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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[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.
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-20028
VALENCE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0214673
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6504 Bridge Point Parkway, Austin, Texas 78730
---------------------------------------------------------
(Address of principal executive offices including zip
code)
(512) 527-2900
---------------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
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.
Common Stock, $0.001 par value 51,692,144
------------------------------ -----------------------------
(Class) (Outstanding at July 8, 2002)
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
PAGES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of
June 30, 2002 and March 31, 2002...................................3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for Each of the Three-
Month Periods Ended June 30, 2002 and June 30, 2001................4
Condensed Consolidated Statements of Cash Flows
for Each of the Three-Month Periods
ended June 30, 2002 and June 30, 2001..............................5
Notes to Condensed Consolidated Financial Statements...............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk........24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................26
Item 2. Changes in Securities and Use of Proceeds.........................26
Item 3. Defaults on Senior Securities.....................................26
Item 4. Submission of Matters to a Vote of Security Holders...............26
Item 5. Other Matters.....................................................26
Item 6. Exhibits and Reports on Form 8-K..................................26
SIGNATURE ..................................................................27
Page 2
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
June 30, 2002 March 31, 2002
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,068 $ 623
Trade receivables, net of allowance of $243 and $312
as of June 30, 2002 and March 31, 2002, respectively 509 362
Inventory, net 3,866 2,589
Prepaid and other current assets 1,187 1,552
----------- -----------
Total current assets 12,630 5,126
Property, plant and equipment, net 15,041 14,166
Intellectual property, net 10,877 11,239
----------- -----------
Total assets $ 38,548 $ 30,531
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 892 $ 683
Accounts payable 3,879 2,548
Accrued expenses 1,824 2,632
Grant payable 1,669 1,553
Accrued payroll and benefits 568 561
----------- -----------
Total current liabilities 8,832 7,977
Long-term interest 4,456 3,778
Long-term debt, less current portion 5,948 5,884
Long-term debt to stockholder 28,587 28,755
----------- -----------
Total liabilities 47,823 46,394
=========== ===========
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $0.001 par value, authorized:
100,000,000 shares, issued and outstanding:
51,692,144 and 45,570,144 shares at June 30,
2002 and March 31, 2002, respectively 52 46
Additional paid-in capital 346,182 331,038
Notes receivable from stockholder (4,953) (5,990)
Accumulated deficit (346,362) (336,703)
Accumulated other comprehensive loss (4,194) (4,254)
----------- -----------
Total stockholders' equity (deficit) (9,275) (15,863)
----------- -----------
Total liabililities and stockholders'
equity (deficit) $ 38,548 $ 30,531
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 3
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
-----------------------------
June 30, 2002 June 30, 2001
------------- -------------
Revenue:
Licensing and royalty revenue $ 1 $ $2,133
Battery and laminate sales 508 725
------------- -------------
Total revenues 509 2,858
Cost of sales: 2,522 2,802
------------- -------------
Gross profit (loss) (2,013) 56
Operating expenses:
Research and product development 2,798 2,541
Marketing 783 433
General and administrative 2,413 3,279
Depreciation and amortization 645 2,390
------------- -------------
Total costs and expenses 6,639 8,643
------------- -------------
Operating loss (8,652) (8,587)
Interest and other income 116 195
Interest expense (1,123) (749)
------------ -------------
Net loss (9,659) (9,141)
Net loss available to common stockholders $ (9,659) $ (9,141)
============= =============
Other comprehensive loss:
Net loss $ (9,659) $ (9,141)
Change in foreign currency
translation adjustments 60 (183)
------------- -------------
Comprehensive loss $ (9,599) $ (9,324)
============= =============
Net loss per share available to
common stockholders $ (0.19) $ (0.20)
============= =============
Shares used in computing net loss per
share available to common stockholders,
basic and diluted 51,488 45,345
============= =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 4
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Three Months
Ended Ended
June 30, 2002 June 30, 2001
-------------- -------------
Cash flows from operating activities:
Net loss $ (9,659) $ (9,141)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 645 2,390
Accretion of debt discount 339 163
Interest income on shareholder note receivable (69)
Changes in operating assets and liabilities:
Trade receivables (155) 1,886
Other current assets 415 (380)
Inventory (1,277) 709
Accounts payable 1,304 (3,416)
Accrued expenses and long-term interest (316) 948
Deferred revenue (2,500)
-------------- ------------
Net cash used in operating activities (8,773) (9,341)
-------------- ------------
Cash flows from investing activities:
Purchases of property, plant & equipment (449) (2,558)
Proceeds from investments 76
-------------- ------------
Net cash used in investing activities (449) (2,482)
-------------- ------------
Cash flows from financing activities:
Proceeds of long-term debt 600 11,349
Other long-term debt (207) (136)
Proceeds from issuance of common stock and
warrants, net of issuance costs 15,150 185
-------------- ------------
Net cash provided by financing activities 15,543 11,398
-------------- ------------
Effect of foreign exchange rates on cash
and cash equivalents 124 (812)
-------------- ------------
Increase (decrease) in cash and cash equivalents 6,445 (1,237)
Cash and cash equivalents, beginning of period 623 3,755
-------------- ------------
Cash and cash equivalents, end of period $ 7,068 $ 2,518
============== ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 5
1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
These interim condensed consolidated financial statements are unaudited
but reflect, in the opinion of management, all normal recurring
adjustments necessary to present fairly the financial position of
Valence Technology, Inc. and its subsidiaries (the "Company") as of June
30, 2002, its consolidated results of operations for each of the
three-month periods ended June 30, 2002 and June 30, 2001, and the
consolidated cash flows for each of the three-month periods ended June
30, 2002 and June 30, 2001. Because all the disclosures required by
generally accepted accounting principles are not included, these interim
condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto in
the Company's Annual Report on Form 10-K as of and for the year ended
March 31, 2002. The results for the three-month period ended June 30,
2002 are not necessarily indicative of the results to be expected for
the entire fiscal year ending March 31, 2003. The year-end condensed
consolidated balance sheet data as of March 31, 2002 was derived from
audited financial statements, but does not include all disclosures
required by generally accepted accounting principles.
During fiscal 2002, the Company completed its transition from a research
and development-focused entity to a marketing and customer-focused
entity. In accomplishing its transition, the Company successfully
executed the following milestones: launch of its Saphion(TM) technology,
establishment of a sales pipeline including generation of initial
revenues, completion of its management team, and scale up of its
manufacturing operations in Northern Ireland. Accordingly, for financial
reporting purposes, the Company transitioned out of its development
stage status.
2. LIQUIDITY AND CAPITAL RESOURCES:
At June 30, 2002, the Company had cash and cash equivalents of $7.1
million. On April 9, 2002, the Company raised net proceeds of
approximately $15.2 million through the sale of 6.122 million shares of
the Company's common stock. In addition, as of June 30, 2002, the
Company had $4.1 million available under a loan agreement and $30.0
million available under an equity line of credit financing commitment
with Berg & Berg Enterprises, LLC ("Berg & Berg"). At that same date we
had commitments for capital expenditures for the next 12 months of
approximately $571,000.
The Company's financing commitment with Berg & Berg will enable it to
access up to $5.0 million per quarter (but no more than $30.0 million in
the aggregate) in equity capital over the next two years. This
commitment is subject to stockholder approval at the Company's 2002
annual meeting to be held on August 27, 2002 and completion of
definitive documentation. In exchange for any amounts funded pursuant to
this new agreement, the Company will issue to Berg & Berg restricted
common stock at 85% of the average closing price of the Company's common
stock over the five trading days prior to the purchase date. The Company
will agree to register any shares it issues to Berg & Berg under this
agreement. Berg & Berg's obligation to fund the equity commitment is
subject to conditions including, but not limited to, the Company's
achievement of operating milestones. In addition, Berg & Berg has the
option to reduce the commitment to the extent the Company enters into a
debt or equity financing arrangement with a third party at any time
during the term of the commitment. As a result of an offering the
Company completed in April 2002, Berg & Berg may elect to reduce its
commitment to $13.5 million.
At the Company's current level of operations, it is using cash from
operations of approximately $6.0 to $9.0 million per quarter. To sustain
its operations for a longer period of time than can be funded from
operations and its commitments from Berg & Berg, the Company may need to
seek additional financing. The Company's cash requirements may vary
materially from those now planned because of changes in its operations,
including changes in relationships with original equipment manufacturers
("OEMs"), market conditions, joint venture and business opportunities,
or a request for repayment of a portion or all of its existing grants,
which totaled $14.4 million at June 30, 2002, from the Northern Ireland
Industrial Development Board, now known as Invest Northern Ireland or
the INI.
The Company believes that its existing cash and cash equivalents,
anticipated cash flows from its operating activities and available
financing will be sufficient to fund its working capital and capital
expenditure needs through fiscal 2003. If the Company's working capital
requirements and capital expenditures are greater than it expects, it
may need to raise additional capital in order to provide for its
operations or reduce its cash requirements accordingly. There can be no
assurance that additional capital will be available on acceptable terms
or at all or that appropriate cash flow reductions can be made without
adversely affecting the Company's current or future business strategy.
Page 6
3. FINANCING:
On April 9, 2002, the Company sold 6.122 million shares in a new
issuance of common stock to a select group of institutional investors,
at a price of $2.70 per share. A.G. Edwards & Sons, Inc. and Wm Smith
Securities, Incorporated served as placement agents for the offering.
The Company raised net proceeds of approximately $15.2 million in the
transaction. Proceeds from the financing will be used for working
capital purposes.
4. NET LOSS PER SHARE:
Net loss per share is computed by dividing the net loss available to
common stockholders by the weighted average shares of common stock
outstanding during the period. The dilutive effect of the options and
warrants to purchase common stock are excluded from the computation of
diluted net loss per share, since their effect is antidilutive. The
antidilutive instruments excluded from the diluted net loss per share
computation at June 30 were as follows:
2002 2001
-------------- --------------
Common stock options
Beginning of period 6,426,000 4,398,000
Granted (expired) during
the period 729,000 2,669,000
-------------- --------------
End of period 7,155,000 7,067,000
Warrants to purchase common stock 3,237,000 1,834,000
-------------- --------------
Total 10,392,000 8,901,000
============== ==============
5. INVENTORY:
Inventory consisted of the following (in thousands) at:
June 30, 2002 March 31, 2002
---------------- ----------------
Raw materials $ 2,093 $ 1,977
Work in process 1,322 591
Finished goods 451 21
---------------- ----------------
$ 3,866 $ 2,589
================ ================
6. INTELLECTUAL PROPERTY:
Intellectual property is amortized over 8 years. Intellectual property,
net of impairment, consisted of the following (in thousands) at:
June 30, 2002 March 31, 2002
--------------- ---------------
Intellectual properties $ 13,602 $ 13,602
Less: accumulated amortization (2,725) (2,363)
--------------- --------------
Intellectual properties, net
of accumulated amortization $ 10,877 $ 11,239
=============== ==============
Amortization expense on intellectual property at June 30, 2002 will be
as follows (in thousands):
Fiscal Year
----------------
Remainder of 2003 $1,088
2004 1,450
2005 1,450
2006 1,450
2007 1,450
Thereafter 3,989
--------
$10,877
========
Page 7
Amortization expense for the three months ended June 30, 2002 and June
30, 2001 was approximately $362,000, and $480,000, and respectively
7. DEBT TO STOCKHOLDER:
June 30, March 31,
2002 2002
------------- ------------
(in thousands)
2001 Loan balance $15,929 $16,436
1998 Loan balance 14,950 14,950
Unaccreted debt discount (2,292) (2,631)
------------- ------------
Balance $28,587 $28,755
============= ============
In October 2001, the Company entered into a loan agreement ("2001 Loan")
with Berg & Berg. Under the terms of the agreement, Berg & Berg agreed
to advance the Company funds of up to $20 million between the date of
the agreement and September 30, 2003. Interest on the 2001 Loan accrues
at 8.0% per annum, payable from time to time, and all outstanding
amounts with respect to the loans are due and payable on September 30,
2005. As of June 30, 2002, a total of $17,036,000 had been drawn on the
2001 Loan. On June 21, 2002, Berg & Berg agreed to reduce the principal
amount of the 2001 loan by $1,106,705, representing interest due to the
Company by Mr. Lev Dawson (See Note 10, Related Party Transactions). The
Company will have the ability to reborrow this principal as needed.
Borrowings on the 2001 Loan, net of the repayment, as of June 30, 2002,
were $15,929,000. In conjunction with the 2001 Loan, Berg & Berg
received a warrant to purchase 1,402,743 shares of the Company's common
stock at the price of $3.208 per share. The warrants were exercisable
beginning on the date they were issued and expire on August 30, 2005.
The fair value assigned to these warrants, totaling approximately
$2,768,000, has been reflected as additional consideration for the debt
financing, recorded as a discount on the debt and accreted as interest
expense, amortized over the life of the loan. The warrants were valued
using the Black-Scholes valuation method using the assumptions of a life
of 47 months, 100% volatility, and a risk free rate of 5.5%. As of June
30, 2002, a total of $530,000 has been accreted and included as interest
expense. The amount charged to interest expense on the outstanding
balance of the loan for the three months ended June 30, 2002 was
$342,000.
In July 1998, the Company entered in to an amended loan agreement ("1998
Loan") with Mr. Berg which allows the Company to borrow, prepay and
re-borrow up to $10,000,000 principal under a promissory note on a
revolving basis. In November 2000, the 1998 Loan agreement was amended
to increase the maximum amount to $15,000,000. As of June 30, 2002, the
Company had an outstanding balance of $14,950,000 under the 1998 Loan
agreement. The loan bears interest at one percent over lender's
borrowing rate (approximately 9.0% at June 30, 2002). Effective December
31, 2001, the Company and the lender agreed to extend the loan's
maturity date from August 30, 2002 to September 30, 2005. As of June 30,
2002, accrued interest on the loan totaled $3,741,000, which is included
in long-term interest. In fiscal 1999, the Company issued warrants to
purchase 594,031 shares of common stock to Carl Berg in conjunction with
the 1998 Loan agreement, as amended. The warrants were valued using the
Black Scholes valuation method and had an average weighted fair value of
approximately $3.63 per warrant at the time of issuance. The fair value
of these warrants, totaling approximately $2,159,000, has been reflected
as additional consideration for the debt financing, recorded as a
discount on the debt and accreted as interest expense to be amortized
over the life of the line of credit. As of June 30, 2002, a total of
$2,104,000 has been accreted. The amounts charged to interest expense
for the three-month periods ended June 30, 2002 and June 30, 2001 were
$335,000 and $335,000, respectively
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION:
During fiscal 2002, the Company received notification that 23 former
employees of the Mallusk, Northern Ireland facility filed claims against
the Company in connection with the reduction in work force at the
facility in March 2001. The time period for filing such claims expired
July 6, 2001, although the Tribunal may accept late claims. The Company
has successfully settled 18 of the claims for a total of $12,000. The
Company is pursuing settlement of the final 5 claims and does not expect
the potential charge to be material.
Page 8
GRANTS:
Resulting from the reduction of Northern Ireland manufacturing activity
at the end of the fiscal year ended March 31, 2001, the employment
levels specified by Northern Ireland Industrial Development Board, now
titled Invest Northern Ireland ("INI"), have not been maintained.
Consequently, the Company is in default of its agreement with the INI.
The INI is not seeking repayment and on the advice of counsel, on the
basis that successful negotiations will be concluded, the Company does
not believe that the INI will bring any legal action pursuant to the
Letter of Offer. The Company has begun discussions with the INI to end
the current agreement and enter into a new agreement more closely
aligned to current business conditions. Initial discussions with the INI
resulted in the INI releasing its potential clawback on $170,000 of
capital grants. Although it is unlikely, the INI could demand repayment
of a portion of the total amounts received, which include revenue grants
of $1.3 million and equipment grants of $13.1 million, net of the
$170,000 release. The Company's estimate of the maximum liability is
$1,669,000.
9. RELATED PARTY TRANSACTIONS:
In March 2002, the Company obtained $30 million of additional equity
financing commitment with Berg & Berg, an affiliate of Carl Berg, a
director and major shareholder in the Company. The Company's financing
commitment with Berg & Berg will enable it to access up to $5.0 million
per quarter (but no more than $30.0 million in the aggregate) in equity
capital over the next two years. This commitment is subject to
stockholder approval at the Company's 2002 annual meeting to be held on
August 27, 2002 and completion of definitive documentation. In exchange
for any amounts funded pursuant to this new agreement, the Company will
issue to Berg & Berg restricted common stock at 85% of the average
closing price of the Company's common stock over the five trading days
prior to the purchase date. The Company will agree to register any
shares it issues to Berg & Berg under this agreement. Berg & Berg's
obligation to fund the equity commitment is subject to conditions
including, but not limited to, the Company's achievement of operating
milestones. In addition, Berg & Berg has the option to reduce the
commitment to the extent the Company enters into a debt or equity
financing arrangement with a third party at any time during the term of
the commitment. As a result of an offering the Company completed in
April 2002, Berg & Berg may elect to reduce its commitment to $13.5
million.
On January 1, 1998, the Company granted options to Mr. Dawson, the
Company's Chairman of the Board, Chief Executive Officer and President,
an incentive stock option to purchase 39,506 shares, which was granted
pursuant to the Company's 1990 Plan (the "1990 Plan"). Also, an option
to purchase 660,494 shares was granted pursuant to the Company's 1990
Plan and an option to purchase 300,000 shares was granted outside of any
equity plan of the Company, neither of which were incentive stock
options (the "Nonstatutory Options"). The exercise price of all three
options is $5.0625 per share, the fair market value on the date of the
grant. The Compensation Committee of the Company approved the early
exercise of the Nonstatutory Options on March 5, 1998. The options
permitted exercise by cash, shares, full recourse notes or non-recourse
notes secured by independent collateral. The Nonstatutory Options were
exercised on March 5, 1998 with non-recourse promissory notes in the
amounts of $3,343,750 ("Dawson Note One") and $1,518,750 ("Dawson Note
Two") (collectively, the "Dawson Notes") secured by the shares acquired
upon exercise plus 842,650 shares previously held by Mr. Dawson. Since
the issuance date (the "Issuance Date") of the Dawson Notes (March 5,
1998), the largest aggregate amounts of indebtedness outstanding at any
time under Dawson Note One and Dawson Note Two were $4,119,383 and
$1,871,046, respectively. As of June 30, 2002, amounts of $3,405,911 and
$1,546,983 were outstanding under Dawson Note One and Dawson Note Two,
respectively, and under each of the Dawson Notes, interest from the
Issuance Date accrues on unpaid principal at the rate of 5.69% per
annum, or at the maximum rate permissible by law, whichever is less.
In accordance with the Dawson Notes, interest is payable annually in
arrears and had been unpaid until June 21, 2002. Accrued interest
through March 4, 2002, the last interest payment due date, totaled
$1,106,705. On June 21, 2002, the accrued interest was paid in full (See
Note 8, Debt to Stockholder). In addition, the stock price of the
Company's common stock has suffered a decline. Management believes that
this is a temporary decline and feels that the principal on the Dawson
Notes will be fully collectible.
10. GEOGRAPHIC INFORMATION:
The Company conducts its business in two geographic segments.
Page 9
Long lived asset information by geographic area at June 30, 2002 and
March 31, 2002 is as follows (in thousands):
June 30, 2002 March 31, 2002
------------- --------------
United States $ 4,641 $ 4,609
International 10,400 9,557
------------- --------------
Total $15,041 $14,166
============= ==============
Revenues by geographic area for the three-month periods ended June 30,
2002 and June 30, 2001 are as follows (in thousands):
June 30, 2002 March 31, 2002
------------- --------------
United States $ 276 $ 1,207
International 233 1,651
------------ ------------
Total $ 509 $ 2,858
============ ============
11. JOINT VENTURE AGREEMENTS:
In June 2001, the Company and Hanil Telecom reached an agreement to
terminate their joint venture. As conditions of the termination, Shinhan
Bank transferred its payment guarantee obligations under a line of
credit from the Company to the Company's former joint venture partner
and the Company granted a license to an affiliate of Hanil Telecom. In
addition, the deferred revenue balance of $2.5 million was offset by
approximately $896,000 of accounts receivable and the remaining $1.6
million balance was recorded as license revenue to recognize the license
agreement.
12. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2001, SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets", was issued, which requires, among other things, the
discontinuance of goodwill amortization. SFAS 142 also requires the
Company to complete a transitional goodwill impairment test six months
from the date of adoption. The Company adopted SFAS No. 142 on April 1,
2002. An assessment of the value of the Company's intellectual property
was performed during the quarter ended December 31, 2001 under SFAS No.
121. An impairment charge was deemed appropriate and recorded during the
quarter ended December 31, 2001, and the useful life of the Company's
intellectual property was reduced. SFAS No. 142 did not have an impact
on the Company's financial statements.
In August 2001, SFAS No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets", was issued, which
addresses the financial accounting and reporting for the impairment of
long-lived assets. This statement supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" and the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", for the disposal of a
segment of a business. The Company adopted SFAS No. 144 on April 1,
2002. An impairment charge was deemed appropriate and recorded during
the quarter period ended December 31, 2001. SFAS No. 144 did not have an
impact on the Company's financial statements.
In April 2002, SFAS No. 145 ("SFAS 145"), "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" was issued, which rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt", and an amendment of that
Statement, FASB Statement No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". The Statement also rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers".
The Statement amends FASB Statement No. 13, "Accounting for Leases", to
eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. The Company will adopt SFAS No. 145 in
April 2003 and does not expect this adoption to have a material effect
on the financial statements.
Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934 and
Section 27A of the Securities Act of 1933. The words "expect," "estimate,"
"anticipate," "predict," "believe," and similar expressions and variations of
such words are intended to identify forward-looking statements. Such statements
appear in a number of places in this report and include statements regarding our
intent, belief or current expectations with respect to, among other things, the
progress of our research and development activities, trends affecting our
liquidity position, including, but not limited to, our access to additional
equity or debt financing and our rate of expenditures, our joint venture
relationships, the status of the development of our products and their
anticipated performance and customer acceptance and our business and liquidity
strategies. We caution you not to put undue reliance on such forward-looking
statements. Such forward-looking statements are not guarantees of our future
performance and involve risks and uncertainties. Our actual results may differ
materially from those projected in this report, for the reasons, among others,
our limited available working capital, uncertain market acceptance of our
products, changing economic conditions, risks inherent in establishing a new
manufacturing capability, risks in product and technology development, the
effect of the Company's accounting policies and the other risks discussed below
under the caption, "Risk Factors," and in our Annual Report on Form 10-K filed
with the Securities and Exchange Commission. We undertake no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date of this report. In addition to the risks
and uncertainties discussed above, our other filings with the Securities and
Exchange Commission contain additional information concerning risks and
uncertainties that may cause actual results to differ materially from those
projected or suggested in our forward-looking statements. You should carefully
review the risk factors discussed below and in the other documents we have filed
with the Securities and Exchange Commission.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying condensed
consolidated financial statements and notes thereto contained herein and our
consolidated financial statements and notes thereto contained in our Annual
Report on Form 10-K as of and for the year ended March 31, 2002. The results for
the three-month period ended June 30, 2002 are not necessarily indicative of the
results to be expected for the entire fiscal year ending March 31, 2003.
OVERVIEW
Founded in 1989, our business has been driven primarily by our research and
development efforts, which have fostered our intellectual property position,
currently consisting of 818 issued and pending patents, including 268 patents
issued in the United States. Since our inception, we have been focused on
acquiring and developing our technology, developing our manufacturing
capabilities, recruiting personnel, establishing our sales channels and pipeline
and acquiring capital.
With the appointment of Stephan B. Godevais as our Chief Executive Officer and
President in May 2001, we initiated the transition of our business by broadening
our marketing and sales efforts to take advantage of our strengths in research
and development. With this strategic shift, our vision is to become a leader in
energy solutions by drawing on the numerous benefits of our latest battery
technology, the extensive experience of our management team and the significant
market opportunity available to us.
Historically, we focused our product development on the application of our
cobalt-oxide and manganese-oxide based lithium-ion technology to the mobile
communications market. Lithium-ion polymer batteries such as these are well
suited for applications including notebook computers, cellular telephones and
personal digital assistants, or PDAs, because they can be uniquely manufactured
as thin as one millimeter.
Recently, we unveiled our new lithium-ion technology, which utilizes a
phosphate-based cathode material. We have branded our phosphate-based
lithium-ion technology, Saphion(TM) technology, and believe that it addresses
the major weaknesses of existing oxide based lithium-ion alternatives while
offering a solution that is competitive in cost and performance. We believe
phosphate, in combination with different metals, enables greater energy density
than oxide technologies, whether cobalt or manganese. We believe that these
characteristics, along with the safety attributes of Saphion(TM) technology,
enable it to be designed into a wide variety of products in markets not served
by current lithium-ion solutions, including, among others, computers,
communications devices, consumer electronics, appliances, toys, vehicles and
uninterrupted power supply systems. Saphion(TM) technology will allow us to
offer solutions in the form of safer, environmentally friendly, lower-cost,
higher performance energy products which are becoming increasingly critical in
today's energy solutions market.
Our business strategy is enhanced by the substantial and broad based experience
of our management team in the high technology industry. During the past year,
management successfully implemented and reached key milestones of our business
Page 11
transition plan. We launched the Saphion(TM) technology and transitioned the
production of our Saphion(TM) polymer batteries from research and development to
our vertically integrated manufacturing facility in Northern Ireland. We
continue to ramp up production of high quality, large format Saphion(TM)
batteries for use in the N-Charge(TM) Power System, our first end-user product.
The N-Charge(TM) Power System is the first solution powered by Saphion(TM)
technology and is the first portable battery system designed to recharge and/or
run two mobile electronic devices simultaneously.
We have established the following objectives as our priorities for fiscal 2003:
o Sign additional Tier One customers for the N-Charge(TM) system.
o Launch new Saphion(TM)-based products to continue to demonstrate the
advantages and multiple applications for this technology.
o Sign an additional OEM agreement to build cylindrical and prismatic
Saphion(TM) products.
o Sign phosphate material and battery licensees by the end of the fiscal
year.
Progress toward meeting these goals has been slowed by delays in signing Tier
One customers.
In the current economic environment, many Tier One vendors have reduced the
resources available to qualify products beyond their core business. With fewer
people to evaluate and test products such as ours, the qualification process is
extended.
We have recently seen internal testing data that has caused concerns regarding
the reliability of the N-Charge(TM) product when stored and not used for long
periods of time. The data we have is preliminary and not complete. We will need
more time to determine what technical changes will be required to resolve this
issue, but we believe we have identified a containment plan and are aggressively
pursuing root cause solutions. We have not had any material warranty claims
related to this issue; however, as part of our continuous product improvement
process, we have decided to put the continued marketing of the product on hold
until our containment plan is validated and in place.
As a result, the Company's previous forecast of strong revenue growth for fiscal
2003 will likely shift by one to two quarters toward the first half of fiscal
2004. However, we do not anticipate that this will affect our liquidity in the
short term. To limit the impact of this delay on our cash flow, we have taken
the following actions:
o In light of the fact that we have sufficient inventory to meet current
customer demand, we have reduced production volumes at our Northern Ireland
facility.
o With the objective of reducing the cost of the N-Charge(TM) product to lower
price points and drive demand, we have engaged a new contract manufacturer
and are planning to transfer part of our assembly process to Mexico.
Further, we are prepared to take additional cost-saving measures, if necessary,
to conserve our financial resources.
Separately, our stock has been trading on the Nasdaq National Market below $3.00
per share for the last three months. Because we are currently operating with
negative stockholder equity, at this trading price, we no longer meet the
minimum listing requirements of the Nasdaq National Market. We intend to apply
to transfer our common stock from the Nasdaq National Market to the Nasdaq
SmallCap Market in accordance with the Nasdaq rules.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 (FIRST QUARTER OF FISCAL 2003) AND JUNE 30,
2001 (FIRST QUARTER OF FISCAL 2002).
BATTERY AND LAMINATE SALES. Revenue from battery and laminate sales totaled
$508,000 for the first quarter of fiscal 2003. For the corresponding period of
fiscal 2002, revenue from battery and laminate sales totaled $725,000. In
December 2000, we completed the acquisition of technology rights from Telcordia
Technologies, Inc. and correspondingly completed a strategic shift away from our
battery and laminate sales pipeline to an emphasis on licensing and royalty
revenue. Battery and laminate sales in the first quarter of fiscal 2002
represented sales from the customer pipeline established before the strategic
shift. During the second half of fiscal 2002, we implemented a balanced strategy
leveraging revenue from both licensing and battery and laminate products.
Battery and laminate sales for the first quarter of fiscal 2003 are initial
results from the re-establishment of our customer pipeline for battery and
laminate products.
Page 12
LICENSING AND ROYALTY REVENUE. No licensing revenue was recognized during the
first quarter of fiscal 2003 and royalty revenue totaled $1,000 for the period.
Licensing and royalty revenue totaled $2.1 million for the first quarter of
fiscal 2002, of which $1.6 million relates to the conversion of the Hanil joint
venture to a license agreement. We continue to pursue licensing for both our
process and chemistry patent portfolio.
COST OF SALES. Cost of sales consists primarily of expenses incurred to
manufacture battery, laminate and Saphion(TM) products. Cost of sales totaled
$2.5 million and $2.8 million for the first quarter of fiscal 2003 and fiscal
2002, respectively. The decrease in cost of sales from fiscal 2002 to fiscal
2003 is due to both the decrease in battery and laminate sales and continued
automation improvements in our manufacturing facility. The decrease is partially
offset by costs associated with manufacturing of our newly launched Saphion(TM)
materials and N-Charge(TM) Power System.
RESEARCH AND PRODUCT DEVELOPMENT. Research and product development expenses
consist primarily of personnel, equipment, and materials to support our battery
and product research and product development. Research and development expenses
totaled $2.8 million and $2.5 million for the first quarter of fiscal 2003 and
fiscal 2002, respectively. The $300,000, or 10%, increase during the first
quarter of fiscal 2003 as compared to the first quarter of fiscal 2002 is due to
additional headcount and development expense associated with the development of
battery pack products using our Saphion(TM) technology. The increase is
partially offset by decreases in research and development expenses associated
with our Northern Ireland facility.
MARKETING. Marketing expenses consist primairly of costs related to sales and
marketing personnel, public relations and promotional materials. Marketing
expenses were $783,000 and $433,000 for the first quarter of fiscal years 2003
and 2002, respectively. The increased expenditures are the result of our
continued focus in the areas of sales and marketing through the reorganization
of sales personnel and increased travel and promotional activities. The
increased expenditures are in line with our transition from a research and
development-focused organization to a sales and customer-focused entity.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and other related costs for finance, human resources,
accounting, information technology, legal and corporate related expenses.
General and administrative expenses were $2.4 million and $3.3 million for the
first quarter of fiscal 2003 and fiscal 2002, respectively. The 26% decrease
between comparable periods is due primarily to decreased recruiting, legal,
severance and travel expenses in the first quarter of fiscal 2003.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization totalled $645,000
and $2.4 million for the first quarter of fiscal 2003 and fiscal 2002,
respectively. The $1.7 million, or 73%, decrease in deprecation and amortization
expenses during the first quarter of fiscal 2003 resulted primarily from the
impact of an impairment of assets during the third quarter of fiscal 2002. This
decrease is partially offset by depreciation for capital assets acquired during
the current quarter and the fourth quarter of fiscal 2002.
INTEREST AND OTHER INCOME. Interest and other income was $116,000 for the first
quarter of fiscal 2003 as compared to $195,000 for the same period in fiscal
2002. The decrease primarily results from less funds being available for
investment.
INTEREST EXPENSE. Interest expense was $1.1 million and $749,000 during the
quarters ended June 30, 2002 and June 30, 2001, respectively. This increase is
a result of increased borrowings of long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we had cash and cash equivalents of $7.1 million. In addition,
as of June 30, 2002 we had $4.1 million available under a loan agreement and
$30.0 million available under an equity line of credit financing commitment with
Berg & Berg Enterprises, LLC. This commitment is subject to stockholder approval
at our 2002 annual meeting and completion of definitive documentation. Berg &
Berg has the option to reduce the commitment to the extent the Company enters
into a debt or equity financing arrangement with a third party at any time
during the term of the commitment. As a result of an offering the Company
completed in April 2002, Berg & Berg may elect to reduce its commitment to $13.5
million. At June 30, 2002, we had commitments for capital expenditures for the
next 12 months of approximately $571,000 relating to specified manufacturing
equipment, which is included in accrued expenses at June 30, 2002. We may
require additional capital expenditures in order to meet greater demand levels
for our products than are currently anticipated. After taking into account our
cash and cash equivalents, projected cash flows from licensing and systems sales
and available funding from our loan agreement and equity line of credit
financing commitment, we expect that we will have sufficient financing through
fiscal 2003 to meet our working capital, capital expenditure and investment
requirements. At our current level of operations, we are using cash from
operations of approximately $6.0 to $9.0 million per quarter. We expect our cash
requirements to increase as
Page 13
our sales increase, and we intend to manage our capital expenditures and
operating expenses based on our then available sources of cash. We may have
additional sources of cash from the commercialization of our Saphion(TM)
technology into new markets and customers in addition to the sale of new
products announced in February 2002. However, at this time we are not able to
accurately forecast cash from these sources.
The Company used net cash from operations for the first quarter of fiscal 2003
and 2002 of $8.8 million and $9.3 million, respectively. The cash used in our
fiscal 2003 operating activities was primarily due to net loss, investments in
inventory and the add back of non-cash expenses, including depreciation and
amortization and accretion of debt discount. The decrease in operating cash
outflows was substantially due to operational improvements company-wide and was
partially offset by increased investment in inventory to support our recently
launched N-Charge(TM) products.
We used $450,000 and $2.5 million in investing activities for the first quarters
of fiscal 2003 and 2002, respectively. The decrease is due to the substantial
completion of investments in equipment for our Northern Ireland facility.
We obtained cash from financing activities of $15.5 million and $11.4 million
during the first quarters of fiscal 2003 and 2002, respectively.
As a result of the above, we had a net increase in cash and cash equivalents of
$6.4 million during the first quarter of fiscal 2003 and a net decrease of cash
of $1.2 million in the first quarter of fiscal 2002.
As of June 30, 2002, our short-term and long-term debt obligations, including
long-term interest, were $892,000 and $39.0 million, respectively. During fiscal
2002, we reached an agreement with Berg & Berg to extend the maturity date of
our loan agreement with a current loan balance of $14.95 million and accrued
interest of $3.7 million from August 30, 2002 to September 30, 2005.
During fiscal 1994, through our Dutch subsidiary, we signed an agreement with
the Northern Ireland Industrial Development Board now titled Invest Northern
Ireland ("INI"), to open an automated manufacturing plant in Northern Ireland in
exchange for capital and revenue grants from the INI. The grants available under
the agreement and offers for an aggregate of up to (pound)25.6 million,
generally became available over a five-year period through October 31, 2001. As
a condition to receiving funding from the INI, the subsidiary must maintain a
minimum of (pound)12.0 million (approximately $18.4 million) in debt or equity
financing from the Company. As of June 30, 2002, we had received grants
aggregating (pound)9.4 million ($14.4 million). The amount of the grants
available under the agreement and offers depends primarily on the level of
capital expenditures that are made by the Company. Substantially all of the
funding received under the grants is repayable to the INI if the subsidiary is
in default under the agreement and offers, which includes the permanent
cessation of business in Northern Ireland. Funding received under the grants to
offset capital expenditures is repayable if related equipment is sold,
transferred or otherwise disposed of during a four-year period after the date of
grant. In addition, a portion of funding received under the grants may also be
repayable if the subsidiary fails to maintain specified employment levels for
the two-year period immediately after the end of the five-year grant period. As
a result of the reduction of Northern Ireland business activity, specified
employment levels have not been maintained, but the INI is not seeking repayment
and on the advice of counsel, on the basis that successful negotiations will be
concluded, we do not believe that the INI will bring any legal action pursuant
to the Letter of Offer. We have begun discussions with the INI to end the
current agreement and enter into a new agreement more closely aligned to current
business conditions. We may not be able to meet the requirements necessary to
retain grants under the INI agreement. Although we believe it is unlikely, the
INI could demand repayment of a portion of the total amounts received, which
include revenue grants of $1.3 million and equipment grants of $13.1 million.
Since inception, we have experienced significant losses and negative cash flow
from operations. We believe that our existing cash and cash equivalents,
anticipated cash flows from our operating activities and available financing
will be sufficient to fund our working capital and capital expenditure needs
through fiscal 2003. If our working capital requirements and capital
expenditures are greater than we expect, we may need to raise additional debt or
equity financing in order to provide for our operations. There can be no
assurance that additional debt or equity financing will be available on
acceptable terms or at all.
Page 14
RISK FACTORS
CAUTIONARY STATEMENTS AND RISK FACTORS
SEVERAL OF THE MATTERS DISCUSSED IN THIS REPORT CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FACTORS ASSOCIATED WITH THE
FORWARD-LOOKING STATEMENTS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THOSE
PROJECTED OR FORECASTED IN THIS REPORT ARE INCLUDED IN THE STATEMENTS BELOW. IN
ADDITION TO OTHER INFORMATION CONTAINED IN THIS REPORT, YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING CAUTIONARY STATEMENTS AND RISK FACTORS.
RISKS RELATED TO OUR BUSINESS
WE MAY HAVE A NEED FOR ADDITIONAL FINANCING.
We may need to raise additional capital. If we cannot obtain additional
financing on reasonable terms, or at all, we may not be able to execute our
business strategy as planned and our results of operations would suffer. At June
30, 2002, the Company had cash and cash equivalents of $7.1 million. On April 9,
2002, the Company raised net proceeds of approximately $15.2 million through the
sale of 6.122 million shares of the Company's common stock. In addition, as of
June 30, 2002, we had $4.1 million available under a loan agreement and $30.0
million available under an equity line of credit financing commitment with Berg
& Berg.
Our financing commitment with Berg & Berg will enable us to access up to $5.0
million per quarter (but no more than $30.0 million in the aggregate) in equity
capital over the next two years. This commitment is subject to stockholder
approval at our 2002 annual meeting and completion of definitive documentation.
In exchange for any amounts funded pursuant to this new agreement, we will issue
to Berg & Berg restricted common stock at 85% of the average closing price of
the Company's common stock over the five trading days prior to the purchase
date. We will agree to register any shares we issue to Berg & Berg under this
agreement. Berg & Berg's obligation to fund the equity commitment is subject to
conditions including, but not limited to, our achievement of operating
milestones. In addition, Berg & Berg has the option to reduce the commitment to
the extent we enter into a debt or equity financing arrangement with a third
party at any time during the term of the commitment. As a result of the offering
we completed in April 2002, Berg & Berg may elect to reduce its commitment to
$13.5 million.
At our current level of operations, we are using cash from operations of
approximately $6.0 to $9.0 million per quarter. To sustain our operations for a
longer period of time than can be funded from operations and our commitments
from Berg & Berg, we may need to seek additional financing. Our cash
requirements may vary materially from those now planned because of changes in
our operations, including changes in OEM relationships, market conditions, joint
venture and business opportunities, or a request for repayment of a portion or
all of our existing grants, which totaled $14.4 million at June 30, 2002, from
the Northern Ireland Industrial Development Board, now known as Invest Northern
Ireland or the INI.
We believe that our existing cash and cash equivalents, anticipated cash flows
from our operating activities and available financing will be sufficient to fund
our working capital and capital expenditure needs through fiscal 2003. If our
working capital requirements and capital expenditures are greater than we
expect, we may need to raise additional capital in order to provide for our
operations or reduce our cash requirements accordingly. There can be no
assurance that additional capital will be available on acceptable terms or at
all or that appropriate cash flow reductions can be made without adversely
effecting our current or future business strategy.
ALL OF OUR ASSETS ARE PLEDGED AS COLLATERAL UNDER OUR LOAN AGREEMENTS. OUR
FAILURE TO MEET THE OBLIGATIONS UNDER OUR LOAN AGREEMENTS COULD RESULT IN
FORECLOSURE OF OUR ASSETS.
All of our assets are pledged as collateral under various loan agreements. If we
fail to meet our obligations pursuant to these loan agreements, our lenders may
declare all amounts borrowed from them to be due and payable together with
accrued and unpaid interest. If we are unable to repay our debt, these lenders
could proceed against our assets.
WE HAVE A HISTORY OF LOSSES, HAVE AN ACCUMULATED DEFICIT AND MAY NEVER ACHIEVE
OR SUSTAIN SIGNIFICANT REVENUES OR PROFITABILITY.
We have incurred operating losses each year since inception in 1989 and had an
accumulated deficit of $346.3 million as of June 30, 2002. We have working
capital of $3.9 million as of June 30, 2002, and have sustained recurring losses
related
Page 15
primarily to the research and development and marketing of our products. We
expect to continue to incur operating losses and negative cash flows through
fiscal 2003, as we begin to build inventory, increase our marketing efforts and
continue our product development. We may never achieve or sustain significant
revenues or profitability in the future.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF OUR SAPHION(TM) TECHNOLOGY BATTERIES
ARE NOT COMMERCIALLY ACCEPTED.
We are researching and developing batteries based upon phosphate chemistry. Our
batteries are designed and manufactured as components for other companies and
end-user customers. Our success is dependent on the acceptance of our batteries
and the products using our batteries in their markets. We have recently become
aware of potential reliability problems if the batteries are stored and not used
over long periods. Acceptance by our targeted customers will be dependent on our
ability to resolve this issue to their satisfaction. Market acceptance may also
depend on a variety of other factors, including educating the target market
regarding the benefits of our products. Market acceptance and market share are
also affected by the timing of market introduction of competitive products. If
we or our customers are unable to gain any significant market acceptance for
Saphion(TM) technology based batteries, our business will be adversely affected.
It is too early to determine if Saphion(TM) technology based batteries will
achieve significant market acceptance.
IF WE ARE UNABLE TO DEVELOP, MANUFACTURE AND MARKET PRODUCTS THAT GAIN WIDE
CUSTOMER ACCEPTANCE, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
The process of developing our products is complex and uncertain, and failure to
anticipate customers' changing needs and to develop products that receive
widespread customer acceptance could significantly harm our results of
operations. We must make long-term investments and commit significant resources
before knowing whether our predictions will eventually result in products that
the market will accept. After a product is developed, we must be able to
manufacture sufficient volumes quickly and at low costs. To accomplish this, we
must accurately forecast volumes, mix of products and configurations that meet
customer requirements, and we may not succeed.
FAILURE TO DEVELOP SALES CHANNELS FOR OUR CURRENT AND FUTURE END-USER PRODUCTS
WOULD SIGNIFICANTLY IMPACT OUR FUTURE REVENUE AND PROFITABILITY.
We introduced the N-Charge(TM) Power System, our first end-user product in
February 2002. We must develop reliable sales channels for distribution of our
N-Charge(TM) product and any future end-user products. If our N-Charge(TM)
product is not commercially accepted, our results of operations will be
adversely affected. In addition, failure to develop effective sales channels
will significantly impact our future revenue and profitability.
OUR FAILURE TO DEVELOP PARTNERSHIPS WITH OTHER BATTERY MANUFACTURERS WILL LIMIT
OUR ABILITY TO WIDELY INTRODUCE OUR PHOSPHATE CHEMISTRY TECHNOLOGY INTO THE
MARKETPLACE AND COULD SIGNIFICANTLY IMPACT OUR SALES AND PROFITABILITY IN FUTURE
PERIODS.
To successfully implement our business strategy of broadly disseminating the
Saphion(TM) technology, we intend to develop relationships with manufacturers of
lithium-ion batteries using stacked polymer technology as well as cylindrical
battery manufacturers. Our failure to develop these relationships will limit our
ability to widely introduce our phosphate chemistry technology into the
marketplace and could significantly impact our sales and profitability in future
periods.
WE RECENTLY FORMED RELATIONSHIPS WITH THREE OF THE WORLD'S LEADING PERSONAL
COMPUTER VENDORS. THESE RELATIONSHIPS MAY NOT RESULT IN SALES OR PROFITABILITY.
We recently entered into a Memorandum of Understanding with each of Acer Inc.
and Wistron Corporation for the development of devices using our technology.
Additionally, we have entered into a relationship with Hewlett-Packard Company
in which our N-Charge(TM) product will be featured in Hewlett-Packard's
Education Solutions Portfolio product bundle. Subsequently, Hewlett Packard
placed an initial purchase order and we began shipment of the N-Charge(TM)
product in April 2002. Neither the Memoranda of Understanding with Acer or
Wistron nor the relationship with Hewlett-Packard requires the companies to make
any financial commitments to us and may not lead to additional purchase orders.
As a result, of the foregoing, these relationships may not result in significant
sales of products incorporating our Saphion(TM) technology, including sales of
our N-Charge(TM) product. If these relationships result in additional sales, we
cannot assure you that they will be profitable. If these relationships do not
lead to significant purchase orders, our future revenues and profitability may
be materially adversely affected.
Page 16
BECAUSE OUR BATTERIES ARE INTENDED PRIMARILY TO BE INCORPORATED INTO OTHER
PRODUCTS, WE WILL NEED TO RELY ON OEMS TO COMMERCIALIZE OUR PRODUCTS. WE MAY NOT
OBTAIN ADEQUATE ASSISTANCE FROM THESE THIRD PARTIES TO SUCCESSFULLY
COMMERCIALIZE OUR PRODUCTS.
Our business strategy contemplates that we will be required to rely heavily on
assistance from OEMs to gain market acceptance for our products. We therefore
will need to identify acceptable OEMs and enter into agreements with them. Once
we identify acceptable OEMs and enter into agreements with them, we will need to
meet these companies' requirements by developing and introducing new products
and enhanced, or modified, versions of our existing products on a timely basis.
OEMs often require unique configurations or custom designs for batteries, which
must be developed and integrated into their product well before the product is
launched. This development process not only requires substantial lead-time
between the commencement of design efforts for a customized battery system and
the commencement of volume shipments of the battery system to the customer, but
also requires the cooperation and assistance of the OEMs for purposes of
determining the battery requirements for each specific application. We have
recently become aware of potential reliability problems if our batteries are
stored and not used over long periods. Acceptance by tier one OEMs will be
dependent on our ability to resolve this issue to their satisfaction. If we are
unable to design, develop and introduce products that meet OEMs' requirements,
we may lose opportunities to enter into additional purchase orders and our
reputation may be damaged. As a result, we may not receive adequate assistance
from OEMs or battery pack assemblers to successfully commercialize our products,
which could impair our profitability.
FAILURE TO IMPLEMENT AN EFFECTIVE LICENSING BUSINESS STRATEGY COULD ADVERSELY
AFFECT OUR REVENUE, CASH FLOW AND PROFITABILITY.
In December 2000, we acquired the intellectual property assets of Telcordia
Technologies, Inc. As a result of the acquisition of these intellectual property
assets and the internal development of our Saphion(TM) technology, we
significantly increased the role of licensing in our business strategy. We have
not entered into any licensing agreements for our Saphion(TM) technology. Our
future operating results could be affected by a variety of factors including:
o our ability to secure and maintain significant customers of our proprietary
technology;
o the extent to which our future licensees successfully incorporate our
technology into their products;
o the acceptance of new or enhanced versions of our technology;
o the rate that our licensees manufacture and distribute their products to
OEMs; and
o our ability to secure one-time license fees and ongoing royalties for our
technology from licensees.
Our future success will also depend on our ability to execute our licensing
operations simultaneously with our other business activities. If we fail to
substantially expand our licensing activities while maintaining our other
business activities, our results of operations and financial condition will be
adversely affected.
FAILURE TO OBTAIN INTERNATIONAL REGULATORY APPROVAL FOR COMMERCIAL SHIPMENTS OF
PHOSPHATE MATERIAL WOULD CAUSE DELAYS IN THE PRODUCTION RAMP PLAN FOR OUR
BATTERY TECHNOLOGY AND RESULT IN DELAYS OR LOSSES OF REVENUES ASSOCIATED WITH
THAT PLAN.
We currently are shipping phosphate material from our facility in Henderson,
Nevada to our manufacturing facility in Mallusk, Northern Ireland as research
and development material. We must receive regulatory approval from the
appropriate international regulatory entities to ship commercial quantities of
the material. Failure to obtain the appropriate regulatory approvals
internationally would cause delays in the production ramp plan for our battery
technology and result in delays or losses of revenue associated with that plan.
OUR FAILURE TO COST-EFFECTIVELY MANUFACTURE BATTERIES IN COMMERCIAL QUANTITIES,
WHICH SATISFY OUR CUSTOMERS' PRODUCT SPECIFICATIONS, COULD DAMAGE OUR CUSTOMER
RELATIONSHIPS AND RESULT IN SIGNIFICANT LOST BUSINESS OPPORTUNITIES FOR US.
To be successful, we must cost-effectively manufacture commercial quantities of
our batteries that meet customer specifications. To facilitate commercialization
of our products, we will need to reduce our manufacturing costs, which includes
substantially raising and maintaining battery yields of commercial quality in a
cost-effective manner. If we fail to substantially increase yields in our
manufacturing process and reduce unit-manufacturing costs, we will not be able
to offer our batteries at a competitive price, and we will lose our current
customers and fail to attract future customers.
Page 17
FAILURE TO SCALE UP OUR MANUFACTURING FACILITY WILL HARM OUR CUSTOMER RELATIONS
AND THREATEN FUTURE PROFITS.
We have begun to manufacture batteries on a commercial scale to fulfill purchase
orders and we are able to produce sufficient quantities of batteries for short-
term needs. We continue to install, de-bug and qualify equipment in our
manufacturing facility. If we fail to develop and efficiently operate a large
scale manufacturing facility capable of cost-effectively producing significant
quantities of batteries according to customer specifications, our ability to
serve the needs of our customers will be harmed and our future sales and profits
will be threatened.
OUR PATENT APPLICATIONS MAY NOT RESULT IN ISSUED PATENTS.
Patent applications in the United States are maintained in secrecy until the
patents issue or are published. Since publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries by
several months, we cannot be certain that we were the first creator of
inventions covered by pending patent applications or the first to file patent
applications on such inventions. We also cannot be certain that our pending
patent applications will result in issued patents or that any of our issued
patents will afford protection against a competitor. In addition, patent
applications filed in foreign countries are subject to laws, rules and
procedures which differ from those of the United States, and thus we cannot be
certain that foreign patent applications related to issued United States patents
will issue. Furthermore, if these patent applications issue, some foreign
countries provide significantly less effective patent enforcement than the
United States.
The status of patents involves complex legal and factual questions and the
breadth of claims allowed is uncertain. Accordingly, we cannot be certain that
patent applications we file will result in patents being issued, or that our
patents and any patents that may be issued to us in the future will afford
protection against competitors with similar technology. In addition, patents
issued to us may be infringed upon or designed around by others and others may
obtain patents that we need to license or design around, either of which would
increase costs and may adversely affect our operations.
IF WE CANNOT PROTECT OR ENFORCE OUR EXISTING INTELLECTUAL PROPERTY RIGHTS OR IF
OUR PENDING PATENT APPLICATIONS DO NOT RESULT IN ISSUED PATENTS, WE MAY LOSE THE
ADVANTAGES OF OUR RESEARCH AND MANUFACTURING SYSTEMS.
Our ability to compete successfully will depend on whether we can protect our
existing proprietary technology and manufacturing processes. We rely on a
combination of patent and trade secret protection, non-disclosure agreements and
cross-licensing agreements. These measures may not be adequate to safeguard the
proprietary technology underlying our batteries. Employees, consultants, and
others who participate in the development of our products may breach their
non-disclosure agreements with us, and we may not have adequate remedies in the
event of their breaches. In addition, our competitors may be able to develop
products that are equal or superior to our products without infringing on any of
our intellectual property rights. Moreover, we may not be able to effectively
protect our intellectual property rights outside of the United States.
We have established a program for intellectual property documentation and
protection in order to safeguard our technology base. We intend to vigorously
pursue enforcement and defense of our patents and our other proprietary rights.
We could incur significant expenses in preserving our proprietary rights, and
these costs could harm our financial condition. We also are attempting to expand
our intellectual property rights through our applications for new patents. We
cannot be certain that our pending patent applications will result in issued
patents or that our issued patents will afford us protection against a
competitor. Our inability to protect our existing proprietary technologies or to
develop new proprietary technologies may substantially impair our financial
condition and results of operations.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS BROUGHT AGAINST US COULD BE TIME-
CONSUMING AND EXPENSIVE TO DEFEND, AND IF ANY OF OUR PRODUCTS OR PROCESSES ARE
FOUND TO BE INFRINGING, WE MAY NOT BE ABLE TO PROCURE LICENSES TO USE PATENTS
NECESSARY TO OUR BUSINESS AT REASONABLE TERMS, IF AT ALL.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. While we currently are
not engaged in any intellectual property litigation or proceedings, we may
become involved in these proceedings in the future. In the future we may be
subject to claims or inquiries regarding our alleged unauthorized use of a third
party's intellectual property. An adverse outcome in litigation could force us
to do one or more of the following:
o stop selling, incorporating or using our products that use the challenged
intellectual property;
o pay significant damages to third parties;
Page 18
o obtain from the owners of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
o redesign those products or manufacturing processes that use the infringed
technology, which may be economically or technologically infeasible.
Whether or not an intellectual property litigation claim is valid, the cost of
responding to it, in terms of legal fees and expenses and the diversion of
management resources, could be expensive and harm our business.
OUR ABILITY TO MANUFACTURE LARGE VOLUMES OF BATTERIES IS LIMITED AND MAY PREVENT
US FROM FULFILLING ORDERS.
We are actively soliciting additional purchase orders. We are qualifying
additional automated equipment at our facility in Mallusk, Northern Ireland
which will provide us with sufficient capacity to assemble batteries in high
volumes. We expect this equipment to be fully operational during the second
quarter of fiscal 2003. If we cannot rapidly increase our production
capabilities to make sufficient quantities of commercially acceptable batteries,
we may not be able to fulfill purchase orders in a timely manner, if at all. In
addition, we may not be able to procure additional purchase orders, which could
cause us to lose existing and future customers, purchase orders, revenue and
profits.
IF OUR BATTERIES FAIL TO PERFORM AS EXPECTED, WE COULD LOSE EXISTING AND FUTURE
BUSINESS, AND OUR LONG-TERM ABILITY TO MARKET AND SELL OUR BATTERIES COULD BE
HARMED.
If we manufacture our batteries in commercial quantities and they fail to
perform as expected, our reputation could be severely damaged, and we could lose
existing or potential future business. Even if the performance failure is
corrected, this performance failure might have the long-term effect of harming
our ability to market and sell our batteries.
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR OUR REVENUES, AND OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION COULD BE HARMED IF WE WERE TO LOSE THE
BUSINESS OF ANY ONE OF THEM.
To date, our existing purchase orders in commercial quantities are from a
limited number of customers. We anticipate that sales of our products to a
limited number of key customers will continue to account for a significant
portion of our total revenues. We do not have long-term agreements with any of
our customers and do not expect to enter into any long-term agreements in the
near future. As a result, we face the substantial risk that one or more of the
following events could occur:
o reduction, delay or cancellation of orders from a customer;
o development by a customer of other sources of supply;
o selection by a customer of devices manufactured by one of our competitors
for inclusion in future product generations;
o loss of a customer or a disruption in our sales and distribution channels;
or
o failure of a customer to make timely payment of our invoices.
If we were to lose one or more customers, or if we were to lose revenues due to
a customer's inability or refusal to continue to purchase our batteries, our
business, results of operations and financial condition could be harmed.
THE FACT THAT WE DEPEND ON A SOLE SOURCE SUPPLIER OR A LIMITED NUMBER OF
SUPPLIERS FOR KEY RAW MATERIALS MIGHT DELAY OUR PRODUCTION OF BATTERIES.
We depend on a sole source supplier or a limited number of suppliers for certain
key raw materials used in manufacturing and developing our batteries. We
generally purchase raw materials pursuant to purchase orders placed from time to
time and have no long-term contracts or other guaranteed supply arrangements
with our sole or limited source suppliers. As a result, our suppliers may not be
able to meet our requirements relative to specifications and volumes for key raw
materials, and we may not be able to locate alternative sources of supply at an
acceptable cost. We have in the past experienced delays in product development
due to the delivery of nonconforming raw materials from our suppliers, and if in
the future we are unable to obtain high quality raw materials in sufficient
quantities on competitive pricing terms and on a timely basis, it may delay
battery production, impede our ability to fulfill existing or future purchase
orders and harm our reputation and profitability.
Page 19
WE HAVE FOUR KEY EXECUTIVES. THE LOSS OF A SINGLE EXECUTIVE OR THE FAILURE TO
HIRE AND INTEGRATE CAPABLE NEW EXECUTIVES COULD HARM OUR BUSINESS.
Other than our written employment agreement with Stephan B. Godevais, our
President and Chief Executive Officer, we do not have written employment
contracts and do not have key man life insurance policies with respect to any of
our key members of management. Without qualified executives, we face the risk
that we will not be able to effectively run our business on a day-to-day basis
or execute our long-term business plan.
OUR REVENUE FROM LICENSE FEES AND ROYALTIES WILL DEPEND SIGNIFICANTLY ON THE
SUCCESS OF OUR LICENSEES AND THE MARKET DEMAND FOR THEIR PRODUCTS.
We expect to generate income from license fees as well as ongoing royalties
based on sales by licensees that design, manufacture and sell batteries
incorporating our technology. License fees will be nonrefundable and may be paid
in one or more installments. Ongoing royalties will be nonrefundable and
generally based on a percentage of the selling price of the batteries that
incorporate our technology sold by the licensee. Because we expect to derive a
portion of our future revenues from royalties on shipments by our licensees, our
future success depends upon the ability of our licensees to develop and
introduce high volume batteries that achieve and sustain market acceptance. If
our licensees are not successful or the demand for lithium-ion polymer
batteries, Saphion(TM) technology batteries or devices utilizing these batteries
does not increase, our revenues and profitability will be adversely affected. In
addition, our license fee revenues depend on our ability to gain additional
licensees within existing and new markets. A reduction in the demand for
lithium-ion polymer batteries, Saphion(TM) technology batteries, our loss of key
existing licensees or our failure to gain additional licensees could have a
material adverse effect on our business.
THERE IS A POTENTIAL SALES-CHANNEL CONFLICT BETWEEN OUR FUTURE TECHNOLOGY
LICENSEES AND US.
The acquisition of the Telcordia Technologies, Inc.'s intellectual property
assets and our Saphion(TM) technology licensing strategy has added significant
diversity to our overall business structure and our opportunities. We recognize
that there is potential for a conflict among our sales channels and those of our
future technology licensees. Although our manufacturing and marketing business
generally is complementary to our licensing business, sales-channel conflicts
may arise. If these potential conflicts do materialize, we may not be able to
mitigate the effect of a conflict that, if not resolved, may impact our results
of operations.
OUR OXIDE-BASED BATTERIES, WHICH NOW COMPRISE A SMALL PORTION OF OUR AVAILABLE
PRODUCTS, CONTAIN POTENTIALLY DANGEROUS MATERIALS, WHICH COULD EXPOSE US TO
PRODUCT LIABILITY CLAIMS.
In the event of a short circuit or other physical damage to an oxide based
battery, a reaction may result with excess heat or a gas being generated and
released. If the heat or gas is not properly released, the battery may be
flammable or potentially explosive. We could, therefore, be exposed to possible
product liability litigation. In addition, our batteries incorporate potentially
dangerous materials, including lithium. It is possible that these materials may
require special handling or that safety problems may develop in the future. We
are aware that if the amounts of active materials in our batteries are not
properly balanced and if the charge/discharge system is not properly managed, a
dangerous situation may result. Battery pack assemblers using batteries
incorporating technology similar to ours include special safety circuitry within
the battery to prevent such a dangerous condition. We expect that our customers
will have to use a similar type of circuitry in connection with their use of our
oxide-based products.
ACCIDENTS AT OUR FACILITIES COULD DELAY PRODUCTION AND ADVERSELY AFFECT OUR
OPERATIONS.
An accident in our facilities could occur. Any accident, whether due to the
production of our batteries or otherwise resulting from our facilities'
operations, could result in significant manufacturing delays or claims for
damages resulting from personal or property injuries, which would adversely
affect our operations and financial condition.
WE DEPEND UPON THE CONTINUED OPERATION OF OUR NORTHERN IRELAND FACILITY.
OPERATIONAL PROBLEMS AT THIS FACILITY COULD HARM OUR BUSINESS.
Our revenues are dependent upon the continued operation of our manufacturing
facility in Northern Ireland. The operation of a manufacturing plant involves
many risks, including potential damage from fire or natural disasters. In
addition, we have obtained permits to conduct our business as currently operated
at the facility. If the facility were destroyed and rebuilt, there
Page 20
is a possibility that these permits would not remain effective at the current
location, and we may not be able to obtain similar permits to operate at another
location. The occurrence of these or any other operational problems at our
Northern Ireland facility may harm our business.
WE EXPECT TO SELL A SIGNIFICANT PORTION OF OUR PRODUCTS TO AND DERIVE A
SIGNIFICANT PORTION OF OUR LICENSING REVENUES FROM CUSTOMERS LOCATED OUTSIDE THE
UNITED STATES. FOREIGN GOVERNMENT REGULATIONS, CURRENCY FLUCTUATIONS AND
INCREASED COSTS ASSOCIATED WITH INTERNATIONAL SALES COULD MAKE OUR PRODUCTS AND
LICENSES UNAFFORDABLE IN FOREIGN MARKETS, WHICH WOULD REDUCE OUR FUTURE
PROFITABILITY.
We expect that international sales of our products and licenses, as well as
licensing royalties, will represent an increasingly significant portion of our
sales. International business can be subject to many inherent risks that are
difficult or impossible for us to predict or control, including:
o changes in foreign government regulations and technical standards,
including additional regulation of rechargeable batteries or technology or
the transport of lithium and phosphate, which may reduce or eliminate our
ability to sell or license in certain markets;
o foreign governments may impose tariffs, quotas and taxes on our batteries
or our import of technology into their countries;
o requirements or preferences of foreign nations for domestic products could
reduce demand for our batteries and our technology;
o fluctuations in currency exchange rates relative to the United States
dollar could make our batteries and our technology unaffordable to foreign
purchasers and licensees or more expensive compared to those of foreign
manufacturers and licensors;
o longer payment cycles typically associated with international sales and
potential difficulties in collecting accounts receivable may reduce the
future profitability of foreign sales and royalties;
o import and export licensing requirements in Northern Ireland or other
countries where we intend to conduct business may reduce or eliminate our
ability to sell or license in certain markets; and
o political and economic instability in Northern Ireland or other countries
where we intend to conduct business may reduce the demand for our batteries
and our technology or our ability to market our batteries and our
technology in those countries.
These risks may increase our costs of doing business internationally and reduce
our sales and royalties or future profitability.
WE MUST CONTINUE TO EXPAND OUR EMPLOYEE BASE AND OPERATIONS IN ORDER TO
DISTRIBUTE OUR PRODUCTS COMMERCIALLY, WHICH MAY STRAIN OUR MANAGEMENT AND
RESOURCES AND COULD HARM OUR BUSINESS.
To implement our growth strategy successfully, we will have to increase our
staff, primarily with personnel in sales, marketing, and product support
capabilities, as well as third party and direct distribution channels. However,
we face the risk that we may not be able to attract new employees to
sufficiently increase our staff or product support capabilities, or that we will
not be successful in our sales and marketing efforts. Failure in any of these
areas could impair our ability to execute our plans for growth and adversely
affect our future profitability.
COMPETITION FOR PERSONNEL, IN PARTICULAR FOR PRODUCT DEVELOPMENT AND PRODUCT
IMPLEMENTATION PERSONNEL, IS INTENSE, AND WE MAY HAVE DIFFICULTY ATTRACTING THE
PERSONNEL NECESSARY TO EFFECTIVELY OPERATE OUR BUSINESS.
We believe that our future success will depend in large part on our ability to
attract and retain highly skilled technical, managerial and marketing personnel
who are familiar with and experienced in the battery industry, as well as
skilled personnel to operate our facility in Northern Ireland. If we cannot
attract and retain experienced sales and marketing executives, we may not
achieve the visibility in the marketplace that we need to obtain purchase
orders, which would have the result of lowering our sales and earnings. We
compete in the market for personnel against numerous companies, including
larger, more established competitors with significantly greater financial
resources than us. We cannot be certain that we will be successful in attracting
and retaining the skilled personnel necessary to operate our business
effectively in the future.
Page 21
THE LIMITED NUMBER OF SKILLED WORKERS IN NORTHERN IRELAND COULD AFFECT THE
SUCCESS OF OUR IMPROVEMENTS IN THE MANUFACTURING FACILITY.
We may need to hire and train additional manufacturing workers. The availability
of skilled workers in Northern Ireland is limited because of a relatively low
unemployment rate. As a result, we face the risk that we may not:
o hire and train the new manufacturing workers necessary for the ramp-up of
our Mallusk, Northern Ireland manufacturing facility;
o develop improved processes;
o implement multiple production lines; or
o efficiently operate the Mallusk facility.
Our failure to efficiently automate our production on a timely basis, if at all,
could damage our reputation and relationships with future and existing
customers, cause us to lose business and potentially prevent us from
establishing the commercial viability of our products.
POLITICAL INSTABILITY IN NORTHERN IRELAND COULD INTERRUPT MANUFACTURING OF OUR
BATTERIES AND END-USER PRODUCTS AT OUR NORTHERN IRELAND FACILITY AND CAUSE US TO
LOSE SALES AND MARKETING OPPORTUNITIES.
Northern Ireland has experienced significant social and political unrest in the
past and we cannot assure you that these instabilities will not continue in the
future. Any political instability in Northern Ireland could temporarily or
permanently interrupt our manufacturing of batteries and end-user products at
our facility in Mallusk, Northern Ireland. Any delays could also cause us to
lose sales and marketing opportunities, as potential customers would find other
vendors to meet their needs.
RISKS ASSOCIATED WITH OUR INDUSTRY
IF COMPETING TECHNOLOGIES THAT OUTPERFORM OUR BATTERIES WERE DEVELOPED AND
SUCCESSFULLY INTRODUCED, THEN OUR PRODUCTS MIGHT NOT BE ABLE TO COMPETE
EFFECTIVELY IN OUR TARGETED MARKET SEGMENTS.
Rapid and ongoing changes in technology and product standards could quickly
render our products less competitive, or even obsolete. Other companies are
seeking to enhance traditional battery technologies, such as lead acid and
nickel cadmium or have recently introduced or are developing batteries based on
nickel metal-hydride, liquid lithium-ion and other emerging and potential
technologies. These competitors are engaged in significant development work on
these various battery systems, and we believe that much of this effort is
focused on achieving higher energy densities for low power applications such as
portable electronics. One or more new, higher energy rechargeable battery
technologies could be introduced which could be directly competitive with, or
superior to, our technology. The capabilities of many of these competing
technologies have improved over the past several years. Competing technologies
that outperform our batteries could be developed and successfully introduced,
and as a result, there is a risk that our products may not be able to compete
effectively in our targeted market segments.
We have invested in research and development of next-generation technology in
energy solutions. If we are not successful in developing and commercially
exploiting new energy solutions based on new materials, or we experience delays
in the development and exploitation of new energy solutions, compared to our
competitors, our future growth and revenues will be adversely affected.
OUR PRINCIPAL COMPETITORS HAVE GREATER FINANCIAL AND MARKETING RESOURCES THAN WE
DO AND THEY MAY THEREFORE DEVELOP BATTERIES SIMILAR OR SUPERIOR TO OURS OR
OTHERWISE COMPETE MORE SUCCESSFULLY THAN WE DO.
Competition in the rechargeable battery industry is intense. The industry
consists of major domestic and international companies, most of which have
financial, technical, marketing, sales, manufacturing, distribution and other
resources substantially greater than ours. There is a risk that other companies
may develop batteries similar or superior to ours. In addition, many of these
companies have name recognition, established positions in the market, and long-
standing relationships with OEMs and other customers. We believe that our
primary competitors are existing suppliers of liquid lithium-ion, competing
polymer and, in some cases, nickel metal-hydride batteries. These suppliers
include Sanyo, Matsushita Industrial Co., Ltd. (Panasonic), Sony, Toshiba, SAFT
and Electrovaya. All of these companies are very large and have substantial
resources and market presence. We expect that we will compete against
manufacturers of other types of batteries in our targeted application segments,
which include laptops, cellular telephones and personal digital assistant
products, on the basis
Page 22
of performance, size and shape, cost and ease of recycling. There is also a risk
that we may not be able to compete successfully against manufacturers of other
types of batteries in any of our targeted applications.
LAWS REGULATING THE MANUFACTURE OR TRANSPORT OF BATTERIES MAY BE ENACTED WHICH
COULD RESULT IN A DELAY IN THE PRODUCTION OF OUR BATTERIES OR THE IMPOSITION OF
ADDITIONAL COSTS THAT WOULD HARM OUR ABILITY TO BE PROFITABLE.
At the present time, international, federal, state or local law does not
directly regulate the storage, use and disposal of the component parts of our
batteries or the transport of our batteries. However, laws and regulations may
be enacted in the future which could impose environmental, health and safety
controls on the storage, use, and disposal of certain chemicals and metals used
in the manufacture of lithium polymer batteries as well as regulations governing
the transport of our batteries. Satisfying any future laws or regulations could
require significant time and resources from our technical staff and possible
redesign which may result in substantial expenditures and delays in the
production of our product, all of which could harm our business and reduce our
future profitability.
GENERAL RISKS ASSOCIATED WITH STOCK OWNERSHIP
WE INTEND TO APPLY FOR OUR COMMON STOCK TO BE TRANSFERRED TO THE NASDAQ SMALLCAP
MARKET BECAUSE WE CURRENTLY DO NOT SATISFY THE CONTINUED LISTING REQUIREMENTS OF
THE NASDAQ NATIONAL MARKET.
We do not currently satisfy the minimum bid listing requirement ($3.00 per
share) of the Nasdaq Stock Market's National Market. We intend to voluntarily
apply to transfer our securities to the Nasdaq SmallCap Market. The last sale
price of our common stock on August 13, 2002 was $1.31. The minimum bid price
requirement of the Nasdaq SmallCap Market is $1.00. Assuming we continue to meet
the bid price and all other listing requirements of the Nasdaq SmallCap Market
and our application is approved, our common stock would then trade on the Nasdaq
SmallCap Market. If we were to fail to meet the requirements for continued
listing, it could have a materially adverse effect on the price of our common
stock.
CORPORATE INSIDERS OR THEIR AFFILIATES WILL BE ABLE TO EXERCISE SIGNIFICANT
CONTROL OVER MATTERS REQUIRING STOCKHOLDER APPROVAL THAT MIGHT NOT BE IN THE
BEST INTERESTS OF OUR STOCKHOLDERS AS A WHOLE.
As of July 15, 2002, our officers, directors and their affiliates as a group
beneficially owned approximately 18.2% of our outstanding common stock. Carl
Berg, one of our directors, owns a substantial portion of that amount. As a
result, these stockholders will be able to exercise significant control over all
matters requiring stockholder approval, including the election of directors and
the approval of significant corporate transactions, which could delay or prevent
someone from acquiring or merging with us. The interest of our officers and
directors, when acting in their capacity as stockholders, may lead them to:
o vote for the election of directors who agree with the incumbent officers'
or directors' preferred corporate policy; or
o oppose or support significant corporate transactions when these
transactions further their interests as incumbent officers or directors,
even if these interests diverge from their interests as stockholders per se
and thus from the interests of other stockholders.
SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY MAKE TAKEOVER ATTEMPTS DIFFICULT,
WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND LIMIT THE PRICE POTENTIAL
ACQUIRERS MAY BE WILLING TO PAY FOR OUR COMMON STOCK.
Our board of directors has the authority, without any action by the
stockholders, to issue additional shares of our preferred stock, which shares
may be given superior voting, liquidation, distribution and other rights as
compared to those of our common stock. The rights of the holders of our capital
stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance of
additional shares of preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock. These provisions may have the effect of delaying, deferring or preventing
a change in control, may discourage bids for our common stock at a premium over
its market price and may decrease the market price, and infringe upon the voting
and other rights of the holders, of our common stock.
OUR STOCK PRICE IS VOLATILE.
The market price of the shares of our common stock has been and is likely to
continue to be highly volatile. Factors that may have a significant effect on
the market price of our common stock include the following:
o fluctuation in our operating results;
Page 23
o announcements of technological innovations or new commercial products by us
or our competitors;
o failure to achieve operating results projected by securities analysts;
o governmental regulation;
o developments in our patent or other proprietary rights or our competitors'
developments;
o our relationships with current or future collaborative partners; and
o other factors and events beyond our control.
In addition, the stock market in general has experienced extreme volatility that
often has been unrelated to the operating performance of particular companies.
These broad market and industry fluctuations may adversely affect the trading
price of our common stock, regardless of our actual operating performance.
As a result of this potential stock price volatility, investors may be unable to
sell their shares of our common stock at or above the cost of their purchase
prices. In addition, companies that have experienced volatility in the market
price of their stock have been the object of securities class action litigation.
If we were the subject of securities class action litigation, this could result
in substantial costs, a diversion of our management's attention and resources
and harm to our business and financial condition.
FUTURE SALES OF CURRENTLY OUTSTANDING SHARES COULD ADVERSELY AFFECT OUR STOCK
PRICE.
The market price of our common stock could drop as a result of sales of a large
number of shares in the market or in response to the perception that these sales
could occur. In addition these sales might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. We had outstanding 51,692,144 shares of common stock as of
June 30, 2002. In addition, at June 30, 2002, we had 5,461,629 shares of our
common stock reserved for issuance under outstanding options and warrants, and
6,933,949 additional shares reserved for issuance under our stock option plans.
SALES OF SHARES ELIGIBLE FOR FUTURE SALE COULD IMPAIR OUR STOCK PRICE.
Sales of a substantial number of shares of common stock in the public market, or
the perception that sales could occur, could adversely affect the market price
for our common stock. These factors could also make it more difficult to raise
funds through future offerings of common stock.
WE DO NOT INTEND TO PAY DIVIDENDS AND THEREFORE STOCKHOLDERS WILL ONLY BE ABLE
TO RECOVER THEIR INVESTMENT IN OUR COMMON STOCK, IF AT ALL, BY SELLING THE
SHARES OF OUR STOCK THAT THEY HOLD.
Some investors favor companies that pay dividends. We have never declared or
paid any cash dividends on our common stock. We currently intend to retain any
future earnings for funding growth and we do not anticipate paying cash
dividends on our common stock in the foreseeable future. Because we may not pay
dividends, a return on an investment in our stock likely depends on the ability
to sell our stock at a profit.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We considered the provisions of Financial Reporting Release No. 48 "Disclosures
of Accounting Policies for Derivative Financial Instruments and Derivative
Commodity Instruments, and Disclosures of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Commodity Instruments." We
had no holdings of derivative financial or commodity instruments at June 30,
2002. However, we are exposed to financial market risks, including changes in
foreign currency exchange rates and interest rates.
The Company has long-term debt, in the form of two building mortgages, which
bear interest at a adjustable rates based on the Bank of England base rate plus
1.5% and 1.75% (5.5% and 5.75%, respectively at June 30, 2002). The Company also
has long-term debt in the form of two loans, which mature in September 2005, to
a stockholder. The first loan has an adjustable rate of interest at 1% above the
lenders borrowing rate (9% at June 30, 2002) and the second loan has a fixed
interest rate of 8%. The table below presents principal amounts by fiscal year
for the Company's long-term debt.
Page 24
2003 2004 2005 2006 2007 THEREAFTER TOTAL
--------- --------- --------- --------- --------- ---------- ---------
(dollars in thousands)
Liabilities:
Fixed rate debt: -- -- -- 15,929 -- -- 15,929
Variable rate debt 666 915 949 15,934 1,021 2,305 21,790
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of its debt obligations approximates fair
value.
Page 25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(1) Exhibit 99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
(1) Report on Form 8-K, filed April 4, 2002, reporting under Item 5
the Placement Agency Agreement dated April 3, 2002, by and between the Company
and A.G. Edwards & Sons, Inc. and the press release of the Comapny issued on
April 4, 2002.
(2) Report on Form 8-K, filed April 15, 2002, reporting under Item 2
the disposition of certain assets in exchange for a discharge and release of all
obligations under the Company's loan agreement with Berg & Berg Enterprises, LLC
dated February 24, 2002.
EXHIBIT INDEX
EXHIBIT NO.
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Page 26
SIGNATURE
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 thereto duly authorized.
VALENCE TECHNOLOGY, INC.
Date: August 14, 2002 By: /S/ STEPHAN B. GODEVAIS
------------------------------------
Stephan B. Godevais
President, Chief Executive Officer
and Chairman of the Board
By: /S/ KEVIN W. MISCHNICK
------------------------------------
Kevin W. Mischnick
Vice President of Finance (Principal
Financial and Accounting Officer)
Page 27