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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
000-31083
(COMMISSION FILE NUMBER)
MILLENNIUM CELL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-3726792
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
ONE INDUSTRIAL WAY WEST,
EATONTOWN, NEW JERSEY 07724
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (732) 542-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 28,395,345 shares of Common
Stock, par value $.001, were outstanding on August 1, 2002.
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MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheet - June 30, 2002 and December 31, 2001 ............................... 1
Condensed Statements of Operations - Three and Six months ended June 30, 2002 and 2001 ...... 2
Condensed Statements of Cash Flows - Six months ended June 30, 2002 and 2001 ................ 3
Notes to Condensed Financial Statements - June 30, 2002 ..................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk .................................. 10
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ................................................... 11
Item 6. Exhibits and Reports on Form 8-K ............................................................ 12
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED BALANCE SHEET
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents.............................. $9,316,309 $ 6,348,763
Accounts receivable.................................... 120,000 129,000
Prepaid expenses....................................... 339,344 352,198
Held-to-maturity investments........................... 2,355,882 11,067,175
---------- -----------
Total current assets..................................... 12,131,535 17,897,136
Property and equipment, net.............................. 1,768,529 1,177,483
Patents and licenses, net................................ 557,524 530,706
Other assets............................................. 643,768 634,648
---------- -----------
$15,101,356 $20,239,973
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 447,701 $ 223,101
Accrued expenses....................................... 766,708 1,395,727
Deferred income........................................ 2,408,988 2,528,988
---------- -----------
Total current liabilities................................ 3,623,397 4,147,816
Refundable grant obligation.............................. 227,522 227,522
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 authorized
shares, none issued and outstanding
Common stock, $.001 par value; authorized 70,000,000
shares, 28,395,345 and 27,292,077 shares issued and
outstanding as of June 30, 2002 and December 31, 2001,
respectively 28,396 27,292
Additional paid-in capital............................. 58,507,335 54,140,914
Deficit accumulated during development stage........... (47,285,294) (38,303,571)
----------- -----------
Total stockholders' equity............................... 11,250,437 15,864,635
----------- -----------
$15,101,356 $20,239,973
=========== ===========
See notes to financial statements.
1
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED CUMULATIVE
JUNE 30, JUNE 30, JUNE 30, JUNE 30, AMOUNTS FROM
2002 2001 2002 2001 INCEPTION
---- ---- ---- ---- ---------
Revenue .......................................... $ 20,282 $ -- $ 380,282 $ -- $ 380,282
Cost of revenue .................................. 20,282 -- 380,282 -- 380,282
Gross margin ..................................... -- -- -- -- --
Product development and marketing ................ 1,469,726 $ 1,307,078 3,198,944 2,168,037 8,712,116
General and administrative
(excluding non-cash charges) ................... 980,783 1,368,216 2,479,156 2,216,901 10,544,045
Non-cash charges ................................. 1,075,499 1,942,830 2,193,324 4,468,156 20,320,166
Restructuring expense ............................ 104,982 -- 104,982 -- 104,982
Depreciation and amortization .................... 180,655 112,621 354,444 206,323 1,141,302
Research and development ......................... 541,209 632,754 904,840 1,122,703 6,481,475
------------ ------------ ----------- ------------ ------------
Total operating expenses ......................... 4,352,854 5,363,499 9,235,690 10,182,120 47,304,086
------------ ------------ ----------- ------------ ------------
Loss from operations ............................. (4,352,854) (5,363,499) (9,235,690) (10,182,120) (47,304,086)
Interest income .................................. 96,351 326,030 253,967 724,485 2,169,673
------------ ------------ ----------- ------------ ------------
Net loss ......................................... (4,256,503) (5,037,469) (8,981,723) (9,457,635) (45,134,413)
Preferred stock amortization ..................... -- -- -- -- 2,150,881
------------ ------------ ----------- ------------ ------------
Net loss applicable to common stockholders ....... $ (4,256,503) $ (5,037,469) $(8,981,723) $(9,457,635) $(47,285,294)
============ ============ =========== ============ ============
Loss per share -- basic and diluted .............. $ (.15) $ (.19) $ (.33) $ (.35) $ (1.84)
============ ============ =========== ============ ============
Weighted-average number of shares outstanding . 27,506,729 27,183,304 27,406,990 27,175,685 25,721,520
============ ============ =========== ============ ============
See notes to financial statements.
2
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED CUMULATIVE
JUNE 30, JUNE 30, AMOUNTS FROM
2002 2001 INCEPTION
---- ---- ---------
OPERATING ACTIVITIES
Net loss $(8,981,723) $ (9,457,635) $(45,134,413)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 354,444 206,323 1,141,302
Non-cash charges 2,193,324 4,468,156 20,320,166
Changes in operating assets and liabilities:
Accounts receivable 9,000 -- (120,000)
Prepaid expenses and other assets 12,854 135,083 (385,020)
Accounts payable and accrued expenses (404,419) (81,225) 1,214,409
Deferred income (120,000) -- 2,408,988
----------- ------------ ------------
Net cash used in operating activities (6,936,520) (4,729,298) (20,554,568)
INVESTING ACTIVITIES
Purchase of property and equipment (916,809) (187,731) (2,697,322)
Patent registration costs (55,499) (76,181) (520,033)
Cash restricted for lease deposit (9,120) -- (598,092)
(Purchase) sale of investments, net 8,711,293 (17,015,864) (2,355,882)
----------- ------------ ------------
Net cash provided by (used in) investing
activities 7,729,865 (17,279,776) (6,171,329)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 81,201 -- 34,994,851
Underwriting and other expenses of initial
public offering -- -- (3,669,613)
Proceeds from PIPE financing, net of fees 2,093,000 -- 2,093,000
Proceeds from capital contribution -- 500,000
Payment of note payable -- -- (250,000)
Proceeds from grant -- -- 227,522
Proceeds from sale of preferred stock -- -- 2,146,446
----------- ------------ ------------
Net cash provided by financing activities 2,174,201 -- 36,042,206
----------- ------------ ------------
Net change in cash and cash equivalents 2,967,546 (22,009,074) 9,316,309
Cash and cash equivalents, beginning of
period 6,348,763 30,098,701 --
----------- ------------ ------------
Cash and cash equivalents, end of period $ 9,316,309 $ 8,089,627 $ 9,316,309
=========== ============ ============
See notes to financial statements.
3
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
known adjustments (which consist primarily of normal recurring adjustments)
considered necessary for a fair presentation have been included. The interim
statements should be read in conjunction with our Annual Report on Form 10-K for
the year ended December 31, 2001.
NOTE 2--INVESTMENTS
At June 30, 2002, Millennium Cell Inc. (the "Company") held $2.4 million
of held-to-maturity investments in bank certificates of deposits stated at
amortized cost, with a weighted-average yield of 2.1%. At June 30, 2002,
amortized cost approximated fair value. Interest income is recognized using the
straight-line method over the lives of the securities. The Company's investments
will mature during the fourth quarter of 2002.
NOTE 3--EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing income available
to common stockholders by the weighted average number of common shares actually
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. All such securities were
anti-dilutive for all periods presented.
NOTE 4--OPTIONS, WARRANTS AND NON-CASH CHARGES
In the second quarter of 2002, the Company recorded a non-cash charge of
approximately $1.0 million related to options issued to employees in 2000. The
Company will incur additional non-cash charges related to employees of
approximately $4.1 million for options over the vesting period as follows: Third
quarter 2002-$1.0 million, Fourth quarter 2002-$1.0 million and 2003-$2.1
million.
In the second quarter of 2002, the Company also incurred a non-cash
charge of $0.1 million related to the fair value of warrants issued to
affiliates. Certain affiliates have the ability to earn new awards based on
certain milestones and service periods. The accounting methodology requires a
re-valuing of certain earned warrants at each period ending market price using a
Black-Scholes pricing model. Due to this variable accounting methodology, it is
difficult to predict the amount of additional non-cash charges the Company will
incur related to these warrants.
NOTE 5 -- RESTRUCTURING EXPENSE
During the second quarter of 2002, the Company incurred and paid
restructuring expenses of approximately $0.1 million for severance and legal
costs related to 14 employee separations. The plan of restructuring was
communicated and all employee separations were complete prior to June 30, 2002.
As of June 30, 2002, the Company has 40 employees.
4
NOTE 6 -- FINANCING TRANSACTION
On June 19, 2002, the Company entered into a private placement financing
transaction with two institutional and accredited investors pursuant to the
terms of a Securities Purchase Agreement among the Company and the purchasers
(the "Purchase Agreement"). The private placement was exempt from registration
under the Securities Act of 1933, as amended, pursuant to Section 4(2) of such
Act.
The placement consisted of the sale on June 19, 2002 of 1,075,269 shares
of common stock, par value $0.001 per share and warrants (with an exercise price
of $3.93) to purchase 268,817 shares of common stock of the Company for gross
proceeds of $3.0 million. Pursuant to the terms of the Purchase Agreement, one
of the investors will acquire, subject to satisfaction of certain conditions
that are outside of its control, $12 million in Secured Convertible Debentures
(the "Debentures"), convertible into common stock of the Company, subject to
certain terms and conditions, and warrants. Debentures with a principal amount
of $9 million (the "Initial Debentures") and warrants to acquire 624,029 shares
will be issued upon effectiveness of the registration statement relating to the
underlying shares of common stock and the remaining $3 million (the "Additional
Debentures") and warrants to acquire 208,010 shares will be issued if, among
other things, shareholder approval, as required by the Rules of the NASDAQ, is
received and a registration statement relating to the underlying shares is
effective. The Debentures will be due 3 years from the issuance of the Initial
Debentures.
The Company's obligations under the Debentures will be secured by a
standby letter of credit issued by Wachovia Bank, with an aggregate face amount
equal to the outstanding principal of the Debentures. The Company will pledge to
the bank as collateral the proceeds from the sale of the Debentures. Therefore,
the Company will not have the ability to use the proceeds from the sale of the
debentures until the bank pledges are released.
The Company is obligated to register the resale of the shares sold in the
private placement and the common stock issuable upon the conversion of the
Debentures and exercise of the warrants. The Company filed the Registration
Statement No. 333-92144 on Form S-3 with the SEC on July 9, 2002, (the
"Registration Statement"). As of the time of filing of this report, the SEC has
not yet declared the Registration Statement effective and the Company can not
provide assurance as to when, if at all, the SEC will declare the Registration
Statement effective and the Debentures will be funded. If the SEC does not
declare the Registration Statement effective as to the shares of common stock
issuable upon conversion of the Debentures and the related warrants, the Company
is relieved of its obligation to file a registration statement as to such
securities. The Company would continue to be obligated to file, and have
declared effective, a registration statement as to the shares of common stock
issued June 19, 2002 and the shares issuable upon exercise of the related
warrants. Penalties will be payable by the Company if, among other things, the
Registration Statement is not declared effective by October 17, 2002.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
accompanying Condensed Financial Statements and Notes thereto included within
this report. In addition to historical information, this Form 10-Q and the
following discussion contain forward-looking statements that reflect our plans,
estimates, intentions, expectations and beliefs. See the discussion contained
herein under the caption "Forward-Looking Statements" for more information. Our
actual results could differ materially from those discussed in the
forward-looking statements. The discussion below should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
2001.
GENERAL
We were formed as a Delaware limited liability company on December 17,
1998, and organized and began operations on January 1, 1999 (inception date). We
were converted into a Delaware corporation on April 25, 2000 when all of the
outstanding equity interests of the limited liability company were converted
into shares of common stock of the corporation. Unless otherwise indicated, all
information that we present in this Form 10-Q for any date or period gives
effect to the conversion as if it had occurred on that date or as of the
beginning of that period and all references to common stock for periods before
the conversion mean our issued and outstanding membership interests.
OVERVIEW
Millennium Cell Inc. is a technology solutions company in the
hydrogen-fuel generation and storage marketplace. We seek to license our
proprietary technology and to provide system design, engineering and management
services to governments and commercial entities. We have developed and are
pursuing a multi-faceted patent portfolio in the United States and abroad to
protect and advance a proprietary process called Hydrogen on Demand(TM) that
safely generates pure hydrogen from environmentally friendly raw materials. In
the process, the energy potential of hydrogen is carried in the chemical bonds
of sodium borohydride--a derivative of borax. Borax is found in substantial
natural reserves globally. Hydrogen from this system can be used to power fuel
cells, as well as fed directly to internal combustion engines. We also have a
patented design for boron-based longer-life batteries and fuel cells.
Our goal is to convert our technology from the research and development
stage to commercialization by solving particular technological challenges for
our customers. Our potential revenue for the next several years is likely to
include up-front license fees, research contracts with various federal, state
and local agencies, collaborations with other companies, management services,
and royalty payments or joint venture revenue from licensees or strategic
partnerships.
We incurred net losses in the second quarter of 2002 and 2001 of
$4,256,503 and $5,037,469 respectively. As of June 30, 2002, we had an
accumulated deficit of $47,285,294. The following table disaggregates the
Company's net operating losses from incurred non-cash charges and preferred
dividends:
NON-CASH
NET LOSS CHARGES
EXCLUDING AND
NON-CASH PREFERRED ACCUMULATED
CHARGES DIVIDENDS DEFICIT
------- --------- -------
Period from January 1, 1999 (inception) to June 30, 2000 .. $ (2,237,759) $ (1,424,757) $ (3,662,516)
Period from July 1, 2000 to December 31, 2000* ............ (3,677,221) (11,511,505) (15,188,726)
Period from January 1, 2001 to December 31, 2001 .......... (12,110,868) (7,341,461) (19,452,329)
Period from January 1, 2002 to June 30, 2002 .............. (6,788,399) (2,193,324) (8,981,723)
------------ ------------ ------------
Cumulative Amount From Inception .......................... $(24,814,247) $(22,471,047) $(47,285,294)
============ ============ ============
* Our initial public offering was completed on August 9, 2000.
6
Our losses have resulted primarily from costs associated with research
and product development activities as well as non-cash amortization of preferred
stock and non-cash charges related to the issuance of stock options and warrants
to employees and third parties. As a result of planned expenditures in the areas
of research, product development and marketing and additional non-cash charges
relating to employee stock options, we expect to incur additional operating
losses for the foreseeable future.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001.
Revenues. We recorded $380,282 of revenues during the six months ended
June 30, 2002. The revenues were attributable to sales of prototype Hydrogen on
Demand(TM) systems. There were no revenues in the six months ended June 30,
2001.
In the near-term, revenues are expected to be derived substantially from
up-front license fees, research contracts with various federal, state and local
agencies, collaborations with other companies, management services, and royalty
payments or joint venture revenue from licensees or strategic partnerships.
Revenues will be recognized in the period in which technology is delivered,
licensing revenues are earned, or as services are performed. Up-front payments
related to licensing or services agreements will be amortized over the license
or servicing term.
Cost of Revenues. We recorded $380,282 cost of revenues during the six
months ended June 30, 2002. There was no cost of revenues in the six months
ended June 30, 2001.
Product Development and Marketing Expenses. Product development and
marketing expenses for the six months ended June 30, 2002 were $3,198,944
compared to $2,168,037 in the six months ended June 30, 2001, an increase of
$1,030,907. This increase is mostly attributable to the growth of our design and
engineering capabilities in the latter half of 2001 to support our technology's
evolution from research to commercialization. Expenses also rose due to an
increase in business development and marketing capabilities since early 2001 to
support our business plan.
General and Administrative Expenses. General and Administrative expenses
were $2,479,156 for the six months ended June 30, 2002 compared to $2,216,901 in
the six months ended June 30, 2001, an increase of $262,255. This was due
largely to the ramp up of our financial, administrative and investor relations'
staffing and infrastructure since the first quarter of 2001.
Non-cash Charges. Non-cash charges were $2,193,324 for the six months
ended June 30, 2002 compared to $4,468,156 in the six months ended June 30,
2001, a decrease of $2,274,832. The decrease was mostly attributable to the
completion of vesting in 2001 of warrants issued to affiliates during 2000 and
the forfeiture of unvested employee options during the fourth quarter of 2001.
Depreciation and Amortization. Depreciation and amortization was $354,444
for the six months ended June 30, 2002 compared to $206,323 in the six months
ended June 30, 2001, an increase of $148,121. The increase in depreciation and
amortization is primarily related to leasehold improvements of our expanded
facilities and additional laboratory equipment purchased since June 30, 2001. We
expect depreciation and amortization to continue to increase as we complete the
expansion of our laboratories and pursue patents on new technologies.
Research and Development Expenses. Research and development expenses were
$904,840 for the six months ended June 30, 2002 compared to $1,122,703 in the
six months ended June 30, 2001, a decrease of $217,863. The decrease is
primarily attributable to the recovery of project-specific research costs from
sales of prototype units during the six months ended June 30, 2002, partially
offset by increased staffing and research projects since the first quarter of
2001.
Interest Income. Net interest income was $253,967 for the six months
ended June 30, 2002 compared to $724,485 in the six months ended June 30, 2001,
a decrease of $470,518. The decrease in net interest income was the result of
declining average cash balances and interest rate decreases from 2001 to 2002.
7
LIQUIDITY AND CAPITAL RESOURCES
Since the inception date, we have financed our operations primarily
through our initial public offering in August 2000 and private placements of
equity securities. In 1999, we issued $1,250,000 of membership interests in
Millennium Cell LLC for cash, which subsequently were converted into our common
stock as of April 25, 2000. We also received a capital contribution of $500,000
in the first quarter of 2000, and in May 2000, we sold 759,368 shares of Series
A preferred stock, which automatically converted into 759,368 shares of common
stock upon the completion of our initial public offering. The net proceeds from
our initial public offering totaled approximately $29.9 million.
In October 2000, we received $2.4 million in cash from Ballard Power
Systems Inc. ("Ballard") as an advance for prospective royalties pursuant to a
product development agreement between us and Ballard. Under certain
circumstances, this advance may be refundable to Ballard. In addition, we have
granted to Ballard a warrant to purchase up to 400,000 shares of our common
stock. Upon completion of certain stages of product development, the parties
must negotiate in good faith for the grant of a license of the Company's
technology to Ballard in certain fields of use, at which time prepaid royalties
may be earned and the warrants will be issued and recorded at fair value. The
Company believes it has achieved the product development milestones and has
commenced negotiations with Ballard regarding the license. The Company is unable
to predict the outcome of these negotiations and whether the prospective
royalties will ultimately be earned or the warrants issued.
On June 19, 2002, the Company entered into a private placement financing
transaction with two institutional and accredited investors pursuant to the
terms of a Securities Purchase Agreement among the Company and the purchasers
(the "Purchase Agreement"). The private placement was exempt from registration
under the Securities Act of 1933, as amended, pursuant to Section 4(2) of such
Act.
The placement consisted of the sale on June 19, 2002 of 1,075,269 shares
of common stock, par value $0.001 per share and warrants (with an exercise price
of $3.93) to purchase 268,817 shares of common stock of the Company for gross
proceeds of $3.0 million. Pursuant to the terms of the Purchase Agreement, one
of the investors will acquire, subject to satisfaction of certain conditions
that are outside of its control, $12 million in Secured Convertible Debentures
(the "Debentures"), convertible into common stock of the Company, subject to
certain terms and conditions, and warrants. Debentures with a principal amount
of $9 million (the "Initial Debentures") and warrants to acquire 624,029 shares
will be issued upon effectiveness of the registration statement relating to the
underlying shares of common stock and the remaining $3 million (the "Additional
Debentures") and warrants to acquire 208,010 shares will be issued if, among
other things, shareholder approval, as required by the Rules of the NASDAQ, is
received and a registration statement relating to the underlying shares is
effective. The Debentures will be due 3 years from the issuance of the Initial
Debentures.
The Company's obligations under the Debentures will be secured by a
standby letter of credit issued by Wachovia Bank, with an aggregate face amount
equal to the outstanding principal of the Debentures. The Company will pledge to
the bank as collateral the proceeds from the sale of the Debentures. Therefore,
the Company will not have the ability to use the proceeds from the sale of the
debentures until the bank pledges are released.
The Company is obligated to register the resale of the shares sold in the
private placement and the common stock issuable upon the conversion of the
Debentures and exercise of the warrants. The Company filed the Registration
Statement No. 333-92144 on Form S-3 with the SEC on July 9, 2002, (the
"Registration Statement"). As of the time of filing of this report, the SEC has
not yet declared the Registration Statement effective and the Company can not
provide assurance as to when, if at all, the SEC will declare the Registration
Statement effective and the Debentures will be funded. If the SEC does not
declare the Registration Statement effective as to the shares of common stock
issuable upon conversion of the Debentures and the related warrants, the Company
is relieved of its obligation to file a registration statement as to such
securities. The Company would continue to be obligated to file, and have
declared effective, a registration statement as to the shares of common stock
issued June 19, 2002 and the shares issuable upon exercise of the related
warrants. Penalties will be payable by the Company if, among other things, the
Registration Statement is not declared effective by October 17, 2002.
As of June 30, 2002, we had $11.7 million in cash and cash equivalents and
held-to-maturity investments. Cash used in operations totaled $2,725,106 and
$2,268,839 in the second quarter of 2002 and 2001, respectively, and related to
the growth in operating expenses as a result of increased staffing, higher
occupancy costs for our larger facilities and for increased business capacity
since the first quarter of 2001. In connection with the Company's amended lease
agreement, the Company issued a letter of credit to the landlord for $588,972 in
lieu of cash security deposit in the fourth quarter of 2001. The letter of
credit was collateralized with a portion of the Company's cash, which is
classified as Other Assets. The funds used for collateral will not be available
for use in operations.
8
Investing activities provided cash of $8,325,694 and $2,235,974 in the
second quarter of 2002 and 2001, respectively. Investing activities in the
second quarter of 2002 and 2001 consisted primarily of the maturity of
held-to-maturity investments in high-grade government bonds. Excluding
investments in held-to-maturity investments, cash used in investing activities
in the second quarter of 2002 increased $567,884 from the second quarter of
2001, mostly due to increased spending on leasehold improvements to complete our
new laboratories for their intended use. Our capital spending during the six
months ended June 30, 2002 was $0.9 million. We expect to spend approximately
$0.1 million to complete our laboratories. We expect the laboratories will be
complete and in use beginning in August 2002. We expect to spend approximately
$0.1 million to register and pursue patents on our technology. The total capital
spending and capitalized patent costs for fiscal 2002 are expected to be
approximately $1.1 million.
Between January 1999 and April 2000, we received an aggregate of $227,522
from a recoverable grant award from the State of New Jersey Commission on
Science and Technology. The funds were used to partially fund costs directly
related to development of our fuel cell technology. The recoverable grant is
required to be repaid when we generate net income in a fiscal year. The
repayment obligation, which begins in June 2001, ranges from 1% to 5% of net
income over a ten-year period and shall not exceed 200% of the original grant.
We are obligated to repay the unpaid amount of the original grant at the end of
the ten-year period.
During the second quarter of 2002, the Company incurred and paid
restructuring costs of approximately $0.1 million for severance and legal costs
related to 14 employee separations. The plan of restructuring was communicated
and all employee separations were complete prior to June 30, 2002. As of June
30, 2002, the Company has 40 employees. Additionally, during the second quarter,
the Company took other cost savings actions to reduce our operating expenses.
After the impact of the cost savings actions, our operating expenses for
fiscal year 2002 are estimated as follows:
OPERATING EXPENSES: ACTUAL ACTUAL ESTIMATE
(DOLLARS IN MILLIONS) Q1 Q2 Q3 Q4 FISCAL 2002
------ ------ ---- ---- -----------
Cash operating expenses $3.6 $3.1(1) $2.6 $2.3 $11.6
Depreciation, amortization and
non-cash charges 1.3 1.2 1.2 1.3 5.0
----- ---- ---- ---- -----
TOTAL OPERATING EXPENSES $4.9 $4.3 $3.8 $3.6 $16.6
==== ==== ==== ==== =====
(1) Includes a restructuring charge of $0.1 million.
We believe that our current cash and cash equivalents, together with cash
available from the financing (see footnote 6) announced on June 19, 2002, will
be sufficient to satisfy anticipated cash needs of our operations into the
latter half of 2004. If cash consumption is higher than anticipated or the
realization of savings as a result of the restructuring plan is different than
anticipated or the recent financing is not ultimately funded and released from
the pledge to the bank, we may seek additional financing within this timeframe.
We may raise additional funds through public or private financings,
collaborative relationships or other arrangements. We cannot assure you that
additional funding, if sought, will be available or will be on terms favorable
to us. Further, any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may involve restrictive covenants. Our failure
to raise capital when needed may harm our business and operating results.
CRITICAL ACCOUNTING POLICIES
Our financial statements are based on the selection and application of
significant accounting policies, which require management to make significant
estimates and assumptions. We believe that the following are some of the more
critical judgment areas in the application of our accounting policies that
currently affect our financial condition and results of operations.
9
Revenue Recognition
In the near-term, the Company's revenues are expected to be derived
substantially from up-front license fees, research contracts with various
federal, state and local agencies, collaborations with other companies,
management services, and royalty payments or joint venture revenue from
licensees or strategic partnerships. Revenues will be recognized in the period
in which technology is delivered, licensing revenues are earned, or as services
are performed. Up-front payments related to licensing or services agreements
will be amortized over the license or servicing term.
Stock Options
The Company has recorded non-cash charges in the second quarter of 2002,
in fiscal 2001 and 2000 for the fair value of warrants issued to certain
affiliates and third parties. Certain affiliates have the ability to earn new
awards based on defined milestones and service periods. The accounting
methodology requires a re-valuing of the related earned warrants at each
reporting period using a Black-Scholes pricing model. Due to this variable
accounting methodology, it is difficult to predict the amount of additional
non-cash charges the Company will incur related to these warrants. The fair
value of the Company's options and warrants issued to affiliates was estimated
at the date of grant using a Black-Scholes option-pricing model.
The Company also records non-cash charges for the difference between the
grant price and market price on the date of grant related to certain stock
options issued to employees and elected directors below market prices as defined
by APB No. 25. The non-cash charge is recognized ratably over the related
vesting period of the respective option contracts.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements (within the meaning of
the Private Securities Litigation Reform Act of 1995) that are subject to risks
and uncertainties. Statements contained herein that are not statements of
historical fact may be deemed to be forward-looking information. When we use
words such as "plan," "believe," "expect," "anticipate," "intend" or similar
expressions, we are making forward-looking statements. You should not rely on
forward-looking statements because they are subject to a number of assumptions
concerning future events, and are subject to a number of uncertainties and other
factors, many of which are outside of our control, that could cause actual
results to differ materially from those indicated. Please note that we disclaim
any intention or obligation to update or revise any forward-looking statements
whether as a result of new information, future events or otherwise. These
factors include, but are not limited to, the following: (i) the cost and timing
of development and market acceptance of, and the availability of components and
raw materials required by a hydrogen fuel storage and delivery system, (ii)
competition from current, improving and alternate power technologies, (iii) our
ability to raise capital at the times, in the amounts and at costs and terms
that are acceptable to fund our businees plan, (iv) our ability to protect our
intellectual property, (v) our ability to achieve budgeted revenue and expense
amounts, (vi) our ability to generate revenues from the sale or license of, or
provision of services related to, our technology , (vii) our ability to form
strategic alliances or partnerships to help promote our technology and achieve
market acceptance, (viii) to generate design, engineering, or management
services revenue opportunities in the hydrogen generation or fuel cell markets,
and (ix) other factors discussed under the caption "Investment Considerations"
in our Annual Report on Form 10-K for the year ended December 31, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk represents the risk of loss that may impact our financial
position, operating results or cash flows due to changes in U.S. interest rates.
This exposure is directly related to our normal operating activities. Our cash
and cash equivalents are invested with high quality issuers and are generally of
a short-term nature. As a result, we do not believe that near-term changes in
interest rates will have a material effect on our future results of operations.
Our systems' ability to produce energy depends on the availability of
sodium borohydride, which has a limited commercial use and is not manufactured
in vast quantities. There are currently only two major manufacturers of sodium
borohydride and there can be no assurance that the high cost of this specialty
chemical will be reduced. Once we commence full operations in the future, we may
need to enter into long-term supply contracts to protect against price increases
of sodium borohydride. There can be no assurance that we will be able to enter
into these agreements to protect against price increases.
10
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) None.
(b) None.
(c) On June 19, 2002, the Company sold an aggregate 1,075,269 shares of
common stock and warrants (with an exercise price of $3.93) to purchase 268,817
shares of common stock of the Company for gross proceeds of $3 million to two
institutional and accredited investors, pursuant to the terms of a Securities
Purchase Agreement. In addition, pursuant to the terms of the Securities
Purchase Agreement, one of the investors will acquire, subject to satisfaction
of certain conditions that are outside of its control, $12 million in Secured
Convertible Debentures (the "Debentures") and warrants. See Note 6 to Unaudited
Condensed Financial Statements of the Company for the period ended June 30, 2002
contained herein for a description of the Debentures to be issued and funded.
The holder of the Debentures may convert all or any portion of the
Debentures at any time. The Company may convert all or any portion of the
Debentures at any time after the earlier of (i) August 19, 2003 and (ii) the one
year anniversary of the issuance of the Initial Debentures at a conversion price
of $4.25 if (x) the average closing price during 30 consecutive trading days
following June 19, 2003 is equal to or greater than $5.10 and (y) the closing
price for each of 15 trading days (which need not be consecutive) during such 30
consecutive trading day period is equal to or greater than $5.10 and if the
Company is in compliance with a number of other equity conditions. At any time
and from time to time after (i) the later of the August 19, 2002 and the
effectiveness of the Registration Statement, with respect to the Initial
Debentures or (ii) the date on which the Initial Debentures shall no longer be
outstanding, with respect to the Additional Debentures, and if certain equity
conditions are met, the Company has the right, upon 10 trading days' prior
notice, to require the conversion of $500,000 of Debentures, subject to the
increase under certain circumstances up to $2,500,000 of Debentures. The
conversion prices at the time and to the extent of the conversion will be set at
a discount ranging from 4% to 12% of the volume weighted average closing price
for the 10 trading days prior to the conversion. All conversions described
above, however, may not be effected to the extent that it would result in a
holder of Debentures owning, together with its affiliates, more than 9.99% of
the Company's common stock then outstanding.
In connection with the issuance of the Debentures, the Company will issue
warrants to purchase 832,039 shares of common stock. The warrants' initial
exercise price will be $3.93, but may change in the future based on certain
anti-dilution and other adjustments. The warrants will be exercisable commencing
on December 19, 2002, subject to vesting based, in part, on the conversion of
the Debentures into common stock.
The Company paid Banc of America a placement fee of $500,000 and has
agreed to pay a commission equal to 3% of the principal amount of the Debentures
as the Debentures are converted. The transaction was made in reliance upon the
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended.
For a more detailed description of the transaction, refer to the Company's
filings with the SEC on Form 8-K filed on June 26, 2002 and Form S-3
Registration Statement No. 333-92144.
(d) None.
11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Exhibit
Number Index
4.3+ Form of Secured Convertible Debenture. (Incorporated by
reference to Exhibit 4.7 to the Current Report Filed on
Form 8-K filed June 26, 2002).
4.4+ Form of Second/Third Warrant to Purchase 624,029/208,010
shares of Common Stock. (Incorporated by reference to
Exhibit 4.8 to the Current Report Filed on Form 8-K
filed June 26, 2002).
4.5+ First Warrant to Purchaser to Purchase 224,014 shares of
Common Stock dated as of June 19, 2002. (Incorporated by
reference to Exhibit 4.5 to the Current Report Filed on
Form 8-K filed June 26, 2002).
4.6+ First Warrant to Purchaser to Purchase 44,803 shares of
Common Stock dated as of June 19, 2002. (Incorporated by
reference to Exhibit 4.6 to the Current Report Filed on
Form 8-K filed June 26, 2002).
10.14+ Securities Purchase Agreement dated as of June 19, 2002
between the Company and the Purchasers. (Incorporated by
reference to Exhibit 4.3 to the Current Report Filed on
Form 8-K filed June 26, 2002).
10.15+ Registration Rights Agreement dated as of June 19, 2002
between the Company and the Purchasers. (Incorporated by
reference to Exhibit 4.4 to the Current Report Filed on
Form 8-K filed June 26, 2002).
99.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Accounting Officer Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
+ Previously filed as Exhibit to Registrant's Current Report on Form 8-K filed
June 26, 2002 and incorporated by the reference herein.
(b) Reports on Form 8-K
The following report was filed under Form 8-K during the quarter ended
June 30, 2002:
ITEM 5. OTHER EVENTS.
On June 26, 2002, Millennium Cell, Inc. announced it had
entered into a Securities Purchase Agreement with two
accredited institutional investors providing for the issuance
of common stock and warrants for gross proceeds of $3 million
and obligating one of the investors, subject to satisfaction
of conditions outside of its control, to purchase $12 million
of Secured Convertible Debentures and certain warrants.
Included in this announcement was a detailed description of
the terms and conditions of the transaction and the related
documents were filed as exhibits.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MILLENNIUM CELL INC.
(Registrant)
By: /s/ NORMAN R. HARPSTER, JR.
---------------------------------
Norman R. Harpster, Jr.
Vice President -- Finance and
International Business and Chief
Financial Officer
August 13, 2002
13