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NEW ENERGY TECHNOLOGIES, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This Report on Form 10-Q contains forward-looking statements which involve assumptions and describe our future plans, strategies, and expectations, and are generally identifiable by use of words such as "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend," or "project," or the negative of these words or other variations on these words or comparable terminology. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished. Such forward-looking statements include statements regarding, among other things, (a) the potential markets for our technologies, our potential profitability, and cash flows, (b) our growth strategies, (c) expectations from our ongoing research and development activities, (d) anticipated trends in the technology industry, (e) our future financing plans, and (f) our anticipated needs for working capital. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as in this Form 10-Q generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the matters described in this Form 10-Q generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. In addition to the information expressly required to be included in this filing, we will provide such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading. Although forward-looking statements in this report reflect the good faith judgment of our management, forward-looking statements are inherently subject to known and unknown risks, business, economic and other risks and uncertainties that may cause actual results to be materially different from those discussed in these forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect our actual results may vary materially from those expected or projected. Except where the context otherwise requires and for purposes of this Form 10-Q only, "we," "us," "our," "Company," "our Company," and "New Energy" refer to New Energy Technologies, Inc., a Nevada corporation, and its consolidated subsidiaries. Overview The following discussion and analysis of our financial condition and results of operations ("MD&A") should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements included in this Form 10-Q. The MD&A is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 20--------------------------------------------------------------------------------Background We are a development stage renewable and alternative energy company, actively developing two novel technologies for generating sustainable electricity, one of which harvests solar energy of the sun and artificial light, and the other harvests the available kinetic energy present in moving vehicles. Our proprietary, patent-pending technologies and products, which are the subjects of 24 patent-filings, have been invented, designed, engineered, and prototyped in preparation for advanced field testing, product development, and commercial deployment. We are currently focusing our development efforts on two technologies, SolarWindow™ Technology, which enables see-through glass windows to generate electricity by applying electricity-generating coatings to their glass surfaces, and MotionPower™ Technology for capturing the kinetic energy of moving vehicles and using it to generate electricity. We do not currently have any commercial products and there is no assurance that we will successfully be able to design, develop, manufacture, or sell any commercial products in the future. Our product development programs involve ongoing research and development efforts, and the commitment of significant resources to support the extensive invention, design, engineering, testing, prototyping, and intellectual property initiatives carried-out by our contract engineers, scientists, and consultants. Ultimately, we plan to market any SolarWindow™ Technology and/or MotionPower™ Technology products through co-marketing, co-promotion, licensing and distribution arrangements with third party collaborators. We believe that this approach could provide immediate access to pre-existing distribution channels, therefore potentially increasing market penetration and commercial acceptance of our products and enabling us to avoid expending significant funds for development of a large sales and marketing organization. We cannot accurately predict the amount of funding or the time required to successfully commercialize either the SolarWindow™ Technology or the MotionPower™ Technology. The actual cost and time required to commercialize these technologies may vary significantly depending on, among other things, the results of our research and development efforts, the cost of developing, acquiring, or licensing various enabling technologies, changes in the focus and direction of our research and development programs, competitive and technological advances, the cost of filing, prosecuting, defending and enforcing claims with respect to patents, the regulatory approval process and manufacturing, marketing and other costs associated with commercialization of these technologies. Because of this uncertainty, even if financing is available to us, we may secure insufficient funding to effectuate our business plan. As of May 31, 2011, we had working capital of $3,007,260. Based upon our current level of operations and expenditures, we believe that, absent any modification or expansion of our existing research, development and testing, cash on hand should be sufficient to enable us to continue operations through at least August 31, 2012. However, any significant expansion in scope or acceleration in time of our current research and development activities, or commencement of any marketing activities, will require additional funds. Research and Related Agreements We are a party to certain agreements related to the development of our SolarWindow™ Technology and our MotionPower™ Technology. These agreements, and certain effects of these agreements on our financial statements for the periods presented in this MD&A, are summarized below. SolarWindow™ Technology Stevenson-Wydler Cooperative Research and Development Agreement with the Alliance for Sustainable Energy On March 18, 2011, in our efforts to advance the commercial development of our SolarWindow™ Technology, we entered into a Stevenson-Wydler Cooperative Research and Development Agreement (a "CRADA") with the Alliance for Sustainable Energy, LLC, which is the operator of The National Renewable Energy Laboratory ("NREL") under our U.S. Department of Energy contract. Under terms of the CRADA, NREL researchers will make use of our exclusive intellectual property and NREL's background intellectual property in order to work towards specific product development goals. 21 -------------------------------------------------------------------------------- Pursuant to SEC Rule 24b-2, we submitted a request to the SEC for confidential treatment of certain portions of the CRADA, which has been granted. Accordingly, certain terms of the CRADA have not been disclosed. The disclosure of such confidential information may potentially harm our competitive position and jeopardize our ability to effectively negotiate future development and sublicensing agreements on preferential terms; and, ongoing relationship with NREL and our ability to negotiate favorable terms with NREL in regards to the ongoing development of our technologies. University of South Florida Research Foundation, Inc. License Agreement, Option Agreement and Sponsored Research Agreement Through our wholly-owned subsidiary, New Energy Solar Corporation, we are a party to a License Agreement, an Addendum to the License Agreement, an Option Agreement and a Sponsored Research Agreement with the University of South Florida Research Foundation, Inc. These agreements provide for our support of a project relating to the development of the SolarWindow™ Technology and grant us an exclusive worldwide commercial license under certain patents relating to the SolarWindow™ Technology. Pursuant to SEC Rule 24b-2, we have submitted requests to the SEC for confidential treatment of certain portions of these agreements, which have been granted. Accordingly, certain terms of these agreements have not been disclosed. On July 5, 2011, we entered into a letter agreement pursuant to which we agreed to reimburse the University of South Florida ("USF") for filing fees associated with USF's Provisional Patent and future PCT Applications (the "Applications") for certain identified technologies (the "Letter Agreement"). Pursuant to the terms of the Letter Agreement, we committed to reimburse USF for all documented, out-of-pocket costs directly related to the filing and maintenance of the Applications. In return, USF granted us the exclusive right to negotiate a definitive option or license agreement with USF for the technologies underlying the Applications for a period of time after USF files a Provisional Patent for an identified technology (the "Negotiation Period"). Should the Negotiation Period expire without us and USF entering into an agreement, we could extend the Negotiation Period for an additional period of time by paying USF a one-time payment of a specified sum. If after this additional time we and USF fail to enter into an agreement, USF is free to enter into negotiations and license the underlying technologies to a third-party. Pursuant to SEC Rule 24b-2, we have submitted a request to the SEC for confidential treatment of certain portions of the Letter Agreement. Once we receive confirmation from the SEC that its CTR has been filed, we will file the redacted Letter Agreement as an amendment to our Form 8-K dated July 11, 2011. University of Illinois at Urbana-Champaign Sponsored Research Agreement Through our wholly-owned subsidiary, Sungen Energy, Inc., we were a party to a Sponsored Research Agreement with the University of Illinois at Urbana-Champaign that provided for our support of the development of a new technology to integrate films of silicon nanoparticle material on glass substrates. This agreement expired on August 22, 2008. As of such date, we had advanced a total of $266,709 to the University of Illinois pursuant to the terms of the agreement. Pursuant to the terms of the agreement, we were to advance an additional $156,109 to the University of Illinois, which is included in other accrued liabilities at May 31, 2011 and August 31, 2010. However, we have not made the advance pending determination as to whether funds previously paid to the University of Illinois under the terms of the agreement have been fully expended. We are of the opinion that to the extent these funds were not expended, they are refundable to us. We did not record any research and development expense pursuant to this agreement during any of the three or nine month periods ended May 31, 2011 or 2010. During the period from inception (May 5, 1998) to May 31, 2011, we recorded $422,818 as research and development expense pursuant to this agreement. 22 --------------------------------------------------------------------------------Oakland Sponsored Research Agreement We were a party to a Sponsored Research Agreement with scientists at Oakland University to further the development of our photovoltaic technology for generating electricity on transparent glass windows. Pursuant to the agreement, we agreed to advance in three installments a total of $348,066 to fund the research and development activities. In August 2008, we advanced the first installment of $140,519 to Oakland University. In February 2009, we elected to terminate the agreement. As of the termination date, $20,220 of the $140,519 advanced to Oakland University had been expended and the remaining $120,299 was refunded to us in April 2009. MotionPower™ Technology Veryst Agreement Through our wholly-owned subsidiary, Kinetic Energy Corporation, we are a party to certain agreements with Veryst Engineering LLC, a Boston area engineering and consulting firm with experience in product development and energy harvesting; one dated November 4, 2008, two dated September 9, 2009 and one dated July 6, 2010, all relating to the development of a car and truck energy harvester. Pursuant to Rule 24b-2 we submitted a request for confidential treatment of certain portions of the November 4, 2008 agreement, relating to the payment terms, scope of work and the milestone terms of the agreement, which has been granted. Accordingly, certain terms and provisions of the November 4, 2008 agreement have not been disclosed. During the three months ended May 31, 2011 and 2010, we recorded $16,075 and $46,969, respectively, as research and development expense pursuant to these agreements. During the nine months ended May 31, 2011 and 2010, we recorded $44,508 and $280,259, respectively, as research and development expense pursuant to these agreements. During the period from inception (May 5, 1998) to May 31, 2011, we recorded $554,599 as research and development expense pursuant to these same agreements. Veryst Engineering LLC has successfully completed its contracted services associated with the agreements dated November 4, 2008 and July 6, 2010. Veryst Engineering LLC continues to perform site-specific work, including planning, installing, and testing services contracted under the agreement dated September 9, 2009. Sigma Design Agreement Through Kinetic Energy Corporation, we have been and continue to be a party to certain consulting agreements with Sigma Design Company, a Vancouver, Washington based engineering and design firm, pursuant to which Sigma Design provides ongoing engineering, product development and testing services relating to the development of our MotionPower™ Technology. During the three months ended May 31, 2011 and 2010, we recorded $24,800 and $0, respectively as research and development expense pursuant to these agreements. During the nine months ended May 31, 2011 and 2010, we recorded $51,223 and $133,525, respectively, as research and development expense pursuant to these agreements. During the period from inception (May 5, 1998) to May 31, 2011, we recorded $317,494 as research and development expense pursuant to these agreements. We continue to utilize Sigma Design Company on a consulting basis to further test, calibrate, and develop our MotionPower™ Technology. Results of Operations Three and Nine Month Periods Ended May 31, 2011 and 2010 Operating Expenses Below is a summary of our operating expense for the three and nine months ended May 31, 2011 and 2010: 23 -------------------------------------------------------------------------------- Three Months Ended Nine Months Ended May 31, Increase / May 31, Increase / 2011 2010 (Decrease) 2011 2010 (Decrease) Operating expense Marketing and investor relations $ 53,569 $ 252,922 $ (199,353 ) $ 213,919 $ 535,055 $ (321,136 ) Wages and benefits 1,129,163 132,463 996,700 2,660,348 605,250 2,055,098 Management fees - related party 22,500 - 22,500 30,000 - 30,000 Professional fees 238,785 136,847 101,938 654,353 364,207 290,146 Research and development 128,148 72,025 56,123 223,248 514,152 (290,904 ) License fee 10,000 - 10,000 10,000 - 10,000 Travel and entertainment 42,687 22,380 20,307 59,327 53,022 6,305 Other operating expenses 55,798 54,410 1,388 150,862 199,662 (48,800 ) Total operating expense $ 1,680,650 $ 671,047 $ 1,009,603 $ 4,002,057 $ 2,271,348 $ 1,730,709 Marketing and Investor Relations Marketing and investor relations costs represent fees paid to publicize our technology within the industry and investor community with the purpose of increasing company recognition. We utilize various third parties to manage our investor relations and facilitate our marketing programs, to increase company recognition and branding, and to provide shareholder communications. The decrease in marketing and investor relations expense during the three months ended May 31, 2011 compared to the same period in 2010, is substantially due to $213,150 incurred by us during the three months ended May 31, 2010 in connection with a targeted marketing program designed to establish our brand name recognition. These marketing efforts kept our stockholders apprised of advances to our technologies and generated more than 100 news media stories, including online, radio, television, and print media coverage. Offsetting the decrease of $213,150 related to the targeted marketing program in the prior year is $20,000 incurred during the current period for amounts related to our targeted marketing program designed to inform our shareholders, investors, and possible customers of the perceived benefits and cost advantages of our technologies and potential products, pursuant to which we incurred $90,000 during the quarter ended February 28, 2011 and $20,000 during the quarter ended May 31, 2011. The decrease in marketing and investor relations expense during the nine months ended May 31, 2011 compared to the same period in 2010 is substantially due to $423,150 incurred by us during the nine months ended May 31, 2010 in connection with a targeted marketing program designed to establish our brand name recognition. Offsetting the decrease of $423,150 related to the targeted marketing program in the prior year is the increase of $110,000 during the current period as discussed in the previous paragraph. We intend to undertake further efforts to develop and market our brand name and increase our brand recognition. We anticipate that as our technologies advance we may be required to expend increasing amounts in connection with our marketing efforts. Wages and Benefits Wages and benefits expense for the three months ended May 31, 2011, includes $51,088 in salary and benefits paid to Mr. John Conklin, who was appointed to serve as our President, Chief Executive Officer and Chief Financial Officer, effective August 9, 2010, and $127,735 in stock compensation expense for the amortization of the fair value of a stock option granted to Mr. Conklin on August 9, 2010, in connection with such appointment. Wages and benefits expense also includes $43,369 in salary and benefits paid to Mr. Andrew Farago, who was appointed to serve as our Chief Operating Officer, effective December 17, 2010 and $891,466 in stock compensation expense for the amortization of the fair value of a stock option granted to Mr. Farago on December 17, 2010, in connection with such appointment. 24 -------------------------------------------------------------------------------- Wages and benefits expense for the three months ended May 31, 2010, includes $43,969 in salary and benefits paid to Mr. Meetesh Patel, our former President, Chief Executive Officer, and Chief Financial Officer, and $85,369 in stock compensation expense for the amortization of the fair value of stock options previously granted to Mr. Patel. Wages and benefits expense for the nine months ended May 31, 2011, includes $170,580 in salary, bonus, and benefits paid to Mr. Conklin and $599,378 in stock compensation expense for the amortization of the fair value of a stock option granted to Mr. Conklin on August 9, 2010. Wages and benefits expense also includes $79,754 in salary and benefits paid to Mr. Farago and $1,784,264 in stock compensation expense for the amortization of the fair value of a stock option granted to Mr. Farago on December 17, 2010. Wages and benefits for the same period also includes $10,932 in salary and benefits paid to Mr. Scott Taper, who was appointed to serve as our Vice President of Business Development, effective February 2, 2011. Mr. Taper subsequently resigned from this position, effective February 23, 2011. Wages and benefits expense for the nine months ended May 31, 2010, includes $129,526 in salary and benefits paid to Mr. Patel and $451,661 in stock compensation expense for the amortization of the fair value of stock options granted to Mr. Patel. Wages and benefits for the same period also includes $23,497 in salary and benefits paid to Mr. James B. Wilkinson, our previous Vice President Corporate Development and Chief Operating Officer. Management Fees - Related Party Management fees - related party represent fees incurred pursuant to an at-will consultancy agreement (the "Consultancy Agreement") entered into on February 1, 2011, between us and Mr. Elliot Maza, pursuant to which Mr. Maza was appointed our Chief Financial Officer. Pursuant to the terms of the Consultancy Agreement, Mr. Maza is paid a monthly fee of $7,500 and reimbursed for reasonable travel and other out-of-pocket expenses necessarily incurred in the performance of his duties. The Consultancy Agreement provides that Mr. Maza's engagement by us is on a part-time basis and is "at-will" and may be terminated by Mr. Maza or us at any time, with or without cause, and for any reason whatsoever, upon written notice to the other. Professional Fees Professional fees primarily consist of accounting, audit and tax fees, legal fees, non-employee board of director fees, SEC filing related fees, and fees for consulting services related to our MotionPower™ Technology and SolarWindow™ Technology. These consulting services consist of technical advice, guidance, and business planning and modeling. Professional fees increased $101,938 for the three months ended May 31, 2011, compared to the three months ended May 31, 2010, substantially as a result of an increase in non-employee board of director fees of approximately $92,100 primarily as a result of the increase in stock compensation expense related to stock options granted to non-employee directors. Also contributing to the increase in professional fees from prior year was an increase in legal fees of approximately $43,200 directly related to the preparation and filing of our Form S-1 and amendments thereto, as well as additional legal services received in connection with the appointment of three new board members during the quarter ended May 31, 2011, entering into the CRADA on March 18, 2011, and the amendments made to our Articles of Incorporation, increasing the number of shares of common stock authorized for issuance and the stockholder approval of a one-for-three reverse stock split, declared effective as of March 21, 2011. Offsetting the increases in non-employee board of director fees and legal fees is a decrease in consulting services of approximately $37,200, which were incurred pursuant to a consulting agreement that we entered into on April 1, 2010, with Mr. Conklin, whereby Mr. Conklin provided technical advice, guidance, and management oversight to help advance the commercial development of our SolarWindow™ and MotionPower™ technologies. The consulting agreement between us and Mr. Conklin was terminated when he was appointed to serve as our President, Chief Executive Officer and Chief Financial Officer, effective August 9, 2010. 25 -------------------------------------------------------------------------------- Professional fees increased $290,146 for the nine months ended May 31, 2011, compared to the nine months ended May 31, 2010, substantially as a result of an increase in non-employee board of director fees of approximately $244,900 primarily as a result of the increase in stock compensation expense related to stock options granted to non-employee directors. Also contributing to the increase in professional fees from prior year is an increase in accounting related fees of approximately $18,300 and legal fees of approximately $52,600. Accounting related fees and legal fees increased primarily due to additional services provided to us in connection with our Form S-1, the appointment of new members to our executive team and board of directors, and the increase in business activity as we continue to develop our MotionPower™ Technology and SolarWindow™ Technology. Offsetting the increase in professional fees from prior year is a decrease in consulting services of approximately $27,000 pursuant to the consulting agreement between us and Mr. Conklin, as discussed in the previous paragraph. Research and Development Research and development costs represent costs incurred to develop our SolarWindow™ Technology and MotionPower™ Technology and are incurred pursuant to our research agreements and agreements with other third party providers. Payments under these agreements include salaries and benefits for research and development personnel, allocated overhead and facility occupancy costs, contract services and other costs. Research and development costs are expensed when incurred, except for nonrefundable advance payments for future research and development activities which are capitalized and recognized as expense as the related services are performed. See "Research and Related Agreements" above for disclosure regarding the terms and amounts incurred under our research agreements. License Fee Please refer to "University of South Florida Research Foundation, Inc. License Agreement, Option Agreement and Sponsored Research Agreement" under "SolarWindow™ Technology" above. Travel and Entertainment Travel and entertainment increased during both the three and nine months ended May 31, 2011 compared to the same periods of the prior year primarily due to executive and Board member travel required as part of the ongoing business efforts. Other Operating Expenses Other operating expenses include but are not limited to directors and officers insurance, rent, patent filing costs, utilities, insurance, press releases, information technology related fees, printing costs, and other administrative costs. Other operating expenses remained relatively flat during the three months ended May 31, 2011 compared to the three months ended May 31, 2010. Other operating expenses decreased $48,800 for the nine months ended May 31, 2011, as compared to the nine months ended May 31, 2010, substantially due to a decrease in patent filing costs of approximately $42,900, a decrease in information technology related fees of approximately $11,300, and a decrease in printing and postage costs of approximately $7,900. During the nine months ended May 31, 2010, we filed U.S. and international patent applications for our MotionPower™ Technology and SolarWindow™ Technology. During the prior year period, we re-designed our website, thereby incurring information technology related fees and during the quarter ended May 31, 2010 we distributed a letter from our President to all of our stockholders providing them an update on the results of our testing of our MotionPower™ and SolarWindow™ Technologies, thus incurring printing and postage for this mailing. Offsetting these decreases in other operating expenses was an increase in director and officers insurance premiums of approximately $13,500. Other Income (Expense) Below is a summary of our other income (expense) for the three and nine months ended May 31, 2011 and 2010: 26 -------------------------------------------------------------------------------- Three Months Ended Nine Months Ended May 31, May 31, 2011 2010 Change 2011 2010 Change Other income (expense) Interest expense $ (382 ) $ - $ (382 ) $ (1,238 ) $ - $ (1,238 ) Foreign exchange loss - (638 ) 638 (497 ) (1,344 ) 847 Change in fair value of warrant liability - 165,660 (165,660 ) 8,059 1,721,658 (1,713,599 ) Total other income (expense) $ (382 ) $ 165,022 (165,404 ) $ 6,324 $ 1,720,314 (1,713,990 ) Change in Fair Value of Warrant Liability On September 1, 2009, we adopted guidance which is now part of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 815-40, Contracts in Entity's Own Equity. We determined that our Class F Callable Warrants contained a dilutive issuance provision. As a result, we reclassified 1,062,833 of our Class F Callable Warrants to warrant liability, resulting in a cumulative adjustment to accumulated deficit as of September 1, 2009 of $342,771. Our Class F Callable Warrants are considered derivative financial liabilities and are therefore required to be adjusted to fair value each quarter. On February 12, 2011, all unexercised Class F Callable Warrants expired. Decreases in the remaining term and volatility of the Class F Callable Warrants during three months ended May 31, 2010 resulted in a decrease in the warrant liability and a non-cash gain related to the Class F Callable Warrants of $165,660 during the three months ended May 31, 2010. The non-cash gain of $8,059 recorded during the nine months ended May 31, 2011 represents the decrease in the fair value of the Class F Callable Warrants from $8,059 at August 31, 2010 to $0 at May 31, 2011 as a result of the expiration of all of the remaining unexercised Class F Callable Warrants on February 12, 2011. Decreases in the remaining term and volatility of the Class F Callable Warrants during the nine months ended May 31, 2010 and a decline in the fair value of our common stock from September 1, 2009 to May 31, 2010 resulted in a decrease in the warrant liability and a non-cash gain related to the Class F Callable Warrants of $1,721,658 during the nine months ended May 31, 2010. Liquidity and Capital Resources The accompanying financial statements have been prepared assuming we will continue as a going concern. We have an accumulated deficit of $10,723,909 through May 31, 2011. Due to the "start up" nature of our business, we expect to incur losses as we continue development of our photovoltaic and energy harvesting technologies and expand. These conditions raise substantial doubt about our ability to continue as a going concern. Management recognizes that in order for us to meet our capital requirements, and continue to operate, additional financing will be necessary. We expect to raise additional funds through private or public equity investment in order to expand the range and scope of its business operations. We will seek access to private or public equity but there is no assurance that such additional funds will be available for us to finance our operations on acceptable terms, if at all. If we are unable to raise additional capital or generate positive cash flow, it is unlikely that we will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our principal source of liquidity is cash in the bank. At May 31, 2011, we had a cash and cash equivalent balance of $3,032,774. We have financed our operations primarily pursuant to a Securities Purchase Agreement in which we received net proceeds of $3,395,955 in February 2008 (as further described below) and from the exercise of warrants and stock options. 27 -------------------------------------------------------------------------------- Net cash used in operating activities was $1,453,539 for the nine months ended May 31, 2011, compared to net cash used in operating activities of $1,687,874 for the nine months ended May 31, 2010. The decrease in cash used in operating activities of $234,335 substantially reflects decreases in amounts paid for marketing and investor relations (see "Marketing and Investor Relations" above), research and development (see "Research and Related Agreements" above), and other operating expenses (see "Other Operating Expenses" above). Offsetting these decreases are increases in amounts paid for Management fees - related party (see "Management Fees - Related Party" above) and wages and benefits expense (see "Wages and Benefits" above). Net cash provided by financing activities was $3,985,175 and $0 for the nine months ended May 31, 2011 and 2010, respectively. During the nine months ended May 31, 2011, we received $3,954,375 from the exercise of Class F Callable Warrants and $30,800 from the exercise of stock options. Private Placement On February 12, 2008, we consummated the sale of an aggregate of 1,225,000 shares of our common stock and Class F Callable Warrants to purchase up to an additional 1,225,000 shares of our common stock for aggregate gross proceeds of $3,675,000 pursuant to the terms of a Securities Purchase Agreement dated February 8, 2008 with certain institutional and other accredited investors. We engaged an agent to help locate investors in the private placement. The agent was paid a total cash fee of 7% of the aggregate proceeds, or $257,250, and received Class F Callable Warrants to purchase 171,500 shares of our common stock, valued at $642,980 and representing 7% of the total number of shares purchased by the investors. In addition, the agent was reimbursed $6,045 for expenses incurred on our behalf. Accrued Liabilities Under the Sponsored Research Agreement with the University of Illinois, described under "Research and Related Agreements - SolarWindow™ Technology - University of Illinois at Urbana-Champaign Sponsored Research Agreement," above, we agreed to provide a total of $422,818 to the University of Illinois. The agreement expired on August 22, 2008. As of this date, we had advanced a total of $266,709 to the University of Illinois. We were to advance an additional $156,109 to the University of Illinois, which is included in other accrued liabilities at May 31, 2011 and August 31, 2010. However, we have not made the advance pending determination as to whether funds previously paid to the University of Illinois under the terms of the agreement have been fully expended. We are of the opinion that to the extent these funds were not expended, they are refundable to us. Other Contractual Obligations In addition to our contractual obligations under the research agreements, as of May 31, 2011, we have future minimum lease payments of $8,400 under our corporate and other office operating leases. In addition, we have future minimum payments totaling $36,050 pursuant to agreements with third party providers that we utilize for investor relations and marketing and business development. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Recently Issued and Adopted Accounting Pronouncements We review new accounting standards as issued. Although some of these accounting standards issued or effective after the end of our previous fiscal year may be applicable to us, we have not identified any standards that we believe merit further discussion. We believe that none of the new standards will have a significant impact on our consolidated financial statements. 28-------------------------------------------------------------------------------- |