MILLENNIUM CELL INC - 10-Q Quarterly Report

As of September 30, 2004, we had $9,758,742 in cash and cash equivalents and restricted cash of $3,019,558. Cash used in operations totaled $5,694,948 and $7,977,731 in the first nine months of 2004 and 2003, respectively, and related to funding our net operating losses. The restricted cash comprised $2.4 million of cash used for collateral in connection with Ballard's strategic investment in us and $0.6 million of cash used for collateral as security deposit held by our landlord in connection with the amended lease agreement. These funds used will not be available for use in operations until the letters of credit have been reduced or terminated.

Investing activities used cash of $152,434 and $406,251 in the first nine months of 2004 and 2003, respectively. Investing activities in 2004 consisted mainly of purchases of laboratory equipment to support our research, while 2003 investing activities were driven by investing activities in a former affiliate.

Commitments and Contingencies

In April 2001, we amended our main operating lease to provide for additional space for our principal operating offices and laboratories. Since November 2001, we occupy all facilities contemplated in the lease agreement. The amended lease will expire in 2008 and contains options to renew for an additional 8 years and requires us to pay our allocated share of taxes and operating costs in addition to the annual base rent payment. Future minimum annual lease commitments including estimated allocated taxes and maintenance under the amended operating leases are as follows:

2004 (remaining 3 months)	$ 121,077
2005	484,310
2006	484,310
2007	484,310
2008	443,950
Total	$ 2,017,957

In connection with the amended lease agreement, we issued a letter of credit to the landlord for $588,972 in lieu of a cash security deposit. The letter of credit was collateralized with a portion of our cash and is classified as Restricted Cash. The funds used for collateral will not be available for use in operations.

Between January 1999 and April 2000, we received an aggregate of $227,522 from a recoverable grant award from the State of New Jersey Commission on Science and Technology. The funds were used to partially fund costs directly related to development of our technology. The recoverable grant is required to be repaid when we generate net sales in a fiscal year. The repayment obligation, which began in September 2001, ranges from 1% to 5% of net sales over a ten-year period. We are obligated to repay the unpaid amount of the original grant at the end of the ten-year period. We repaid approximately $21,000 of the award during the second quarter of 2003, which represents 3% of our 2002 net sales. Based upon 4% of our 2003 net sales, $18,675 is due to be repaid in 2004.


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We received net proceeds from the sale of New Jersey net operating losses (NOL’s) in connection with the New Jersey Emerging Technology and Biotechnology Financial Assistance Program of $221,480 and $234,963 in 2003 and 2002, respectively. This program allows certain companies to apply to transfer New Jersey NOL’s to other companies. This program, if continued by the State of New Jersey in future years, may produce similar cash inflows for us.

We believe that our current cash and cash equivalents, together with the cash that will be available from the recent private placement financing and projected results of operations will be sufficient to satisfy anticipated cash needs of our operations into 2006. We may raise additional funds through public or private financing, collaborative relationships or other arrangements. Additional funding, if sought, may not be available or, if available, may be offered at terms not favorable to us. Further, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed may harm our business and operating results.

Critical Accounting Policies

Application of Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses, and other financial information. Actual results may differ significantly from these estimates under different assumptions and conditions. In addition, our reported financial condition and results of operations could vary due to a change in the application of a particular accounting standard.

We regard an accounting estimate underlying our financial statements as a "critical accounting estimate" if the accounting estimate requires us to make assumptions about matters that are highly uncertain at the time of estimation and if different estimates that reasonably could have been used in the current period, or changes in the estimate that are reasonably likely to occur from period to period, would have had a material effect on the presentation of financial condition, changes in financial condition, or results of operations.

Not all of these significant accounting policies, however, require management to make difficult, complex or subjective judgments or estimates. Our management has discussed our accounting policies with the audit committee of our board of directors, and we believe that our estimates relating to revenue recognition, convertible debt and stock options described below fit the definition of "critical accounting estimates."

Revenue Recognition

Our near term revenues will be derived substantially from contracts that require us to deliver hydrogen generation technology, management services, system design and prototype systems and licensing of technology for test and evaluation. It is anticipated that revenues will be recognized in the period in which the technology is delivered or licensed revenue is earned.

Convertible Debt

We account for the issuance and conversion of convertible debt in accordance with APB No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants". As a result, we record original issue discounts to the extent the fair value of the debt is below the face value of the instrument and amortizes the discount over the life of the instrument. To the extent conversions of debt into common stock are made prior to the maturity date of the instrument, we will record as interest expense a ratable proportion of the discount associated with the face value of the debt converted.

We account for issuances of convertible debt in accordance with Emerging Issues Task Force ("EITF") No. 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments", and EITF No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios". As a result of certain conversion price discounts included within our outstanding debt instruments, we will record interest expense resulting from Beneficial Conversion Features as described under the caption "Liquidity and Capital Resources" above.

Stock Options

We have recorded non-cash charges in 2004 and 2003 for the fair value of warrants issued to certain affiliates and third parties. Certain affiliates have the ability to earn new awards based on defined milestones and service periods. The accounting methodology requires a re-valuing of the related earned warrants at each reporting period using a Black-Scholes pricing model. Due to this variable accounting methodology, it is difficult to predict the amount of additional non-cash charges that we will incur related to these warrants. The fair value of our options and warrants issued to affiliates and third parties was estimated at the date of grant using a Black-Scholes option-pricing model.


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We also disclose pro forma information regarding net income and earnings per share that is required by SFAS No. 148. This information is required to be determined as if we had accounted for employee stock options under the fair value method of that statement. The fair value of options granted has been estimated at the date of grant using a Black-Scholes option-pricing model.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Our options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. Due to these highly subjective assumptions, the non-cash charges incurred in 2004 and 2003 for warrants issued to affiliates and the pro forma disclosures of net loss and loss per share for those periods are not likely to be representative of non-cash charges and the pro forma effects on net loss and loss per share, respectively, in future periods.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Market risk represents the risk of loss that may impact our financial position, operating results or cash flows due to changes in U.S. interest rates. This exposure is directly related to our normal operating activities. Our cash and cash equivalents are invested with high quality issuers and are generally of a short-term nature. As a result, we do not believe that near-term changes in interest rates will have a material effect on our future results of operations.

Our systems' ability to produce energy depends on the availability of sodium borohydride, which has a limited commercial use and is not manufactured in vast quantities. There are currently only two major manufacturers of sodium borohydride and there can be no assurance that the high cost of this specialty chemical will be reduced. Once we commence full operations in the future, we may need to enter into long-term supply contracts to protect against price increases of sodium borohydride. There can be no assurance that we will be able to enter into these agreements to protect against price increases.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

Our Interim Chief Executive Officer and Acting Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Based on such evaluation, our Interim Chief Executive Officer and our Acting Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective to provide reasonable assurance that material information relating to us and our business is made known to management, including our Interim Chief Executive Officer and our Acting Chief Financial Officer, particularly during the period when our periodic reports are being p repared.

(b) Changes in Internal Controls.

Since the evaluation date, there have not been any significant changes in our internal controls or in other factors that could significantly affect such controls.


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PART II

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) None.

(b) None.

(c) The Company issued the following shares of its common stock (“Shares”) to an institutional and accredited investor (“Investor”) upon conversion of an aggregate amount of $1,000,000.63 principal amount of the Company’s unsecured convertible debentures owned by the Investor:

Date	Amount of Unsecured Convertible Debentures	Number of Shares of Common Stock Issued
8/02/04	$300,000.11	232,559
8/25/04 9/9/04	$300,000.44 $400,000.08	245,902 283,688

The issuances of the Shares of Common Stock listed above were made by the Company in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. The resale of the Shares by the Investor is registered pursuant to a registration statement declared effective by the Securities and Exchange Commission.

Item 3. Defaults Upon 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

31.1 — Certification of Interim Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.2 — Certification of Acting Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1

— Certification of Interim Chief Executive Officer and Acting Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

(b)

Reports on Form 8-K

On September 10, 2004, Millennium Cell Inc. filed a Current Report on Form 8-K announcing it would participate in the Morgan Keegan & Company, Inc. 2004 Equity Conference in New Orleans. A copy of the investor presentation materials for the meetings was furnished as Exhibit 99.1 to the report.

On September 30, 2004, Millennium Cell Inc. filed a Current Report on Form 8-K announcing it had issued $4.0 million of unsecured convertible debentures to an accredited investor under the private placement agreement signed in February 2004.


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Signatures, and Certifications of the Chief Executive Officer and the Chief Financial Officer of the Company.

Exhibits 31.1, 31.2 and 32.1 to this Quarterly Report on Form 10-Q include Certifications of our Interim Chief Executive Officer and our Acting Chief Financial Officer.

The first two forms of Certification are required by Rule 13a-14 under the Exchange Act in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). The Section 302 Certifications include references to an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” and our “internal controls and procedures for financial reporting”. Item 4 of Part I of this Quarterly Report presents the conclusions of our Interim Chief Executive Officer and our Acting Chief Financial Officer about the effectiveness of such controls based on and as of the date of such evaluation (relating to Item 4 of the Section 302 Certifications), and contain additional information concerning disclosures to our Audit Committee and independent auditors with regard to deficiencies in internal controls and fraud and related matters.

The second form of Certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of this Form 10-Q or as a separate disclosure document. A signed original of such written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to us and will be retained by us and furnished to the Securities and Exchange Commission or its staff upon request.

SIGNATURES

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

	MILLENNIUM CELL INC.
	(Registrant)

	By: /s/ H. David Ramm
	H. David Ramm
	Interim President and Chief Executive Officer
	November 15, 2004


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Delaware	22-3726792
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification Number)

	September 30,	December 31,
	2004	2003
ASSETS
Current assets:
Cash and cash equivalents	$ 9,758,742	$ 6,004,173
Accounts receivable	235,623	41,244
Prepaid expenses	399,234	265,459
Deferred financing costs	134,185	22,663
Total current assets	10,527,784	6,333,539
Property and equipment, net	740,631	1,009,514
Patents and licenses, net	576,884	597,564
Restricted cash	3,019,558	2,998,379
Security deposits	45,676	45,676
	$ 14,910,533	$ 10,984,672

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$ 204,922	$ 272,143
Accrued expenses	774,873	389,464
Short-term portion of capital lease obligation	33,950	37,036
Short-term portion of refundable grant obligation	18,675	18,675
Deferred compensation	32,315	32,315
Convertible unsecured debentures, net of discount	1,868,982	--
Deferred revenue	85,000	--
Total current liabilities	3,018,717	749,633

Convertible unsecured debentures, net of discount	3,755,522	684,791
Convertible secured debentures, net of discount	2,399,988	2,399,988
Refundable grant obligation	187,266	187,266
Capital lease obligation and other long-term liabilities	13,385	31,909

Commitments and contingencies

Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 authorized shares, none issued and
outstanding
Common stock, $.001 par value; authorized 70,000,000 shares,
38,324,333 and 35,029,052 shares issued and outstanding
as of September 30, 2004 and December 31, 2003, respectively	38,325	35,029
Additional paid-in capital	84,865,156	77,784,952
Deferred compensation	(209,096)	(358,427)
Deficit accumulated during development stage	(79,158,730)	(70,530,469)
Total stockholders' equity	5,535,655	6,931,085
	$ 14,910,533	$ 10,984,672

	Three Months	Three Months	Nine months	Nine months
	Ended	Ended	Ended	Ended	Cumulative
	September 30,	September 30,	September 30,	September 30,	Amounts From
	2004	2003	2004	2003	Inception

Revenue	$ 10,000	$ 102,605	$ 125,000	$ 395,914	$ 1,311,251
Cost of revenue	10,000	92,805	125,000	338,504	1,224,508
Gross margin	--	9,800	--	57,410	86,743

Product development and marketing.	904,063	1,496,724	2,679,564	4,019,356	19,275,470
General and administrative
(excluding non-cash charges)	782,676	736,620	3,023,682	2,841,389	18,977,387
Non-cash compensation charges	126,356	418,787	718,358	2,366,019	25,158,085
Restructuring expense	--	--	--	--	104,982
Depreciation and amortization	128,477	153,173	420,817	494,744	2,600,008
Research and development	27,997	221,982	119,093	798,380	8,231,206
Total operating expenses	1,969,569	3,027,286	6,961,514	10,519,888	74,347,138
Loss from operations	(1,969,569)	(3,017,486)	(6,961,514)	(10,462,478)	(74,260,395)
Other income, net	--	--	--	--	456,443
Interest expense	365,364	1,464,068	1,666,747	2,318,303	2,347,819
Equity in losses of affiliates	--	--	--	488,364	856,078
Net loss.	(2,334,933)	(4,481,554)	(8,628,261)	(13,269,145)	(77,007,849)
Preferred stock amortization.	--	--	--	--	2,150,881
Net loss applicable to common stockholders	$ (2,334,933)	$ (4,481,554)	$ (8,628,261)	$ (13,269,145)	$ (79,158,730)
Loss per share -- basic and diluted	$ (.06)	$ (.14)	$ (.24)	$ (.43)	$ (2.80)
Weighted -- average number of shares outstanding	37,701,400	31,944,522	36,696,629	30,541,661	28,311,024

	Nine months	Nine months	Cumulative
	Ended	Ended	Amounts from
	September 30, 2004	September 30, 2003	Inception
OPERATING ACTIVITIES
Net loss	$ (8,628,261)	$ (13,269,145)	$ (77,007,849)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization	420,817	494,744	2,600,008
Amortization of discount on debentures	660,793	749,246	1,609,490
Beneficial conversion feature on debentures	455,757	1,156,370	1,812,582
Amortization of deferred financing costs	474,569	437,452	1,071,213
Losses on investment in affiliate	--	488,364	856,078
Non-cash compensation charges	718,358	2,366,019	25,158,085
Changes in operating assets and liabilities:
Accounts receivable	(194,379)	35,728	(235,623)
Prepaid expenses and other assets	(133,775)	(144,341)	(444,910)
Accounts payable and accrued expenses.	446,041	(292,168)	1,537,217
Deferred revenue	85,000	--	2,484,988
Net cash used in operating activities.	(5,695,080)	(7,977,731)	(40,558,721)

INVESTING ACTIVITIES
Purchase of property and equipment	(97,585)	(6,050)	(2,885,446)
Patent registration costs	(33,669)	(51,553)	(695,893)
Restricted cash……………...	(21,179)	(27,696)	(3,019,558)
Investment in affiliate………...……………...	--	(320,952)	(856,078)
Net cash used in investing activities	(152,433)	(406,251)	(7,456,975)

FINANCING ACTIVITIES
Proceeds from issuance of common stock	345,324	145,000	35,485,174
Underwriting and other expenses of initial
public offering	--	--	(3,669,613)
Proceeds from issuance of debentures	9,428,806	8,500,000	21,428,806
Proceeds from equity private placement	--	--	2,736,279
Deferred financing costs	(150,438)	(277,852)	(769,745)
Proceeds from capital contribution	--	--	500,000
Payment of note payable	--	--	(250,000)
Payment of capital lease obligation	(21,610)	--	(38,849)
Proceeds from grant, net	--	(21,582)	205,940
Proceeds from sale of preferred stock.	--	--	2,146,446
Net cash provided by financing activities	9,602,082	8,345,566	57,774,438
Net change in cash and cash equivalents	3,754,569	(38,416)	9,758,742
Cash and cash equivalents, beginning of
period	6,004,173	7,987,127	--
Cash and cash equivalents, end of period	$ 9,758,742	$ 7,948,711	$ 9,758,742

		Additional			Total
Common Stock		Paid-In	Deferred	Accumulated	Stockholders'
Shares	Amount	Capital	Compensation	Deficit	Equity

		Page
Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheet - September 30, 2004 and December 31, 2003	1

	Consolidated Statements of Operations - Three and Nine months ended
	September 30, 2004 and 2003	2

	Consolidated Statements of Cash Flows - Nine months ended September 30, 2004 and 2003	3

	Consolidated Statements of Stockholders’ Equity - Nine months ended
	September 30, 2004	4

	Notes to Consolidated Financial Statements - September 30, 2004	5

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15

Item 4.	Controls and Procedures	15


PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	16

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16

Item 3.	Defaults Upon Senior Securities	16

Item 4.	Submission of Matters to a Vote of Security Holders	16

Item 5.	Other Information	16

Item 6.	Exhibits	17

Balance at December 31, 2003	35,029,052	$ 35,029	$ 77,784,952	$ (358,427)	$ (70,530,469)	$ 6,931,085
Issuance of common stock from conversion of debentures	2,463,981	2,464	4,697,536	-	-	4,700,000
Beneficial conversion feature of debentures	-	-	455,757	-	-	455,757
Issuance of common stock for debt financing costs	377,846	378	813,445	-	-	813,823
Issuance of common stock from exercise of options	115,532	116	345,208	-	-	345,324
Issuance of common stock for Board of Director compensation	98,659	99	184,695	-	-	184,794
Amortization of deferred compensation	-	-	5,889	149,331	-	155,220
Issuance of common stock for executive compensation	100,000	100	141,900	-	-	142,000
Non-cash compensation charges	-	-	141,689	-	-	141,689
Issuance of common stock in lieu of employee merit increase	51,800	52	130,996	-	-	131,048
Issuance of common stock for interest payments	55,958	56	100,111	-	-	100,167
Issuance of stock for 401(k) plan matching contributions	31,505	31	62,978	-	-	63,009
Net loss	_________	_______	___________	___________	(8,628,261)	(8,628,261)
Balance at September 30, 2004	38,324,333	$ 38,325	$ 84,865,156	$ (209,096)	$ (79,158,730)	$ 5,535,655

	Three Mos. Ended Sept. 30,		Nine Mos. Ended Sept. 30,
	2004	2003	2004	2003
Net loss attributable to common stockholders —
As reported	$(2,334,933)	$(4,481,554)	$(8,628,261)	$(13,269,145)
Add: Total stock-based compensation expense
included in net loss	126,356	418,787	718,358	2,366,019
Deduct: Total stock-based compensation expense
determined under fair value based method for all
stock option awards	(316,987)	(1,083,597)	(1,331,835)	(5,263,423)
Net loss attributable to common stockholders —
Pro forma	$(2,525,564)	$(5,146,364)	$(9,241,738)	$(16,166,549)
Net loss per share attributable to common
stockholders — As reported	$(0.06)	$(0.14)	$(0.24)	$(0.43)
Net loss per share attributable to common
stockholders — Pro forma	$(0.07)	$(0.16)	$(0.25)	$(0.53)

	Three and Nine Mos. Ended September 30,
	2004	2003
Expected dividend yield	—	—
Expected stock price volatility	.57	.69
Risk-free interest rate	3.48%	3.68%
Expected option term	5 years	5 years

2004 (remaining 3 months)	$ 91,055
2005	278,632
2006	31,789
2007	7,947
Total	$ 409,423