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U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10–Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended
September 30, 2004

Commission file number: 0-30391

MEDIS TECHNOLOGIES LTD.
(Exact Name of Registrant as Specified in its Charter)

Delaware (State or other jurisdiction of incorporation or organization)		13–3669062 (I.R.S. Employer Identification Number)

805 Third Avenue
New York, New York 10022
(Address of Principal Executive Offices and Zip Code)

(212) 935–8484
(Registrant’s Telephone Number, Including Area Code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X]   No [   ]

        Indicate by check mark whether Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)   Yes [X]   No [   ]

        The number of shares of Common Stock, par value $.01 per share, outstanding as of November 5, 2004 was 26,286,590.

MEDIS TECHNOLOGIES LTD.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2004

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Medis Technologies Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Medis Technologies Ltd. and SubsidiariesCondensed
Consolidated Statements of Operations
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Medis Technologies Ltd. and SubsidiariesCondensed
Consolidated Statements of Cash Flows
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Medis Technologies Ltd. and SubsidiariesNotes
to Condensed Consolidated Financial Statements
(Unaudited)

Note A — Nature Of Operations And Basis Of Presentation

        Medis Technologies Ltd. (“MTL”), a Delaware corporation, is a holding company, which through its wholly-owned subsidiaries, Medis El Ltd. (“Medis El”) and More Energy Ltd. (“More Energy”) (collectively, the “Company”), engages in research and development of technology products to license, sell, or enter into joint ventures with large corporations. The Company’s primary business focus is on the advanced development, manufacturing, marketing and distribution of direct liquid fuel cell products for portable electronic devices. Included in this category are the most modern cell phones with a full range of functionality, digital cameras, PDAs, MP3 players, other devices with similar power requirements and a broad array of military devices.  The Company’s other technologies, which are in various stages of development, include the CellScan, inherently conductive polymers, the toroidal engine, stirling cycle system, and the Rankin cycle linear compressor.

        The accompanying condensed consolidated financial statements should be read in conjunction with the following notes and with the consolidated financial statements for the year ended December 31, 2003 and related notes included in the Company’s Annual Report on Form 10-K. The condensed consolidated financial statements as of September 30, 2004 and for the three and nine months ended September 30, 2003 and 2004 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim financial information and the rules and regulations promulgated by the Securities and Exchange Commission. Accordingly, such condensed consolidated financial statements do not include all of the information and footnote disclosures required in annual financial statements. In the opinion of the Company’s management, the unaudited condensed consolidated interim financial statements include all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of such condensed consolidated financial statements. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the entire year.

        The condensed consolidated balance sheet as of December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements.

Note B — Certain Transactions

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Note C — Liquidity

        Since inception, the Company has incurred operating losses and has used cash in its operations. Accordingly, the Company has relied on financing activities, principally the sale of its stock, to fund its research and development activities and operations. The Company believes this dependence will continue unless it is able to successfully develop and market its technologies. However, there can be no assurance that the Company will be able to continue to obtain financing or successfully develop and market its technologies.

        On October 18, 2004, the Company entered into a fourth amendment to the agreement governing its existing $5,000,000 revolving credit line. Pursuant to the amendment, the termination date of the revolving credit line was extended from July 1, 2005 to July 1, 2006. The amendment also modified certain guarantor covenants. The loan agreement bears interest on any outstanding balances based on either the LIBOR or Prime Rate, at the options of the borrower. Any outstanding balances would be collateralized by all deposits with the bank and an assignment of certain leases owned by a partnership in which the Company’s chairman and chief executive officer and its president are partners. Additionally, the Company’s chairman and chief executive officer and its president have personally guaranteed any amounts due under such credit line. As of September 30, 2004, the Company had not borrowed any funds under its credit line.

Note D — Recently Issued Accounting Pronouncements

        In March 2004, the EITF reached consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1), regarding disclosures about unrealized losses on available-for-sale debt and equity securities accounted for under FASB Statements No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, and No. 124, “Accounting for Certain Investments Held by Not-For-Profit Organizations.” EITF 03-1 was to be effective for all other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. However, the guidance contained in paragraphs 10-20 of EITF 03-1 has been delayed by FASB Staff Position EITF Issue 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, ‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,’" posted in September 2004. The delay of the effective date for paragraphs 10-20 will be superseded concurrent with the final issuance of proposed FASB Staff Position EITF Issue 03-1-a, “Implication Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, ‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments’". Under EITF 03-1, the disclosures continue to be effective in annual financial statements for fiscal years ending after December 15, 2003, for investments accounted for under FASB Statements 115 and 124. For all other investments within the scope of EITF 03-1, the disclosures continue to be effective in annual financial statements for fiscal years ending after June 15, 2004. The additional disclosures for cost method investments continue to be effective for fiscal years ending after June 15, 2004. The Company does not expect the implementation of these pronouncements will have a material effect on our consolidated financial statements.

Note E — Subsequent Event

        On October 13, 2004 subsequent to the balance sheet date, MTL extended through December 31, 2005 the expiration dates of certain outstanding warrants that were issued to shareholders of the Company and to members of its corporate advisory board. Such warrants were all scheduled to expire on December

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31, 2004. The Company has estimated the fair value of the extension of such warrants to be approximately $1,530,000.

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Forward Looking Statements

        Some of the information in this quarterly report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “plans,” and “continue” or similar words. You should read statements that contain these words carefully because they:

•   discuss our future expectations;
  
  
•   contain projections of our future results of operations or of our financial condition; or
  
  
•   state other "forward-looking" information.
  
  

        We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The risk factors listed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003, as well as any cautionary language in this quarterly report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. You should be aware that the occurrence of the events described in these risk factors and elsewhere in this quarterly report could have a material adverse effect on our business, operating results and financial condition.

Introduction

        Our primary business focus is on the development, manufacturing, marketing and distribution of direct liquid fuel cell products for portable electronic devices, for the consumer (personal and professional) and military markets. We are also working to develop and commercialize other technologies we own or own the rights to, including the CellScan, inherently conductive polymers, stirling cycle system, toroidal technologies and Rankin cycle linear compressor. Based upon our decision to devote more resources to developing our fuel cell technologies and commercializing fuel cell-based products, in recent years we have increased funding of our fuel cell related efforts, which increases we expect will continue until such time as we successfully commercialize our first fuel cell products, of which we can give no assurance, and perhaps thereafter.

        This presentation includes the operations of our wholly owned subsidiaries, unless we tell you otherwise.

Results Of Operations

        From our inception in April 1992 through September 30, 2004 we have generated an accumulated deficit of approximately $118,885,000, including approximately $43,543,000 from amortization expense. We expect to incur additional operating losses during the remainder of 2004 and possibly thereafter, principally as a result of our continuing anticipated research and development costs,

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increases in selling, general and administrative expenses related to the introduction of our products and the uncertainty of bringing our fuel cell technology or any of our other technologies to commercial success. Since our inception, we have relied principally on outside sources of funding to finance our operations, as our revenues have been minimal. We expect this to continue until we are able to successfully commercialize our fuel cell or any of our other products or technologies, of which we can give no assurance.

        Our research and development costs have increased from approximately $2,749,000 for the year ended December 31, 1999 to approximately $5,010,000 for the year ended December 31, 2003 and to $6,683,000 for the nine months ended September 30, 2004, and are expected to increase further during the remainder of 2004; however, if we are unable to successfully commercially develop our fuel cell technology or any of our other technologies, we will be forced to curtail our spending levels until such time, if ever, as we generate revenues or otherwise receive funds from third party sources.

        We sustained net losses of $10,761,000 and $4,157,000 during the nine and three months ended September 30, 2004, respectively, compared to $7,374,000 and $2,231,000 during the nine and three months ended September 30, 2003, respectively. The increase in the net loss can primarily be attributed to an increase in research and development costs as we increase funding of our fuel cell related efforts and an increase in selling, general and administrative expenses, somewhat offset by a decrease in amortization of intangible assets during the nine months ended September 30, 2004 as certain intangible assets have become fully amortized.

        We did not recognize any revenues during the nine and three months ended September 30, 2004, compared to revenues of approximately $113,000 and $38,000, and gross profit of approximately $70,000 and $22,000, during the nine and three months ended September 30, 2003, respectively. The revenues recognized during the nine and three months ended September 30, 2003 were attributable to a January 2002 agreement to develop for a third party an application for the use of our inherently conductive polymers in its fuel cell products.

        Research and development costs amounted to $6,683,000 and $2,459,000 during the nine and three months ended September 30, 2004, respectively, compared to $3,632,000 and $1,179,000 during the nine and three months ended September 30, 2003, respectively. The increases in research and development costs incurred during the nine and three months ended September 30, 2004, compared to the same periods in 2003, can be primarily attributed to an increase of approximately $3,198,000 and $1,303,000 in costs related to our fuel cell technologies, somewhat offset by a decrease of approximately $36,000 and $34,000 in costs related to our CellScan and by a decrease of approximately $148,000 and $3,000 in aggregate costs related to our toroidal technologies, stirling cycle system and linear compressor. The research and development activities for the periods presented include:

• Fuel Cell Technologies. We incurred costs relating to our fuel cell technologies of approximately $5,749,000 and $2,173,000 during the nine and three months ended September 30, 2004, respectively, compared to costs of approximately $2,551,000 and $870,000 during the nine and three months ended September 30, 2003, respectively The increases in our research and development expenses related to our fuel cell technologies of approximately $3,198,000 and $1,303,000 reflect our decision to continue to devote substantial and increasing amounts of resources to the further development of our fuel cell technologies and products.
  

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• CellScan. We incurred costs relating to the refinement and assembly of the desktop CellScan system and on various CellScan research activities of approximately $741,000 and $214,000 during the nine and three months ended September 30, 2004, compared to costs of approximately $777,000 and $248,000 during the nine and three months ended September 30, 2003. During the nine and three months ended September 30, 2004, in order to move towards commercialization of the CellScan in 2004, we devoted a greater proportion of our CellScan resources to the assembly of additional desktop CellScan systems, as compared to the same periods in 2003 when we devoted a greater proportion to the establishment of CellScan research programs at third party medical institutions.
  
  
• Toroidal Technologies, Stirling Cycle System and Linear Compressor. We incurred aggregate costs relating to our toroidal engine and compressor, stirling cycle system and linear compressor of approximately $126,000 and $37,000 during the nine and three months ended September 30, 2004, compared to costs of approximately $274,000 and $40,000 during the nine and three months ended September 30, 2003. The decreases reflect management’s decision to allocate less of our resources to the development of these technologies and more of our resources to the development of our fuel cell technologies and products.
  
  

        Selling, general and administrative (“SG&A”) expenses during the nine and three months ended September 30, 2004 amounted to approximately $4,069,000 and $1,695,000, respectively, compared to approximately $2,929,000 and $1,055,000 during the nine and three months ended September 30, 2003, respectively. The increase of $1,140,000 for the nine months ended September 30, 2004 is primarily attributable to an increase in non-cash charges relating to stock options and warrants of approximately $780,000 (comprised of approximately $825,000 related to the extension of the expiration date of certain stock options, partially offset by a net decrease of approximately $45,000 in other costs related to stock options and warrants); an increase in selling and marketing expenses of approximately $151,000; an increase in professional fees of approximately $79,000; an increase in labor and executive consulting costs of approximately $74,000; an increase in insurance costs of approximately $72,000; somewhat offset by a net decrease in various other SG&A cost categories of approximately $16,000. The increase in SG&A expenses of $640,000 for the three months ended September 30, 2004 is primarily attributable to an increase in non-cash charges relating to stock options and warrants of approximately $516,000 (comprised of approximately $825,000 related to the extension of the expiration date of certain stock options, partially offset by a net decrease of approximately $309,000 in other costs related to stock options and warrants); an increase in selling and marketing expenses of approximately $68,000; an increase in labor and executive consulting costs of approximately $33,000; and a net increase in various other SG&A cost categories of approximately $23,000.

        Amortization of intangible assets amounted to $156,000 and $52,000 during the nine and three months ended September 30, 2004, compared to $945,000 and $52,000 during the nine and three months ended September 30, 2003. The decreases for the nine months ended September 30, 2004 are primarily attributable to intangible assets acquired in our September 2000 exchange offer for shares of Medis El that we did not already own becoming fully amortized during the nine months ended September 30, 2003, partially offset by amortization of intangible assets acquired in our March 2003 acquisition of the remaining 7% of More Energy that we did not already own.

Liquidity And Capital Resources

        We finance our operations primarily through the proceeds of investor equity financing, which we expect will continue until such time as we successfully commercialize our fuel cell products or products derived from any of our other technologies.

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        Our working capital and capital requirements at any given time depend upon numerous factors, including, but not limited to:

• the progress of research and development programs;
  
  
• the status of our technologies; and
  
  
• the level of resources that we devote to the development of our technologies, patents, marketing and sales capabilities.
  
  

        Another source of revenue or other means to effect our cash expenditures are collaborative arrangements with businesses and institutes for research and development and companies participating in the development of our technologies. Since January 2002, we have realized revenues of $323,000 on costs of sales of $176,000, as well as credits against our research and development costs of approximately $422,000, with respect to collaborative arrangements with third parties relating to our fuel cell technologies. There can be no assurance that we will realize additional revenue or credits to our research and development expense from such collaborative arrangements still in existence or that we will enter into additional collaborative arrangements in the future. Furthermore, there can be no assurance that we will raise additional funds through any financing approach implemented by us.

        In January 2004, we issued 1,425,000 shares of our common stock in a private placement to institutional investors. We received gross proceeds of approximately $14,588,000, less related costs of approximately $309,000.

        During the nine months ended September 30, 2004, option holders exercised outstanding options issued under our 1999 Stock Option Plan, as amended, to acquire 252,534 shares of our common stock, respectively, for aggregate proceeds of approximately $1,442,000.

        During the nine months ended September 30, 2004, warrant holders exercised outstanding warrants to acquire 47,968 shares of our common stock, at exercise prices ranging from $4.92 to $9.60 per share, for aggregate proceeds of approximately $283,000, of which approximately $80,000 is payable pursuant to a short-term promissory note.

        Proceeds from all of the above financing and option and warrant exercises have been and will continue to be used for working capital, including for the continued development of our direct liquid fuel cell technologies and related products, as well as for selling, general and administrative expenses.

        For the nine months ended September 30, 2004, net cash used in operating activities was $7,858,000 compared to $5,870,000 for the nine months ended September 30, 2003. The increase was primarily attributable to management’s decision to continue to increase levels of spending on research and development related to our fuel cell technologies during the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003, and increases in SG&A expenditures, as described more fully above.

        For the nine months ended September 30, 2004, net cash used in investing activities was $916,000, which represented the following: (i) investments in short-term deposits of $12,198,000, fully offset by maturities of $12,198,000, (ii) a loan of approximately $109,000 to Gennadi Finkelshtain, the General Manager of More Energy, under an existing three year promissory note dated April 11, 2003, as amended, made principally to enable him to pay the final installment of certain taxes arising in connection with our March 2003 purchase from him of the remaining 7% of More Energy we did not already own, and (iii) purchases of property and equipment of approximately $807,000, of which approximately $449,000 represents leasehold improvement costs for our new facility in Lod, Israel. This is compared to net cash used in investing activities of $434,000 for the nine months ended September 30,

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2003, which was comprised of a loan of approximately $155,000 to Mr. Finkelshtain pursuant to the promissory note described above, and capital expenditures aggregating approximately $279,000.

        For the nine months ended September 30, 2004, cash aggregating $15,928,000 was provided by financing activities, compared to $8,868,000 for the nine months ended September 30, 2003. During the nine months ended September 30, 2004, cash was provided by the financing activities described in detail above. The cash provided by financing activities for the nine months ended September 30, 2003 aggregating $8,868,000 was generated from: (i) our March 11, 2003 rights offering from which we generated gross proceeds of approximately $5,000,000, less costs of such offering of approximately $122,000, (ii) recording approximately $3,578,000 and related costs of approximately $120,000 pursuant to our offer to exchange and exercise which commenced September 3, 2003 and expired on November 13, 2003, (iii) warrant holders exercising warrants to purchase an aggregate of 12,542 shares of our common stock, for proceeds of approximately $56,000, (iv) warrant holders exercising other outstanding warrants to purchase an aggregate of 25,509 shares of our common stock, for proceeds of approximately $128,000 and (v) holders of options issued under our stock option plan exercised options to acquire an aggregate of 60,513 shares or our common stock, for proceeds of approximately $348,000.

        As of September 30, 2004, we had approximately $13,774,000 in cash and cash equivalents and an unused $5,000,000 revolving credit line which terminates in accordance with its terms on July 1, 2006. As of September 30, 2004, we believe that our cash and cash equivalents and monies available to us from our credit facility will be sufficient to support our operating and developmental activities and capital expenditures for approximately the next 16 months. Beyond such time, or prior to that if we increase our research and development costs and other costs beyond that currently contemplated, we may require capital infusions of cash to continue our operations, whether through debt financing, issuance of shares or from companies or other organizations participating in the development of our technologies. However, to the extent we are unable to raise or acquire additional other funds, we will curtail research and development of one or more technologies until such time as we have adequate funds available.

Commitments and Contingencies

        The following table sets forth our contractual obligations at September 30, 2004.

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Item 3.  Quantitative And Qualitative Disclosures About Market Risk

Disclosure About Market Risk

   Impact Of Inflation And Devaluation On Results Of Operations, Liabilities And Assets

        In connection with our currency use, we operate in a mixed environment. Payroll is paid in our local currency and the local currency of each of our subsidiaries, such as the New Israeli Shekel (NIS) with respect to our Israeli-based operations, as are most of our other operating expenses. Consideration for virtually all sales is either in dollars or dollar-linked currency. As a result, not all monetary assets and all monetary liabilities are linked to the same base in the same amount at all points in time, which may cause currency fluctuation related gains or losses. In order to help minimize the losses, we currently invest our liquid funds in both dollar-based and NIS-based assets.

        For many years prior to 1986, the Israeli economy was characterized by high rates of inflation and devaluation of the Israeli currency against the United States dollar and other currencies. Since the institution of the Israeli Economic Program in 1985, inflation, while continuing, has been significantly reduced and the rate of devaluation has been substantially diminished. However, Israel effected devaluation / (appreciation) of the NIS against the dollar as follows:

        In 1999 and 2000, the rate of inflation in Israel exceeded the rate of devaluation of the NIS against the dollar, but in 2001 and 2002 the rate of devaluation of the NIS against the dollar exceeded the rate of inflation in Israel. In 2003, Israel experienced both price deflation and an appreciation of the NIS against the dollar. In 2003, the rate of inflation (deflation) in Israel was (1.9)% and the rate of devaluation (appreciation) of the NIS was (7.6)%, against the dollar. Additionally, in 2004, through September 30, the rate of inflation in Israel was 1.2% and the rate of devaluation of the NIS was 2.4% against the dollar.

Impact Of Political And Economic Conditions

        The state of hostility which has existed in varying degrees in Israel since 1948, its unfavorable balance of payments and its history of inflation and currency devaluation, all represent uncertainties which may adversely affect our business.

Item 4.  Controls and Procedures

        Our management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of September 30, 2004. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission.

        There has not been any change in our internal control over financial reporting in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act that occurred during the quarter

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ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 6.  Exhibits

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 9, 2004

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