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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 MARCH 31, 2003
[ ] 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 29,977,191 shares of Common
Stock, par value $.001, were outstanding on May 1, 2003.
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MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet - March 31, 2003 and December 31, 2002.......................... 1
Consolidated Statements of Operations - Three months ended March 31, 2003 and 2002......... 2
Consolidated Statements of Cash Flows - Three months ended March 31, 2003 and 2002......... 3
Notes to Consolidated Financial Statements - March 31, 2003................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 12
Item 4. Controls and Procedures.................................................................... 12
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders........................................ 13
Item 6. Exhibits and Reports on Form 8-K........................................................... 13
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 4,820,954 $ 7,987,127
Accounts receivable............................................................. 451,858 234,015
Prepaid expenses................................................................ 257,331 337,589
Deferred financing costs........................................................ 100,104 313,690
---------------- ---------------
Total current assets............................................................... 5,630,247 8,872,421
Property and equipment, net........................................................ 1,374,625 1,526,983
Patents and licenses, net.......................................................... 595,098 590,269
Investment in affiliate............................................................ -- 167,412
Restricted cash.................................................................... 11,496,942 2,963,050
Security deposits.................................................................. 45,676 45,676
---------------- ---------------
$ 19,142,588 $ 14,165,811
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 208,393 $ 612,651
Accrued expenses................................................................ 664,944 615,006
Convertible unsecured debentures, net of discount............................... 2,150,422 3,029,882
Deferred income................................................................. 70,000 --
---------------- ---------------
Total current liabilities.......................................................... 3,093,759 4,257,539
Convertible secured debentures, net of discount.................................... 9,333,326 2,399,988
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, 29,689,834 and
29,027,077 shares issued and outstanding
as of March 31, 2003 and December 31, 2002, respectively..................... 29,690 29,027
Additional paid-in capital...................................................... 65,868,533 61,679,267
Deficit accumulated during development stage.................................... (59,410,242) (54,427,532)
---------------- ---------------
Total stockholders' equity......................................................... 6,487,981 7,280,762
---------------- ---------------
$ 19,142,588 $ 14,165,811
================ ===============
See notes to financial statements.
1
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED CUMULATIVE
MARCH 31, MARCH 31, AMOUNTS FROM
2003 2002 INCEPTION
---- ---- ---------
Revenues....................................... $ 55,261 $ 360,000 $ 774,653
Cost of revenues............................... 55,261 360,000 745,320
----------- ------------- ------------
Gross margin................................... -- -- 29,333
Product development and marketing.............. 1,231,499 1,729,218 12,532,986
General and administrative
(excluding non-cash charges)................. 1,070,493 1,498,373 13,188,325
Restructuring expense.......................... -- -- 104,982
Non-cash charges............................... 1,095,406 1,117,825 23,370,499
Depreciation and amortization.................. 175,297 173,789 1,673,130
Research and development....................... 305,411 363,631 7,397,422
----------- ------------- ------------
Total operating expenses....................... 3,878,106 4,882,836 58,267,344
----------- -------------- ------------
Loss from operations........................... (3,878,106) (4,882,836) (58,238,011)
Interest income/(expense)...................... (810,404) 157,616 1,405,601
Other income................................... -- -- 234,963
Equity in losses of affiliate.................. (294,200) -- (661,914)
------------ ------------- -------------
Net loss....................................... (4,982,710) (4,725,220) (57,259,361)
Preferred stock amortization................... -- -- 2,150,881
----------- ------------- ------------
Net loss applicable to common stockholders..... $(4,982,710) $ (4,725,220) $(59,410,242)
=========== ============= ============
Loss per share -- basic and diluted............ $ (.17) $ (.17) $ (2.26)
============ ============== ============
Weighted average number of shares outstanding.. 29,401,836 27,306,144 26,277,716
=========== ============= ============
See notes to financial statements.
2
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS THREE MONTHS CUMULATIVE
ENDED ENDED AMOUNTS FROM
MARCH 31, 2003 MARCH 31, 2002 INCEPTION
-------------- -------------- -------------
OPERATING ACTIVITIES
Net loss.................................... $ (4,982,710) $ (4,725,220) $ (57,259,361)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization............... 175,297 173,789 1,673,130
Amortization of discount on debentures...... 366,838 -- 388,703
Beneficial conversion feature on debentures. 234,631 -- 234,631
Amortization of deferred financing costs.... 213,586 -- 228,176
Losses on investment in affiliate........... 294,200 -- 661,914
Non-cash charges............................ 1,095,406 1,117,825 23,370,499
Changes in operating assets and liabilities:
Accounts receivable......................... (217,843) (243,098) (451,858)
Prepaid expenses and other assets........... 80,258 (55,216) (303,007)
Accounts payable and accrued expenses....... (307,388) (359,494) 1,002,644
Deferred royalty income..................... 70,000 (120,000) 70,000
------------- -------------- -------------
Net cash used in operating activities....... (2,977,725) (4,211,414) (30,384,529)
INVESTING ACTIVITIES
Purchase of property and equipment.......... (6,050) (335,988) (2,786,502)
Patent registration costs................... (21,718) (29,874) (606,351)
Investment in affiliate..................... (126,788) -- (661,914)
Purchase of investments, net................ -- (229,967) --
------------- -------------- -------------
Net cash used in investing activities....... (154,556) (595,829) (4,054,767)
FINANCING ACTIVITIES
Proceeds from issuance of common stock...... -- 60,900 34,994,850
Underwriting and other expenses of initial
public offering.......................... -- -- (3,669,613)
Proceeds from issuance of debentures........ 8,500,000 -- 14,399,988
Restricted cash............................. (8,533,892) -- (11,496,942)
Proceeds from equity private placement...... -- -- 2,736,279
Deferred financing costs.................... -- -- (328,280)
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/(used in) financing
activities............................... (33,892) 60,900 39,260,250
-------------- ------------- -------------
Net change in cash and cash equivalents..... (3,166,173) (4,746,343) 4,820,954
Cash and cash equivalents, beginning of
period................................... 7,987,127 6,348,763 --
------------- ------------- -------------
Cash and cash equivalents, end of period.... $ 4,820,954 $ 1,602,420 $ 4,820,954
============= ============= =============
NON-CASH TRANSACTIONS:
The Company issued 25,232 shares of common stock valued at $46,931 to
employees as 401(k) Plan employer matching contributions in February 2003. The
Company also converted unsecured debentures into shares of common stock during
the quarter (see Note 5).
See notes to financial statements.
3
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Millennium Cell Inc. and its wholly owned subsidiary, MCE Ventures LLC. MCE
Ventures is a Delaware limited liability corporation that was formed in 2002 to
engage in limited strategic investment activities. All significant inter-company
transactions and accounts have been eliminated.
The accompanying unaudited consolidated 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, 2002. Reclassifications were made to ensure
consistency with current year presentation.
NOTE 2--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 3--STOCK BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB")
issued FAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure. FAS 148 amends FAS No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, FAS 148 amends the disclosure requirements of FAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock based employee compensation and the effect of the
method used on reported results. The provisions of FAS 148 are effective for
financial statements for fiscal years and interim periods ending after December
15, 2002. The disclosure provisions of FAS 148 have been adopted by the Company.
FAS 148 did not require the Company to change to the fair value based method of
accounting for stock-based compensation.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation" encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has elected to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25").
4
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation:
QUARTER ENDED MARCH 31,
-----------------------
2003 2002
---- ----
Net loss attributable to common stockholders--
As reported.......................................... $(4,982,710) $(4,725,220)
Add: Total stock-based compensation expense
included in Net Loss................................. 1,095,406 1,117,825
Deduct: Total stock-based compensation expense
determined under fair value based method for all
stock option awards.................................. (1,364,750) (1,544,088)
Net loss attributable to common stockholders--
Pro forma............................................ $(5,252,054) $(5,151,483)
Net loss per share attributable to common
stockholders-- As reported........................... $(0.17) $(0.17)
Net loss per share attributable to common
stockholders-- Pro forma............................. $(0.18) $(0.19)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
QUARTER ENDED MARCH 31,
-----------------------
2003 2002
---- ----
Expected dividend yield................................... -- --
Expected stock price volatility........................... .69 .69
Risk-free interest rate................................... 3.68% 3.68%
Expected option term...................................... 5 years 5 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. The Company's options have characteristics significantly different
from those of traded options, and changes in the subjective input assumptions
can materially affect the fair value estimate. Based upon the above assumptions,
the weighted average fair value of stock options granted at market was $1.44 and
$4.13 in the first quarter of 2003 and 2002, respectively.
NOTE 4--OPTIONS, WARRANTS AND NON-CASH CHARGES
In the first quarter of 2003, the Company recorded a non-cash charge
of approximately $0.8 million related to options issued to employees below fair
value on the date of the grant in 2000. The Company will incur additional
non-cash charges related to these issuances of approximately $0.8 million for
options during the second quarter of 2003.
There are a number of outstanding stock warrants held by former
employees. The accounting methodology for these warrants requires a re-valuing
of the warrants at each period ending market price using a Black-Scholes pricing
model. During the first quarter of 2003, the Company recorded $0.3 million of
non-cash charges for changes in the fair value of affiliates' warrants. Due to
the variable nature of this accounting methodology, it is difficult to predict
the amount of additional non-cash charges the Company will incur related to
these warrants during future periods.
NOTE 5--SECURED AND UNSECURED DEBENTURES
In December 2002, the Company issued convertible unsecured debentures
with a principal amount of $3.5 million. Interest accrues at a rate of 4% per
annum with payments due quarterly. The debentures were originally due June 30,
2003, however, the holder and the Company agreed to extend the due date to
September 30, 2003. During the quarter ended March 31, 2003, the Company
converted approximately $1.2 million of unsecured debentures into 637,111 shares
of common stock. Approximately $2.3 million of unsecured debentures are
outstanding as of March 31, 2003.
5
In January 2003, the Company issued $8.5 million of convertible secured
debentures. Interest accrues at money market rates with payments due quarterly.
The secured debentures are secured by a standby letter of credit issued by
Wachovia Bank, National Association, with an aggregate face amount equal to the
outstanding principal of the secured debentures and are due in January 2006. The
Company pledged to the bank as collateral the proceeds from the sale of the
secured debentures. Therefore, the Company does not have the ability to use the
proceeds from the sale of the secured debentures until the bank pledges are
released upon conversion to unsecured debentures.
The Company is obligated in the future to register the resale of shares
issuable on conversion of the $8.5 million principal amount of secured
debentures following exchange of such secured debentures for unsecured
debentures. Each time the principal amount of outstanding unsecured debentures
is less than $1.0 million, a portion of the $8.5 million of secured debentures
will automatically convert into unsecured debentures in increments of $3.0
million, $3.0 million and $2.5 million upon effectiveness of the registration
statement relating to the underlying shares of common stock.
In accordance with APB No. 14, "Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants", the Company determined that the fair
value of the unsecured debentures and secured debentures was $3,008,017 and
$6,887,040, respectively. The resulting discounts are being amortized as
interest expense, using the effective interest method, over the original
maturity period of six months for the unsecured debentures and three years for
the secured debentures. During the quarter ended March 31, 2003, the Company
recognized a non-cash charge to interest expense of $366,838 for amortization of
discounts on debentures. To the extent conversions of unsecured debentures into
common stock are made prior to the maturity date of the debentures, the Company
records as interest expense a ratable proportion of the discount associated with
the face value of the debentures converted.
In accordance with Emerging Issues Task Force ("EITF") No. 00-27,
"Application of Issue No. 98-5 to Certain Convertible Instruments", and EITF No.
98-5, "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios", and after considering the terms
of the transaction, the Company determined that the unsecured debentures
contained an initial beneficial conversion feature ("BCF"). The BCF existed
because of a discount that will be given to the investor in the event of a
company-initiated conversion of the unsecured debentures prior to maturity.
These discounts will range from 4% to 12%, depending on the amount of debentures
converted into common stock. Accordingly, at time of conversion, the Company
will record as interest expense any applicable BCF based on the fair value of
the conversion feature on that date in the event of an early conversion of the
unsecured debentures into common stock. During the quarter ended March 31, 2003,
approximately $1,200,000 of unsecured debentures were converted into common
stock. As a result of the conversions, the Company recorded as interest expense
a non-cash charge of $234,630 for the BCF during the period. Subsequent to March
31, 2003, the Company converted an additional $1,300,000 of unsecured debentures
as of May 14, 2003.
NOTE 6--INVESTMENT IN AFFILIATE
In July 2002, the Company agreed to acquire a 50% non-controlling
interest in a European alkaline fuel cell company (the "Affiliate"). The
Company's investment is accounted for by the equity method. The Company has
evaluated its Investment in Affiliate and due to the uncertainty of the
recoverability of the investment determined that the fair value of the
investment was currently zero. As a result, the Company has written off the
Investment in Affiliate until the fair value can be readily determined.
6
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 consolidated 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,
2002.
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
We have developed a patented process called Hydrogen on Demand(TM) that
safely generates pure hydrogen or electricity from environmentally friendly raw
materials. In the process, the energy potential of hydrogen is carried in the
chemical bonds of sodium borohydride, which in the presence of a catalyst
releases hydrogen or produces electricity. The primary input components of the
reaction are water and sodium borohydride, a derivative of borax, which 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 patents covering boron-based longer-life batteries and fuel cells. Our
goal is to convert our technology from the research and development stage to
commercialization.
Our losses have resulted primarily from costs associated with product
development and research and 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
THREE MONTHS ENDED MARCH 31, 2003 VERSUS THREE MONTHS ENDED MARCH 31, 2002
Revenues. Revenues for the quarter ended March 31, 2003 were $55,261
compared to $360,000 for the same period of 2002. Revenues for the first quarter
of 2002 included the sale of large, prototype systems which were not recurring
in the first quarter of 2003.
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.
Cost of Revenues. Cost of revenues for the quarter ended March 31, 2003
were $55,261 compared to $360,000 for the same period of 2002. Cost of revenues
on prototype unit sales during the development stage are allocated from the
Product Development and Marketing expense and Research and Development expense
line items on the income statement depending on the nature of the project. The
decline in cost of revenues was due to the sale in the first quarter of 2002 of
large, prototype systems which were not recurring in the first quarter of 2003.
Product Development and Marketing Expense. Product development and
marketing expenses for the quarter ended March 31, 2003 were $1,231,499 compared
to $1,729,218 for the same period of 2002, a decrease of $497,719. This decrease
is mostly attributable to the cost reduction program implemented during the
second quarter of 2002.
7
General and Administrative Expense. General and administrative expenses
for the quarter ended March 31, 2003 were $1,070,493 compared to $1,498,373 for
the same period of 2002, a decrease of $427,880. The decrease was a result of
increased efficiency of our administrative and finance organizations as well as
the cost reduction program implemented during the second quarter of 2002.
Non-cash Charges. Non-cash charges were $1,095,406 for the quarter
ended March 31, 2003 compared to $1,117,825 for the same period of 2002, a
decrease of $22,419. The non-cash charges are related to options issued below
market to employees in 2000 and warrants issued to affiliates and other third
parties for services rendered.
Depreciation and Amortization. Depreciation and amortization was
$175,297 for the quarter ended March 31, 2003 compared to $173,789 for the same
period of 2002, an increase of $1,508. This slight increase reflects
depreciation on our newly completed lab and facilities expansion in 2002 offset
by assets that have recently fully depreciated.
Research and Development Expense. Research and development expenses
were $305,411 for the quarter ended March 31, 2003 compared to $363,631 for the
same period of 2002, a decrease of $58,220. The decrease is primarily
attributable to the cost reduction program implemented during the second quarter
of 2002.
Interest Income/(Expense). Net interest expense was $810,404 for the
quarter ended March 31, 2003 compared to interest income of $157,616 for the
same period of 2002, a change of $968,020. The increase in net interest expense
was mainly the result of interest expense and amortization of original issue
discounts and issue costs on the Company's unsecured and secured debentures
issued in December 2002 and January 2003, respectively.
We expect total interest expense of approximately $0.5 million will be
incurred during the quarter ended June 30, 2003 for the amortization of the
original issue discounts, debt issue costs and cash interest payments on the
outstanding convertible debentures. The timing of the Company's conversions of
debentures into common stock will be based on stock market conditions and
operating cash needs. Therefore, it is difficult to predict the total amount of
interest expense that will be recorded for the remainder of fiscal 2003.
Equity in losses of affiliate. In July 2002, the Company agreed to
acquire a 50% non-controlling interest in a European alkaline fuel cell company
(the "Affiliate"). The Company's investment is accounted for by the equity
method. The Company has evaluated its Investment in Affiliate and due to the
uncertainty of the recoverability of the investment determined that the fair
value of the investment was currently zero. As a result, the Company has written
off the Investment in Affiliate until the fair value can be readily determined.
LIQUIDITY AND CAPITAL RESOURCES
General
Since the inception date, we have financed our operations primarily
through our initial public offering in August 2000 and private placements of
equity and debt 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 and the net proceeds from the private equity
placement and convertible debentures totaled $14.1 million.
Convertible Debentures
In December 2002, the Company issued convertible unsecured debentures
with a principal amount of $3.5 million. Interest accrues at a rate of 4% per
annum with payments due quarterly. The debentures were originally due June 30,
2003, however, the holder and the Company agreed to extend the due date to
September 30, 2003. During the quarter ended March 31, 2003, the Company
converted approximately $1.2 million of unsecured debentures into 637,111 shares
of common stock. Approximately $2.3 million of unsecured debentures are
outstanding as of March 31, 2003.
In January 2003, the Company issued $8.5 million of convertible secured
debentures. Interest accrues at money market rates with payments due quarterly.
The secured debentures are secured by a standby letter of credit issued by
8
Wachovia Bank, National Association, with an aggregate face amount equal to the
outstanding principal of the secured debentures and are due in January 2006. The
Company pledged to the bank as collateral the proceeds from the sale of the
secured debentures. Therefore, the Company does not have the ability to use the
proceeds from the sale of the secured debentures until the bank pledges are
released upon conversion to unsecured debentures.
The Company is obligated in the future to register the resale of shares
issuable on conversion of the $8.5 million principal amount of secured
debentures following exchange of such secured debentures for unsecured
debentures. Each time the principal amount of outstanding unsecured debentures
is less than $1.0 million, a portion of the $8.5 million of secured debentures
will automatically convert into unsecured debentures in increments of $3.0
million, $3.0 million and $2.5 million upon effectiveness of the registration
statement relating to the underlying shares of common stock.
In accordance with APB No. 14, "Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants", the Company determined that the fair
value of the unsecured debentures and secured debentures was $3,008,017 and
$6,887,040, respectively. The resulting discounts are being amortized as
interest expense, using the effective interest method, over the original
maturity period of six months for the unsecured debentures and three years for
the secured debentures. During the quarter ended March 31, 2003, the Company
recognized a non-cash charge to interest expense of $366,838 for amortization of
discounts on debentures. To the extent conversions of unsecured debentures into
common stock are made prior to the maturity date of the debentures, the Company
records as interest expense a ratable proportion of the discount associated with
the face value of the debentures converted.
In accordance with Emerging Issues Task Force ("EITF") No. 00-27,
"Application of Issue No. 98-5 to Certain Convertible Instruments", and EITF No.
98-5, "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios", and after considering the terms
of the transaction, the Company determined that the unsecured debentures
contained an initial beneficial conversion feature ("BCF"). The BCF existed
because of a discount that will be given to the investor in the event of a
company-initiated conversion of the unsecured debentures prior to maturity.
These discounts will range from 4% to 12%, depending on the amount of debentures
converted into common stock. Accordingly, at time of conversion, the Company
will record as interest expense any applicable BCF based on the fair value of
the conversion feature on that date in the event of an early conversion of the
unsecured debentures into common stock. During the quarter ended March 31, 2003,
approximately $1,200,000 of unsecured debentures were converted into common
stock. As a result of the conversions, the Company recorded as interest expense
a non-cash charge of $234,631 for the BCF during the period. Subsequent to March
31, 2003, the Company converted an additional $1,300,000 of unsecured debentures
as of May 14, 2003.
Sources and Uses of Cash
As of March 31, 2003, we had $4,820,954 in cash and cash equivalents
and restricted cash of $11,496,942. Cash used in operations during the first
quarter of 2003 and 2002 totaled $2,977,725 and $4,211,414, respectively, and
related to funding our net operating losses. The decrease as compared to the
first quarter of 2002 was mainly a result of the Company's cost reduction
program implemented during the second quarter of 2002. The restricted cash
comprised $8.5 million of secured debentures issued in January 2003, $2.4
million of cash used for collateral in connection with Ballard's strategic
investment in the Company and $0.6 million of cash used for collateral as
security deposit held by our landlord in connection with the Company's amended
lease agreement. These funds used will not be available for use in operations
until the letters of credit have been reduced or terminated.
Investing activities used cash of $154,556 and $595,829 in the first
quarter of 2003 and 2002, respectively. Investing activities consisted primarily
of purchases of laboratory equipment necessary for the continuation of our
research and development activities and patent registration costs. The decrease
from the first quarter of 2003 from the same period of 2002 was a result of the
completion of our lab and facilities expansion in the third quarter of 2002.
In July 2002, the Company agreed to acquire a 50% non-controlling
interest in a European alkaline fuel cell company. The Company's investment is
accounted for by the equity method. During the first quarter of 2003, the
Company provided cash contributions of $126,788 to the Affiliate for use in
operating activities.
In April 2001, the Company amended its main operating lease to provide
for additional space for the Company's principal operating offices and
laboratories. The amended lease will expire in 2008 and will contain options to
renew for an additional 8 years and will require the Company to pay its
allocated share of taxes and operating cost in addition to the annual
9
base rent payment. Future minimum annual lease commitments including allocated
taxes and maintenance under the amended operating leases are as follows:
2003 (remaining nine months)............. $363,232
2004..................................... 484,310
2005..................................... 484,310
2006..................................... 484,310
2007..................................... 484,310
Thereafter............................... 443,950
-------
Total.................................... $2,744,422
==========
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 technology. The recoverable grant is required to
be repaid when we generate net income (defined as net sales) 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. We are obligated to repay the unpaid amount of
the original grant at the end of the ten-year period. We expect approximately
$21,000 to be repaid during the second quarter of 2003.
We believe that our current cash and cash equivalents, together with
cash available from the financings (see footnote 5) together with future
conversions of the secured and unsecured debentures, and projected cash
generated from our operations will be sufficient to satisfy anticipated cash
needs of our operations through the end of 2004. If cash consumption is higher
than anticipated, we may seek additional financing within this time frame. 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
Application of Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect our reported assets and liabilities,
revenues and expenses, and other financial information. Actual results may
differ significantly from these estimates under different assumptions and
conditions. In addition, our reported financial condition and results of
operations could vary due to a change in the application of a particular
accounting standard.
We regard an accounting estimate underlying our financial statements as
a "critical accounting estimate" if the accounting estimate requires us to make
assumptions about matters that are highly uncertain at the time of estimation
and if different estimates that reasonably could have been used in the current
period, or changes in the estimate that are reasonably likely to occur from
period to period, would have had a material effect on the presentation of
financial condition, changes in financial condition, or results of operations.
Not all of these significant accounting policies, however, require
management to make difficult, complex or subjective judgments or estimates. Our
management has discussed our accounting policies with the audit committee of our
board of directors, and we believe that our estimates relating to revenue
recognition, convertible debt and stock options described below fit the
definition of "critical accounting estimates."
Revenue Recognition
The Company's near term revenues will be derived substantially from
contracts that require the Company to deliver hydrogen generation technology,
management services, system design and prototype systems and licensing of
technology for test and evaluation. It is anticipated that revenues will be
recognized in the period in which the technology is delivered or licensed
revenue is earned.
10
Convertible Debt
The Company accounts for the issuance and conversion of convertible
debt in accordance with APB No. 14, "Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants". As a result, the Company records original
issue discounts to the extent the fair value of the debt is below the face value
of the instrument and amortizes the discount over the life of the instrument. To
the extent conversions of debt into common stock are made prior to the maturity
date of the instrument, the Company will record as interest expense a ratable
proportion of the discount associated with the face value of the debt converted.
The Company accounts for issuances of convertible debt in accordance
with Emerging Issues Task Force ("EITF") No. 00-27, "Application of Issue No.
98-5 to Certain Convertible Instruments", and EITF No. 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios". As a result of certain conversion price discounts
included within the Company's outstanding debt instruments, the Company will
record interest expense resulting from Beneficial Conversion Features as
described under the caption "Liquidity and Capital Resources" above.
Stock Options
The Company has recorded non-cash charges in the first quarter of 2003
and 2002 to 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.
The Company also discloses pro forma information regarding net income
and earnings per share that is required by SFAS No. 148. This information is
required to be determined as if the Company had accounted for its employee stock
options under the fair value method of that statement. The fair value of options
granted has been estimated at the date of grant using a Black-Scholes
option-pricing model.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. The Company's options have characteristics significantly different
from those of traded options, and changes in the subjective input assumptions
can materially affect the fair value estimate. Due to these highly subjective
assumptions, the non-cash charges incurred in the first quarter of 2003 and 2002
for warrants issued to affiliates and the pro forma disclosures of net loss and
loss per share for the first quarter of 2003 and 2002, are not likely to be
representative of non-cash charges and the pro forma effects on net loss and
loss per share, respectively, in future periods.
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 business plan, (iv)
11
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) our ability 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, 2002.
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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer and Acting Chief Financial
Officer has evaluated the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended) as of a date within 90 days prior
to the filing date of this quarterly report. Based on such evaluation, the
officer has concluded that, as of the evaluation date, the Company's disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to the Company required to be included in the
Company's reports filed or submitted under the Exchange Act.
(b) Changes in Internal Controls.
Since the evaluation date, there have not been any significant changes
in the Company's internal controls or in other factors that could significantly
affect such controls.
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) None.
(b) None.
(c) The Company issued the following shares of its common stock ("Shares") to an
institutional and accredited investor ("Investor") upon conversion of an
aggregate amount of $1,200,000 principal amount of the Company's unsecured
convertible debentures owned by the Investor:
(d) None.
12
AMOUNT OF UNSECURED NUMBER OF SHARES OF
DATE CONVERTIBLE DEBENTURES COMMON STOCK ISSUED
---- ---------------------- -------------------
1/29/03 $399,999.60 190,476
2/5/03 $500,001.75 273,225
2/14/03 $299,999.30 173,410
The issuances of the Shares of Common Stock listed above were made by
the Company in reliance upon the exemption from registration under Section 4(2)
of the Securities Act of 1933, as amended. The resale of the Shares by the
Investor is registered pursuant to a registration statement declared effective
by the Securities and Exchange Commission.
(d) None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A Special Meeting of Shareholders was held on January 23, 2003. The
meeting was called to approve issuance of $8.5 million of secured debentures to
an accredited investor as required by the rules of the NASDAQ. There were no
shareholder proposals. The results of the voting were as follows:
PROPOSAL (1): VOTES FOR VOTES AGAINST ABSTAINED TOTAL VOTES
- ------------- --------- ------------- --------- -----------
Approval of issuance of debentures as required by
the rules of the NASDAQ.................................... 19,155,103 309,178 55,030 19,519,311
There were no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.29 -- Change-in-Control Agreements made and entered into as of
January 1, 2003 by and between Millennium Cell Inc. and Adam
P. Briggs and Schedule of Other Change-in-Control Agreements
99.1 -- Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of Sarbanes-
Oxley Act of 2002
99.2 -- Certification of Acting Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On January 27, 2003, the Company filed a Form 8-K under Item 5
(Other Events) and Item 7 (Exhibits) to announce a favorable
shareholder vote approving the issuance of secured convertible
debentures; and the receipt of a letter from NASDAQ denying the
Company's compliance plan for continued listing on the NASDAQ National
Market. Also announced was that the Company had requested an appeal
hearing with the NASDAQ Listing Qualifications Panel. On March 11,
2003, the SEC approved certain changes requested by the NASDAQ to the
NASDAQ's bid price rules. Given the rule changes, the NASDAQ Listing
Qualifications Panel determined that the Company complies with all
requirements for continued listing on the NASDAQ National Market and
closed the Company's hearing file.
On January 27, 2003, the Company also filed a Form 8-K under
Item 5 (Other Events) to announce the resignation of Norman R.
Harpster, Jr., the Company's Chief Financial Officer and the
appointment of Stephen S. Tang, the Company's President and Chief
Executive Officer as Acting Chief Financial Officer.
13
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/ Stephen S. Tang
-----------------------
Stephen S. Tang
President, Chief Executive Officer and
Acting Chief Financial Officer
May 14, 2003
14
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Stephen S. Tang, President and Chief Executive Officer of Millennium Cell
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Millennium Cell Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
By /s/ Stephen S. Tang
Stephen S. Tang
President, Chief Executive Officer and
Acting Chief Financial Officer
15
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Stephen S. Tang, Acting Chief Financial Officer of Millennium Cell Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Millennium Cell Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
By /s/ Stephen S. Tang
Stephen S. Tang
President, Chief Executive Officer and
Acting Chief Financial Officer
16