WEGY 2nd Qtr 08

Unique Capability in Electrolizer and HHO

World Energy has a large body of trade secret and patent-protected intellectual property embodied in their HHO products for automotive, trucking and water-heating markets. At the heart of their HHO products is their proprietary electrolyzer. Key innovations include: 

• Electrode power supply; Proprietary pulse width modulated signal maximizes hydrogen generated per watt

• Special electrode alloys for more efficient electrolysis for an additional 10%-15% efficiency

• Proprietary understanding of optimal oxygen/hydrogen mix and engine control algorithms for maximizing vehicle mileage while minimizing exhaust emissions

• Unique facilities, equipment and instrumentation for HHO efficiency testing

• Optimal design of fuel manifold and heat exchanger for tankless hot water heating applications

 HHO Water

World Energy’s is undertaking to develop a range of HHO-based tankless water heater products for the domestic, commercial and industrial sectors that will significantly reduce the energy costs of heating water and provide an environmentally friendly hot water.   These HHO products use hydrogen and oxygen gasses from an electrolyzer to heat water on demand.  The Company is now demonstrating the ability to heat water from 70 degrees Fahrenheit to 195 degrees Fahrenheit in less than 15 seconds at a cost of six-tenths of a cent per minute.

World Energy continues to make excellent progress with its ‘traditional’ tankless water heater (using natural gas as the heat source) for domestic and commercial use. Their prototype is more efficient than most others they have examined.  Temperature control is superior and less variable than with other units.   World Energy’s product is more compact and can be set to maximum water temperatures for most climatic conditions.     

The next generation of World Energy’s tankless water heating products will incorporate an HHO/electrolyzer system as the heat source, eliminating the need for natural gas. This will be a truly revolutionary development in the water heating industry, with many applications in residential and industrial water heating, even in remote solar-powered water heating. 

In the final form of the residential product, water flow from a faucet will automatically activate the heating source and the water temperature is governed at permitted maximum by a newly developed control unit.  The potential savings are large. There is  no storage tank for hot water, which looses heat, no twin transfer pipes around the building and no heat loss from the hot pipe.

Large channel players in the water heating industry are tracking World Energy’s progress with great interest. As their products come to market, World Energy will establish strategic partnerships. It is already negotiating with a marketing company to supply Tankless Hot Water Heaters for sale under their brand.  The market is large and comprises the retrofit sector as well as the ‘new build’ sector. There is also a huge export market which the marketing company will pursue. 

HHO Engine

An HHO application with even greater commercial interest and potential is for increasing the efficiency of gasoline and diesel engines. By injecting the separated hydrogen and oxygen gasses directly into the intake of the engine, gas or diesel mileage can be significantly increased and its emissions are reduced nearly 100%, to little more than water.

The most abundant source of hydrogen on earth is water. Every molecule of water contains one oxygen atom and two hydrogen atoms.  An electrolyzer is a galvanic cell composed of an anode and a cathode submerged in a water-based electrolyte. In an electrolyzer, an electrical current is applied between the anode and the cathode, which causes the water in the electrolyte to break down, releasing oxygen gas at the anode and hydrogen gas at the cathode.

In their automotive HHO system, World Energy uses a high efficiency multi-cell plate-geometry water electrolyzer. The gases generated at the electrodes are allowed to combine, forming a low-pressure mixture of hydrogen and oxygen.  This mixture is then transported into the engine air intake, where it mixes with the normal air intake charge.   Mixing hydrogen gas into the intake charge of a hydrocarbon-fueled gas or diesel engine has several positive effects on engine performance.  

• Hydrogen reduces misfires when igniting lean air/fuel mixtures, thus improving efficiency, emissions, and power output
• Hydrogen improves the energy density of the air/fuel mixture, improving engine output torque under wide-open throttle conditions
• Addition of hydrogen to a hydrocarbon fuel causes the effective octane rating of the fuel mixture to rise

 HHO versus Hydrogen Fuel Cell

Development of hydrogen fuel cells and hydrogen fuel engines has been widely covered.  In many ways, the operation of an electrolyzer is the opposite of operating these other hydrogen systems. In a hydrogen fuel cell, pressurized hydrogen and oxygen, which are stored on the vehicle, are supplied to the anode and the cathode, and they combine to form water while creating an electrical current that is then put to use.  Hydrogen engine solutions also require high pressure hydrogen that is stored on the vehicle

In an HHO system, the hydrogen is generated on the vehicle. The HHO system is designed to produce hydrogen only when required, in response to driver throttle commands.  When the system is shut off, no hydrogen is present on the vehicle.  HHO is therefore much safer than traditional hydrogen systems.   

HHO Engine Testing

World Energy’s HHO system has been installed successfully into a stock Honda gasoline vehicle.  Preliminary results of on-road testing achieved more than double the mpg with a huge decrease in harmful exhausts. Hydro-carbon particulate and gaseous emissions were reduced by 99% and carbon monoxide by 92%.

World Energy then proceeded to launch a program for diesel engine testing utilizing a test cell and dynamometer installed in the company’s Research & Development laboratory.  There has been considerable interest in the HHO system for diesel engines and a bus company has offered a sample diesel engine for testing.  The company expects the HHO system to increase diesel mpg by 12-15% while reducing emissions by over 90%, due to more complete combustion within the engine.

World Energy has also acquired a new Ford Hybrid Escape and converted it to HHO.  The vehicle has possibly the most efficient gasoline engine in production and the company ran it for several road tests.  Preliminary results were very encouraging, and showed an increase in mpg of 18% with significantly reduced emissions.  There is more work to do to gain maximum efficiency from the HHO system but it is a most encouraging start.

In parallel, World Energy continues to build a substantial body of patents and intellectual property in the area of automotive HHO solutions. The company intends not only to offer leading technology HHO solutions for automobile and diesel markets, but also to substantially “own” this technology sector through an extensive patent portfolio, along with strong worldwide brand recognition for such brands as “H-Hybrid,” which World Energy recently acquired.  

How It Works

·        Hydrogen/Oxygen injected pre-combustion into fuel.          

·        ECU is adapted to provide proper ignition and fuel parameters.

Why It Works

·        Proprietary power and electrolysis system creates, on-the-fly, enough hydrogen and oxygen that supplements the fuel reduced (26%) for the engine.

·        Due to a much more complete combustion process, the new fuel mixture substantially reduces emissions.

The Results

·        Fuel is reduced 26%

·        Emissions reduced: Hydrocarbons > 99% - Carbon Monoxide > 92%

 Honda

Technology Validation - 1998 Honda

AC Surge Protection

AC Surge Suppressors

Low Voltage Surge Protection

The company has a complete line of surge protectors for low voltage applications from modular units for cat 5, db 9-15, and telephone line units to sophisticated hardwired units to protect data and low voltage circuits of all types. The product usage ranges from sensitive high tech equipment like fire alarm systems, security alarm systems, card access, gate entry, phone system, even sensitive computer networking equipment.

Low Voltage Surge Suppressors

Video Surge Protection

World Energy continues to manufacture a complete line of surge protectors for video, CCTV and Network applications which are available in many frequencies and voltages with a selection of connection types such as BNC or F type connection. The product usage ranges from sensitive high tech video surveillance systems and close circuit TV to sophisticated computer networking.

Video Voltage Surge Suppressors

IV. AQUISITIONS

On June 10, 2008, World Energy acquired Advanced Alternative Energy, Inc. (AAEI) in a tax free stock for stock exchange.  AAEI was incorporated in the State of Florida on May 20, 2008.

As payment, the company issued 100,000 shares of Series B Convertible Preferred Stock to UTEK Corporation in exchange for 100% of the issued and outstanding shares of AAEI, assignment of an exclusive technology license for the production and preparation of mechanically and electrochemically stable electrodes and transition metal oxide catalysts; prepaid consulting fees and $200,000 cash.

The preferred shares may be converted by the holder at any time into common stock prior to the sixty month anniversary of the execution of the agreement into the $3,500,000 of common shares of World Energy, based on the average of the five day closing price prior to the conversion.

At any time after six months and before the sixty month anniversary of the execution of the agreement, World Energy will have the right, at its sole discretion, to repurchase at an agreed upon percentage value, any non-converted shares of the Series B Convertible Preferred Stock.

The shares may be repurchased within twelve months at 105%; within thirteen and twenty-four months at 110%; within twenty-five and thirty-six months at 115%; and at anytime after thirty-six months at a 120% value of the original pro rata purchase price.  The convertible preferred shares have no voting rights.

Royalties will become due on a quarterly basis based upon the net sales of any of the licensed products sold from the technology license.  Royalties are to be paid within ninety days and are based on 3% of the net sales on the licensed products.  The royalty obligations will terminate on a country by country basis upon the expiration of the last to expire licensed patent covering the licensed product in each such country.

Twelve months after the first anniversary of the execution of the license agreement, minimum annual royalties become due.  The minimum royalty due for the second anniversary year of the executed agreement is $5,000; for the third anniversary is $10,000; for the fourth anniversary is $15,000 and for the fifth anniversary thereafter until the end of the license term is $30,000.

AAEI will reimburse any patent costs incurred to maintain or control the patents related to the technology and licensed products.

The prepaid consulting expenses relate to technical consulting services to be provided related to the license. The consulting agreement was entered into by UTEK on the behalf of AAEI and per the agreement any additional consulting expenses will be the direct responsibility of UTEK.

The purchase price of $3,500,000 was based on the agreed face value of the Series B Convertible Preferred Stock as of the date of acquisition. 

The resulting intangible asset of $3,264,000 was analyzed and although the company anticipates further development of the related technology, as of June 30, 2008, the technology had not yet been tested on the market nor had there been any related sales.

Estimation of future sales could not be determined as the technology is not ready to be introduced into the market place and knowledge of when or if the company can fully develop the technology is not known.  In addition, consideration of other similar technology entering the market prior to the company can not be determined. Based on the above factors, the company concluded that the valuation of the intangible could not be supported and as of June 30, 2008, the company deemed it impaired and wrote it off.

V. PATENT APPLICATIONS

Pure Air Tech Technologies                                         

(PATI)                                    

U.S. Patent Application            20060067854 A1        Filed 03/31/08             

Patent Application Titled           Air Revitalization Methods and Systems                       

Hydrogen Safe Technologies, Inc.                                            

(HSTI)                                    

U.S. Patent Application            7,047,792 B1   Filed 5/23/06               

Patent Application titled:           Surface acoustic wave hydrogen sensor            

Developed from the University of South Florida # 02B058                               

Advanced Alternative Energy                                       

(AAEI) U.S. Patent Application 11/261,128     Filed 10/28/05             

FSU #'s 05-031,07-058 and 07-085  U.S. Patent Application titled "Methods for Preparing Mechanically and Electrochemically Stable Electrodes”  And PCT Patent Pending NO  PCT/07/83328  filed 11/1/2007   "Transition Metal Oxide Catalysts and Methods Producing the Same" and "Hydrogen Evolution Catalysts for Alkaline Water Electrolysis"

Method and Apparatus for the Production of Hydrogen and Oxygen                            

                        Published Date: 4/26/07           

U.S. Patent Application S.N. 11/254,593         Publication # 2007-00899997 

VI. FINANCING

World Energy has commenced an offering of its common stock pursuant to and in reliance upon the exemption from registration by the SEC under the Securities Act of 1933, as amended.  The company seeks to sell up to twenty million shares of its restricted common stock in a Regulation S offering.  The Shares are available for sale only to third parties who are not U.S. persons (as defined in Rule 902 of Regulation S).

World Energy has engaged three separate entities to serve as its distribution managers for the Offering.  The company and the distribution managers have engaged two separate entities to serve as the escrow agent.  The escrow agent will hold funds paid by buyers and disburse company stock certificates to buyers who qualify as non-U.S. persons in a Regulation S placement and whose offers to purchase Shares are accepted by the company.

The shares sold will be offered on the lower of the closing bid price for World Energy stock as quoted on the NASDAQ Bulletin Board on the date prior to the trade date or the closing price of said shares minus an original offering discount of 15%.

The company will receive 27% of the proceeds from each accepted offer and the balance will be paid to the Distribution Manager (72%) and the Escrow Agent (1%).   The agreements terminate on December 31, 2008 unless extended in writing by both parties.  World Energy may terminate the agreement at any time with 21 days written notice.

During the six months ended June 30, 2008, the company issued a total of 17,656,710 shares of common stock in connection with the Regulation S stock offering resulting in proceeds of $662,092 to the company.  The proceeds are net of $1,784,824 of stock offering costs. In the same six month period, the company sold and issued and additional 2,340,000 shares of common stock for $241,020 cash.

On January 8, 2008, the company donated 100,000 shares of stock to an organization.  The stock was valued at the stock closing price on the date of the donation which was $0.228 resulting in a total expense of $22,800.

The company recorded $14,000 of contributed capital and related consulting expense to Hydrogen Safe Technologies during the six months ended June 30, 2008. 

VII. OUR OPINION

Our opinion of the company remains relatively unchanged. As we pointed out at the beginning of our report, the company has worked diligently, and continues to do so, to bring “green” technology to the marketplace.

And like everyone else, including the company’s shareholders, we have been somewhat frustrated with what would appear on the surface to be a painfully slow evolution from the laboratory to the marketplace. Since we last reviewed World Energy, it has spent the 12-18 months acquiring technologies and developing products that make the most sense in terms of generating the greatest return to its shareholders.

We want to stress that we are not discouraged with the company’s progress. Based on our research, we are of the opinion that World Energy will see increasing revenue from its revamped surge suppressor and control product line as we move into 2009. The only thing holding back the new line of suppressors UL approval, which we believe will be attained shortly.

We are forecasting that the revenues from that line will be approximately $500,000 will likely exceed one million dollars by the end of 2008 with a gross profit margin of 50%.

The reason for the substantial increase is the addition of senior sales talent experienced in selling products of this nature, in addition to the products being listed on the Federal government’s GSA schedule. The sales revenues from the suppressor product line will likely go a long ways towards supporting the company’s other lines of business.

With the prototype of the Pure Air system up and running successfully, this product line is well on the way to becoming a commercially viable product and should begin to generate sales by mid-2009. Even the most minimal of sales should result in revenues in the neighborhood of $500,000 the first year, with a 25% gross profit margin. We believe that the initial sales of the Pure Air system will be to the Federal government, most likely on a trial basis as the technology proves itself out.

The company’s proprietary hydrogen/oxygen gas technology, while exciting and likely to largest profit producing segment of World Energy’s commercial offerings, it is difficult to project whether the technology will generate revenue in 2009. However, from a pricing perspective, a competitor’s system currently sells for $7,800 per diesel truck. Assuming a more competitive price and a 25% net profit margin, World Energy could easily generate revenues in excess of $2,000,000 with a 25% net profit margin in the first full year of production.

We had previously estimated overall corporate expenses at about $150,000 per month or about $1,800,000 for 2008. It appears that we were pretty much on target with the number likely to come in at just about $2,000,000.

While we had previously projected a loss of about 2 cents per share for 2008, the stretched out development time for the three major product lines has of course made that impossible. However, we do believe that the losses will continue to decline in the last half of 2008 with an ending number likely to be at around a negative 23 cents per share or possibly a shade less.

We need to point out that World Energy is still for the most part a development company despite the fact that it has a seasoned product line in arena of surge suppressors and controllers. As such, our revenue and profit projections are somewhat tenuous. Should either the Pure Air or the HHO product line pick up development speed as companies become increasingly interested in licensing the technology, World Energy would likely break-even or could possibly become profitable in year 2009.

In that vein, we also feel it is critical to emphasize that the important source of profitability will likely come from simply licensing the technology to other firms that wish to either sell stand-alone products or incorporate the technology into their own proprietary offerings.

For example, manufacturers of military equipment incorporating a closed environment, such as a tank, aircraft or submarine, could license World Energy’s patents and then utilize the technology in their own air purification systems.

The same sort of logic applies to the HHO technology as utilized to increase the performance of diesel trucks. While not in the vehicle manufacturing or after-market business, World Energy could license their patents to those who are.

Furthermore, licensing their technology would not necessarily preclude the company from engaging in manufacturing activities that do not infringe on the license agreements they have in place, should they desire to do so,.

Therefore, although we cannot project at this time that World Energy will become profitable in 2009, we can see how it could easily take place. Should it happen, we will revisit our analysis and share price projection.

Regardless, we feel the company will become profitable in 2010, although we will reserve our projections until we see numbers for the second half of 2008.

Until then, we are reducing our 18 month target price on the stock of $0.92 per share based primarily on the company’s prior track record, patent portfolio and new sales team, along with what we feel is a more in-depth management team and board of directors.

We generated that estimate from the assumption that for 2009, the company should be able to generate net earnings of about $200,000 from its Pure Air system, about $1,175,000 from its HHO technology and at least $450,000 from its suppressor division, for a total of about $1,925,000, or about $0.04 per share, using an overall revenue estimate of . At a multiple of 23 (reasonable for a company of this nature) times earnings, the result is a share price of $0.92.

VIII. FINANCIAL STATEMENTS

Disclaimer

This disclaimer is an integral part of our service. Please read it before investing in any security on which we report.

Opinions are solely those of the staff of The Rudd Report and are subject to change without notice. Our reports are for information only and we do not offer securities or solicit the offer of securities of any company. Our reports are to inform the public and not to promote any company or its securities.

In the case of sponsored reports, of which World Energy Solutions is one, we do receive a set fee. We do not inform any company in advance of the nature or conclusions of our reports, nor can a company withdraw from coverage before the expiration of the one-year term. In the case of World Energy Solutions our fee for this report was $6,000.

Our reports contain factual statements and opinions. We derive these factual statements from sources that we believe are accurate. However, we do not represent that the facts presented are accurate or complete. Furthermore, the information contained in this report may become inaccurate because of the passage of time and should therefore be read for historical information only.