Contracts 2,810,381 3,376,310 Total revenues
$ 27,788,748
$ 23,658,792
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20
Gross margin less selling expenses by segment for the year ended December 31, 2015 and 2014 by segment is as follows:
2015 2014 Commercial Product $ 5,256,494 $ 3,428,170 Development Contracts 310,574 681,703 Gross margin less selling expenses
5,567,068
4,109,873
Unallocated costs and expenses: Research and development 2,913,769 5,849,518 General and administrative 2,742,662 4,033,714
Loss from operations
$ (89,363)
$ (5,773,359)
Revenue for the year ended December 31, 2015 and 2014 by geographic region is as follows:
2015 2014 United States $ 16,400,835 $ 11,944,512Remainder of North America 219,773 459,994Africa 454,124 161,513Asia 1,949,483 4,224,678Middle East 5,591,563 1,051,694Europe 2,893,692 4,839,819South America 143,986 853,326Oceania 135,292 123,256 Total revenues $ 27,788,748
$ 23,658,792
Proton Energy Systems, Inc.
Consolidated Financial Statements
December 31, 2014 and December 28, 2013
1
PROTON ENERGY SYSTEMS, INC.
INDEX
Page
Independent Auditor’s Report 2 to 3 Consolidated Balance Sheets 4 Consolidated Statements of Operations 5 Consolidated Statements of Changes in Equity 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8 to 20
2
INDEPENDENT AUDITOR’S REPORT To the Shareholder Proton Energy Systems, Inc. We have audited the accompanying consolidated financial statements of Proton Energy Systems, Inc. (the “Company”) which comprise the consolidated balance sheets as of December 31, 2014 and December 28, 2013, and the related consolidated statements of operations, changes in equity and cash flows for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
3
Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Proton Energy Systems, Inc. as of December 31, 2014 and December 28, 2013, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
C
Hartford, Connecticut March 31, 2015
4
PROTON ENERGY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2014 and DECEMBER 28, 2013
2014
2013
ASSETS
Current assets:
Cash and cash equivalents $ 1,248,808 $1,376,452 Accounts receivable, less allowances of $ - and $42,000 4,784,840 2,104,953 Unbilled accounts receivable 184,497 254,337 Inventories 5,662,246 5,894,782 Costs and estimated earnings in excess of billings on contracts in progress 72,731 286 Other current assets 716,870 591,592 Total current assets 12,669,992 10,222,402
Property, plant and equipment, net ($9,082,801 and $9,262,757 for collateral of variable interest entity debt)
10,845,616 10,115,621 Restricted cash 1,040,111 850,134 Spare parts inventory 470,951 468,123 Due from related parties 130,366 145,603 Other assets 101,290 109,142 Total assets $ 25,258,326 $21,911,025
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 2,311,768 $ 1,222,400 Current portion of mortgage payable of variable interest entity 530,622 389,121 Accrued expenses and warranty reserve 1,848,877 1,370,197 Customer advances 21,070 37,326 Deferred revenue 3,026,908 1,154,596 Due to affiliate - 10,000 Billings in excess of costs and estimated earnings on contracts in progress 62,352 41,099 Total current liabilities 7,801,597 4,224,739
Long-term liabilities:
Mortgage payable of variable interest equity, less current portion 4,554,510 5,141,994 Notes payable to stockholder 9,403,941 2,798,875 Total liabilities 21,760,048 12,165,608
Commitments
Equity:
Proton Energy Systems, Inc.: Common stock, $.01 par value; 12,500,000 shares authorized; 8,500,000 shares issued and outstanding 85,000 85,000 Additional paid-in capital 9,702,481 9,610,854 Accumulated deficit (10,894,896) (4,200,992) Total Proton Energy Systems, Inc. (deficit) equity (1,107,415) 5,494,862 Noncontrolling variable interest equity 4,605,693 4,250,555 Total equity 3,498,278 9,745,417
Total liabilities and equity $ 25,258,326 $ 21,911,025
See Notes to Consolidated Financial Statements.
5
PROTON ENERGY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2014 and DECEMBER 28, 2013
2014 2013
Revenues $ 23,658,792 $ 21,763,669
Cost of revenues 16,317,747 14,701,116
Gross margin 7,341,045 7,062,553
Operating expenses: Selling 3,231,172 2,491,039 Research and development 5,849,518 3,086,964 General and administrative 4,033,714 2,382,500
Total operating expenses 13,114,404 7,960,503
Loss from operations (5,773,359) (897,950)
Interest expense, net of interest income of $1,794 and $2,422 565,407 439,424
Consolidated net loss (6,338,766) (1,337,374)
Net income attributed to noncontrolling interest 355,138 285,342
Loss attributed to Proton Energy Systems, Inc. $ (6,693,904) $ (1,622,716)
Loss earnings per share: Basic and diluted loss earnings per share $ (0.79) $ (0.19)
Weighted average shares outstanding 8,500,000 8,500,000
See Notes to Consolidated Financial Statements.
6
PROTON ENERGY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 2014 and DECEMBER 28, 2013 Additional Total Common stock Paid-in Accumulated Proton Energy Noncontrolling Total Shares Amount Capital Deficit Systems, Inc. Interest Equity
Balance at December 29, 2012 8,500,000 $ 85,000 $ 9,545,353 $ (2,578,276) $ 7,052,077 $ 3,965,213 $ 11,017,290 Stock-based compensation expense - - 65,501 - 65,501 - 65,501
Net (loss) income - - - (1,622,716) (1,622,716) 285,342 (1,337,374) Balance at December 28, 2013 8,500,000 85,000 9,610,854 (4,200,992) 5,494,862 4,250,555 9,745,417 Stock-based compensation expense - - 91,627 - 91,627 - 91,627 Net (loss) income - - - (6,693,904) (6,693,904) 355,138 (6,338,766)
Balance at December 31, 2014 8,500,000 $ 85,000 $ 9,702,481 $ (10,894,896) $ (1,107,415) $ 4,605,693 $ 3,498,278 See Notes to Consolidated Financial Statements.
7
PROTON ENERGY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2014 and DECEMBER 28, 2013
2014 2013
Operating activities: Consolidated net loss $ (6,338,766) $ (1,337,374) Adjustments to reconcile consolidated net loss to net cash used in operating activities: Depreciation and amortization 427,360 376,951 Stock-based compensation expense 91,627 65,501 Bad debt expense 65 42,200 Changes in operating assets and liabilities: Accounts receivable (2,679,952) 1,904,478 Unbilled accounts receivable 69,840 488,787 Inventories 229,708 (1,273,112) Costs and estimated earnings in excess of billings on contracts in progress (72,445) 60,584 Other current assets (132,874) (46,159) Due from related parties 15,237 95,281 Other assets 7,852 6,881 Accounts payable 1,089,368 (585,799) Accrued expenses and warranty reserve 478,680 169,715 Customer advances (16,256) - Deferred revenue 1,872,312 55,295 Billings in excess of costs and estimated earnings on contracts in progress 21,253 (53,385) Net cash used in operating activities (4,936,991) (30,156) Investing activities: Purchases of equipment (1,149,759) (447,233) Increase in restricted cash (189,977) (34,020) Net cash used in investing activities (1,339,736) (481,253) Financing activities: Mortgage payments (445,983) (366,897) Loan proceeds from stockholder 6,605,066 1,798,875 Loan repayments to affiliate (10,000) (100,000) Payments of capital lease obligation - (2,121)
Net cash provided by financing activities 6,149,083 1,329,857 Net change in cash and cash equivalents (127,644) 818,448 Cash and cash equivalents, beginning of year 1,376,452 558,004 Cash and cash equivalents, end of year $ 1,248,808 $ 1,376,452 Supplemental disclosure of cash flow information: Cash paid for interest $ 385,492 $ 441,846 See Notes to Consolidated Financial Statements.
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business activity and summary of significant accounting policies:
Business activity: Proton Energy Systems, Inc. (the “Company”) is a global provider of proton exchange membrane (PEM) water electrolysis products, which produce ultra-high purity hydrogen for industrial purposes. The Company’s products generate hydrogen gas from water and electricity and are sold internationally. The Company recently expanded its suite of principal products beyond hydrogen generators to include nitrogen and zero air generators, which are essential to expanding our customer base in the analytical laboratory market. Additionally, the Company has a proprietary control system product called the StableFlowTM Hydrogen Control System that is used in conjunction with its hydrogen generators to improve performance of electric generators in power plants by actively monitoring and controlling the purity, pressure and dew point to optimize the conditions in the electric generator. The Company also provides the associated service and spare parts to ensure that its products meet the high reliability requirements its customers’ demand.
Variable interest entity:
During 2009, the Company sold its membership interest in its previously consolidated wholly-owned subsidiary, HWorld Real Estate LLC ("HWorld"), to the single member of F9 Investments, LLC for $10.0 million. There was no gain or loss recognized on the sale. The single member of F9 Investments, LLC is also the Company’s sole stockholder. HWorld’s assets consisted of land and a building. HWorld entered into a $7.0 million bank promissory note, which has been guaranteed by the Company. Subsequent to the sale, the Company entered into an operating lease with HWorld. HWorld has no other operating revenue other than the operating lease income from the Company. Management has determined that HWorld is a variable interest entity in which the Company has provided certain financial support in the form of a loan guarantee (referred to as variable interests) and of which the Company is the primary beneficiary as we believe the Company has the power to direct the activities of HWorld and the obligation to absorb its losses. As such, the Company has consolidated the accounts of HWorld commencing for the year ended December 31, 2009.
The consolidated financial statements include the accounts of the Company and HWorld. All intercompany transactions between the Company and HWorld have been eliminated in consolidation.
Fiscal year: The Company maintains its books and records on a 52 week, four, four, five closing cycle. In 2014, the Company modified its fiscal year end to end on December 31. In prior years, the fiscal year ended on the Saturday closest to December 31. As such, the 2014 fiscal year ended on December 31, 2014 and the 2013 fiscal year ended on December 28, 2013.
Use of estimates:
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from these estimates.
8
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and cash equivalents: All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. As of December 31, 2014 and December 28, 2013, there was $192,659 and $560,488, respectively, of cash equivalents.
Restricted cash:
As of December 31, 2014 and December 28, 2013, the Company has classified $1,040,111 and $850,134, respectively, as long-term restricted cash. On December 31, 2014 and December 28, 2013, the Company had six and five outstanding irrevocable standby letters of credit with a bank for a total of $690,882 and $343,592, respectively, maturing between January 28, 2015 and May 15, 2018. The letters of credit were issued as an assurance for contractual and bid performance. At December 31, 2014, the customers had not drawn on the letters of credit. On June 18, 2009, the Company entered into an agreement with Peoples Bank as the corporate guarantor, along with HWorld, on the loan for the sale of the Wallingford, Connecticut facility to HWorld. Under this agreement, the Company must hold in escrow $702,000 as twelve months debt service on the loan and $150,000 as an environmental escrow. On May 7, 2013, the amount escrowed for debt service was reduced. The balance of restricted funds held in escrow for debt service was $349,200 on December 31, 2014. On September 27, 2013, the environmental escrow was fully released.
Allowance for doubtful accounts: The Company evaluates credit risk on its accounts receivable and estimates an allowance for doubtful accounts. The Company evaluates the adequacy of the allowance for doubtful accounts on a periodic basis. The evaluation includes historical loss experience, adverse situations that may affect a customer’s ability to repay and prevailing economic conditions. The Company makes adjustments to its allowance if the evaluation of allowance requirements differs from the actual aggregate reserve. This evaluation is inherently subjective and estimates may be revised as more information becomes available.
Inventories: The Company records inventories at the lower of cost or market value. The Company determines cost by the average cost method. This policy requires the Company to write down the inventories for the excess of the carrying value, which is typically the original cost, over the amount the Company expects to realize from the ultimate sale or other disposal of the inventories based upon on its assumptions regarding forecasted consumer demand, market conditions, inventory aging and technological obsolescence. If any of its estimates are inaccurate, for example because of changes in technology that affect demand for certain products in an unforeseen manner, the Company may be exposed to losses in excess of its established reserve and those losses could be material. The Company maintains spare parts inventory for fielded products which is recorded at cost.
9
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, plant and equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are calculated using the straight-line method over the following estimated useful lives:
Estimated Useful Lives Building Building improvements Machinery and equipment Computer equipment
40 years 15 years
5 – 7 years 3 – 5 years
When assets are sold or retired, the related cost and accumulated depreciation are removed from their respective accounts and any resulting gain or loss is included in income. The Company and HWorld periodically review the carrying value of their property, plant and equipment to assess recoverability based upon the expectation of undiscounted future cash flows. Expenditures for maintenance and repairs which do not improve or extend the useful lives of the respective fixed assets are expensed as incurred.
Impairment of long-lived assets: The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing a review for impairment, the Company compares the carrying value of the assets with their estimated future undiscounted cash flows. If it is determined that an impairment has occurred, the loss is recognized during that period. The impairment loss is calculated as the difference between the assets' carrying values and the present value of estimated net cash flows or comparable market values, giving consideration to recent operating performance and pricing trends. There was no impairment in 2014 and 2013.
Deferred financing costs: HWorld capitalized costs incurred with its debt financing and is amortizing the costs to interest expense, using the effective interest method, over the term of the agreement. As of December 31, 2014, net deferred financing costs were $71,927 and are included in other assets in the consolidated balance sheets. Amortization expense was $7,596 for the full year in 2014 and 2013 and is expected to approximate $7,600 annually through the maturity date.
Revenue recognition:
The Company generates revenue from three principal sources: product sales, long-term contracts and service contracts.
10
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product revenue: Product revenue is recorded when a firm sales agreement is in place, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. If customer acceptance of products is not assured, revenue is recorded only upon formal customer acceptance. Customer acceptance provisions included in the product sales agreements may include written acceptance from the customer, acceptance upon servicing and installation of the equipment and acceptance after a period of time. Revenue for product sales to distributors, for which there are no rights of return or price adjustments on unsold inventories, is recognized on a gross basis upon shipment to the distributors, as they assume title and risk of loss.
Contract revenue: The Company derives contract revenues from government-sponsored research and development contracts and from commercial customers. For government-sponsored research and development contracts that are fixed-price, revenue is recognized using the percentage-of-completion method. For fixed-price-incentive, or cost-reimbursement contracts that do not require the Company to meet specific obligations, revenue is recorded as the work is performed. For those research and development contracts that require the Company to meet specified obligations, including delivery and acceptance obligations, the Company recognizes amounts advanced as contract liabilities until such obligations are met. Once the obligations are met, the Company recognizes the amounts as contract revenue. For all other commercial contracts, revenue is recognized under the completed contract method and revenue and cost is deferred until contract completion.
Service revenue:
For service and repair contracts, revenue is recognized as work is performed. For operating and maintenance contracts where the Company has agreed to provide routine maintenance services over a period of time for a fixed price, revenue is recognized ratably over the service period. The Company periodically enters into arrangements with customers that involve multiple elements. We assess such contracts to evaluate whether there are multiple deliverables, and whether the consideration under the arrangement is being appropriately allocated to each of the deliverables.
Cost of revenues: Adjustments to cost estimates are made periodically and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. The aggregate of costs incurred and income recognized on uncompleted contracts accounted for under percentage-of-completion method in excess of related billings and deferred costs on contracts accounted for under the completed contract method of accounting are shown as current assets. The aggregate of billings on uncompleted contracts accounted for under percentage-of-completion method in excess of related costs incurred and income recognized and deferred revenue are shown as current liabilities. All costs incurred in the shipping and handling of customer goods are included in cost of revenues in the statement of operations. 11
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred revenue: Deferred revenue represents the unearned portion of advance billings, which have been collected from customers but not yet earned or included as revenue. Such amounts are anticipated to be recorded as revenue as goods are delivered in subsequent periods.
Research and development: Research and development costs are expensed as incurred.
Warranty costs:
The Company's warranty to customers is limited to replacement parts and services and generally expires one year from the date of shipment or contract completion, except with respect to laboratory hydrogen generators, where the warranty period is two years. Estimated warranty obligations are recorded in the period in which the related revenue is recognized or when a project is installed or commissioned. The Company quantifies and records an estimate for warranty related costs, which is principally based on historical experience. The accounting for warranties requires the Company to make assumptions and apply judgments when estimating product failure rates and expected material and labor costs. The Company makes adjustments to accruals as warranty claim data and historical experience warrant. If actual results are not consistent with the assumptions and judgments used to calculate the warranty liability because either failure rates or repair costs differ from the Company's assumptions, the Company may be exposed to gains or losses that could be material. The changes in accrued product and service warranties for the years ended December 31, 2014 and December 28, 2013 are as follows:
2014 2013 Balance at beginning of period $ 270,633 $ 279,473 Warranties issued during the period 376,458 292,944 Adjustments to provision 40,901 (128,236) Warranty claims and adjustments (184,777) (173,548) Balance at end of period $ 503,215 $ 270,633
Stock-based compensation:
In October 2009, the Company established the 2009 Stock Incentive Plan. The compensation costs resulting from share-based payment transactions are recognized in the financial statements. Fair value is the measurement objective in accounting for share-based payment arrangements and requires the application of a fair-value measurement method of accounting for share-based payment transactions with employees and non-employees. The Company uses a fair value model combined with a Black-Scholes option-pricing model to determine the value of its Stock Incentive Plan share awards. The option pricing models includes various assumptions, including comparable companies and the expected life of share awards. These assumptions reflect the Company's best estimates, but they involve inherent uncertainties based on market conditions generally outside of the control of the Company.
12
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expected stock price volatility is determined using the average stock price volatility of peer group public companies with similar attributes to the Company. Risk-free interest rate is determined using interest rates on U.S. Government Treasury Securities at the date of grant of the awards. The average expected life of the awards is determined based on the weighted average of the remaining life of the exercisable shares. The Company uses the simplified method for estimating the expected term which represents the average of the vesting period and the contractual life of the option. The Company uses the simplified method as it does not have sufficient historic exercise experience to provide a reasonable basis to estimate the term.
Income taxes: With the consent of its stockholder, the Company has elected under the Internal Revenue Code and state statutes to be recognized as an "S" Corporation. In lieu of Federal or state corporate income taxes, the stockholders of an "S" Corporation are taxed on their proportionate share of the corporation's taxable income. Therefore, no provision or liability for Federal or state income taxes has been included in the accompanying financial statements. HWorld is a limited liability company. In lieu of Federal and state income taxes, members of a limited liability company are taxed on their proportionate share of the company's taxable income. Therefore, no provision or liability for Federal or state income taxes has been included in the accompanying financial statements related to HWorld. The Company and HWorld have no unrecognized tax benefits at December 31, 2014 or December 28, 2013. The Company’s and HWorld's Federal and state income tax returns prior to 2011 are closed and management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.
The Company and HWorld recognize interest and penalties, if any, associated with any tax matters as part of the income tax expense and includes accrued interest and penalties with the related tax liability in the balance sheet.
Sales taxes: The various states that the Company operates in impose sales tax on certain sales to nonexempt customers. The Company collects sales tax from customers and remits the entire amount to the appropriate state. The Company’s accounting policy is to exclude the tax collected and remitted to the state from revenues and cost of revenues in the Statement of Operations.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts with Customers. The purpose of this new standard is to clarify the principles for recognizing revenue so that it can be applied consistently across various transactions , industries and capital markets. The Company has not completed its assessment of ASU No. 2014-09.
13
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsequent events: Management has evaluated events and transactions for potential recognition or disclosure through March 31, 2015, which is the date the financial statements were available to be issued.
Note 2 - Inventories: Inventories consist of the following as of December 31, 2014 and December 28, 2013:
2014 2013 Raw materials $ 4,110,226 $ 4,417,937 Work in process 1,356,022 914,952 Finished goods, net 195,998 561,893 $ 5,662,246 $ 5,894,782
Note 3 - Costs in excess of billings and billings in excess of costs on contracts in progress:
Information concerning costs and billings on contracts in progress accounted for under the percentage-of-completion as of December 31, 2014 and December 28, 2013 is as follows:
2014 2013 Costs incurred and estimated earnings on contracts in progress $ 497,721 $ 172,997Less billings to date 424,990 172,711Costs and estimated earnings in excess of billings, net $ 72,731 $ 286 Costs incurred and estimated earnings on contracts in progress $ 3,458,975 $ 7,606,655Less billings to date 3,521,327 7,647,754Billings in excess of costs and estimated earnings, net $ (62,352) $ (41,099)
Costs and estimated earnings in excess of billings on contracts
in progress $ 72,731
$ 286 Billings in excess of costs and estimated earnings on contracts
in progress (62,352)
(41,099)Cost and estimated earnings in excess of billings,(billings and
estimated earnings in excess of costs), net $ 10,379
$ (40,813)
14
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Property, plant and equipment: Property, plant and equipment at December 31, 2014 and December 28, 2013 was comprised of the following: 2014 2013 Land Building Building improvements Machinery and equipment
$ 2,000,000 8,000,000 430,161 820,611
$ 2,000,000 8,000,000 430,161 389,513
Computer equipment 549,738 473,212 Construction in process 898,861 256,724 Totals 12,699,371 11,549,610 Less accumulated depreciation 1,853,755 1,433,989 Property, plant and equipment, net $ 10,845,616 $ 10,115,621 Depreciation expense on property, plant and equipment totaled $419,764 and $369,355 for the year ended December 31, 2014 and December 28, 2013, respectively.
Note 5 - Employee benefit plan:
The Company maintains a 401(k) plan covering substantially all of its employees, subject to certain eligibility requirements. Participants have the option of contributing up to 15% of their annual compensation. The Company makes matching contributions to the 401(k) plan of 35% of the first 6% of the eligible employees’ contribution. The Company’s 401(k) match expense for the years ended December 31, 2014 and December 28, 2013 was $123,854 and $105,282, respectively.
Note 6 - Concentrations of credit risk:
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with high-credit quality financial institutions. At times, such amounts may exceed Federally insured limits. As of December 31, 2014, the Company had cash and cash equivalent balances in excess of Federally insured limits in the amount of approximately $1.9 million. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, their dispersion across different geographic areas and generally short payment terms. No single customer represents more than 10% of the total revenues for the years ended December 31, 2014 and December 28, 2013. The Company's two largest customers accounted for 12% and 15% of sales for the years ended December 31, 2014 and December 28, 2013 respectively. In addition the Company closely monitors the extension of credit to its customers while maintaining allowances for potential credit losses. On a periodic basis, the Company evaluates its trade accounts receivable and establishes allowances for doubtful accounts, based on a history of past write-offs and collections and current credit considerations.
15
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Commitments: Sales and property tax accruals: The Company has recorded, within current liabilities, tax accruals of $142,546 and $90,000 for certain property tax and sales tax contingencies for which there may be exposure at December 31, 2014 and December 28, 2013, respectively. The assumptions used in determining the estimate of the accrual is subject to change and the actual amount could be greater or less than the accrued amount.
Note 8 - Stock incentive plan:
In October 2009, the Company established the 2009 Stock Incentive Plan (the “Plan”), under which selected employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock awards, or other stock-based awards under the Plan. The option or purchase price is determined by the Board of Directors. The total number of shares of common stock for which options or restricted stock may be granted or issued under the Plan cannot exceed 1,500,000. Under the Plan, options and restricted stock generally vest over a five year period, with 20% vesting on each year anniversary of the grant date. One grant contains different vesting; specifically 40% on the grant date and 20% on each year anniversary of the grant date with full vesting over three years. The maximum term is 10 years for all options granted and there is no maximum term for restricted stock.
The weighted-average grant date fair value of options granted was $0.77 and $0.61 in 2014 and 2013, respectively. Fair value was determined using the Black Scholes option pricing model with the following assumptions: December 31, 2014 December 28, 2013 Risk free interest rate 2.24% 2.10% Expected dividend rate 0.0% 0.0% Expected term 6.5 years 6.5 years Expected volatility 122% 86% For the year ended December 31, 2014 and December 28, 2013, the Company recorded stock-based compensation expense of $91,627 and $65,501, respectively. Stock compensation is recorded as a component of general and administrative expense. As of December 31, 2014, there was $223,737 of unrecognized compensation cost related to nonvested stock-based compensation awards granted under the Plan. The unrecognized cost is expected to be recognized over a weighted average period of 3.96 years.
16
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of stock option activity for the years ended December 31, 2014 and December 28, 2013 is as follows
Options
OutstandingWeighted Average
Exercise Price
Weighted Average Remaining
Contractual Life Balance at December 29, 2012 965,000 $1.00 6.75 years Options granted 241,900 $1.20 Options exercised - Options forfeited (25,900) $1.02 Balance at December 28, 2013 1,181,000 $1.04 6.67 years
Options granted 204,100 $4.00 Options exercised - Options forfeited (14,700) $2.31
Balance at December 31, 2014 1,370,400 $1.47 6.08 years At December 28, 2013: Options vested and expected to vest 1,181,000 $1.04 6.67 years Options exercisable 852,800 $1.00 5.89 years At December 31, 2014:
Options vested and expected tovest 1,370,400 $1.47 6.08 years
Options exercisable 986,300 $1.01 4.93 years
Note 9 - Related party transactions:
The Company provides administrative and accounting services, at cost, to related parties. The cash payments received from related parties for these services were $135,491 and $222,184 for the years ended December 31, 2014 and December 28, 2013, respectively. Further, in 2014, HWorld transferred $100,000 to a related party. The amounts due from related parties were $130,366 and $145,603 at December 31, 2014 and December 28, 2013, respectively.
17
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is engaged to provide certain product development service to Sun Hydro, LLC, wholly-owned by the Company’s sole shareholder. The Company was reimbursed for its direct costs associated with this arrangement and such reimbursements are netted against the related development costs in the accompanying financial statements. Total reimbursements under this arrangement were $290,584 in 2014 and $622,171 in 2013.
The Company leases its operating facility from HWorld under an operating lease agreement that expires in June 2024. The Company has the right to extend this lease for two consecutive terms of five years each. The lease is an absolute net lease with all costs, real estate taxes, expenses and obligations being the responsibility of the Company. The Company subleases a portion of its office building under the terms of an agreement dated June 18, 2009 and amended in February 2014, which provides for monthly payments of approximately $16,000 through June 2019.
Future minimum rental payments, reduced by rents to be received under existing sublease agreements, are as follows:
2015 $ 624,310 2016 634,953 2017 647,844 2018 659,149 2019 780,237 Thereafter 4,217,388
$ 7,566,881
HWorld recognized $804,068 and $788,302 of rental income from Proton Energy Systems, Inc. in 2014 and 2013, respectively. Rental income and the associated rental expense recognized by the Company have been eliminated in consolidation. The Company recognized $188,160 and $184,320 of sub-lease income in 2014 and 2013 respectively.
The Company has two outstanding subordinated unsecured promissory notes due to the stockholder that provide borrowings of up to $13,000,000. The outstanding balances were $9,403,941 and $2,798,875 as of December 31, 2014 and December 28, 2013 respectively. The notes provide for periodic draws up to the maximum value of the note. The proceeds of these notes were used for working capital and new product development. The notes have an interest rate of 6% with interest accrued on the new product note and is payable at maturity. Interest is due monthly in arrears for the working capital note. Interest expense related to these loans was approximately $321,900 and $102,000 in 2014 and 2013 respectively. The notes are due and payable no later than December 31, 2016.
Note 10 - Earnings per share: Basic and diluted earnings (loss) per share are determined by dividing the net income (loss) attributable to the Company by the weighted average outstanding shares of the Company's common stock. Common stock options totaling 1,370,400 and 1,181,000 as of December 31, 2014 and December 28, 2013 have been excluded from determining the diluted loss per share as the impact would have been anti-dilutive.
18
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Mortgage payable: HWorld has an outstanding mortgage payable with a financial institution with an outstanding balance of $5,085,132 and $5,531,115 at December 31, 2014 and December 28, 2013, respectively. The mortgage has an variable interest rate set at 250 basis points above the bank's cost of funds or 2.66% as of December 31, 2014 and requires monthly payments through July 7, 2024. The Company is required to meet a debt service coverage ratio annually. As of December 31, 2014, the Company was not in compliance with the debt service coverage ratio. The financial institution has waived this annual requirement for the year ended December 31, 2014. The mortgage is secured by the land and building and the Company’s operating assets. Further, the Company has provided a guarantee to the financial institution. Minimum future mortgage payments are:
2015 $ 530,622 2016 530,622 2017 530,622 2018 530,622 2019 530,622 Thereafter 2,432,022 $5,085,132
Note 12 - Segment information:
The Company has determined that it has two operating segments: Commercial Product and Development Contracts.
The Company measures operating segment performance based on revenues and gross margin less selling expenses. Research and development and general and administrative expenses are primarily for the benefit of all segments and are not specifically allocated. Identifiable assets of the Company are not segregated by operating segment and are located in the United States. Revenue for the year ended December 31, 2014 and December 28, 2013 by segment is as follows:
2014 2013 Commercial Product $ 20,282,482 $ 15,999,465 Development Contracts 3,376,310 5,764,204 Total revenues
$ 23,658,792
$ 21,763,669
19
PROTON ENERGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross margin less selling expenses by segment for the year ended December 31, 2014 and December 28, 2013 by segment is as follows:
2014 2013 Commercial Product $ 3,428,170 $ 3,582,614 Development Contracts 681,703 988,900 Gross margin less selling expenses
4,109,873
4,571,514
Unallocated costs and expenses: Research and development 5,849,518 3,086,964 General and administrative 4,033,714 2,382,500
Loss from operations
$ (5,773,359)
$ (897,950)
Revenue for the year ended December 31, 2014 and December 28, 2013 by geographic region is as follows:
2014 2013 United States $ 11,944,512 $ 12,964,752Remainder of North America 459,994 520,273Africa 161,513 99,504Asia 4,224,678 3,922,396Middle East 1,051,694 1,430,107Europe 4,839,819 2,323,658South America 853,326 160,327Oceania 123,256 342,652 Total revenues
$ 23,658,792
$ 21,763,669
20