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TMCNet:  HPEV, INC. - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations

[March 04, 2014]

HPEV, INC. - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Our Management's Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.


Although the forward-looking statements in this Quarterly Statement reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

The following discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction with, its unaudited financial statements and related notes elsewhere in this Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States.

Background/Plan of Operation We have not generated any revenues to date. We expect to begin to generate revenues in the first quarter of 2014, and anticipate that we will also be cash flow positive in the second quarter of 2014.

We have developed and intend to commercialize thermal dispersion technologies in various product platforms, a parallel power input gearbox around which we have designed a mobile generator system and an electric load assist technology around which we have designed a vehicle retrofit system. In preparation, we have applied for trademarks for some of our technologies and their acronyms including 'Totally Enclosed Heat Pipe Cooled', 'TEHPC', 'Electric Load Assist', 'ELA', 'Mobile Generator' and 'MG'.

We believe that our proprietary technologies, including our patent portfolio and trade secrets, can help increase the efficiency and change the manufacturing cost structure in several large industries beginning with fleet vehicles and the motor/generator industries.

48 -------------------------------------------------------------------------------- The markets for products utilizing our technology include consumer, industrial and military markets, both in the U.S. and worldwide. Our initial target markets include those involved in moving materials and moving people, such as: Motors/Generators, Mobile Generators Compressors, Turbines (Wind, Micro), Bearings, Electric Vehicles: rail, off-highway, mining, delivery, refuse, Brakes/rotors/calipers, Pumps/fans, Passenger vehicles: auto, bus, train, aircraft, Commercial vehicles: SUV, light truck, tram, Military: boats, Humvee, truck, aircraft, and Marine: boats ranging in size from 30 feet to 120 feet and beyond.

Our Technologies Our technologies are divided into three distinct but complementary categories: heat dispersion technology, mobile electric power and electric load assist technology.

Heat Dispersion Technology Heat is an undesirable byproduct of anything that moves, especially motors and generators. Historically, a large percentage of the cost of manufacturing any motor has been in the technology necessary to remove heat during its operation to prevent failure and increase power. Heat can destroy motors, generators and many other types of machinery, and the energy necessary to remove heat can limit output.

Our thermal dispersion technology removes heat via patented heat pipe technologies. Heat pipes have been utilized for more than 50 years, but we have a proprietary process and design technology that makes our heat pipes usable in many applications that have previously not been effective. The key is that our heat pipes move heat in ANY direction in a system that requires little or no maintenance and can be applied to almost any motor, generator or industrial product. This allows for more efficient, smaller, and higher output machines, resulting in cooler motors and a longer operating life.

49 -------------------------------------------------------------------------------- Our patent portfolio covers the application and integration of our heat pipes into various cooling schemes for enhanced heat removal in motors, generators and numerous other industrial applications including marine, aviation and military.

We believe that our technologies have the potential to deliver power output increases and cost reductions, depending on the machine type or motor/generator size, as follows: Increase power density of current motor platforms by 20% to 50%, Reduce total product cost by 12.5% to 25%, Increase motor and generator efficiency by 1% to 2%, and Increase motor and generator life.

We believe that products produced with our technologies have the potential to deliver operational savings as well, including: Savings from reduced maintenance costs, Savings from the standardization of multiple platforms down to a single platform, Savings from the standardization of drawings and data around existing platforms, Savings from the ability to use standard designs and standard insulation systems vs. custom, and Savings from the ability to integrate and produce on existing production lines with no retooling and no additional or minimum capital investment.

Our revenue model for the heat dispersion technology is to license the technology in exchange for royalties.

We have entered into product development and commercialization agreements with manufacturing partners. We anticipate that we will begin to enter into license agreements, subject to successful completion of our initial product development, when the product is ready to be manufactured on the licensee's regular production line, after all development and testing has been completed.

We currently expect to have two applications for the technology approved by potential licensees by the end of 2013. As a result, we expect to begin to generate revenues from our heat dispersion technology business in the first quarter of 2014.

Mobile Electric Power A proprietary gearing system the Company developed for our electric load assist (see below) can also be used to power an on-board generator with the result that commercial vehicles no longer need to tow a mobile generator to a work site.

Management believes it has uncovered an immediate need for on-board, continuous generation of up to 250 kW of power to remote jobsites as well as the mobile generation of emergency power in the event of an outage or disaster.

Consequently, we intend to offer an on-board generator installation kit as a stand-alone (Mobile Generator) and as part of a hybrid conversion (the Ultimate Work Truck).

Based upon the anticipated final testing of the technology by the end of the year, we currently expect to begin to generate revenues from our mobile electric power technology business in the first quarter of 2014.

Electric Load Assist (ELA) Technology We have also developed proprietary Electric Load Assist (ELA) technology. The technology is the centerpiece of our vehicle retrofit system (separate and apart from our heat pipe technology and heat dispersion product development partnerships), which also relies on the benefits of heat removal and is protected by patents and patents-pending.

50 -------------------------------------------------------------------------------- With ELA, a vehicle engine does not have to work as hard, as some of the work that was done by the engine is now performed by an electric motor running in parallel. The vehicle still drives and feels the same, and our ELA controller allows full acceleration and braking control; however, the engine runs much more efficiently and burns significantly less fossil fuel. The ELA controller enables the vehicle operator to determine the amount of load assist during operation, ranging from all-fuel to all-electric. We believe that our ELA system will provide a significant difference and improvement from, and competitive advantage over, current market offerings such as the Toyota Prius. If either the electrical system or the internal combustion engine fails, the ELA vehicle can operate on the remaining system. In current market offerings, if either system fails, the vehicle fails.

Our ELA technology is compatible with any manufacturer as well as any power source, including traditional gasoline/diesel engines, compressed natural gas, batteries and fuel cells. We also believe that our technology will have a wide range of marine, aviation, industrial and military applications.

Initially, our ELA system business will implement a simple version of its technology for on-board mobile generator and we hope to generate revenue from transport companies and other businesses which own and/or manage fleets of Class 2, 3, 4 and 6 vehicles or light to medium-duty trucks. Our revenue model for the ELA technology will be to license the technology in exchange for royalties based on fuel savings.

Going Concern As a result of our financial condition, we have received a report from our independent registered public accounting firm for our financial statements for the period from March 24, 2011 (Inception) to December 31, 2012 that includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern. In order to continue as a going concern we must effectively balance many factors and begin to generate revenue so that we can fund our operations from our sales and revenues. If we are not able to do this, we may not be able to continue as an operating company.

Results of Operations Comparison for the Three Months Ended June 30, 2013 and 2012 Revenues During the three months ended June 30, 2013, we had no revenues. We did not generate any revenues during the three month period ended June 30, 2012.

Operating Expenses Total operating expenses for the three months ended June 30, 2013 were $ 788,779, consisting of consulting fees ($ 595,314 ), professional fees ($38,853), research and development ($87,700), and general and administrative expenses ($ 66,912 ) as we worked to raise capital to fund operations and secure the equipment and software necessary to implement the requirements of the memoranda of understanding that had been negotiated with global manufacturers.

51 -------------------------------------------------------------------------------- This is compared to our operating expenses for the three months ended June 30, 2012 of $890,546, consisted of consulting fees ($533,775), professional fees ($211,937), research and development ($105,898), and general and administrative expenses ($38,936) as we filed new patents, created proposals and negotiated memoranda of understanding with global manufacturers as well as continued to raise capital to fund operations and to implement the requirements of the memoranda.

We have tried to minimize our operating expenses. The expenses for the second quarter of 2013 consisted primarily of payments to independent contractors and general and administrative expenses. For the three months ended June 30, 2013 and 2012, our total operating expenses were $788,779 and $890,546, respectively.

The majority of the decrease in operating expenses from 2012 to 2013 was due to an increase in consulting fees as a result of the working to raise capital, a decrease in research and development of $18,198 as a result of budget tightening and the shift in focus from planning and engineering for our initial hybrid conversion to the incorporation of our thermal technology into electric motors manufactured by two different companies. Otherwise, professional fees decreased by $173,084 due to new legal representation and the resignation of our auditors whereas general and administrative costs rose by $27,976 as the company began to incur increased administrative cost.

Net Loss For the three months ended June 30, 2013, we had a net loss of $788,779. For the three months ended June 30, 2012, we incurred a net loss of $1,090,789.

Our basic loss per common share during the three months ended June 30 , 2013 was $0.02 per share. During the three months ended June 30, 2012, we our basic loss per common share was $0.02 per share.

Comparison for the Six Months ended June 30, 2013 and 2012 Revenues For the six months ended June 30, 2013 and June 30, 2012, we had no revenues.

Operating Expenses Total operating expenses for the six month period ended June 30, 2013 were $ 1,317,308, consisting of consulting fees ($ 1,022,317 ), professional fees ($86,369), research and development ($89,700), and general and administrative expenses ($118,922) as we worked to raise capital to fund operations and secure the equipment and software necessary to implement the requirements of the memoranda of understanding that had been negotiated with global manufacturers.

This is compared to our operating income for the six months ended June 30, 2012 of $992,191 consisting of a gain due to a director returning shares gifted to a director from a shareholder 2,650,000, consulting fees ($906,079), professional fees ($242,733), research and development ($449,131), and general and administrative expenses ($59,866) as we filed new patents, created proposals and negotiated memoranda of understanding with global manufacturers as well as continued to raise capital to fund operations.

The increase in net operating loss for 2013 is due to an increase in consulting fees of $116,238 as a result of the working to raise capital, a decrease in research and development of $359,431 as a result of budget tightening and the shift in focus from planning and engineering for our initial hybrid conversion to the incorporation of our thermal technology into electric motors manufactured by two different companies. Otherwise, professional fees decreased by $156,364 due to new legal representation and the resignation of our auditors whereas general and administrative costs rose by $ 59,056 as the company began to incur increased administrative cost.

52 -------------------------------------------------------------------------------- Other income and expenses Total other income and expenses for the six months ended June 30, 2013 was $19,475, consisting of a gain on debt settlement of legal fees as compared to our other income and expenses for the six months ended June 30, 2012 of 200,754, which consisted mainly of finance expenses incurred as a result of issuing warrants for loans payable.

Net (Income) Loss For the six month period ended June 30, 2013, we incurred a net loss of $1,297,833. For the six months ended June 30, 2012, we reported net income of $791,437, which represents a decrease of approximately 164% between 2012 and 2013.

Our loss per share during the first half of 2013 was $0.03 per share. During the first half of 2012, we had net income of $0.02 per share.

Liquidity and Capital Resources Introduction During the six months ended June 30, 2013, because we did not generate any revenues, we had negative operating cash flows. Our cash on hand as of June 30, 2013 was $49,136, which came primarily from the issuance of common stock for cash. Our monthly cash flow burn rate is approximately $115,000. As a result, we have significant cash needs. We anticipate that these needs will be satisfied through the sale of our securities until such time as our cash flows from operations will satisfy our cash flow needs.

Our cash, current assets, total assets, current liabilities, and total liabilities as of June 30, 2013 and December 31, 2012, respectively, are as follows: June 30, 2013 (Unaudited) December 31, 2012 Change Cash $ 49,136 $ 194,721 $ ( 145,585 ) Total Current Assets 49,136 568,400 (519,264 ) Total Assets 143,943 641,982 (498,039 ) Total Current Liabilities 357,619 263,695 (93,924 ) Total Liabilities $ 357,619 $ 263,695 $ (93,924 ) Our cash decreased by $145,585 as of June 30, 2013 as compared to December 31, 2012 due to the purchases of electric motors. Our total current assets, and total assets, decreased by $519,264 and $498,039, respectively, during the same period, partly because of our decrease in cash, but also as a result of amortization of prepaid expenses which were fully amortized as of June 30, 2013.

53 -------------------------------------------------------------------------------- Our current liabilities increased by $93,924 as of June 30, 2013 as compared to December 31, 2012 primarily because of accounts payable due to related party of $174,979. Our total liabilities increased by the same $93,924 for the same reasons.

In order to repay our obligations in full or in part when due, we will be required to raise significant capital from other sources. There is no assurance, however, that we will be successful in these efforts.

Sources and Uses of Cash Operations Our net cash used by operating activities for the six month period ended June 30, 2013 was ($463,160) which consisted of our net loss from operations of $1,297,833, offset by an increase in accounts payable of $ 8,425, an increase in accounts payable from a related party of $122,674, stock issued for services of $373,679, and warrants issued for services of $349,370 and a gain on settlement of debt of ($19,475).

Investments Our net cash used by investing activities for the six month period ended June 30, 2013 totaled ( $21,225 ) and consisted of an increase in intangible assets of ($21,225).

Financing Our net cash provided by financing activities for the three month period ended June 30, 2013 was $338,800, which consisted of proceeds from the sales of equity securities to two accredited investors of $350,000, $900 in proceeds from notes payable from a related party, offset by payments on notes payable to a related party of $12,100.

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