UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
FOR
ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR
15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
x ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the Fiscal Year Ended December 31, 2004
o TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
000-31083
(Commission
File Number)
MILLENNIUM
CELL INC.
(Exact
Name Of Registrant As Specified In Its Charter)
|
Delaware
(State
or Other Jurisdiction of
Incorporation
or Organization) |
22-3726792
(I.R.S.
Employer Identification Number) |
|
1
Industrial Way West, Eatontown, New Jersey
(Address
Of Principal Executive Offices) |
07724
(Zip
Code) |
| |
|
(732)
542-4000
(Registrant's
Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value
per share
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 o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). Yes o No
x
The
aggregate market value of the registrant's common stock held by non-affiliates
as of March 1, 2005 was $75,763,788.
The
number of shares outstanding of the registrant's common stock as of March 1,
2005 was 40,544,538.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive proxy statement dated March 21, 2005 to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held on April 21, 2005 are incorporated by reference into Part III.
TABLE
OF CONTENTS
|
Item |
Description |
Page |
| |
|
|
| |
PART
I |
|
| |
|
|
|
Item
1. |
Business |
1 |
|
Item
2. |
Properties |
7 |
|
Item
3. |
Legal
Proceedings |
7 |
|
Item
4. |
Submission
of Matters to a Vote of Securities Holders |
7 |
| |
|
|
| |
PART
II |
|
| |
|
|
|
Item
5. |
Market
for the Registrant's Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities |
8 |
|
Item
6. |
Selected
Financial Data |
9 |
|
Item
7. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
9 |
|
Item
7A. |
Quantitative
and Qualitative Disclosure About Market Risk |
17 |
|
Item
8. |
Financial
Statements and Supplementary Data |
17 |
|
Item
9. |
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure |
17 |
|
Item
9A. |
Controls
and Procedures |
17 |
| |
|
|
| |
PART
III |
|
| |
|
|
|
Item
10. |
Directors
and Executive Officers of the Registrant |
17 |
|
Item
11. |
Executive
Compensation |
18 |
|
Item
12. |
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
18 |
|
Item
13. |
Certain
Relationships and Related Transactions |
18 |
|
Item
14. |
Principal
Accountant Fees and Services |
18 |
| |
|
|
| |
PART
IV |
|
| |
|
|
|
Item
15. |
Exhibits,
Financial Statement Schedules, and Reports on Form 8-K |
18 |
PART
I
Item
1. Business.
General
We were
formed as a Delaware limited liability company in 1998, organized and began
operations on January 1, 1999 and converted into a Delaware corporation on April
25, 2000. Upon our initial public filing, our business focus was on
commercialization of our technology in transportation and battery markets. Based
upon the delay in commercialization of fuel cells and the cost of sodium
borohydride, we re-directed our focus over the past 18 months to more
attractive, near term markets. As a result, our current business focus is to
develop hydrogen energy systems for use in portable electronic devices for the
consumer, medical, military and industrial markets. These energy systems offer
runtime, weight, safety and cost advantages versus existing battery solutions.
We are developing this technology in partnership with corporate and government
entities.
Our
Energy Systems
Our
energy systems provide a unique way to safely store and deliver hydrogen energy
in a “battery” sized package. These systems utilize Millennium Cell’s
proprietary Hydrogen
on Demand®
technology and provide what we believe to be an excellent value proposition for
a number of high performance applications. In our system, the energy is stored
in a sodium borohydride fuel blend, which in the presence of a catalyst releases
hydrogen (stored energy). The fuel blends used in our energy systems are
comprised of a combination of water, sodium borohydride and sodium hydroxide.
The
hydrogen produced by our energy systems is converted into electricity by a fuel
cell. A fuel cell transforms hydrogen and oxygen directly into electrical power
and produces power as long as the hydrogen and oxygen are supplied to it. Our
energy systems utilize fuel cartridges to recharge the fuel cell instantly on
demand. Using multiple fuel cartridges, our customers’ devices can run as long
as needed without the need for battery recharging or connection to an electrical
wall outlet.
We do not
manufacture fuel cells, but we procure them from public and private fuel cell
suppliers and integrate them with our systems to develop power solutions for our
customers. We find our outsourcing of the fuel cell supply to be advantageous as
there are many potential suppliers of fuel cells to choose from, each with their
own specialties. We choose the fuel cell with the most appropriate
characteristics (i.e. size, power density, form factor) for each application to
optimize the solution for our customers.
Business
Strategy
Our
primary business model is to license our technology to OEM’s and other
product-focused entities so that they can manufacture systems to meet their
specifications. We expect we may have to manufacture some of our systems
initially at low volumes but we do not expect to continue manufacturing volume
production longer term. We will also license our fuel cartridge technology to
companies that are interested and able to distribute replacement cartridges in
sufficient quantities and locales to meet mass market users’ needs.
To
accomplish our objective of providing an attractive alternative to the batteries
generally used to power portable electronic devices, a core part of our strategy
is to partner with various fuel cell companies and to integrate our technology
to form a complete power source solution for device manufacturers and consumers.
In pursuit of this goal, we intend to partner with a number of fuel cell
companies to provide optimized solutions that best meet our customers’
requirements in different market segments.
One key
fuel cell partnership is with Protonex Technology Corporation. Millennium Cell
and Protonex have entered into a joint development and licensing agreement that
results in collaborative efforts towards military, industrial and medical market
opportunities for a Protonex fuel cell and a Millennium Cell hydrogen energy
system. In this agreement, Protonex has licensed Millennium Cell’s technology so
that they can make and sell fuel cell systems. Millennium Cell is a
sub-contractor to Protonex in the development of a 30-watt power source for the
US Air Force Research Laboratory (“USAFRL”). The USAFRL is providing funding for
our development activities through the Dual Use Science and Technology program.
Millennium Cell and Protonex publicly demonstrated the initial prototype
developed under this program at the Tactical Power Sources Symposium on January
31, 2005. We plan to continue product development towards a goal of providing
products for field-testing by the USAFRL in 2006. We are also using this fuel
cell system as a platform to enter the industrial and medical markets.
To
accelerate the path towards product commercialization, we entered into a
strategic relationship with The Dow Chemical Company (“Dow”) on February 27,
2005. Dow is a leader in science and technology, providing innovative chemical
and plastic products and services to many essential consumer markets. With
annual sales of $33 billion, Dow serves customers in more than 180 countries and
a wide range of markets. In this three-year collaboration, the two companies
will strive for the commercialization of Millennium Cell’s energy systems in key
identified markets. Dow will supply necessary product design, chemical and
material analysis, and product development resources necessary to create
products that are successful for these markets. With successful achievement of
defined milestones towards these goals, Dow will progressively increase its
human resources, cash investment and equity ownership in Millennium Cell. Dow
may also become a manufacturer and distributor of products such as fuel
cartridges to serve these markets.
We are
also working with the Peugeot Citroen and Gaz de France on a project to explore
the use of sodium borohydride for on-board auxiliary power and to study the
supply chain requirements of distributing sodium borohydride on a mass scale. In
2004, we successfully passed the gate for phase 1 of the work plan and are
continuing to work on this funded effort to advance our technology in specialty
transportation applications.
To
investigate lower cost ways to manufacture sodium borohydride, we are executing
on our multi-year program with the Department of Energy with Air Products and
Chemicals as our subcontractor. Our goal for this work is to enable longer-term,
cost-sensitive markets in parallel as we move down the path to commercialization
in portable power markets.
During
the fourth quarter of 2004, we began work with Concurrent Technologies and the
Fuel Cell Test and Evaluation Center under the Common Core Power Production
program. This program’s goal is to identify alternative power sources for use in
military standby power, portable power and specialty transportation
applications. This one-year program began in the fourth quarter of
2004.
Market
Opportunity for Our Products
As
portable electronic devices continue to become more advanced and look to offer
greater capabilities and functionality, device manufacturers, service providers
and consumers are seeking significantly increased and longer lasting power.
Since we believe that batteries presently used in these devices are approaching
their technological limits, the power gap that already exists between
ever-increasing power demands of electronic applications and the amounts of
power in the batteries will increase. We believe that our proprietary energy
systems can bridge this gap. Rather than being an incremental improvement to
current battery technology, our energy systems should provide a major
technological leap as compared to battery technology in that our technology has
greater energy density, weighs less and in many cases is more
affordable.
Millennium
Cell's products are being designed to significantly increase device run time
compared to existing lithium-ion batteries using the same volume and less
weight. Our technology eliminates the need to stay tied to an electrical wall
outlet for recharging as well as providing for an instant recharge through the
use of disposable fuel cartridges. Upon commercial success of our products,
portable electronics devices will be "truly wireless", capable of going
anywhere, anytime with no need to plug in or wait for a recharge.
Due to
the scalability of our technology, we have the ability to address a number of
significant markets without the need to develop alternative pathways to deliver
the energy. Applications range from small (cellular phones, personal digital
assistants, notebook PCs) to large (auxiliary power units, stationary power,
automobiles), where the demands for volumetric energy density are particularly
challenging. This is a substantial advantage over many competing energy
technologies.
Target
Markets
The
initial markets we intend to address are the military and laptop computer
segment of consumer electronics. The military is well known as a proving ground
for new technologies and is facing problems for which we believe that our
technology is well suited. Frost and Sullivan report that a profound problem
facing the military today is the steady increase in energy demand driven by the
power hungry new equipment used by soldiers.1
Such
equipment includes laser-designators, chemical-biological sensors, uniform
ventilators, exoskeleton enhancements, night vision systems and communication
equipment. Considering the military’s 72-hour mission duration requirements, the
capabilities of traditional batteries have been far exceeded. In our alliance
with Protonex, we plan to offer an energy system that will have best in class
runtime, reduced weight and lower cost. Each year, the military uses more than
$150 million worth of batteries for such missions and this market is expected to
continue growing as the soldiers of the future utilize more and, as reported by
Frost and Sullivan, more high tech equipment.
1
| 1 |
Information
courtesy of Frost and Sullivan. |
We plan
to use the products developed for the military with Protonex as a platform for
entering medical and industrial markets, each of which has a diverse customer
base with unique energy storage needs and challenges. The energy demand for
portable medical and industrial equipment has also seen a sharp rise and shows
no signs of leveling off. Driven by an aging population, an increase in
decentralized care centers and a need for equipment and services closer to
patients’ required point of treatment, the total battery market for medical
equipment is approaching $500 million and continues to grow. 1
Defibrillators, vital sign monitors, infusion pumps and other portable equipment
all need extended runtime and lighter energy sources.
In the
laptop computer market, we are developing a hydrogen energy system with the goal
of enabling all day operation, without the need for any recharging. We believe
that Millennium Cell’s energy dense fuel cartridge together with a flat panel,
passive fuel cell has the potential to reach this elusive target that
traditional rechargeable batteries cannot approach. As Frost and Sullivan
project, sales of rechargeable batteries approaching $1 billion in 2005 and
annual growth of more than 10%, we believe that the laptop computer market is a
prime target for our power systems.1
Within
the next several years, laptop computer shipments are projected to overtake
desktop shipments, further intensifying the demand for extended runtime
solutions. In addition, we believe that the products being developed for the
laptop market will be able to serve as a platform for entering other segments of
the consumer electronics market such as handheld computers, personal digital
assistants, cell phones, handheld game devices and other converged devices on
the horizon.
Our
Systems
Portable
Power Source
Together
with our fuel cell partner Protonex, we are developing a 30-watt power system
for the U.S. Air Force to provide portable soldier power for the dismounted
soldier on a 72-hour mission. According to our research, compared with the
lithium sulfur dioxide battery used today for this application, our solution is
about 1/3 the weight and 1/3 the cost when analyzed over the course of 30
missions. Today, a soldier on a 72-hour mission needs to carry 13 batteries that
weigh an aggregate of about 29 pounds. Our solution would be comprised of a fuel
cell module accompanied by 5 fuel cartridges and would collectively weigh about
10 pounds. Additionally, there are features that fuel cell systems can offer
that batteries cannot. Our system has the ability to monitor the amount of
energy (run-time) remaining in the fuel cartridge at any given time. This is
significant for a military operation as soldiers returning from missions with
partially depleted batteries will often dispose of them in favor of a fresh
battery when going on the next mission. This is a tremendous waste of energy and
adds unnecessary cost.
We
demonstrated this system at a major military conference in January 2005. We
delivered this version of the system to the Air Force in February 2005 and will
deliver the next generation system that will contain a higher amount of energy
and have increased robustness later in 2005.
We expect
that the system developed with Protonex will provide a scalable platform from
which to introduce our hydrogen energy systems in the commercial medical and
industrial markets. We believe that these solutions will provide a
lighter-weight, longer run-time power option desired by these markets as well.
Laptop
Computer Power Source
The
“power gap” between what battery technology can provide versus what portable
electronic devices require is growing rapidly in the consumer electronics market
as well. We believe our technology is the key to offering the promise of a full
day of computing time. Our hydrogen energy systems provide a major technological
leap as compared to battery technology in terms of energy density, lightweight
operation and in many cases affordability. Even more exciting, our solutions can
fit inside the compartment typically used to hold a battery. Direct methanol
fuel cells, another technology competing for this market, have been unable to
fit their systems into this space.
Our
current prototype incorporates our fuel cartridge and a partner’s fuel cell to
produce a system that has the potential to provide a full day of runtime. We are
developing our disposable, one time use hydrogen fuel cartridge to fit in the
battery cavity and the flat panel fuel cell to be integrated into the personal
computer on the back of the LCD screen. Our proof-of-concept prototype system
operates a laptop personal computer for three continuous hours at nominal and
peak loads. Later in 2005, we intend to reach over six hours of runtime in a
single hydrogen fuel cartridge. Our goal with this system is to demonstrate to
OEM’s that our systems are ready to be considered for design into their
devices.
| 1 |
Information
courtesy of Frost and Sullivan. |
We
demonstrated these energy systems at the Intel Developers Forum in September
2004 and again in March 2005 to expose our technology to OEM’s and other
interested parties and show them that we have a path to deliver a full day of
run time to their devices within the required space. We have been very
encouraged by the feedback we have received at these shows and we are working to
secure commitments from OEM’s to design-in our energy systems to power their
devices.
Fuel
Distribution and Infrastructure
We intend
to evolve the fueling and refueling supply chain for our energy systems based on
customer need and convenience. Today, consumer electronic device power
requirements are satisfied by the purchase of self-contained solid-state
disposable batteries and rechargeable battery systems. In the future, we expect
that our supply chain will be similar to that used by disposable batteries
today. This is different from the transportation market which would require more
extensive changes including retrofitting of existing service stations and
recycling of spent fuel in regional centers. Millennium Cell's energy systems
are designed to integrate well with diverse customer fueling requirements
because of the unique safety and convenience in storing, transporting,
distributing, and using the sodium borohydride fuel.
The key
to our energy systems is our sodium borohydride fuel blends. Our fuel is safe
and non-flammable when handled appropriately. Our fuel can be shipped dry or as
a liquid and we expect a number of different system options to be available
which will be suited to our customers needs. We are currently working on
obtaining the required approvals from the United Nations and related regulatory
organizations but we expect that our fuel will be compatible with everyday use
on all forms of transportation.
Research
and Development
We are
aggressively working on programs with the U.S. Department of Energy (“DOE”) and
with Air Products and Chemicals, a major producer of hydrogen, to reduce the
cost of sodium borohydride. Reducing the cost of manufacturing sodium
borohydride through a reduction in raw materials costs or process costs is
important to the Company’s longer-term vision of using our Hydrogen on Demand
technology to power larger, continuous use applications such as transportation.
In order to compete with liquid fuels such as gasoline or diesel on a cost
basis, we will need to substantially lower the cost of our fuel. We have already
made progress in these programs and we continue to work with the DOE and Air
Products to complete this important work. This three-year program began in the
fourth quarter of 2003 and provides funding to Millennium Cell of $3.6
million.
Intellectual
Property Rights
Our
hydrogen energy systems are the culmination of work reflected in more than 30
patents (either granted or in application) that collectively provide us with a
leading position in the system and fuel blend technology used to convert sodium
borohydride to hydrogen energy for use in portable electronic device
applications.
We
own six U.S. and seven non-U.S. patents, which cover a wide variety of
devices, systems, uses and applications for various boron chemistries. We have
filed an additional 16 U.S. and 25 non-U.S. patent applications. We have also
filed three U.S. trademark applications. Our earliest patent expires in 2015 and
the most recently filed applications, if issued, will not expire until
2023.
Our
intellectual property strategy is to identify key intellectual property
developed by us in order to protect it appropriately. In addition, we seek to
use and assert such intellectual property to our competitive advantage. We rely
on a combination of patents, trade secrets, trademarks, and license and
nondisclosure agreements to protect our proprietary technology.
We use
patents as the frontline means of protecting our technological advances and
innovations, such as our proprietary hydrogen generators, components, materials,
operating techniques and systems and, therefore, the enforcement of our patents
is critical to our business. We have adopted a proactive approach to identifying
patentable inventions and securing patent protection through the timely filing
and aggressive prosecution of patent applications. Patent applications are filed
in the United States and internationally, in countries carefully chosen based on
the likely value and enforceability of intellectual property
rights.
There are
companies who claim to be working on the generation of hydrogen or electricity
from sodium borohydride. We believe we have a leading intellectual property
position in these areas. We actively monitor competitive activity and will
enforce our patent rights to the fullest extent.
Competition
We expect
our products to compete with power systems that utilize both direct and indirect
energy conversion methods. Direct conversion may involve fuels such as methanol,
ethanol and sodium borohydride that are converted into electrons through a
direct fuel cell system. The indirect method of energy conversion is to generate
hydrogen and convert it to electricity through a fuel cell in a two-step
process. This is the method utilized by Millennium Cell’s Hydrogen on Demand
technology. There are competing solutions which also use an indirect method
based on another fuel such as methanol. Our primary competitors are companies
developing small fuel cells for the portable electronics market such as MTI
Micro Fuel Cells and Medis Technologies.
We
believe other large electronic device companies may also be developing fuel
cells based on competing fuel sources for the portable electronics market.
Toshiba Corporation, NEC Corporation, Hitachi, Ltd., Casio Computer Co. Ltd.,
Samsung Electronics Co. Ltd. and Sony Corporation have all publicly disclosed
information about their fuel cell development programs. Toshiba, Hitachi and
other Japanese corporations have announced their intention to unify the
technical standards for micro fuel cells powered by methanol that they are each
developing, in the hope of boosting the market for such fuel cells. We believe
that there are other companies that we may not know of that are also developing
fuel cells and competing fuel sources for portable electronic
devices.
We also
expect indirect competition from companies who manufacture and design existing
battery products (both chargeable and rechargeable). Existing battery products
are the incumbent solution with the significant advantage of having commercially
available products today. These companies are continuously investing in
marketing and further research and development to improve their existing
products and explore alternative technologies.
We expect
products using our energy systems to compete on the basis of reduced volume and
weight, increased length of operating time, greater convenience and lower
cost.
Raw
Materials
Sodium
borohydride is manufactured from a base material called borax. There are
approximately 600 million metric tons of borax raw materials worldwide, and the
United States is among the largest holders of borax reserves in the world. Borax
is most commonly found in dried lakes or sea beds, and it is mined at the
surface using drag lines, whereby buckets are continuously dragged across the
ground scraping borax from the surface. Currently, a limited number of
manufacturers make sodium borohydride as a specialty chemical. Despite the great
quantities of reserves and current annual production of borax, there are few
commercial applications that require sodium borohydride today. The most common
application for sodium borohydride is for use as a bleaching agent in the paper
industry. Up until now, the relatively limited commercial uses of sodium
borohydride have allowed manufacturing to continue using technology from the
early 1950s.
In as
much as we intend to focus primarily on research and development, and not on
large scale manufacturing, we do not believe that our costs to comply with
federal, state and local provisions that have been enacted or adopted regulating
the discharge of materials into the environment, or otherwise relating to the
protection of the environment, will have a material effect on our capital
expenditures, earnings or competitive position.
Human
Resources
As of
February 14, 2005, we had a total staff of 32 employees, of which 19 are
scientists, engineers and other professionals. We expect to hire a few employees
in business development and product development functions during
2005.
Investment
Considerations
Our
business, the results of operations and the trading price of our common stock
could be harmed by any of the following factors:
Company
Risk Factors
| · |
We
are a development stage company, and have only been in business for a
short time. In addition, many aspects of our business plan rest on beliefs
formed by our management and have not necessarily been supported by
independent sources. As a result, there is a limited basis of evaluation
of the Company. |
| · |
We
have incurred substantial losses and expect losses for the foreseeable
future. Accordingly, we may not be able to achieve profitability, and even
if we do become profitable, we may not be able to sustain profitability.
|
| · |
We
expect our future operating results to vary significantly quarter to
quarter, and increase the likelihood that we may fail to meet the
expectations of securities analysts and investors at any given time.
|
| · |
We
may not be able to enter into agreements with collaborators and strategic
partners and, if we do enter into agreements with collaborators and
strategic partners, we or our collaborators and strategic partners may
fail to perform under such agreements. |
| · |
We
may be unable to continue to complete prototype development and
engineering of commercially viable hydrogen generation systems and, if
not, may not be able to build our business as anticipated.
|
| · |
Failure
to meet milestones and performance goals with potential customers could
delay or impede commercialization of our technology and potential
purchasers of our systems may decline to purchase them or choose to
purchase alternate technologies. |
| · |
Our
hydrogen generation systems may only be commercially viable as a component
of other companies’ products and these companies may choose not to include
our systems in their products. |
| · |
Any
perceived problem while conducting demonstrations of our technology could
hurt our reputation and the reputation of our products, which would impede
the development of our business. |
| · |
Some
of the raw materials that the hydrogen generation systems use are
expensive and are not manufactured in large quantities and sell at high
margin. Therefore, the energy produced by our systems may cost more than
energy provided through conventional and alternative systems. Accordingly,
our systems may be less attractive to potential users.
|
| · |
If
we cannot develop and demonstrate lower cost processes for the manufacture
of sodium borohydride, our commercialization plans may be hindered.
|
| · |
If
we don’t raise additional capital into 2006, we won’t be able to fulfill
our business plan and the development of our business will be adversely
affected. |
Risks
Relating to Owning Our Securities
| · |
A
substantial number of shares of our common stock have been, and are
expected in the near future to be, registered for resale in connection
with the issuance of common stock to private investors and the issuance of
our common stock after conversion of outstanding debentures and exercise
of outstanding warrants. Resale of a significant number of shares into the
public markets could depress the trading price of our common stock and
make it more difficult for our stockholders to sell equity securities in
the future. |
| · |
Our
debentures are subject to a number of restrictive covenants, including a
requirement that our common stock remain listed on a National Exchange. If
we are unable to maintain a listing on either the NASDAQ National Market
or NASDAQ SmallCap Market, the debentures may be called by the holders.
Furthermore, if the NASDAQ National Market or SmallCap listing is not
maintained, our stockholders might find it more difficult to liquidate
their investment. |
| · |
We
may be required to issue more shares of common stock to the holders of the
debentures and the warrants as a result of the anti-dilution provisions of
the debentures and the warrants. In addition, subject to the satisfaction
of numerous conditions, we have the right to force conversion of the
unsecured debentures at a discount to current market prices. Sales of
substantial amounts of common stock could reduce the market price for our
common stock and make it more difficult for our stockholders to sell their
shares. |
| · |
Failure
to comply with certain financial conditions under the terms of the
unsecured convertible debentures could result in an event of default under
the unsecured convertible debentures. |
| · |
We
do not intend to pay any dividends on our common
stock. |
| · |
We
will need future capital to complete our product development and
commercialization plans. If we are able to raise additional capital, it
may dilute the ownership of our stockholders or restrict our ability to
run our business. |
| · |
We
may be subject to litigation if our common stock price is volatile, which
may result in substantial costs and a diversion of our management's
attention and resources and could have a negative effect on our business
and results of operations. |
| · |
We
are heavily dependent on companies or governmental agencies that would
include our hydrogen generation systems in their products and to develop
the infrastructure required to use of our technologies in certain
applications or markets. |
| · |
We
are dependent on government contracts which is important to the
implementation of our commercialization
plans. |
| · |
Failure
to meet cost or performance goals with potential customers could delay or
impede commercialization of our technology.
|
| · |
Any
accidents involving our products or the raw materials used in our products
could impair their market acceptance. |
| · |
We
will continue to face intense competition from alternative power
technologies and may be unable to compete successfully.
|
| · |
We
depend on our intellectual property and may not be able to protect the
rights to that intellectual property. Our failure to protect this
intellectual property could adversely affect our future growth and
success. |
| · |
Our
future plans could be adversely affected if we are unable to attract or
retain key personnel. |
Industry
Risk Factors
| · |
A
mass market for fuel cells, hydrogen generation systems or batteries may
never develop or may take longer to develop than we anticipate.
|
| · |
Changes
in environmental policies could result in automobile manufacturers
abandoning their interest in fuel cell powered vehicles. This may lessen
the market for our products and harm the development of our business.
|
| · |
Since
zero emission vehicle requirements can be met without using fuel cells,
automobile manufacturers may use other technologies to meet regulatory
requirements. |
Available
Information
We file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy any document
we file with the Commission at the Commission’s public reference rooms at 450
Fifth Street, N.W., Washington, D.C. 20549, 233 Broadway, New York, New York
10279, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661- 2511. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. Our Commission filings are also
available to the public from the Commission’s Website at “http://www.sec.gov.”
We make available free of charge our annual, quarterly and current reports,
proxy statements and other information upon request.
We
maintain a Website at “http://www.MillenniumCell.com” (this is not a hyperlink,
you must visit this website through an Internet browser). Our Website and the
information contained therein or connected thereto are not incorporated into
this Annual Report on Form 10-K.
Item
2. Properties.
Our
principal offices are located at 1 Industrial Way West, Eatontown, New Jersey
07724, currently occupying 32,500 square feet. Our amended lease will expire in
2008, with five and three year options to renew through 2016. We believe that
the current facilities will be sufficient for our operations in the foreseeable
future.
Item
3. Legal Proceedings.
We are
not aware of any pending or threatened legal actions other than disputes arising
in the ordinary course of our business that would, if determined adversely to
us, have a material adverse effect on our business and operations.
Item
4. Submission of Matters to a Vote of Security Holders.
No
matters were submitted to a vote of stockholders during the fourth quarter of
the fiscal year covered by this report.
PART
II
Item
5. Market For The Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Market
Price And Dividend Information
Price
Range of Common Stock
Our
common stock is traded on the NASDAQ SmallCap Market under the symbol "MCEL".
The following table sets forth the high and low closing bid prices for our
common stock as reported by NASDAQ.
| |
|
Common
Stock Price |
|
| |
|
High |
|
Low |
|
|
Fiscal
Year Ending December 31, 2004 |
|
|
|
|
|
|
Fourth
quarter |
|
$ |
1.39 |
|
$ |
0.81 |
|
|
Third
quarter |
|
$ |
1.90 |
|
$ |
1.21 |
|
|
Second
quarter |
|
$ |
2.65 |
|
$ |
1.71 |
|
|
First
quarter |
|
$ |
3.00 |
|
$ |
1.77 |
|
| |
|
|
|
|
|
|
|
|
Fiscal
Year Ending December 31, 2003 |
|
|
|
|
|
|
|
|
Fourth
quarter |
|
$ |
3.40 |
|
$ |
2.31 |
|
|
Third
quarter |
|
$ |
3.95 |
|
$ |
1.62 |
|
|
Second
quarter |
|
$ |
2.08 |
|
$ |
1.50 |
|
|
First
quarter |
|
$ |
2.50 |
|
$ |
1.53 |
|
| |
|
|
|
|
|
|
|
As of
March 1, 2005, there were approximately 286 holders of record of our common
stock. The closing bid price of our common stock on March 1, 2005 was $2.17 per
share.
Dividend
Policy
We have
never declared or paid any cash dividends on our common stock. We currently
intend to retain our future earnings, if any, to finance the expansion of our
business and do not expect to pay any dividends in the foreseeable future.
Payment
of future cash dividends on our common stock, if any, will be at the discretion
of our Board of Directors after taking into account various factors, including
our financial condition, operating results, current and anticipated cash needs
and plans for expansion.
Sales
of Unregistered Securities
In the
fourth quarter of 2004, we converted $600,000 of unsecured convertible
debentures into 698,053 shares of common stock. This transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended,
pursuant to Section 4(2) of such Act.
Item
6. Selected Financial Data.
The
following table presents selected historical financial data for the twelve
months ended December 31, 2004, 2003, 2002, 2001 and 2000. Our selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
financial statements and related notes included elsewhere in this Form 10-K.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Twelve |
|
Twelve |
|
Twelve |
|
Twelve |
|
Twelve |
|
|
|
| |
|
Months
Ended |
|
Months
Ended |
|
Months
Ended |
|
Months
Ended |
|
Months
Ended |
|
|
|
| |
|
Dec.
31,
2004 |
|
Dec.
31,
2003 |
|
Dec.
31,
2002 |
|
Dec.
31,
2001 |
|
Dec.
31,
2000 |
|
From
Inception |
|
| Statement
of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
198,474 |
|
$ |
466,859 |
|
$ |
719,392 |
|
$ |
— |
|
$ |
— |
|
$ |
1,384,725 |
|
|
Cost
of revenue |
|
|
198,474 |
|
|
409,449 |
|
|
690,059 |
|
|
— |
|
|
— |
|
|
1,297,982 |
|
|
Gross
margin |
|
|
— |
|
|
57,410 |
|
|
29,333 |
|
|
— |
|
|
— |
|
|
86,743 |
|
|
Product
development and marketing |
|
|
3,396,469 |
|
|
5,294,419 |
|
|
5,788,315 |
|
|
5,513,172 |
|
|
— |
|
|
19,992,375 |
|
|
General
and administrative |
|
|
4,262,066 |
|
|
3,835,873 |
|
|
4,052,943 |
|
|
4,726,543 |
|
|
3,173,393 |
|
|
20,215,771 |
|
|
Restructuring
expense |
|
|
— |
|
|
— |
|
|
104,982 |
|
|
— |
|
|
— |
|
|
104,982 |
|
|
Non-cash
charges |
|
|
796,286 |
|
|
2,164,634 |
|
|
4,148,251 |
|
|
7,341,461 |
|
|
10,785,381 |
|
|
25,236,013 |
|
|
Depreciation
and amortization |
|
|
516,172 |
|
|
681,358 |
|
|
710,975 |
|
|
473,031 |
|
|
256,820 |
|
|
2,695,363 |
|
|
Research
and development |
|
|
474,609 |
|
|
1,020,102 |
|
|
1,515,376 |
|
|
2,624,823 |
|
|
2,131,684 |
|
|
8,586,722 |
|
|
Total
operating expenses |
|
|
9,445,602 |
|
|
12,996,386 |
|
|
16,320,842 |
|
|
20,679,030 |
|
|
16,347,278 |
|
|
76,831,226 |
|
|
Loss
from operations |
|
|
(9,445,602 |
) |
|
(12,938,976 |
) |
|
(16,291,509 |
) |
|
(20,679,030 |
) |
|
(16,347,278 |
) |
|
(76,744,483 |
) |
|
Interest
income (expense), net |
|
|
(1,770,102 |
) |
|
(2,897,077 |
) |
|
300,299 |
|
|
1,226,701 |
|
|
678,194 |
|
|
(2,451,174 |
) |
|
Equity
in losses of affiliate |
|
|
— |
|
|
(488,364 |
) |
|
(367,714 |
) |
|
— |
|
|
— |
|
|
(856,078 |
) |
|
Loss
before income taxes |
|
|
(11,215,704 |
) |
|
(16,324,417 |
) |
|
(16,358,924 |
) |
|
(19,452,329 |
) |
|
(15,669,084 |
) |
|
(80,051,735 |
) |
|
Benefit
from income taxes |
|
|
410,726 |
|
|
221,480 |
|
|
234,963 |
|
|
— |
|
|
— |
|
|
867,169 |
|
|
Net
loss |
|
|
(10,804,978 |
) |
|
(16,102,937 |
) |
|
(16,123,961 |
) |
|
(19,452,329 |
) |
|
(15,669,084 |
) |
|
(79,184,566 |
) |
|
Preferred
stock amortization |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2,150,881 |
|
|
2,150,881 |
|
|
Net
loss applicable to common stockholders |
|
$ |
(10,804,978 |
) |
$ |
(16,102,937 |
) |
$ |
(16,123,961 |
) |
$ |
(19,452,329 |
) |
$ |
(17,819,965 |
) |
$ |
(81,335,447 |
) |
|
Loss
per share — basic and diluted |
|
$ |
(.29 |
) |
$ |
(.51 |
) |
$ |
(.58 |
) |
$ |
(.71 |
) |
$ |
(.69 |
) |
$ |
(2.83 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, |
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
|
Balance
Sheet Data: |
|
|
|
|
|
| Total
assets |
|
$ |
13,305,998 |
|
$ |
10,984,672 |
|
|
Secured
debentures (long term) |
|
$ |
— |
|
$ |
2,399,988 |
|
|
Refundable
grant obligation |
|
$ |
177,174 |
|
$ |
187,266 |
|
|
Capital
lease obligation |
|
$ |
2,669 |
|
$ |
31,909 |
|
Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Unless
the context otherwise requires, all references to “we,” “us,” “our,” and the
“Company” include Millennium Cell Inc. (“Millennium Cell”), and its
wholly-owned, presently inactive subsidiary, MCE
Ventures LLC.
This
report contains forward-looking statements (within the meaning of the Private
Securities Litigation Reform Act of 1995) that are subject to risks and
uncertainties. Statements contained herein that are not statements of historical
fact may be deemed to be forward-looking information. When we
use words such as "plan," "believe," "expect," "anticipate," "intend" or similar
expressions, we are making forward-looking statements. You should not rely on
forward-looking statements because they are subject to a number of assumptions
concerning future events, and are subject to a number of uncertainties and other
factors, many of which are outside of our control, that could cause actual
results to differ materially from those indicated. Please note that we disclaim
any intention or obligation to update or revise any forward-looking statements
whether as a result of new information, future events or otherwise. These
factors include, but are not limited to, the following: (i) the cost and timing
of development and market acceptance of our hydrogen fuel storage and delivery
system; (ii) the cost and commercial availability of the quantities of raw
materials required by our hydrogen fuel storage and delivery systems; (iii)
competition from current, improving and alternative power technologies; (iv) our
ability to raise capital at the times, in the amounts and at the costs and terms
that are acceptable to fund the development and commercialization of our
hydrogen fuel storage and delivery system and our business plan; (v) our ability
to protect our intellectual property; (vi) our ability to achieve budgeted
revenue and expense amounts; (vii) our ability to generate revenues from the
sale or license of, or provision of services related to, our technology; (viii)
our ability to enter into agreements with collaborators and strategic partners
and the failure of our collaborators and strategic partners to perform under
their agreements with us; (ix) our ability to generate design, engineering, or
management services revenue opportunities in the hydrogen generation or fuel
cell markets; (x) our ability to secure government funding of our research and
development and technology demonstration projects; and (xi) other factors
discussed herein under the caption "Investment Considerations" and other factors
detailed from time to time in our filings with the Securities and Exchange
Commission.
The
following discussion should be read in conjunction with our financial statements
and the notes thereto appearing elsewhere in this Form 10-K.
General
We were
formed as a Delaware limited liability company on December 17, 1998, and
organized and began operations on January 1, 1999 (inception date). We were
converted into a Delaware corporation on April 25, 2000 when all of the
outstanding equity interests of the limited liability company were converted
into shares of common stock of the corporation. Unless otherwise indicated, all
information that we present in this Annual Report for any date or period gives
effect to the conversion as if it had occurred on that date or as of the
beginning of that period and all references to common stock for periods before
the conversion mean our issued and outstanding membership interests.
Overview
We are
engaged in the development of next-generation hydrogen energy systems for use
primarily in portable electronic devices for the consumer, medical, military and
industrial markets. We are developing this technology in partnership with
corporate and government entities. Hydrogen on Demand® is the trademarked name
for our proprietary hydrogen energy storage and delivery technology. Our
technology is based on the culmination of work reflected in more than 30 patents
(either granted or in application) that collectively provide us with a leading
position in the system and fuel blend technology used to convert sodium
borohydride to hydrogen energy for use in portable electronic device
applications.
Our
losses have resulted primarily from costs associated with product development
and research and development activities as well as non-cash amortization of
preferred stock and non-cash charges related to the issuance of stock options
and warrants to employees and third parties. As a result of planned expenditures
in the areas of research, product development and marketing and additional
non-cash charges relating to employee stock options, we expect to incur
additional operating losses for the foreseeable future.
Results
of Operations
Year
Ended December 31, 2004 versus 2003
Revenues. We
recorded $198,474 of revenues during the year ended December 31, 2004 compared
with revenues of $466,859 in 2003. The decrease was mainly attributable to
engineering and design services under a short-term contract that was performed
during 2003 that were non-recurring in the current year. While in the
development stage, our revenues are expected to fluctuate from year to year with
the timing of prototype development and design services.
In the
near-term, revenues are expected to be derived substantially from up-front
license fees, research contracts with various federal, state and local agencies,
collaborations with other companies, management services, and royalty payments
or joint venture revenue from licensees or strategic partnerships. Revenues will
be recognized in the period in which technology is delivered, licensing revenues
are earned, or as services are performed.
Cost
of Revenues. We
recorded cost of revenues of $198,474 during the year ended December 31, 2004,
down from $409,449 for the year ended December 31, 2003. The decline in cost of
revenue was attributable to fewer sales of large prototype systems and services
to the transportation markets and more sales of smaller systems designed for the
consumer electronics market.
Product
Development and Marketing Expense. Product
development and marketing expenses for the year ended December 31, 2004 were
$3,396,469 compared to $5,294,419 for the year ended December 31, 2003, a
decrease of $1,897,950. This decrease is mostly attributable to ongoing cost
reduction activities and our cost shared development program as a subcontractor
to Protonex for the U.S. Air Force. Under
this program, one half of our incurred costs are reimbursed and recorded as
reductions to operating expense. This program began during the second quarter of
2004.
General
and Administrative Expense. General
and administrative expenses were $4,262,066 for the year ended December 31, 2004
compared to $3,835,873 for the year ended December 31, 2003, an increase of
$426,193. The increase was driven mainly by the accrual of separation costs of
approximately $591,000 as a result of the resignation of our previous President
and Chief Executive Officer in March 2004. The separation costs were comprised
of salary, benefits and other costs in satisfaction of his employment contract.
The remaining costs will be paid according to the following
schedule:
|
2005 |
|
$ |
278,632 |
|
|
2006 |
|
|
31,789 |
|
|
2007 |
|
|
7,947 |
|
|
Total |
|
$ |
318,368 |
|
| |
|
|
|
|
The
unfavorable effect of the separation costs was mostly offset by the impact of
ongoing cost reduction programs, including headcount reductions made early in
2004, and the recovery of indirect costs under U.S. government funded cost share
programs which began in 2004.
Non-cash
Charges.
Non-cash charges were $796,286 for the year ended December 31, 2004 as compared
to $2,164,634 for the year ended December 31, 2003, a decrease of $1,368,348.
The decrease was mostly attributable to the completion of vesting in 2003 of
below market value options issued to employees during 2000.
Depreciation
and Amortization.
Depreciation and amortization was $516,172 for the year ended December 31, 2004
compared to $681,358 for the year ended December 31, 2003, a decrease of
$165,186. This was attributable to more assets becoming fully depreciated in
fiscal 2004 than were added during the year.
Research
and Development Expense.
Research and development expenses were $474,609 for the year ended December 31,
2004 compared to $1,020,102 for the year ended December 31, 2003, a decrease of
$545,493. The decrease is mainly attributable to the reimbursement of expenses
under the Department of Energy program for the joint research of electrochemical
pathways to manufacture sodium borohydride. This program reimburses us for 80%
of our qualifying costs under the program.
Interest
Expense. Net
interest expense was $1,770,102 for the year ended December 31, 2004 compared to
interest expense of $2,897,077 for the year ended December 31, 2003, a decrease
of $1,126,975. The decrease was attributable to the issuance and subsequent
conversion of the debentures issued in December 2002 and January 2003 through a
private placement financing. As the unsecured debentures were converted into
common shares, the pro rata portion of the discount and charges related to the
beneficial conversion features was recorded as interest expense. During fiscal
2004, approximately $5.3 million of the debentures issued in the private
placement financing had been converted to common stock as compared to $11.3
million in fiscal 2003.
The
components of interest expense were as follows for the years ended December 31,
2004 and 2003 (in millions):
| |
|
2004 |
|
2003 |
|
|
Beneficial
conversion feature (BCF) |
|
$ |
0.5 |
|
$ |
1.4 |
|
|
Amortization
of debt discount |
|
|
0.8 |
|
|
0.9 |
|
|
Amortization
of debt issue costs |
|
|
0.4
|
|
|
0.6
|
|
|
Other
interest, net |
|
|
0.1
|
|
|
0.0
|
|
|
Total
Interest Expense |
|
$ |
1.8 |
|
$ |
2.9 |
|
| |
|
|
|
|
|
|
|
Benefit
from Income Taxes. Benefit
from income taxes was $410,726 for the year ended December 31, 2004 as compared
to $221,480 in 2003. This income was derived from our participation in the New
Jersey Emerging Technology and Biotechnology Financial Assistance Program. This
program allows certain companies to transfer New Jersey net operating losses to
other companies. This program, if continued by the state in future years, may
provide us with similar cash inflows each year if we continue to incur net
operating losses.
Results
of Operations
Year
Ended December 31, 2003 versus 2002
Revenues. We
recorded $466,859 of revenues during the year ended December 31, 2003 compared
with revenues of $719,392 in 2002. The decline in revenue was attributable to
fewer sales of large prototype systems and services to the transportation
markets and more sales of smaller systems designed for standby power and
consumer electronics markets.
In the
near-term, revenues are expected to be derived substantially from up-front
license fees, research contracts with various federal, state and local agencies,
collaborations with other companies, management services, and royalty payments
or joint venture revenue from licensees or strategic partnerships. Revenues will
be recognized in the period in which technology is delivered, licensing revenues
are earned, or as services are performed.
Cost
of Revenues. We
recorded cost of revenues of $409,449 during the year ended December 31, 2003,
down from $690,059 for the year ended December 31, 2002. The decline in cost of
revenue was attributable to fewer sales of large prototype systems and services
to the transportation markets and more sales of smaller systems designed for
standby power and consumer electronics markets. Cost of revenues on prototype
unit sales during the development stage are allocated from the Product
Development and Marketing expense and Research and Development expense line
items on the income statement depending on the nature of the project.
Product
Development and Marketing Expense. Product
development and marketing expenses for the year ended December 31, 2003 were
$5,294,419 compared to $5,788,315 for the year ended December 31, 2002, a
decrease of $493,896. This decrease is mostly attributable to cost reduction
efforts implemented throughout fiscal 2003.
General
and Administrative Expense. General
and administrative expenses were $3,835,873 for the year ended December 31, 2003
compared to $4,052,943 for the year ended December 31, 2002, a decrease of
$217,070. The decrease was a result of increased efficiency of our
administrative and finance organizations as well as the impact of headcount
reductions and other cost reduction activities.
Restructuring
Expense. There
was no restructuring expense in 2003. Restructuring expense was $104,982 for the
year ended December 31, 2002. During the second quarter of 2002, we incurred and
paid restructuring expenses primarily for severance costs related to 14 employee
separations.
Non-cash
Charges.
Non-cash charges were $2,164,634 for the year ended December 31, 2003 as
compared to $4,148,251 compared for the year ended December 31, 2002, a decrease
of $1,983,617. The decrease was mostly attributable to the completion of vesting
in 2003 of below market value options issued to employees during 2000.
Depreciation
and Amortization.
Depreciation and amortization was $681,358 for the year ended December 31, 2003
compared to $710,975 for the year ended December 31, 2002, a decrease of
$29,617. This was attributable to more assets being fully depreciated than were
added during the year.
Research
and Development Expense.
Research and development expenses were $1,020,102 for the year ended December
31, 2003 compared to $1,515,376 for the year ended December 31, 2002, a decrease
of $495,274. The decrease is primarily attributable to the full year impact of
the restructuring announced in May 2002 as well as other cost reduction programs
implemented in 2003.
Interest
Income (Expense), net. Net
interest expense was $2,897,077 for the year ended December 31, 2003 compared to
interest income of $300,299 for the year ended December 31, 2002, a change of
$3,197,376. The increase in interest expense was attributable to the issuance
and subsequent conversion of the debentures issued in December 2002 and January
2003 through a private placement financing. As the unsecured debentures were
converted into common shares, the pro rata portion of the discount and charges
related to the beneficial conversion features was recorded as interest expense.
As of December 31, 2003, approximately $11.3 million of the debentures issued in
the private placement financing had been converted to common stock.
The
components of interest expense were as follows for the year ended December 31,
2003 (in millions):
|
Beneficial
conversion feature (BCF) |
|
$ |
1.4 |
|
|
Amortization
of debt discount |
|
|
0.9 |
|
|
Amortization
of debt issue costs |
|
|
0.6
|
|
|
Total
Interest Expense |
|
$ |
2.9 |
|
| |
|
|
|
|
Equity
in Losses of Affiliate. In July
2002, we agreed to acquire a 50% non-controlling interest in a European alkaline
fuel cell company (the "Affiliate"). During the period from July 2002 to June
2003, we directly and indirectly provided limited funding for its proportionate
share of the Affiliate’s operating expenses. As of June 30, 2003, we had written
off its Investment in Affiliate on the balance sheet and determined the fair
value of the investment was zero. During the third quarter of 2003, we decided
to abandon our interest in the Affiliate. No gain or loss was recognized upon
this event.
Benefit
from Income Taxes. Benefit from income taxes was $221,480 for the year
ended December 31, 2003 as compared to $234,963 in 2002. This income was derived
from our participation in the New Jersey Emerging Technology and Biotechnology
Financial Assistance Program. This program allows certain companies to transfer
New Jersey net operating losses to other companies. This program, if continued
by the state in future years, may provide us with similar cash inflows if we
continue to have NOL’s.
Liquidity
and Capital Resources
General
Since our
inception, we have financed our operations primarily through our initial public
offering in August 2000 and private placements of equity and debt securities. In
1999, we issued $1.25 million of membership interests in Millennium Cell LLC for
cash, which subsequently were converted into shares of our common stock as of
April 25, 2000. We also received a capital contribution of $0.5 million in the
first quarter of 2000, and in May 2000, we sold 759,368 shares of Series A
preferred stock, which automatically converted into 759,368 shares of common
stock upon the completion of our initial public offering. The net proceeds from
our initial public offering totaled approximately $29.9 million and we generated
net proceeds from private placement transactions in 2002 and 2003 totaling $14.1
million. In 2004, we received net proceeds of approximately $9.4 million from a
new private placement transaction.
Ballard
Power Systems
In
October 2000, we received $2.4 million in cash from Ballard Power Systems Inc.
as an advance for prospective royalties pursuant to a product development
agreement between Ballard and us. In addition, we granted to Ballard a warrant
to purchase up to 400,000 shares of our common stock, which was terminated as
part of the strategic investment discussed below. Upon completion of certain
stages of product development, the parties agreed to negotiate in good faith for
the grant of a license of our technology to Ballard in certain fields of use, at
which time prepaid royalties may be earned and the warrants will be issued and
recorded at fair value.
On
November 8, 2002, we agreed with Ballard that the product development milestones
had been achieved and agreed to convert the $2.4 million refundable royalty
payment into an investment in our company in the form of secured convertible
debentures with a maturity date of November 8, 2005. The Ballard debentures are
secured by a standby letter of credit issued by Wachovia Bank, National
Association, with an aggregate face amount equal to the outstanding principal.
We will not have the ability to use this cash until the bank pledges are
released upon conversion of the Ballard debentures to common stock. The
debentures are convertible at a conversion price of $4.25, subject to
anti-dilution adjustments and certain price protection in the event we initiate
the conversion. As part of the purchase agreement we entered into with Ballard,
Ballard retains the option to license the non-exclusive right to manufacture and
sell products with our Hydrogen on Demandâ
technology for specific portable fuel cell products and stationary internal
combustion engine generators.
Private
Placement Transactions
During
2002, 2003 and 2004, we entered into a series of private placement financing
transactions with three different institutional and accredited investors
pursuant to the terms of separate securities purchase agreements among the
Company and the purchasers. The private placements were exempt from registration
under the Securities Act of 1933, as amended, pursuant to Section 4(2) of such
Act. The placements collectively raised $26.0 million dollars through the sale
of $4.0 million in common stock and the issuance of $22.0 million in convertible
debentures. As of December 31, 2004, approximately $16.6 million of debentures
had been converted into 8,630,035 shares
of common stock and $5.4 million of unsecured debentures remain outstanding. See
Note 11 of the notes to financial statements for more information about the
private placement transactions.
Subsequent
Events
On
February 27, 2005, we entered into a stock purchase agreement (the “Stock
Purchase Agreement”) with The Dow Chemical Company (“Dow”). The Stock Purchase
Agreement represents the first step of a proposed joint development arrangement
(the “Agreements”) with Dow. It is required in the joint development agreement,
that our stockholders approve the issuance of securities to the extent that such
issuance, on an as converted, as exercised basis, is equal to 19.9% or more of
the outstanding common stock of voting power of the Company. We intend to
solicit such shareholder approval during our 2005 Annual Meeting of Stockholders
to be held on April 21, 2005.
The
purpose of the Agreements is for the two companies to jointly develop portable
power solutions based on our Hydrogen on Demand® energy systems coupled with a
fuel cell. The Joint Development Agreement has a three-year term and Dow may
terminate the Joint Development Agreement if milestones are not met and under
certain other conditions. The Joint Development Agreement contemplates a series
of four milestones designed to culminate in a commercially available product.
The milestones are focused on portable and/or consumer electronics applications.
Achievement of milestones in either portable or consumer electronics
applications will be sufficient to trigger equity transactions at Dow’s option
to
purchase $1.25 million of our preferred stock. For
more information regarding this transaction, see our Current Report on Form 8-K
filed on February 28, 2005.
During
the first quarter of 2005, we converted 3.4 million of debentures into 1,954,331
shares of our common stock.
Sources
and Uses of Cash
As of
December 31, 2004, we had $8,217,840 in cash and cash equivalents and restricted
cash of $3,035,021. Cash used in operations totaled $7,271,861, $9,856,825 and
$11,388,768 in 2004, 2003 and 2002, 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 Millennium Cell
and $0.6 million of cash used for collateral as security deposit held by our
landlord in connection with our amended lease agreement for our facility. These
funds used will not be available for use in operations until the letters of
credit have been reduced or terminated.
Investing
activities provided/(used) cash of $(180,284), $(441,281) and $7,037,933 in
2004, 2003 and 2002, respectively. Investing activities in 2004 and 2003
consisted of an investment in equipment and patent registration costs. In 2002,
investment activities consisted mainly of maturities of investments in
high-grade government bonds and bank certificates of deposit and purchases of
laboratory equipment necessary for the continuation of our research and
development activities. We intend to continue to register, pursue and defend
patents on our technology.
Commitments
and Contingencies
In April
2001, we amended our main operating lease for our facility to provide for
additional space for our principal operating offices and laboratories. Since
November 2001, we have occupied 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 will require us to pay our allocated share of
taxes and operating cost in addition to the annual base rent payment. Future
minimum annual lease commitments excluding estimated allocated taxes and
maintenance under the amended operating leases are noted below:
Rent
expense under the operating lease was approximately $640,523, $546,710 and
$507,310 for the years ended December 31, 2004, 2003, and 2002, respectively.
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. We collateralized the
letter of credit with a portion of our cash and classified the letter of credit
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 June 2001, escalating 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. As of December 31, 2004, we have repaid
approximately $21,000 and an additional $28,766 is due to be paid in 2005.
The
Contractual Obligations discussed above is outlined in the following
table:
| |
|
|
Payment
due in fiscal years |
|
| Contractual
Obligations |
|
|
Total |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease - Facility |
|
$ |
1,896,880 |
|
$ |
484,310 |
|
$ |
484,310 |
|
$ |
484,310 |
|
$ |
443,950 |
|
$ |
¾ |
|
|
Refundable
grant obligation |
|
|
205,940 |
|
|
28,766 |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
177,174 |
|
|
Capital
lease obligations |
|
|
39,705 |
|
|
37,036 |
|
|
2,669 |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
Convertible
secured debentures |
|
|
2,399,988 |
|
|
2,399,988 |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
Convertible
unsecured debentures |
|
|
5,137,335 |
|
|
5,137,335 |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
Accrued
severance |
|
|
318,368 |
|
|
318,368 |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
¾ |
|
|
Total |
|
$ |
9,998,216 |
|
$ |
8,405,803 |
|
$ |
486,979 |
|
$ |
484,310 |
|
$ |
443,950 |
|
$ |
177,174 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
received net proceeds from the sale of New Jersey net operating losses (NOL’s)
in conjunction with the New Jersey Emerging Technology and Biotechnology
Financial Assistance Program of $410,726, $221,480 and $234,963 in 2004, 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 in future years, may provide us with similar cash inflows if we continue
to incur NOL’s.
We
believe that our current cash and cash equivalents and projected cash generated
from our operations and cost sharing agreements will be sufficient to fund our
operations into the first half of 2006. We may raise additional funds through
public or private financing, collaborative relationships or other arrangements.
We cannot be assured that additional funding, if sought, will be available or
will be on terms favorable to us. Further, any additional equity financing may
be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Our failure to raise capital when needed may harm our
business and operating results.
Critical
Accounting Policies
Application
of Critical Accounting Policies
The
discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect our reported assets and liabilities, revenues and
expenses, and other financial information. Actual results may differ
significantly from these estimates under different assumptions and conditions.
In addition, our reported financial condition and results of operations could
vary due to a change in the application of a particular accounting standard.
We regard
an accounting estimate underlying our financial statements as a "critical
accounting estimate" if the accounting estimate requires us to make assumptions
about matters that are highly uncertain at the time of estimation and if
different estimates that reasonably could have been used in the current period,
or changes in the estimate that are reasonably likely to occur from period to
period, would have had a material effect on the presentation of financial
condition, changes in financial condition, or results of operations.
Our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements. 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 the
Company to deliver hydrogen generation technology, management services, system
design and prototype systems and licensing of technology for test and
evaluation. We anticipate 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 have and will record original issue discounts to the
extent the fair value of the debt is below the face value of the instrument and
amortize 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" ("EITF No. 00-27"), and EITF No. 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" ("EITF No. 98-5"). As a result of certain
conversion price discounts included within our outstanding debt instruments, we
will record interest expense resulting from BCFs as described under the caption
"Liquidity and Capital Resources" above.
Stock
Options
We have
recorded non-cash charges in 2004, 2003 and 2002 of 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 we will incur related to these warrants.
We also
record non-cash charges for the difference between the grant price and market
price on the date of grant related to certain stock options issued to employees
and elected directors below market prices as defined by APB No. 25. The non-cash
charge is recognized ratably over the related vesting period of the respective
option contracts. As of June 30, 2003, all of these options were
vested.
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 its employee stock options under the fair value method of
that statement. We have estimated the fair value of options granted for the
fiscal years ended December 31, 2004, 2003 and 2002 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, 2003 and 2002 for warrants issued to
affiliates and the pro forma disclosures of net loss and loss per share for
fiscal 2004, 2003 and 2002, are not likely to be representative of non-cash
charges and the pro forma effects on net loss and loss per share, respectively,
in future years.
Impact
of Recently Issued Accounting Standards
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 123R “Share Based Payment.” This statement is a revision to SFAS
123 and supersedes Accounting Principles Board (APB) Opinion No. 25,
“Accounting for Stock Issued to Employees,” and amends FASB Statement
No. 95, “Statement of Cash Flows.” This statement requires a public entity
to expense the cost of employee services received in exchange for an award of
equity instruments. This statement also provides guidance on valuing and
expensing these awards, as well as disclosure requirements of these equity
arrangements. This statement is effective for the first interim reporting period
that begins after June 15, 2005.
SFAS 123R
permits public companies to choose between the following two adoption methods:
|
|
1. |
A
“modified prospective” method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of
SFAS 123R for all share-based payments granted after the effective date
and (b) based on the requirements of Statement 123 for all awards
granted to employees prior to the effective date of SFAS 123R that remain
unvested on the effective date, or |
|
|
|
|
2. |
A
“modified retrospective” method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS 123 for
purposes of pro forma disclosures either (a) all prior periods
presented or (b) prior interim periods of the year of
adoption. |
|
|
As
permitted by SFAS 123, we currently account for share-based payments to
employees using APB Opinion 25’s intrinsic value method and, as such, we
generally recognize no compensation cost for employee stock options if they are
issued at the fair market value of common stock at the date of the grant. The
impact of the adoption of SFAS 123R cannot be predicted at this time because it
will be depend on levels of share-based payments granted in the future. However,
valuation of employee stock options under SFAS 123R is similar to SFAS 123, with
minor exceptions. For information about what our reported results of operations
and earnings per share would have been had we adopted SFAS 123, please see the
discussion under the heading “Stock Based Compensation” in Note 1 to our
Consolidated Financial Statements. Accordingly, the adoption of SFAS 123R’s fair
value method will have a significant impact on our results of operations,
although it will have no impact on our overall financial position. SFAS 123R
also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods
after adoption. Due to timing of the release of SFAS 123R, we have not yet
completed the analysis of the ultimate impact that this new pronouncement will
have on the results of operations, nor the method of adoption for this new
standard.
In
October 2004, the FASB ratified Emerging Issues Task Force ("EITF") Issue No.
04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings Per
Share." Their conclusion was that beginning with reporting periods ending after
December 15, 2004 (i) contingently convertible debt instruments are subject to
the if-converted method under SFAS No. 128, "Earnings Per Share," regardless of
the contingent features included in the instrument, and (ii) prior period
earnings per share would have to be restated. Our secured and unsecured
convertible debentures are contingently convertible debt instruments that are
potentially convertible into approximately 3.7 million shares of common stock.
With the ratification of EITF Issue No. 04-8, we were required to include such
potentially issuable shares, if dilutive, in its diluted earnings per share
calculation beginning with the fourth quarter 2004 reporting period. We did not
have to restate our prior period earnings per share since the issuable shares
would have been anti-dilutive.
Item
7A. Quantitative and Qualitative Disclosure of 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
8. Financial Statements and Supplementary Data.
See Index
to Financial Statements and Financial Statement Schedule in Item 15.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item
9A. Controls and Procedures.
(a)
Evaluation of Disclosure Controls and Procedures.
Our
interim Chief Executive Officer and our Acting Chief Financial Officer has
evaluated the effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934, as amended) as of a date within 90 days prior to the filing date of
this annual report. Based on such evaluation, they have concluded that, as of
the evaluation date, our disclosure controls and procedures are effective in
alerting him on a timely basis to material information relating to us required
to be included in our reports filed or submitted under the Securities Exchange
Act of 1934.
(b)
Changes in Internal Controls.
During
the fourth quarter of fiscal 2004, the Company added another position in the
finance department to improve segregation of duties and the financial statement
close process. There have not been any other significant changes in the
Company's internal controls or in other factors that could significantly affect
such controls.
PART
III
Item
10. Directors and Executive Officers of the Registrant.
Information
regarding Section 16(a) compliance, the Audit Committee, our Code of Conduct and
background of the directors appearing under the captions “Election of
Directors,” “Common Stock Ownership of Principal Stockholders and Management”
and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy
Statement for the 2005 annual meeting of stockholders is hereby incorporated by
reference.
Item
11. Executive Compensation.
Information
regarding executive compensation appearing under the caption “Executive
Compensation” in the Company’s Proxy Statement for the 2005 annual meeting is
hereby incorporated by reference.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
Other
information setting forth the security ownership of certain beneficial owners
and management appearing under the caption “Executive Compensation” in the 2005
Proxy Statement is hereby incorporated by reference.
Item
13. Certain Relationships and Related Transactions.
Information
regarding certain relationships and related transactions appearing under the
caption “Certain Relationships and Related Transactions” in our Proxy Statement
for the 2005 annual meeting of shareholders is hereby incorporated by
reference.
Item
14. Principal Accountant Fees & Services.
Information
appearing under the captions “Fees Paid to the Company’s Auditors” in the 2005
Proxy Statement is hereby incorporated by reference.
PART
IV
Item
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)
Documents filed as part of this report
1.
Financial Statements
The
financial statements and notes are listed in the Index to Financial Statements
on page F-1 of this report.
2.
Financial Statement Schedules
None of
the schedules for which provision is made in the applicable accounting
regulations under the Securities Exchange Act of 1934, as amended, are required.
3.
Exhibits
The
following documents are filed as Exhibits to this report on Form 10-K or
incorporated by reference herein. Any document incorporated by reference is
identified by a parenthetical referencing the SEC filing which included such
document.
|
Exhibit
No. |
|
Description |
| |
|
|
|
2.1† |
— |
Certificate
of Conversion of Millennium Cell LLC to Millennium Cell Inc. (incorporated
by reference to the Registration Statement filed on Form S-1, Registration
No. 333-37896) |
| |
|
|
|
3.1† |
— |
Certificate
of Incorporation of Millennium Cell Inc. (incorporated by reference to the
Registration Statement filed on Form S-1, Registration No.
333-37896) |
| |
|
|
|
3.2† |
— |
By-Laws
of Millennium Cell Inc. (incorporated by reference to the Registration
Statement filed on Form S-1, Registration No.
333-37896) |
| |
|
|
|
3.3† |
— |
Certificate
of Amendment to Certificate of Incorporation of Millennium Cell Inc.
(incorporated by reference to the Registration Statement filed on Form
S-1, Registration No. 333-37896) |
| |
|
|
|
3.4† |
— |
Certificate
Eliminating Reference to the Series A Convertible Preferred Stock from the
Certificate of Incorporation of Millennium Cell Inc. (incorporated by
reference to Exhibit 3.4 to the Quarterly Report on Form 10-Q filed on May
13, 2002) |
| |
|
|
| Exhibit
No. |
|
Description |
| |
|
|
|
3.5† |
— |
Certificate
of Amendment of Certificate of Incorporation of Millennium Cell Inc.
(incorporated by reference to Exhibit 3.5 to the Quarterly Report on Form
10-Q filed on May 13, 2002) |
| |
|
|
|
4.1† |
— |
Specimen
stock certificate representing the Registrant's Common Stock (incorporated
by reference to the Registration Statement filed on Form S-1, Registration
No. 333-37896) |
| |
|
|
|
4.2† |
— |
First
Warrant to Purchase 224,014 shares of Common stock dated June 19, 2002
(incorporated by reference to Exhibit 4.5 to the Current Report on Form
8-K filed on June 26, 2002) |
| |
|
|
|
4.3† |
— |
First
Warrant to Purchase 44,803 shares of Common Stock dated June 19, 2002
(incorporated by reference to Exhibit 4.6 to the Current Report on Form
8-K filed on June 26, 2002) |
| |
|
|
|
4.4.1† |
— |
Closing
Warrant No. 1 to purchase 73,599 shares of Common Stock dated October 31,
2002 (incorporated by reference to Exhibit 4.7.1 to the Annual Report on
Form 10-K filed on March 17, 2003) |
| |
|
|
|
4.5.2† |
— |
Closing
Warrant No. 2 to purchase 73,599 shares of Common Stock dated October 31,
2002 (incorporated by reference to Exhibit 4.7.2 to the Annual Report on
Form 10-K filed on March 17, 2003) |
| |
|
|
|
4.6† |
— |
First
Warrant to purchase 242,678 shares of Common Stock dated December 26, 2002
(incorporated by reference to Exhibit 4.8 to the Annual Report on Form
10-K filed on March 17, 2003) |
| |
|
|
|
4.7† |
— |
Second
Warrant to purchase 589,376 shares of Common Stock dated January 30, 2003
(incorporated by reference to Exhibit 4.9 to the Annual Report on Form
10-K filed on March 17, 2003) |
| |
|
|
|
4.8† |
— |
Secured
Convertible Debenture issued to Ballard Power Systems, Inc. (incorporated
by reference to Exhibit 4.13 to the Quarterly Report on Form 10-Q filed on
November 14, 2002) |
| |
|
|
|
4.9† |
— |
Letter
Amendment to Unsecured Convertible Debenture and Secured Convertible
Debenture dated April 22, 2003 (incorporated by reference to Exhibit No.
4.10.3 to Registration Statement No. 333-105582 on Form S-3 filed on May
27, 2003) |
| |
|
|
|
4.10† |
— |
Unsecured
Convertible Debenture No. 1 in aggregate principal amount of $6 million
dated February 17, 2004 (incorporated by reference to Exhibit 4.1 on Form
8-K filed on September 30, 2004) |
| |
|
|
|
4.11† |
— |
Unsecured
Convertible Debenture No. 2 in aggregate principal amount of $4 million
dated September 30, 2004 (incorporated by reference to Exhibit 4.1 on Form
8-K filed on September 30, 2004) |
| |
|
|
|
10.1† |
— |
Agreement
for Recoverable Grant Award, dated as of April 1999, by and between State
of New Jersey Commission on Science and Technology and Millennium Cell LLC
(incorporated by reference to Exhibit the Registration Statement filed on
Form S-1, Registration No. 333-37896) |
| |
|
|
|
10.2† |
— |
Amended
and Restated Millennium Cell Inc. 2000 Stock Option Plan, Amended
effective December 1, 2001 (incorporated by reference to Exhibit 10.6 to
the Annual Report on Form 10-K filed on March 25, 2002) |
| |
|
|
|
10.3† |
— |
Securities
Purchase Agreement dated as of June 19, 2002 between the Company and the
Purchasers (incorporated by reference to Exhibit 4.3 to the Current Report
on Form 8-K filed on June 26, 2002) |
| |
|
|
|
10.4† |
— |
Registration
Rights Agreement dated as of June 19, 2002 between the Company and the
Purchasers (incorporated by reference to Exhibit 4.4 to the Current Report
on Form 8-K filed on June 26, 2002) |
| |
|
|
|
10.5† |
— |
Securities
Purchase Agreement dated as of October 31, 2002 among the Company and the
Purchasers named therein (incorporated by reference to Exhibit 10.16 to
Registration Statement No. 333-101061 on Form S-3 filed on November 7,
2002) |
| |
|
|
|
10.6† |
— |
Registration
Rights Agreement dated as of October 31, 2002 among the Company and the
Purchasers named therein (incorporated by reference to Exhibit 10.17 to
Registration Statement No. 333-101061 on Form S-3 filed on November 7,
2002) |
| |
|
|
|
10.7† |
— |
Securities
Purchase Agreement dated as of November 8, 2002 Company and Ballard Power
Systems, Inc. (incorporated by reference to Exhibit 10.19 to the Quarterly
Report on Form 10-Q filed on November 14, 2002) |
| |
|
|
|
10.8† |
— |
Registration
Rights Agreement dated as of November 8, 2002 between the Company and
Ballard Power Systems, Inc. (incorporated by reference to Exhibit 10.20 to
the Quarterly Report on Form 10-Q filed on November 14,
2002) |
| |
|
|
|
10.9† |
— |
Continuing
Letter of Credit Agreement dated January 30, 2003 between the Company and
Wachovia Bank, National Association (incorporated by reference to Exhibit
10.21 to Registration Statement No. 333-103104 on Form S-3 filed February
11, 2003) |
| |
|
|
|
10.10† |
— |
Security
Agreement dated January 30, 2003 between the Company and Wachovia Bank,
National Association (incorporated by reference to Exhibit 10.22 to the
Registration Statement No. 333-103104 on Form S-3 filed on February 11,
2003) |
| Exhibit
No. |
|
Description |
| |
|
|
|
10.11† |
— |
Letter
of Credit securing $8.5 million Secured Convertible Debentures
(incorporated by reference to Exhibit 10.23 to the Registration Statement
No. 333-103104 on Form S-3 filed on February 11, 2003) |
| |
|
|
|
10.12† |
— |
Continuing
Letter of Credit Agreement dated November 8, 2002 between the Company and
Wachovia Bank, National Association relating
to the Secured Convertible Debentures issued to Ballard Power Systems,
Inc. (incorporated
by reference to Exhibit 10.26 to the Annual Report on Form 10-K filed on
March 17, 2003) |
| |
|
|
|
10.13† |
— |
Security
Agreement dated November 8, 2002 between the Company and Wachovia Bank,
National Association relating to the Secured Convertible Debentures issued
to Ballard Power Systems, Inc. (incorporated by reference to Exhibit 10.27
to the Annual Report on Form 10-K filed on March 17,
2003) |
| |
|
|
|
10.14† |
— |
Letter
of Credit securing $2.4 million Secured Convertible Debentures issued for
the benefit of Ballard Power Systems, Inc. (incorporated by reference to
Exhibit 10.28 to the Annual Report on Form 10-K filed on March 17,
2003) |
| |
|
|
|
10.15† |
— |
Change-in-Control
Agreement between the Company and Adam P. Briggs dated as of January 1,
2003 and Schedule of Other Change-in-Control Agreements. (incorporated by
reference to Exhibit 10.29 to the Annual Report on Form 10-K filed on
March 17, 2003) |
| |
|
|
|
10.16† |
— |
Securities
Purchase Agreement dated as of January 16, 2004 between the Company and
the purchaser named therein. (incorporated by reference to Exhibit 10.24
to Registration Statement No. 333-112519 on Form S-3 filed on February 5,
2004) |
| |
|
|
|
10.17† |
— |
Registration
Rights Agreement dated as of January 16, 2004 between the Company and the
purchaser named therein. (incorporated by reference to Exhibit 10.25 to
Registration Statement No. 333-112519 on Form S-3 filed on February 5,
2004) |
| |
|
|
|
10.18† |
— |
Employment
Agreement, dated as of July 20, 2004, by and between Millennium Cell Inc.
and H. David Ramm. (incorporated by reference to Exhibit 10.1 on Form 8-K
filed on July 28, 2004) |
| |
|
|
|
10.19† |
— |
Restricted
Stock Grant Agreement, dated as of July 20, 2004, by and between
Millennium Cell Inc. and H. David Ramm. (incorporated by reference to
Exhibit 10.2 on Form 8-K filed on July 28, 2004) |
| |
|
|
|
10.20† |
— |
Agreement,
dated as of July 20, 2004, by and between Millennium Cell Inc. and DKRW
Energy LLC. (incorporated by reference to Exhibit 10.3 on Form 8-K filed
on July 28, 2004) |
| |
|
|
| 23.1* |
— |
Consent
of Independent Registered Public Accounting Firm. |
| |
|
|
|
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 Chief Executive Officer and Acting Chief Executive Officer Pursuant to
Section 906 of Sarbanes-Oxley Act of
2002. |
†
Previously filed.
* Filed
herewith.
The
Company will furnish, without charge, to a security holder upon request a copy
of the proxy statement, portions of which are incorporated herein by reference
thereto. The Company will furnish any other exhibit at cost.
(b)
Reports on Form 8-K
The
following reports were filed under Form 8-K during the last quarter of the
period covered by this report:
| Date Filed or |
|
|
|
|
| Furnished |
|
Item No. |
|
Description |
| |
|
|
|
|
| October 14, 2004 |
|
Item 3.01 |
|
Millennium
Cell Inc. (the “Company”) received notification from The Nasdaq Stock
Market (“Nasdaq”) that it no longer met the listing requirements for
listing on the Nasdaq National Market.* |
| |
|
|
|
|
| December 17, 2004 |
|
Item 9.01 |
|
Millennium
Cell Inc. (the “Company”) received notification from The Nasdaq Stock
Market (“Nasdaq”) that Nasdaq had approved the Company’s application to
transfer the listing of the Company’s shares of common stock from the
Nasdaq National Market to the Nasdaq SmallCap
Market.* |
*This
furnished 8-K is not to be deemed filed or incorporated by reference into any
filing.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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. |
|
|
|
| Date: March 21,
2005 |
By: |
/s/ H. DAVID
RAMM |
| |
|
| |
H. David Ramm
President, Chief
Executive Officer |
| |
|
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
| /s/
H. DAVID RAMM |
|
Interim
President, Chief Executive Officer, and Director |
|
March
21, 2005 |
| H. David Ramm |
|
|
|
|
| |
|
|
|
|
| /s/
JOHN D. GIOLLI |
|
Vice-President, Finance and Acting Chief Financial Officer
|
|
March 21, 2005 |
| John D. Giolli |
|
|
|
|
| |
|
|
|
|
| /s/
G. CHRIS ANDERSEN |
|
Director |
|
March 21, 2005 |
|
G.
Chris Andersen |
|
|
|
|
| |
|
|
|
|
| /s/
KENNETH R. BAKER |
|
Director |
|
March 21, 2005 |
|
Kenneth
R. Baker |
|
|
|
|
| |
|
|
|
|
| /s/
ALEXANDER MACLACHLAN |
|
Director |
|
March 21, 2005 |
|
Alexander
MacLachlan |
|
|
|
|
| |
|
|
|
|
| /s/
PETER A. MCGUIGAN |
|
Director |
|
March 21, 2005 |
|
Peter
A. McGuigan |
|
|
|
|
| |
|
|
|
|
| /s/
ZOLTAN MERSZEI |
|
Director |
|
March 21, 2005 |
|
Zoltan
Merszei |
|
|
|
|
| |
|
|
|
|
| /s/
JAMES L. RAWLINGS |
|
Director |
|
March 21, 2005 |
|
James
L. Rawlings |
|
|
|
|
| |
|
|
|
|
| /s/
RICHARD L. SANDOR |
|
Director |
|
March 21, 2005 |
|
Richard
L. Sandor |
|
|
|
|
| |
|
|
|
|
| /s/
JOHN R. WALLACE |
|
Director |
|
March 21, 2005 |
|
John
R. Wallace |
|
|
|
|
INDEX
TO FINANCIAL STATEMENTS
| |
Page |
| |
|
|
Report
of Independent Auditors |
F-2 |
| |
|
|
Balance
Sheet as of December 31, 2004 and 2003 |
F-3 |
| |
|
|
Statement
of Operations for the fiscal years ended December 31, 2004, 2003 and
2002 |
F-4 |
| |
|
|
Statement
of Stockholders' Equity for the period from January 1, 2001 to December
31, 2004 |
F-5 |
| |
|
|
Statement
of Cash Flows for the fiscal years ended December 31, 2004, 2003 and
2002 |
F-6 |
| |
|
|
Notes
to Financial Statements |
F-7 |
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
Millennium
Cell Inc.
We have
audited the accompanying consolidated balance sheets of Millennium Cell Inc. (a
development stage company) as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years then ended, and for the period January 1, 1999
(inception) through December 31, 2004. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Millennium Cell
Inc. at December 31, 2004 and 2003 and the consolidated results of their
operations and their cash flows for each of the three years then ended, and for
the period January 1, 1999 (inception) through December 31, 2004 in conformity
with U.S. generally accepted accounting principles.
/s/ ERNST
& YOUNG LLP
New York,
New York
February
11, 2005
MILLENNIUM
CELL INC.
(a
development stage enterprise)
CONSOLIDATED
BALANCE SHEETS
| |
|
December
31, |
|
December
31, |
|
|
Assets |
|
2004 |
|
2003 |
|
|
Current
assets: |
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
8,217,840 |
|
$ |
6,004,173 |
|
|
Accounts
receivable- Trade |
|
|
73,474 |
|
|
41,244 |
|
Accounts
receivable - Other |
|
|
372,776 |
|
|
— |
|
|
Prepaid
expenses |
|
|
261,467 |
|
|
265,459 |
|
|
Deferred
financing costs |
|
|
97,366 |
|
|
22,663 |
|
|
Total
current assets |
|
|
9,022,923 |
|
|
6,333,539 |
|
| |
|
|
|
|
|
|
|
|
Property
and equipment, net |
|
|
663,576 |
|
|
1,009,514 |
|
|
Patents
and licenses, net |
|
|
538,802 |
|
|
597,564 |
|
|
Restricted
cash |
|
|
3,035,021 |
|
|
2,998,379 |
|
|
Security
deposits |
|
|
45,676 |
|
|
45,676 |
|
| |
|
$ |
13,305,998 |
|
$ |
10,984,672 |
|
| |
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity |
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
282,586 |
|
$ |
272,143 |
|
|
Accrued
expenses |
|
|
593,698 |
|
|
389,464 |
|
Accrued
separation costs |
|
|
318,368 |
|
|
— |
|
|
Short-term
portion of capital lease obligation |
|
|
37,036 |
|
|
37,036 |
|
Short-term
portion of refundable grant obligation |
|
|
28,766 |
|
|
18,675 |
|
|
Deferred
compensation |
|
|
65,037 |
|
|
32,315 |
|
Convertible
secured debentures |
|
|
2,399,988 |
|
|
— |
|
|
Convertible
unsecured debentures |
|
|
5,137,335 |
|
|
684,791 |
|
|
Deferred
income |
|
|
85,000
|
|
|
— |
|
|
Total
current liabilities |
|
|
8,947,814 |
|
|
1,434,424 |
|
| |
|
|
|
|
|
|
|
|
Convertible
unsecured debentures |
|
|
— |
|
|
— |
|
Convertible
secured debentures |
|
|
— |
|
|
2,399,988 |
|
|
Refundable
grant obligation |
|
|
177,174 |
|
|
187,266 |
|
Capital
lease obligation |
|
|
2,669 |
|
|
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 and 39,113,963 and
35,029,052 shares issued and outstanding as of December 31, 2004 and 2003,
respectively |
|
|
39,114 |
|
|
35,029 |
|
|
Additional
paid-in capital |
|
|
85,663,479 |
|
|
77,784,952 |
|
Deferred
compensation |
|
|
(188,805 |
) |
|
(358,427 |
) |
|
Deficit
accumulated during development stage |
|
|
(81,335,447 |
) |
|
(70,530,469 |
) |
|
Total
stockholders' equity |
|
|
4,178,341 |
|
|
6,931,085 |
|
| |
|
$ |
13,305,998 |
|
$ |
10,984,672 |
|
| |
|
|
|
|
|
|
|
See
accompanying notes.
(a
development stage enterprise)
CONSOLIDATED
STATEMENTS OF OPERATIONS
| |
|
Twelve
Months |
|
Twelve
Months |
|
Twelve
Months |
|
Cumulative |
|
| |
|
Ended |
|
Ended |
|
Ended |
|
Amounts |
|
| |
|
December
31,
2004 |
|
December
31,
2003 |
|
December
31,
2002 |
|
From
Inception |
|
|
Revenue |
|
$ |
198,474 |
|
$ |
466,859 |
|
$ |
719,392 |
|
$ |
1,384,725 |
|
|
Cost
of revenue |
|
|
198,474 |
|
|
409,449 |
|
|
690,059 |
|
|
1,297,982 |
|
|
Gross
margin |
|
|
— |
|
|
57,410 |
|
|
29,333 |
|
|
86,743 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
development and marketing |
|
|
3,396,469 |
|
|
5,294,419 |
|
|
5,788,315 |
|
|
19,992,375 |
|
General
and administrative |
|
|
4,262,066 |
|
|
3,835,873 |
|
|
4,052,943 |
|
|
20,215,771 |
|
|
Restructuring
expense |
|
|
— |
|
|
— |
|
|
104,982 |
|
|
104,982 |
|
Non-cash
charges |
|
|
796,286 |
|
|
2,164,634 |
|
|
4,148,251 |
|
|
25,236,013 |
|
|
Depreciation
and amortization |
|
|
516,172 |
|
|
681,358 |
|
|
710,975 |
|
|
2,695,363 |
|
|
Research
and development |
|
|
474,609 |
|
|
1,020,102 |
|
|
1,515,376 |
|
|
8,586,722 |
|
|
Total
operating expenses |
|
|
9,445,602
|
|
|
12,996,386
|
|
|
16,320,842
|
|
|
76,831,226 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations |
|
|
(9,445,602 |
) |
|
(12,938,976 |
) |
|
(16,291,509 |
) |
|
(76,744,483 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net |
|
|
(1,770,102 |
) |
|
(2,897,077 |
) |
|
300,299 |
|
|
(2,451,174 |
) |
|
Equity
in losses of affiliates |
|
|
— |
|
|
(488,364 |
) |
|
(367,714 |
) |
|
(856,078 |
) |
|
Loss
before income taxes |
|
|
(11,215,704 |
) |
|
(16,324,417 |
) |
|
(16,358,924 |
) |
|
(80,051,735 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
from income taxes |
|
|
410,726 |
|
|
221,480 |
|
|
234,963 |
|
|
867,169 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
(10,804,978 |
) |
|
(16,102,937 |
) |
|
(16,123,961 |
) |
|
(79,184,566 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock amortization |
|
|
— |
|
|
— |
|
|
— |
|
|
2,150,881 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stockholders |
|
$ |
(10,804,978 |
) |
$ |
(16,102,937 |
) |
$ |
(16,123,961 |
) |
$ |
(81,335,447 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share — basic and diluted |
|
$ |
(.29 |
) |
$ |
(.51 |
) |
$ |
(.58 |
) |
$ |
(2.83 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
— average number of shares outstanding |
|
|
37,226,377 |
|
|
31,564,345 |
|
|
28,022,872 |
|
|
28,751,356 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
MILLENNIUM
CELL INC.
(a
development stage enterprise)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
| |
|
|
|
|
|
Additional |
|
|
|
|
|
Total |
|
| |
|
Common Stock |
|
Paid-in |
|
Deferred |
|
Accumulated |
|
Stockholder's |
|
| |
|
Shares |
|
Amount |
|
Capital |
|
Compensation |
|
Deficit |
|
Equity |
|
|
Balance
at December 31, 2001 |
|
|
27,292,077 |
|
|
27,292 |
|
|
54,140,914 |
|
|
— |
|
|
(38,303,571 |
) |
|
15,864,635 |
|
|
Issuance
of common stock in private placement transactions |
|
|
1,664,058 |
|
|
1,664 |
|
|
2,959,615 |
|
|
— |
|
|
— |
|
|
2,961,279 |
|
|
Fair
value of warrants issued with unsecured debentures |
|
|
— |
|
|
— |
|
|
491,983 |
|
|
— |
|
|
— |
|
|
491,983 |
|
|
Issuance
of common stock from exercise
of options |
|
|
28,000 |
|
|
28 |
|
|
81,172 |
|
|
— |
|
|
— |
|
|
81,200 |
|
|
Issuance
of common stock for 401(k) |
|
|
43,356 |
|
|
43 |
|
|
82,332 |
|
|
— |
|
|
— |
|
|
82,375 |
|
|
Non-cash
compensation charges for issuance of stock options |
|
|
— |
|
|
— |
|
|
3,923,251 |
|
|
— |
|
|
— |
|
|
3,923,251 |
|
|
Net
loss |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(16,123,961 |
) |
|
(16,123,961 |
) |
|
Balance
at December 31, 2002 |
|
|
29,027,491 |
|
|
29,027 |
|
|
61,679,267 |
|
|
— |
|
|
(54,427,532 |
) |
|
7,280,762 |
|
|
Issuance
of common stock in private placement transactions |
|
|
5,468,001 |
|
|
5,468 |
|
|
11,294,533 |
|
|
— |
|
|
— |
|
|
11,300,001 |
|
|
Beneficial
conversion feature on private placement transactions |
|
|
— |
|
|
— |
|
|
1,356,825 |
|
|
— |
|
|
— |
|
|
1,356,825 |
|
|
Fair
value of warrants issued with secured debentures |
|
|
— |
|
|
— |
|
|
471,923 |
|
|
— |
|
|
— |
|
|
471,923 |
|
|
Issuance
of common stock from exercise
of options |
|
|
50,000 |
|
|
50 |
|
|
144,950 |
|
|
— |
|
|
— |
|
|
145,000 |
|
|
Issuance
of restricted stock in conjunction with tender offer |
|
|
197,599 |
|
|
198 |
|
|
395,000 |
|
|
(395,198 |
) |
|
— |
|
|
— |
|
|
Common
stock under deferred compensation plan |
|
|
— |
|
|
— |
|
|
— |
|
|
(32,315 |
) |
|
— |
|
|
(32,315 |
) |
|
Amortization
of deferred compensation for restricted stock |
|
|
— |
|
|
— |
|
|
— |
|
|
69,086 |
|
|
— |
|
|
69,086 |
|
|
Issuance
of common stock to Board of Directors |
|
|
201,289 |
|
|
201 |
|
|
404,354 |
|
|
— |
|
|
— |
|
|
404,555 |
|
|
Issuance
of common stock for 401(k) |
|
|
84,672 |
|
|
85 |
|
|
143,139 |
|
|
— |
|
|
— |
|
|
143,224 |
|
|
Non-cash
compensation charges for issuance of stock options |
|
|
— |
|
|
— |
|
|
1,894,961 |
|
|
— |
|
|
— |
|
|
1,894,961 |
|
|
Net
loss |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(16,102,937 |
) |
|
(16,102,937 |
) |
|
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 in private placement transactions |
|
|
3,162,034 |
|
|
3,162 |
|
|
5,296,839 |
|
|
— |
|
|
— |
|
|
5,300,001 |
|
|
Beneficial
conversion feature on private placement transactions |
|
|
— |
|
|
— |
|
|
497,757 |
|
|
— |
|
|
— |
|
|
497,757 |
|
|
Issuance
of stock for deferred financing costs |
|
|
377,846 |
|
|
378 |
|
|
813,445 |
|
|
|
|
|
|
|
|
813,823 |
|
|
Issuance
of common stock from exercise
of options |
|
|
115,532 |
|
|
115 |
|
|
345,208 |
|
|
— |
|
|
— |
|
|
345,323 |
|
|
Common
stock under deferred compensation plan |
|
|
— |
|
|
— |
|
|
(27,216 |
) |
|
169,622 |
|
|
— |
|
|
142,406 |
|
|
Issuance
of stock for interest payments |
|
|
90,671 |
|
|
91 |
|
|
142,426 |
|
|
— |
|
|
— |
|
|
142,517 |
|
|
Issuance
of common stock to Board of Directors |
|
|
126,817 |
|
|
127 |
|
|
226,751 |
|
|
— |
|
|
— |
|
|
226,878 |
|
|
Issuance
of stock for merit program |
|
|
51,800 |
|
|
52 |
|
|
130,996 |
|
|
— |
|
|
— |
|
|
131,048 |
|
|
Issuance
of stock for executive compensation |
|
|
100,000 |
|
|
100 |
|
|
199,900 |
|
|
— |
|
|
— |
|
|
200,000 |
|
|
Issuance
of common stock for 401(k) |
|
|
60,211 |
|
|
60 |
|
|
103,712 |
|
|
— |
|
|
— |
|
|
103,772 |
|
|
Non-cash
compensation charges for issuance of stock options |
|
|
— |
|
|
— |
|
|
148,709 |
|
|
— |
|
|
— |
|
|
148,709 |
|
|
Net
loss |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(10,804,978 |
) |
|
(10,804,978 |
) |
|
Balance
at December 31, 2004 |
|
|
39,113,963 |
|
$ |
39,114 |
|
$ |
85,663,479 |
|
$ |
(188,805 |
) |
$ |
(81,335,447 |
) |
$ |
4,178,341 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
MILLENNIUM
CELL INC.
(a
development stage enterprise)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| |
|
Twelve
Months
Ended
December 31,
|
|
Twelve
Months
Ended
December 31,
2003 |
|
Twelve
Months
Ended December
31,
2002 |
|
Cumulative Amounts
From
Inception |
|
|
Operating
activities |
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(10,804,978 |
) |
$ |
(16,102,937 |
) |
$ |
(16,123,961 |
) |
$ |
(79,184,566 |
) |
|
Adjustments
to reconcile net loss to net cash used in operating
activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
516,172 |
|
|
681,358 |
|
|
710,975 |
|
|
2,695,363 |
|
|
Amortization
of discount on unsecured debentures |
|
|
773,623 |
|
|
926,832 |
|
|
21,865 |
|
|
1,722,320 |
|
|
Amortization
of deferred financing costs |
|
|
367,932 |
|
|
582,054 |
|
|
14,590 |
|
|
964,576 |
|
|
Non-cash
interest charges |
|
|
142,517 |
|
|
— |
|
|
— |
|
|
142,517 |
|
|
Beneficial
conversion feature on PIPE financing |
|
|
497,757 |
|
|
1,356,825 |
|
|
— |
|
|
1,854,582 |
|
|
Losses
on investment in affiliate |
|
|
— |
|
|
488,364 |
|
|
367,714 |
|
|
856,078 |
|
|
Non-cash
charges |
|
|
796,286 |
|
|
2,164,634 |
|
|
4,148,251 |
|
|
25,236,013 |
|
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(405,006 |
) |
|
192,771 |
|
|
(105,015 |
) |
|
(446,250 |
) |
|
Prepaid
expenses and other assets |
|
|
3,993 |
|
|
72,130 |
|
|
14,609 |
|
|
(307,142 |
) |
|
Accounts
payable and accrued expenses |
|
|
754,842 |
|
|
(218,856 |
) |
|
(308,796 |
) |
|
1,846,018 |
|
|
Deferred
income |
|
|
85,000 |
|
|
— |
|
|
(129,000 |
) |
|
2,484,988 |
|
|
Net
cash used in operating activities |
|
|
(7,271,862 |
) |
|
(9,856,825 |
) |
|
(11,388,768 |
) |
|
(42,135,503 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment |
|
|
(97,585 |
) |
|
(7,409 |
) |
|
(999,939 |
) |
|
(2,885,446 |
) |
|
Patent
registration costs |
|
|
(46,057 |
) |
|
(77,591 |
) |
|
(120,099 |
) |
|
(708,281 |
) |
|
Investment
in affiliate |
|
|
|
|
|
(320,952 |
) |
|
(535,126 |
) |
|
(856,078 |
) |
|
Increase
in restricted cash |
|
|
(36,642 |
) |
|
(35,329 |
) |
|
(2,374,078 |
) |
|
(3,035,021 |
) |
|
Redemption
of held-to-maturity investments, net |
|
|
— |
|
|
— |
|
|
11,067,175 |
|
|
— |
|
|
Net
cash (used in) provided by investing activities |
|
|
(180,284 |
) |
|
(441,281 |
) |
|
7,037,933 |
|
|
(7,484,826 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock |
|
|
345,324 |
|
|
145,000 |
|
|
81,200 |
|
|
35,485,174 |
|
|
Underwriting
and other expenses of initial
public offering |
|
|
—
|
|
|
— |
|
|
— |
|
|
(3,669,613 |
) |
|
Proceeds
from issuance of secured debentures |
|
|
—
|
|
|
8,500,000 |
|
|
— |
|
|
8,500,000 |
|
|
Proceeds
from issuance of unsecured debentures |
|
|
9,428,806 |
|
|
— |
|
|
3,500,000 |
|
|
12,928,806 |
|
|
Proceeds
from equity private placement |
|
|
—
|
|
|
—
|
|
|
2,736,279 |
|
|
2,736,279 |
|
|
Deferred
financing costs |
|
|
(79,077 |
) |
|
(291,027 |
) |
|
(328,280 |
) |
|
(698,384 |
) |
|
Capital
lease obligation payments |
|
|
(29,240 |
) |
|
(17,239 |
) |
|
— |
|
|
(46,479 |
) |
|
Proceeds
from capital contribution |
|
|
— |
|
|
— |
|
|
— |
|
|
500,000 |
|
|
Payment
of note payable |
|
|
— |
|
|
— |
|
|
— |
|
|
(250,000 |
) |
|
Proceeds
from grant, net |
|
|
— |
|
|
(21,582 |
) |
|
— |
|
|
205,940 |
|
|
Proceeds
from sale of preferred stock |
|
|
— |
|
|
— |
|
|
— |
|
|
2,146,446 |
|
|
Net
cash provided by financing activities |
|
|
9,665,813 |
|
|
8,315,152 |
|
|
5,989,199 |
|
|
57,838,168 |
|
|
Net
increase (decrease) in cash and cash equivalents |
|
|
2,213,667 |
|
|
(1,982,954 |
) |
|
1,638,364 |
|
|
8,217,840 |
|
|
Cash
and cash equivalents, beginning of period |
|
|
6,004,173 |
|
|
7,987,127 |
|
|
6,348,763 |
|
|
— |
|
|
Cash
and cash equivalents, end of period |
|
$ |
8,217,840 |
|
$ |
6,004,173 |
|
$ |
7,987,127 |
|
$ |
8,217,840 |
|
Supplemental
Cash Flow Data:
Please
see Note 3 for more information.
See
accompanying notes.
MILLENNIUM
CELL INC.
(a
development stage enterprise)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note
1 — Basis of Presentation
Millennium
Cell Inc. (the "Company"), which was formed to acquire substantially all of the
assets of the Battery Technology Group of GP Strategies Corporation ("GPS"), was
incorporated on December 17, 1998 and organized on January 1, 1999 (inception).
Millennium
Cell Inc. is a development stage company, as defined in Statement of Financial
Accounting Standards No.7, “Accounting and Reporting by Development Stage
Enterprises.” The Company is focused on commercialization of next-generation
hydrogen energy systems for use primarily in portable electronic devices for the
military, medical, industrial and consumer markets. These energy systems offer
runtime, weight, safety and cost advantages in an attractive form factor versus
existing solutions. Millennium Cell is developing this technology in partnership
with corporate and government entities.
Note
2 — Significant Accounting Policies
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, MCE Ventures LLC. MCE Ventures is a Delaware limited
liability corporation that was formed in 2002 to engage in limited strategic
investment activities. All significant inter-company transactions and accounts
have been eliminated.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments purchased with an initial
maturity of three months or less to be cash equivalents.
Accounts
receivable
Accounts
receivable - trade is comprised of agreements with third parties from revenue
agreements. Accounts receivable - other represents amounts due from the
Company’s cost sharing programs.
Concentration
of Credit Risk
Financial
instruments, which potentially expose the Company to concentrations of credit
risk, consist principally of cash investments and trade receivables. The Company
places its cash investments with highly rated financial institutions. At times,
such investments may be in excess of the FDIC insurance limit. The Company’s
limited customer base increases its concentrations of credit risk with respect
to trade receivables. The Company routinely assesses the financial strength of
its customers.
Long-Lived
Assets
The
Company records impairment losses on long-lived assets when events and
circumstances indicate that the assets might be impaired and the undiscounted
estimated cash flows to be generated by the related assets are less than the
carrying amount of those assets. During fiscal 2004, the Company performed an
impairment analysis on long-lived assets and as a result the Company wrote off a
non-core patent with a net value of $32,171.
MILLENNIUM
CELL INC.
(a
development stage enterprise)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Property
and Equipment
Property
and equipment are stated at cost. The Company provides for depreciation and
amortization using the straight-line method over their estimated useful lives as
follows:
|
|
|
Estimated |
|
| Asset Classification |
|
|
Useful
Life |
|
| |
|
|
|
|
|
Machinery
and equipment |
|
|
3
years |
|
|
Furniture
and fixtures |
|
|
3
years |
|
|
Leasehold
improvements |
|
|
7
years |
|
| |
|
|
|
|
Leasehold
improvements are amortized over the estimated useful lives of the assets or
related lease terms, whichever is shorter. Repairs and maintenance are charged
to expense as incurred.
Patents
and Licenses
Certain
costs associated with obtaining and licensing patents and trademarks are
capitalized as incurred and are amortized on a straight-line basis over their
estimated useful lives of 10 to 17 years, unless the asset is determined to be
impaired. Amortization of such costs begins once the patent has been issued. The
Company evaluates the recoverability of its patent costs when events and
circumstances indicate that the assets might be impaired and the undiscounted
estimated cash flows to be generated by the related assets are less than the
carrying amount of those assets. During fiscal 2004, the Company performed an
impairment analysis on long-lived assets and as a result the Company wrote off a
non-core patent with a net value of $32,171.
Investment
in Affiliate
Investments
in which Millennium Cell does not have control, but has the ability to exercise
significant influence over the operating and financial policies, are accounted
for under the equity method. Millennium Cell's share of net earnings and losses
from investments is included in the consolidated statement of operations.
In July
2002, the Company agreed to acquire a 50% non-controlling interest in a European
alkaline fuel cell company (the "Affiliate"). During the period from July 2002
to June 2003, the Company directly and indirectly provided limited funding for
their proportionate share of the Affiliate’s operating expenses. As of June 30,
2003, the Company had written off its Investment in Affiliate on the balance
sheet and determined the fair value of the investment was zero. During the third
quarter of 2003, the Company decided to abandon its interest in the Affiliate.
No gain or loss was recognized upon this event.
Restricted
Cash
Cash that
is pledged as collateral under the Company's amended facilities lease agreement
and the secured debentures issued to Ballard Power Systems, Inc. (“Ballard Power
Systems”) is classified as restricted cash on the consolidated balance sheet.
Revenue
Recognition
Revenues
for the year ended December 31, 2004 were derived primarily from engineering and
design services performed during 2004 that were non-recurring in the current
year. While in the development stage, the Company’s revenue is expected to
fluctuate from year to year with the timing of prototype development and design
services.
The
Company's near term revenues will be derived substantially from contracts that
require the Company to deliver engineering, design and management services,
hydrogen generation technology, prototype systems and licensing of technology.
Revenues will be recognized in the period in which the services are performed,
technology and/or prototype is delivered or licensed revenue is earned.
MILLENNIUM
CELL INC.
(a
development stage enterprise)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Cost
Sharing Programs
The
Company participates in a number of government programs, which provide the
Company with funding to offset the costs of product development and research. As
the Company’s full costs are not billable under these programs, the billable
costs are shown as reductions of operating expenses on the accompanying
consolidated statements of operations in the period in which the costs are
incurred on a time and materials basis.
Product
Development and Marketing Costs
Product
development and marketing costs are expensed as incurred.
Research
and Development Costs
Research
and development costs are expensed as incurred.
Stock
Based Compensation
In
December 2002, the Financial Accounting Standards Board ("FASB") issued FAS No.
148, Accounting for Stock-Based Compensation-Transition and Disclosure. FAS 148
amends FAS No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, FAS 148
amends the disclosure requirements of FAS 123 to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock based employee compensation and the effect of the method used on
reported results. The provisions of FAS 148 are effective for financial
statements for fiscal years and interim periods ending after December 15, 2002.
The disclosure provisions of FAS 148 have been adopted by the Company. FAS 148
did not require the Company to change to the fair value based method of
accounting for stock-based compensation.
Statement
of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based
Compensation” encourages, but does not require, companies to record compensation
cost for stock-based employee compensation plans at fair value. The Company has
elected to account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees” (“APB 25”).
The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation:
| |
|
Year
Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Net
loss attributable to common stockholders - As reported |
|
$ |
(10,804,978 |
) |
$ |
(16,102,937 |
) |
$ |
(16,123,961 |
) |
|
Plus:
Stock-based compensation expense included in reported net
loss |
|
|
796,286 |
|
|
2,164,634 |
|
|
4,148,251 |
|
|
Less:
Total stock-based compensation expense determined using the fair value
method |
|
|
(1,576,863 |
) |
|
(6,125,215 |
) |
|
(6,907,045 |
) |
|
Net
loss attributable to common stockholders - Pro forma |
|
$ |
(11,585,555 |
) |
$ |
(20,063,518 |
) |
$ |
(18,882,755 |
) |
|
Net
loss per share attributable to common stockholders - As reported
|
|
$ |
(0.29 |
) |
$ |
(0.51 |
) |
$ |
(0.58 |
) |
|
Net
loss per share attributable to common stockholders - Pro
forma |
|
$ |
(0.31 |
) |
$ |
(0.64 |
) |
$ |
(0.67 |
) |
MILLENNIUM
CELL INC.
(a
development stage enterprise)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
| |
|
Year
Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Expected
dividend yield |
|
|
— |
|
|
— |
|
|
— |
|
|
Expected
stock price volatility |
|
|
.57 |
|
|
.69 |
|
|
.69 |
|
|
Risk-free
interest rate |
|
|
3.48 |
% |
|
3.68 |
% |
|
3.68 |
% |
|
Expected
option term |
|
|
5
years |
|
|
5
years |
|
|
5
years |
|
| |
|
|
|
|
|
|
|
|
|
|
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. The
Company's options have characteristics significantly different from those of
traded options, and changes in the subjective input assumptions can materially
affect the fair value estimate. Based upon the above assumptions, the weighted
average fair value of stock options granted at market was $1.14, $1.44 and $3.10
in fiscal 2004, 2003 and 2002, respectively.
Earnings
Per Share
Basic
earnings per share (EPS) is computed by dividing income available to common
stockholders by the weighted average number of common shares actually
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. Basic and diluted EPS
were the same for all periods presented herein.
In
October 2004, the FASB ratified Emerging Issues Task Force ("EITF") Issue No.
04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings Per
Share." Their conclusion was that beginning with reporting periods ending after
December 15, 2004 (i) contingently convertible debt instruments are subject to
the if-converted method under SFAS No. 128, "Earnings Per Share," regardless of
the contingent features included in the instrument, and (ii) prior period
earnings per share would have to be restated. With the ratification of EITF
Issue No. 04-8, the Company was required to include such potentially issuable
shares, if dilutive, in its diluted earnings per share calculation beginning
with the fourth quarter 2004 reporting period. The Company did not have to
restate their prior period earnings per share since the issuable shares would
have been anti-dilutive.
Options
to purchase 4,017,191, 4,422,476 and 4,345,829 shares of common stock have not
been included in the computation of diluted net loss per share for the years
ended December 31, 2004, 2003 and 2002, respectively, as their effects would
have been anti-dilutive.
Warrants
to purchase 1,248,069, 1,248,069 and 658,693 shares of common stock have not
been included in the computation of diluted net loss per share for the years
ended December 31, 2004, 2003 and 2002, respectively, as their effects would
have been anti-dilutive.
Income
Taxes
The
Company is subject to state and federal income taxes and accounts for income
taxes under the liability method. Accordingly, net deferred tax assets and an
offsetting valuation allowance of $29,609,000 and $26,707,000 at December 31,
2004 and 2003, respectively, have been recorded due to the uncertainty regarding
the realization of such deferred tax assets. The significant items giving rise
to the deferred income taxes were primarily tax loss and credit carry forwards
and depreciation. The net operating losses will begin to expire in 2020.
MILLENNIUM
CELL INC.
(a
development stage enterprise)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Use
of Accounting Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recently
Issued Accounting Standards
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 123R “Share Based Payment.” This statement is a revision to SFAS
123 and supersedes Accounting Principles Board (APB) Opinion No. 25,
“Accounting for Stock Issued to Employees,” and amends FASB Statement
No. 95, “Statement of Cash Flows.” This statement requires a public entity
to expense the cost of employee services received in exchange for an award of
equity instruments. This statement also provides guidance on valuing and
expensing these awards, as well as disclosure requirements of these equity
arrangements. This statement is effective for the first interim reporting period
that begins after June 15, 2005.
SFAS 123R
permits public companies to choose between the following two adoption methods:
|
|
1. |
A
“modified prospective” method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of
SFAS 123R for all share-based payments granted after the effective date
and (b) based on the requirements of Statement 123 for all awards
granted to employees prior to the effective date of SFAS 123R that remain
unvested on the effective date, or |
|
|
|
|
2. |
A
“modified retrospective” method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS 123 for
purposes of pro forma disclosures either (a) all prior periods
presented or (b) prior interim periods of the year of
adoption. |
|
|
As
permitted by SFAS 123, the Company currently accounts for share-based payments
to employees using APB Opinion 25’s intrinsic value method and, as such, the
Company generally recognizes no compensation cost for employee stock options if
they are issued at the fair market value of common stock at the date of the
grant. The impact of the adoption of SFAS 123R cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
However, valuation of employee stock options under SFAS 123R is similar to SFAS
123, with minor exceptions. For information about what our reported results of
operations and earnings per share would have been had it adopted SFAS 123,
please see the discussion under the heading “Stock Based Compensation” in Note 1
to our Consolidated Financial Statements. Accordingly, the adoption of SFAS
123R’s fair value method will have a significant impact on the Company’s results
of operations, although it will have no impact on the Company’s overall
financial position. SFAS 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. Due to timing of the release of SFAS 123R, the
Company has not yet completed the analysis of the ultimate impact that this new
pronouncement will have on the results of operations, nor the method of adoption
for this new standard.
Reclassifications
Amounts
previously reported as "Product Development and Engineering" have been
reclassified and shown as "Research and Development" for all periods presented.
Additionally, sales of net operating losses in the State of New Jersey
previously recorded as “Other Income” have been reclassified and shown as
“Benefit from Income Taxes” for all periods presented. Certain other amounts
have been reclassified to conform to the current year's presentation.
Note
3 — Supplemental Cash Flow Information
The
Company funded its vested matching contributions in connection with its 401(k)
plan for employees with 60,211, 84,672 and 43,356 shares of common stock with a
market value of $103,773, $143,224 and $82,375 in fiscal 2004, 2003 and 2002,
respectively. In November 2002, the Company and Ballard Power Systems agreed to
convert a cash advance for deferred royalty income paid by Ballard Power Systems
in October 2000 to a strategic investment in the form of Secured Debentures of
$2.4 million.
MILLENNIUM
CELL INC.
(a
development stage enterprise)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The
Company also made non-cash payments of $131,048 to employees in lieu of a merit
raise in 2004 and to Board of Directors members in lieu of cash compensation of
$226,877 and $404,555 in 2004 and 2003, respectively.
Interest
paid during 2004, 2003 and 2002 totaled $88,749, $104,337 and $2,722,
respectively. Non-cash interest paid during 2004 was $142,517. The Company also
issued debentures in 2004, 2003 and 2002 which resulted in non-cash
transactions. Please see Note 11 for more information.
Note
4 — Income Taxes
The
components of the benefit for income taxes are as follows:
| |
|
Year
Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Current
benefit: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
State |
|
|
(410,726 |
) |
|
(221,480 |
) |
|
(234,963 |
) |
|
Deferred
provision: |
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
— |
|
|
— |
|
|
— |
|
|
State |
|
|
— |
|
|
— |
|
|
— |
|
|
Total |
|
$ |
(410,726 |
) |
$ |
(221,480 |
) |
$ |
(234,963 |
) |
| |
|
|
|
|
|
|
|
|
|
|
The
income tax benefits recorded for the years ended December 31, 2004, 2003 and
2002 were derived from the Company's participation in the New Jersey Emerging
Technology and Biotechnology Financial Assistance Program. This program allows
certain qualified companies to be compensated for the transfer of their New
Jersey net operating losses to other companies.
Significant
components of the Company’s net deferred taxes as of December 31, 2004 and 2003
are as follows:
| |
|
Year
Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
|
Stock
based compensation |
|
$ |
8,757,000 |
|
$ |
8,457,000 |
|
|
Net
operating loss carryforwards |
|
|
18,946,000 |
|
|
15,907,000 |
|
|
Research
and development credits |
|
|
1,490,000 |
|
|
920,000 |
|
|
Depreciation
and amortization |
|
|
382,000 |
|
|
396,000 |
|
|
Deferred
revenue |
|
|
34,000 |
|
|
827,000 |
|
|
Other |
|
|
— |
|
|
200,000 |
|
|
Valuation
reserve |
|
|
(29,609,000 |
) |
|
(26,707,000 |
) |
|
Net
deferred tax asset |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
The
Company has provided a full valuation allowance in 2004 and 2003 for its
deferred tax assets since the realization of these future benefits is not
considered more likely than not. The amount of deferred tax assets considered
realizable is subject to change based on estimates of future taxable income
during the carryforward period. If the Company achieves profitability, these
deferred tax assets would be available to offset future income taxes. The
Company assesses the need for the valuation allowance at each balance sheet date
based on all available evidence.
As of
December 31, 2004, the Company had available net operating loss carryforwards of
approximately $49,000,000 for federal income tax purposes and approximately
$37,000,000 for state income tax purposes. The federal carryforwards will begin
to expire in 2020, and the state carryforwards will begin to expire in 2007. In
addition, at December 31, 2004 the Company had available federal research and
development tax credit carryforwards of approximately $1,120,000 that begin to
expire in 2020 and state research and development credits of approximately
$560,000.
MILLENNIUM
CELL INC.
(a
development stage enterprise)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The
reconciliation of income tax expense computed at the U.S. federal statutory rate
to the recorded provision (benefit) for income taxes is as follows:
| |
|
Year
Ended December 31, |
|
| |
|
2004 |
|
% |
|
2003 |
|
% |
|
2002 |
|
% |
|
|
Tax
at U.S. statutory rate |
|
$ |
(3,925,000 |
) |
|
35.0 |
|
$ |
(5,636,000 |
) |
|
35.0 |
|
$ |
(5,643,000 |
) |
|
35.0 |
|
|
State
tax (benefit), net of federal tax effect |
|
|
(647,000 |
) |
|
5.8 |
|
|
(942,000 |
) |
|
5.8 |
|
|
(943,000 |
) |
|
5.8 |
|
|
Research
and experimentation tax credit |
|
|
(130,000 |
) |
|
1.2 |
|
|
(193,000 |
) |
|
1.2 |
|
|
(248,000 |
) |
|
1.5 |
|
|
Interest
expense |
|
|
655,000 |
|
|
(6.1 |
) |
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
Other |
|
|
(4,726 |
) |
|
0.0 |
|
|
94,000 |
|
|
(0.5 |
) |
|
113,000 |
|
|
(0.7 |
) |
|
Valuation
allowance |
|
|
3,641,000 |
|
|
(32.2 |
) |
|
6,455,520 |
|
|
(40.1 |
) |
|
6,486,037 |
|
|
(40.2 |
) |
|
Provision
(benefit) for income taxes |
|
$ |
(410,726 |
) |
|
3.7 |
|
$ |
(221,480 |
) |
|
1.4 |
|
|
(234,963 |
) |
|
1.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
5 — Property And Equipment
Property
and equipment consist of the following at December 31:
| |
|
2004 |
|
2003 |
|
|
Machinery
and equipment |
|
$ |
1,329,655 |
|
$ |
1,232,070 |
|
|
Furniture
and fixtures |
|
|
402,125 |
|
|
402,125 |
|
|
Leasehold
improvements |
|
|
1,290,078 |
|
|
1,290,078 |
|
| |
|
|
3,021,858 |
|
|
2,924,273 |
|
|
Accumulated
depreciation |
|
|
(2,358,282 |
) |
|
(1,914,759 |
) |
|
Property
and equipment, net |
|
$ |
663,576 |
|
$ |
1,009,514 |
|
| |
|
|
|
|
|
|
|
The
Company recorded depreciation expense of $443,523, $611,062, and $650,439 for
the fiscal years ended December 31, 2004, 2003 and 2002, respectively.
In the
second quarter of 2003, the Company entered into a three-year capital lease for
approximately $86,000 to purchase software. The software is classified as
machinery and equipment and the amortization of the leased assets are included
in depreciation expense in the accompanying financial statements. The lease term
is three years and contains a bargain purchase option at the end of the lease.
Note
6 — Patents and Licenses
Patent
and license costs consist of the following at December 31:
| |
|
2004 |
|
2003 |
|
|
Patent
and license costs |
|
$ |
816,211 |
|
$ |
812,224 |
|
|
Accumulated
amortization |
|
|
(277,409 |
) |
|
(214,660 |
) |
| |
|
$ |
538,802 |
|
$ |
597,564 |
|
| |
|
|
|
|
|
|
|
The
Company recorded amortization expense of $72,649 $70,296, and $60,536 for the
fiscal years ended December 31, 2004, 2003 and 2002, respectively. Amortization
of patents and licenses is estimated to be approximately $69,000 per year over
the next five years and $194,000 thereafter.
MILLENNIUM
CELL INC.
(a
development stage enterprise)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note
7 — Product Development Agreement
In
October 2000, the Company received $2.4 million in cash from Ballard Power
Systems as an advance for prospective royalties pursuant to a product
development agreement between the Company and Ballard. In addition, the Company
granted to Ballard Power Systems a warrant to purchase up to 400,000 shares of
the Company’s common stock, which was terminated as part of the strategic
investment discussed below. Upon completion of certain stages of product
development, the parties agreed to negotiate in good faith for the grant of a
license of our technology to Ballard Power Systems in certain fields of use, at
which time prepaid royalties may be earned and the warrants will be issued and
recorded at fair value.
On
November 8, 2002, the Company agreed with Ballard Power Systems that the product
development milestones have been achieved and agreed to convert the $2.4 million
refundable royalty payment into an investment in the Company in the form of
secured convertible debentures due November 8, 2005. The Ballard debentures are
secured by a standby letter of credit issued by Wachovia Bank, National
Association, with an aggregate face amount equal to the outstanding principal.
The Company pledged to the bank as collateral $2.4 million of funds previously
reported under cash and cash equivalents on the accompanying balance sheet. The
Company will not have the ability to use this cash until the bank pledges are
released upon conversion of the Ballard debentures to common stock. The
debentures are convertible at a conversion price of $4.25, subject to
anti-dilution adjustments and certain price protection in the event the Company
initiates the conversion. As part of the purchase agreement entered into between
the Company and Ballard Power Systems, Ballard Power Systems retains the option
to license the non-exclusive right to manufacture and sell products with the
Company’s Hydrogen
on Demandâ
technology for specific portable fuel cell products and stationary internal
combustion engine generators.
Note
8 — Grant Obligation
Between
January 1999 and April 2000, the Company 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 the Company’s technology. The recoverable grant is required to be
repaid when the Company generates net sales in a fiscal year. The repayment
obligation, which began in June 2001, ranges from 1% to 5% of net sales over a
ten-year period. The Company is obligated to repay the unpaid amount of the
original grant at the end of the ten-year period. As of December 31, 2004, the
Company has repaid approximately $21,000 and an additional $28,766 is due to be
paid in 2005.
Note
9 — Commitments And Contingencies
In April
2001, the Company amended its main operating lease to provide for additional
space for the Company's principal operating offices and laboratories. The
amended lease will expire in 2008 and will contain options to renew for an
additional 8 years and will require the Company to pay its allocated share of
taxes and operating cost in addition to the annual base rent payment. Future
minimum annual lease commitments excluding estimated allocated taxes and
maintenance under the amended operating leases are as follows:
|
2005 |
|
$ |
484,310 |
|
|
2006 |
|
|
484,310 |
|
|
2007 |
|
|
484,310 |
|
|
2008 |
|
|
443,950 |
|
|
Total |
|
$ |
1,896,880 |
|
Rent
expense under the operating lease was approximately $640,523, $546,710 and
$507,310 for the years ended December 31, 2004, 2003, and 2002, respectively.
In
connection with the amended lease agreement, the Company 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 the Company's cash and is
classified as Restricted Cash. The funds used for collateral will not be
available for use in operations.
From time
to time, the Company is involved in litigation relating to claims arising in the
normal course of business. The Company does not believe that any such litigation
would have a material adverse effect on the Company’s results of operations or
financial condition.
MILLENNIUM
CELL INC.
(a
development stage enterprise)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note
10 — Rabbi Trust
In 2003,
the Company established a deferred compensation arrangement whereby a portion of
certain Board of Directors fees could be withheld and placed in a Rabbi Trust at
their option. The Company adopted the provisions of Emerging Issues Task Force
(EITF) 97-14 "Accounting for Deferred Compensation Arrangement Where Amounts Are
Earned and Held in a Rabbi Trust and Invested" which requires the Company to
consolidate into its financial statements the net assets of the trust. The
deferred compensation obligation has been classified as a current liability. The
fair value of the Rabbi Trust was $45,623 and is payable in cash or the
Company’s common stock upon the holders’ request.
Note
11 — Private Placement Transactions
Private
Placement Transactions
2002
Placement
On June
19, 2002, the Company entered into a private placement financing transaction
with two institutional and accredited investors pursuant to the terms of a
securities purchase agreement among the Company and the purchasers. The private
placement was exempt from registration under the Securities Act of 1933, as
amended, pursuant to Section 4(2) of such Act. The placement consisted of the
sale of 1,075,269 shares of common stock for gross proceeds of $3.0 million and
warrants to purchase 268,817 shares of common stock (with an exercise price of
$3.93 per share).
On
October 31, 2002, the Company entered into a separate private placement
financing transaction with the same two institutional and accredited investors
pursuant to the terms of a new purchase agreement among the Company and the
purchasers. The private placement was exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) of such Act. The
placement consisted of the sale of 588,790 shares of common stock and warrants
(with an exercise price of $2.32) to purchase 147,198 shares of common stock of
the Company for gross proceeds of $1.0 million. Pursuant to the terms of the
purchase agreement, one of the investors agreed to acquire $12 million of
secured and unsecured debentures, convertible into common stock of the Company,
subject to certain terms and conditions, and warrants.
In
December 2002, the Company issued convertible unsecured debentures with a
principal amount of $3.5 million. As of June 30, 2003, the entire $3.5 million
of unsecured debentures had been converted into 2,094,048 shares of common
stock.
2003
Debentures
On
January 23, 2003, the Company's shareholders approved the issuance of $8.5
million of debentures (the “2003 Debentures”) and warrants to acquire 589,376
shares. The debentures were issued on January 30, 2003. During the third and
fourth quarters of 2003, the Company converted approximately $7.8 million of the
2003 Debentures into 3,373,953 shares of common stock. As a result,
approximately $0.7 million of unsecured 2003 Debentures were outstanding as of
December 31, 2003. These debentures were converted to common shares in January
2004.
In
accordance with APB No. 14, "Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants", the Company determined that the fair value of the
debentures was $11,036,195 upon issuance. The resulting discount was amortized
as interest expense, over the original maturity period of the debentures or
ratably based on conversions whichever came first.
In
accordance with Emerging Issues Task Force ("EITF") No. 00-27, "Application of
Issue No. 98-5 to Certain Convertible Instruments", and EITF No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios", and after considering the terms of
the transaction, the Company determined that the debentures contained a
beneficial conversion feature ("BCF"). The BCF existed because of a discount
that was given to the investor for the company-initiated conversion of the
debentures. These discounts ranged from 4% to 12%, depending on the amount of
debentures converted into common stock. Accordingly, at the time of conversion,
the Company recorded as interest expense the applicable BCF based on the fair
value of the conversion feature on that date. During the fiscal years ended
December 31, 2004 and 2003, approximately $0.7 million and $11.3 million of 2003
debentures were converted at the option of the Company and BCF charges of
$175,757 and $1,356,825 were recorded, respectively.
MILLENNIUM
CELL INC.
(a
development stage enterprise)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
2004
Debentures
In
January 2004, the Company entered into a private placement financing transaction
with an institutional and accredited investor pursuant to the terms of a
securities purchase agreement between the Company and the purchaser. The Company
claimed the exemption from registration under Section 4(2) of the Securities Act
of 1933. Pursuant to the terms of the agreement, the investor agreed to acquire
up to $10 million of unsecured debentures, convertible into common stock of the
Company, subject to certain terms and conditions. The SEC declared the
registration of shares underlying the debentures effective on February 17, 2004
and $6.0 million of unsecured debentures (the “2004 Debentures”) were issued to
the investor on that date at an initial conversion price of $3.30, subject to
certain terms and conditions. As of December 31, 2004, approximately $4.6
million of the 2004 Debentures were converted into 2,859,004 shares of the
Company’s common stock.
Under the
terms of the agreement, cash fees of $400,000 were deducted from the initial
proceeds and 140,180 shares of common stock valued at $377,084 were issued to
the holder of the debentures upon closing of the transaction. The market value
of these shares and the cash fees were recorded as a discount on the debentures
and are amortized over the term of the debentures or as they are converted,
whichever happens first. The carrying value of the debentures was $5,222,916 at
the time of issuance. The debentures mature 18 months after the date of issuance
and are subject to six, 30-day extensions and bear interest at 6% per annum with
payments due quarterly.
In
September 2004, the Company issued an additional $4.0 million of unsecured
convertible debentures under the private placement transaction that closed in
February of 2004. These debentures were issuable at the Company’s option because
$4 million of the initial $6 million of 2004 Debentures had been converted. Cash
fees of $171,194 were deducted from the proceeds and 60,069 shares of common
stock valued at $73,284 were issued to the holder of the debentures upon closing
of the transaction. The market value of these shares and the cash fees were
recorded as a discount on the debentures and are amortized over the term of the
debentures or as they are converted, whichever happens first. The carrying value
of the debentures was $3,755,522 at the time of issuance. The debentures mature
18 months after the date of issuance and are subject to six, 30-day extensions
and bear interest at 6% per annum with payments due quarterly.
Among
other things, the terms and conditions of the 2004 Debentures include covenants
related to the Company’s continued listing on a nationally recognized stock
market (which includes the NASDAQ National Market and/or The NASDAQ SmallCap
Market), in the event that our average closing stock price is below $1.00,
$0.75, or $0.50 for 30, 15 and 5 consecutive trading days, respectively, and
minimum cash maintenance requirements of 80% of outstanding unsecured
debentures. If there is an event of default under the debentures, the holder may
elect to require us to prepay all of a portion of the principal amount of the
debentures plus a 30% premium. The Company is in compliance with all applicable
covenants at December 31, 2004.
In
accordance with APB No. 14, “Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants”, the Company amortizes discounts on its debentures
as interest expense, over the original maturity period of the debentures or
ratably as they are converted, whichever comes first. In 2004, the Company
recognized a non-cash charge to interest expense of $773,623, respectively for
amortization of discount on debentures.
In
accordance with Emerging Issues Task Force (“EITF”) No. 00-27, “Application of
Issue No. 98-5 to Certain Convertible Instruments”, and EITF No. 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios”, and after considering the terms of
the transaction, the Company determined that the debentures contained a
beneficial conversion feature (“BCF”). The BCF existed because of a discount of
7% that will be given to the investor in the event of a company-initiated
conversion of the debentures prior to maturity. Accordingly, at time of
conversion, the Company will record as interest expense any applicable BCF based
on the fair value of the conversion feature on that date in the event of an
early conversion of debentures into common stock. During the year ended December
31, 2004, $4.6 million of 2004 Debentures were converted and a BCF of $321,990
was recorded.
MILLENNIUM
CELL INC.
(a
development stage enterprise)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note
12 — Stock Options and Employee Benefit Plans
2000
Stock Option Plan
In July
2000, the Company adopted the Amended and Restated 2000 Stock Option Plan.
8,500,000 shares of common stock have been reserved for issuance under the plan.
The plan provides for the granting of the following types of awards: stock
options, stock warrants, stock appreciation rights, restricted stock awards,
performance unit awards and stock bonus awards. Options and warrants issued
under this plan have a life of ten years and generally vest ratably over three
years. The specific terms and conditions of awards granted under the plan are
specified in a written agreement between the Company and the participant.
The
following table summarizes option and warrant activity under the Plan:
| |
|
|
|
Weighted |
|
| |
|
Number
Of |
|
Average |
|
| |
|
Options |
|
Exercise
Price |
|
| |
|
And
Warrants |
|
Per
Share |
|
| |
|
|
|
|
|
|
Balance
at December 31, 2001 |
|
|
4,766,720 |
|
|
5.09 |
|
|
Granted
at fair value |
|
|
5,000 |
|
|
5.16 |
|
|
Forfeited
or terminated |
|
|
(397,891 |
) |
|
5.57 |
|
|
Exercised |
|
|
(28,000 |
) |
|
2.90 |
|
|
Balance
at December 31, 2002 |
|
|
4,345,829 |
|
$ |
5.06 |
|
|
Granted
at fair value |
|
|
1,122,840 |
|
|
2.30 |
|
|
Forfeited
or terminated |
|
|
(996,093 |
) |
|
7.46 |
|
|
Exercised |
|
|
(50,000 |
) |
|
2.90 |
|
|
Balance
at December 31, 2003 |
|
|
4,422,576 |
|
$ |
3.84 |
|
|
Granted
at fair value |
|
|
642,038 |
|
|
2.33 |
|
|
Forfeited
or terminated |
|
|
(931,891 |
) |
|
3.61 |
|
|
Exercised |
|
|
(115,532 |
) |
|
2.98 |
|
|
Balance
at December 31, 2004 |
|
|
4,017,191 |
|
$ |
3.79 |
|
| |
|
|
|
|
|
|
|
The
following is additional information relating to options and warrants granted and
outstanding under the plan as of December 31, 2004:
| |
|
|
|
|
|
Remaining |
|
|
|
|
|
| |
|
|
|
Weighted |
|
Weighted |
|
|
|
Weighted |
|
| |
|
Options |
|
Average |
|
Average |
|
Options |
|
Average |
|
|
Exercise
Price Range |
|
Outstanding |
|
Exercise
Price |
|
Life
(Years) |
|
Exercisable |
|
Exercise
Price |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
$0.01
- $ 2.00 |
|
|
55,867 |
|
$ |
1.98 |
|
|
10.00 |
|
|
5,867 |
|
$ |
1.80 |
|
|
$2.01
- $ 2.90 |
|
|
3,146,924 |
|
|
2.69 |
|
|
3.41 |
|
|
2,555,391 |
|
|
2.76 |
|
|
$2.91
- $
9.58 |
|
|
381,536 |
|
|
5.60 |
|
|
.72 |
|
|
354,469 |
|
|
5.69 |
|
|
$10.00
-
$19.63 |
|
|
432,864 |
|
|
10.39 |
|
|
7.00 |
|
|
432,864 |
|
|
10.57 |
|
| |
|
|
4,017,191 |
|
$ |
3.79 |
|
|
3.55 |
|
|
3,348,591 |
|
$ |
3.83 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The stock
option tables above exclude 197,599 shares of restricted stock issued under the
2000 Stock Option Plan in conjunction with the tender exchange offer in August
2003, of which 81,425 are vested. The shares vest ratably over 2 years or when
the closing price of the Company’s common stock reaches $4.25 (first 50% vests
immediately) and $5.10 (second 50% vests immediately). This plan expired in
April 2004. The table also excludes 100,000 shares of restricted stock issued
for executive compensation in 2004.
The
Company recorded non-cash charges of approximately $0.4 million, $1.7 million
and $3.8 million in 2004, 2003, and 2002, respectively, related to options
issued below market to employees and the Board of Directors in 2000 that were
fully vested in 2003 and charges related to restricted stock issued in
conjunction with our tender offer in August 2003 as discussed below under the
heading “Tender Exchange Offer.”
MILLENNIUM
CELL INC.
(a
development stage enterprise)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The
Company also incurred non-cash charges of $0.2 million, $0.5 million and $0.1
million in 2004, 2003 and 2002, respectively, related to the fair value of
warrants issued to affiliates. The accounting methodology for these warrants
requires a re-valuing of the warrants at each period ending market price using a
Black-Scholes pricing model. Due to the variable nature of this accounting
methodology, it is difficult to predict the amount of additional non-cash
charges the Company will incur related to these warrants during future periods.
Savings
Plan
In
December 2000, the Company enacted a savings plan that complies with Section
401(k) of the Internal Revenue Code. The plan allows employees to contribute a
portion of their compensation on a pre-tax and/or after-tax basis in accordance
with specified guidelines. The Company matches in company stock in July and
December of each fiscal year, on a one to one basis the vested portion of
employee contributions up to 6% of eligible compensation. Employee contributions
to this plan began in January 2001. Employer matching stock contributions vest
ratably over three years based on the length of service of the employee. The
Company funded the vested matching contributions to the plan with 60,211, 84,672
and 43,356 shares of common stock with an issued market value of $103,773,
$143,224 and $82,375 in fiscal 2004, 2003 and 2002, respectively. The Company
has reserved 180,000 shares of common stock for the 401(k) plan.
Note
13 — Related Party Transactions
On July
14, 2004, the Company entered into an Employment Agreement and a Restricted
Stock Grant Agreement with Mr. H. David Ramm, a member of the Board of
Directors, and the Interim President and Chief Executive Officer, and an
Agreement with DKRW Energy LLC (“DKRW”), a limited liability company of which
Mr. Ramm is a member. The Company made a one-time grant to Mr. Ramm of 100,000
shares of restricted stock in accordance with the restricted stock agreement.
Under the DKRW agreement, the Company agreed to pay a monthly retainer of
$25,000 to DKRW in connection with Mr. Ramm’s serving as Interim President and
Chief Executive Officer. On September 28, 2004, the initial six-month term of
the agreement was completed and going forward the agreement will automatically
renew on a month-to-month basis unless terminated in writing by either
party.
On July
14, 2004, the Company’s Board of Directors approved the payment of a success fee
under a financial advisory services agreement with Andersen & Company LLC
(“Andersen”) for services provided in connection with the Company’s private
placement transaction which closed on February 17, 2004. For these services,
Andersen received consideration of $200,000, which was paid for by the issuance
of 111,421 shares of the Company’s common stock in August 2004 and which was
recorded as debt issue costs in the accompanying balance sheet. The number of
shares to be issued was calculated using an average closing price of the
Company’s common stock for the 10 days preceding the approval by the Board. Two
members of the Company’s Board of Directors are principals of Andersen: G. Chris
Andersen, the Chairman of the Board and Shareholder, and James L. Rawlings, the
Chairman of the Compensation Committee and Shareholder.
In
October 2004, the Company’s Board of Directors approved a financial advisory
services agreement with Andersen, pursuant to which Andersen is to act as the
Company’s Senior Financial Advisor. As Senior Financial Advisor, Andersen is
required to support the Company’s efforts to raise capital through transactions
that contemplate issuances of debt, equity and/or convertible securities by
Millennium to strategic entities and financial investors. In consideration
therefore, the Company paid Andersen a non-refundable retainer in the amount of
$62,500 in cash. Further, upon the execution and delivery of definitive
agreements with respect to a strategic transaction, Andersen shall be entitled
to a fee equal to $62,500 payable in shares of restricted Common Stock. The
value of the Common Stock will be calculated based upon the average closing
sales price of the Common Stock during the ten (10) consecutive trading days
immediately preceding the date of the definitive agreement. Andersen shall also
be entitled to reimbursement of all reasonable and necessary out-of-pocket
expenses incurred in rendering such services; provided, that the Company shall
not be required to reimburse Andersen for any such expenses once the aggregate
of the reimbursed expenses exceeds $5,000, without the prior written approval of
the Company.
Note
14 — Subsequent Events (Unaudited)
On
February 27, 2005, the Company entered into a stock purchase agreement (the
“Stock Purchase Agreement”) with The Dow Chemical Company (“Dow”). The Stock
Purchase Agreement represents the first step of a proposed joint development
arrangement (the “Agreements”) with Dow. It is required in the joint development
agreement, that the Company’s stockholders approve the issuance of securities to
the extent that such issuance, on an as converted, as exercised basis, is equal
to 19.9% or more of the outstanding voting stock of the Company. The Company
intends to solicit such shareholder approval during the Company’s 2005 Annual
Meeting of Stockholders to be held on April 21, 2005.
MILLENNIUM
CELL INC.
(a
development stage enterprise)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The
purpose of the Agreements is for the two companies to jointly develop portable
power solutions based on the Company’s Hydrogen on Demand® energy systems
coupled with a fuel cell. The Joint Development Agreement has a three year term
and Dow may terminate the Joint Development Agreement if milestones are not met
and under certain other conditions. The Joint Development Agreement contemplates
a series of four milestones designed to culminate in a commercially available
product. The milestones are focused on portable and/or consumer electronics
applications. Achievement of milestones in either portable or consumer
electronics applications will be sufficient to trigger equity transactions at
Dow’s option to purchase $1.25 million of the Company’s preferred stock. For
more information regarding this transaction, see the Company’s Current Report on
Form 8-K filed on February 28, 2005.
During
the first quarter of 2005, the Company converted 3.4 million of debentures into
1,954,331 shares of the Company’s common stock.
Note
15 — Quarterly Information (Unaudited) (1)
| |
|
Fiscal
Year Quarters |
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
Total |
|
| |
|
(in
000's, except per share amounts) |
|
|
Fiscal
Year ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
25 |
|
$ |
90 |
|
$ |
10 |
|
$ |
73 |
|
$ |
198 |
|
|
Cost
of revenue |
|
|
25 |
|
|
90 |
|
|
10 |
|
|
73 |
|
|
198 |
|
|
Gross
margin |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Product
development & marketing |
|
|
1003 |
|
|
773 |
|
|
904 |
|
|
717 |
|
|
3,396 |
|
|
General
and administrative |
|
|
1,611 |
|
|
630 |
|
|
783 |
|
|
1,238 |
|
|
4,262 |
|
|
Non-cash
charges |
|
|
322 |
|
|
270 |
|
|
126 |
|
|
78 |
|
|
796 |
|
|
Depreciation
and amortization |
|
|
142 |
|
|
150 |
|
|
128 |
|
|
95 |
|
|
516 |
|
|
Research
and development |
|
|
(10 |
) |
|
101 |
|
|
28 |
|
|
356 |
|
|
475 |
|
|
Total
operating expenses |
|
|
3,068 |
|
|
1,923 |
|
|
1,969 |
|
|
2,484 |
|
|
9,445 |
|
|
Loss
from operations |
|
|
(3,068 |
) |
|
(1,923 |
) |
|
(1,969 |
) |
|
(2,484 |
) |
|
(9,445 |
) |
|
Interest
income (expense) |
|
|
(314 |
) |
|
(987 |
) |
|
(365 |
) |
|
(103 |
) |
|
(1,770 |
) |
|
Equity
in losses of affiliates |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Loss
before income taxes |
|
|
(3,382 |
) |
|
(2,911 |
) |
|
(2,335 |
) |
|
(2,587 |
) |
|
(11,215 |
) |
|
Benefit
from income taxes |
|
|
— |
|
|
— |
|
|
— |
|
|
411 |
|
|
411 |
|
|
Net
loss |
|
|
(3,382 |
) |
|
(2,911 |
) |
|
(2,335 |
) |
|
(2,176 |
) |
|
(10,804 |
) |
|
Loss
per share — basic and diluted |
|
$ |
(.10 |
) |
$ |
(.08 |
) |
$ |
(.06 |
) |
$ |
(.06 |
) |
$ |
(.29 |
) |
|
Weighted
— average number of shares outstanding |
|
|
35,399 |
|
|
36,986 |
|
|
37,701 |
|
|
38,804 |
|
|
37,226 |
|
| |
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
Total |
|
| |
|
(in
000's, except per share amounts) |
|
|
Fiscal
Year ended December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
55 |
|
$ |
238 |
|
$ |
103 |
|
$ |
71 |
|
$ |
467 |
|
|
Cost
of revenue |
|
|
55 |
|
|
190 |
|
|
93 |
|
|
70 |
|
|
409 |
|
|
Gross
margin |
|
|
— |
|
|
48 |
|
|
10 |
|
|
— |
|
|
57 |
|
|
Product
development & marketing |
|
|
1,231 |
|
|
1,291 |
|
|
1,497 |
|
|
1,275 |
|
|
5,294 |
|
|
General
and administrative |
|
|
1,070 |
|
|
1,034 |
|
|
737 |
|
|
995 |
|
|
3,836 |
|
|
Non-cash
charges |
|
|
1,095 |
|
|
852 |
|
|
419 |
|
|
(201 |
) |
|
2,165 |
|
|
Depreciation
and amortization |
|
|
175 |
|
|
166 |
|
|
153 |
|
|
186 |
|
|
681 |
|
|
Research
and development |
|
|
305 |
|
|
271 |
|
|
222 |
|
|
222 |
|
|
1,020 |
|
|
Total
operating expenses |
|
|
3,878 |
|
|
3,614 |
|
|
3,027 |
|
|
2,476 |
|
|
12,996 |
|
|
Loss
from operations |
|
|
(3,878 |
) |
|
(3,567 |
) |
|
(3,017 |
) |
|
(2,476 |
) |
|
(12,939 |
) |
|
Interest
income (expense) (2) |
|
|
(516 |
) |
|
(338 |
) |
|
(1,464 |
) |
|
(579 |
) |
|
(2,897 |
) |
|
Equity
in losses of affiliates |
|
|
(294 |
) |
|
(194 |
) |
|
— |
|
|
— |
|
|
(488 |
) |
|
Loss
before income taxes |
|
|
(4,688 |
) |
|
(4,099 |
) |
|
(4,481 |
) |
|
(3,055 |
) |
|
(16,324 |
) |
|
Benefit
from income taxes |
|
|
— |
|
|
— |
|
|
— |
|
|
221 |
|
|
221 |
|
|
Net
loss |
|
|
(4,688 |
) |
|
(4,099 |
) |
|
(4,481 |
) |
|
(2,834 |
) |
|
(16,103 |
) |
|
Loss
per share — basic and diluted |
|
$ |
(.16 |
) |
$ |
(.13 |
) |
$ |
(.14 |
) |
$ |
(.08 |
) |
$ |
(.51 |
) |
|
Weighted
— average number of shares outstanding |
|
|
29,402 |
|
|
30,452 |
|
|
31,945 |
|
|
34,555 |
|
|
31,564 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Some
columns and rows may not foot or cross-foot due to rounding.
|
| (2) |
In
the fourth quarter of 2003, the Company determined that non-cash interest
expense was overstated by $.01 per share in the first and third quarters
of 2003 and $.02 per share in the second quarter of 2003. Accordingly,
non-cash interest expense was cumulatively adjusted in the fourth quarter.
Management believes the impact to each of the quarters was not
material. |