Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.
The following discussion should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this Form 10-K.
We were formed as a Delaware limited liability company on December 17, 1998, and organized and began operations on January 1, 1999 (inception date). We were converted into a Delaware corporation on April 25, 2000 when all of the outstanding equity interests of the limited liability company were converted into shares of common stock of the corporation. Unless otherwise indicated, all information that we present in this Form 10-K 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.
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, 2002 versus 2001
Revenues. We recorded $719,392 of revenues during the year ended December 31, 2002. The revenues were attributable to sales of prototypeHydrogen on DemandTM systems and design and engineering services. There were no revenues in 2001.
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 $690,059 during the year ended December 31, 2002. Cost of revenues on prototype unit sales during the development stage are allocated from the Product Development and Marketing expense and Research and Development expense line items on the income statement depending on the nature of the project. There was no cost of revenues in the year ended December 31, 2001.
Product Development and Marketing Expense. Product development and marketing expenses for the year ended December 31, 2002 were $5,788,315 compared to $5,513,172 for the year ended December 31, 2001, an increase of $275,143. This increase is mostly attributable to increased business development resources dedicated to penetrating markets in the portable power and military applications in addition to spending on programs that support our technology's continued evolution from research to commercialization.
General and Administrative Expense. General and administrative expenses were $4,052,943 for the year ended December 31, 2002 compared to $4,726,543 for the year ended December 31, 2001, a decrease of $673,600. The decrease was a result of increased efficiency of our administrative and finance organizations as well as the impact of headcount reductions in those organizations during the second quarter of 2002.
Restructuring Expense. Restructuring expense was $104,982 for the year ended December 31, 2002. During the second quarter of 2002, the Company incurred and paid restructuring expenses for severance and legal costs related to 14 employee separations. There was no restructuring expense in 2001.
Non-cash Charges. Non-cash charges were $4,148,251 for the year ended December 31, 2002 compared to $7,341,461 for the year ended December 31, 2001, a decrease of $3,193,210. The decrease was mostly attributable to the substantial completion of vesting in 2001 of warrants issued to affiliates during 2000 and the forfeiture of certain unvested employee options during the fourth quarter of 2001. Included in the charges was an accrual for approximately $225,000 for Board of Directors' compensation for meetings held in 2002 that will be paid to the directors in shares of the Company's common stock in 2003.
Depreciation and Amortization. Depreciation and amortization was $710,975 for the year ended December 31, 2002 compared to $473,031 for the year ended December 31, 2001, an increase of $237,944. This increase reflects depreciation on our newly completed lab and facilities expansion program in 2002.
Research and Development Expense. Research and development expenses were $1,515,376 for the year ended December 31, 2002 compared to $2,624,823 for the year ended December 31, 2001, a decrease of $1,109,447. The decrease is primarily attributable to the cost reduction efforts announced in May 2002.
Other Income. Other income was $234,963 for the year ended December 31, 2002. This income was derived from the Company's participation in the New Jersey Emerging Technology and Biotechnology
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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 produce similar cash inflows for the Company each year.
Interest Income, net. Net interest income was $300,299 for the year ended December 31, 2002 compared to $1,226,701 for the year ended December 31, 2001, a decrease of $926,402. The decrease in net interest income was the result of declining average cash balances and interest rate decreases from 2001 to 2002 in addition to interest expense and amortization of discount incurred on the $3.5 million unsecured debentures issued in December 2002. The total interest expense incurred for the year ended December 31, 2002 for the $3.5 million unsecured debentures was $39,176.
Interest expense will increase substantially in 2003 for interest payments and amortization of discounts recorded upon issuance of an additional $8.5 million secured debentures, which were issued in January 2003 and for the full impact of the $3.5 million unsecured debentures which mature in June 2003. To the extent the unsecured debentures are converted into common shares, the pro rata portion of the discount and charges related to the beneficial conversion features will be recorded as interest expense. Total interest expense of approximately $1.3 million will be incurred prior to June 30, 2003 for the amortization of the original issue discount, other issue costs and cash interest payments on the $3.5 million unsecured debentures. As the timing of conversions will be based on stock market conditions and operating cash needs, it is difficult to predict the amount of the interest expense that will be recorded in 2003 for the $8.5 million secured debentures that were issued in the first quarter of 2003.
Equity in losses of affiliate. In July 2002, the Company agreed to acquire a 50% interest in a European alkaline fuel cell company (the "Affiliate"). The Company's investment is accounted for by the equity method. According to the purchase agreement, the Company was responsible to record its portion of the Affiliate's losses from July 1, 2002 through December 31, 2002. The losses recorded by the Company during this period were $367,714.
Year Ended December 31, 2001 versus 2000
Total Revenues. During 2001 and 2000, we did not recognize any revenues related to the sale or license of our technology.
Product Development and Marketing Expense. Product development and marketing expenses were $5,513,172 for the year ended December 31, 2001. These expenses include business development and marketing activities and efforts to customize our technology in accordance with agreements with partners as well as for general business development. We did not incur product development and marketing expenses in the year ended December 31, 2000.
General and Administrative Expense. General and administrative expenses were $4,726,543 for the year ended December 31, 2001 compared to $3,173,393 in 2000, an increase of $1,553,150. This was due largely to the full year impact of our financial, administrative and investor relation organizations (including salary and related benefits costs) established during the latter half of 2000. Occupancy costs also increased as we tripled the size of our facilities in 2001.
Non-cash Charges. Non-cash charges were $7,341,461 for the year ended December 31, 2001 compared to $10,785,381 in 2000, a decrease of $3,443,920. Non-cash charges recorded in 2001 were related to continuing amortization of below market options granted to employees and non-employee board members in 2000 of $5,875,136 and the fair value of warrants issued to affiliates in 2000 of $1,466,325. Non-cash charges for the year ended December 31, 2000 included a non-cash compensation charge of $5,840,780 for the grant of company stock options to employees and non-employee board members below market, the fair value of warrants issued to affiliates of $2,875,631 and $2,068,970 for the issuance of common stock in connection with the termination of the royalty agreement.
Depreciation and Amortization. Depreciation and amortization was $473,031 for the year ended December 31, 2001 compared to $256,820 in 2000, an increase of $216,211. This increase in depreciation and amortization is related to the addition of certain laboratory equipment and leasehold improvements in our newly expanded facilities.
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Research and Development Expense. Research and development expenses were $2,624,823 for the year ended December 31, 2001 compared to $2,131,684 in 2000, an increase of $493,139. The increase is primarily attributable to increased staffing and research projects as required to further the development of our technology.
Interest Income. Net interest income was $1,226,701 for the year ended December 31, 2001 compared to $678,194 in 2000, an increase of $548,507. The increase in interest income is primarily the result of higher average balances in 2001 resulting from the proceeds of the initial public offering in August 2000 coupled with our long-term investment strategy established in January 2001.
Preferred Stock Amortization. Preferred stock amortization of $2,150,881 for the year ended December 31, 2000 represents a non-cash charge to the common stockholders in connection with the May 2000 issuance of the preferred stock at less than the initial public offering price, which was converted into common stock in August 2000.
Liquidity and Capital Resources
General
Since the inception date, we have financed our operations primarily through our initial public offering in August 2000 and private placements of equity and debt securities. In 1999, we issued $1,250,000 of membership interests in Millennium Cell LLC for cash, which subsequently were converted into our common stock as of April 25, 2000. We also received a capital contribution of $500,000 in the first quarter of 2000, and in May 2000, we sold 759,368 shares of Series A preferred stock, which automatically converted into 759,368 shares of common stock upon the completion of our initial public offering. The net proceeds from our initial public offering totaled approximately $29.9 million and the net proceeds from the private placement and debt securities totaled $5.9 million as of December 31, 2002.
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 have 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 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. We pledged to the bank as collateral $2.4 million of funds previously reported under cash and cash equivalents on the accompanying balance sheet. 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 the Company initiates the conversion. As part of the purchase agreement entered into between Ballard and us, Ballard retains the option to license the non-exclusive right to manufacture and sell products with ourHydrogen on DemandTM technology for specific portable fuel cell products and stationary internal combustion engine generators.
Private Placement Transactions
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).
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Pursuant to the terms of the June 19, 2002 purchase agreement, one of the investors was obligated to acquire $12 million in secured convertible debentures, convertible into common stock of the Company, subject to certain terms and conditions, and related warrants. Subsequent to this transaction, the Company and the investor agreed the debentures would not be issued under the June 19, 2002 purchase agreement. Accordingly, the Company withdrew its request for registration on Form S-3 with the SEC for the common stock underlying the debentures and related warrants.
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. Convertible unsecured debentures with a principal amount of $3.5 million and warrants to acquire 242,678 shares (with an exercise price of $3.00 per share) were issued on December 26, 2002 following effectiveness of the registration statement relating to the underlying shares of common stock. Interest accrues at a rate of 4% per annum with payments due quarterly. The unsecured debentures are due June 30, 2003, subject to six thirty-day extensions, subject to the mutual consent of the Company and the investor.
On January 23, 2003, the Company's shareholders approved the issuance of $8.5 million of secured debentures and warrants to acquire 589,376 shares at a special meeting of shareholders and the secured debentures were issued on January 30, 2003. Interest accrues at money market rates with payments due quarterly. The secured debentures are secured by a standby letter of credit issued by Wachovia Bank, National Association, with an aggregate face amount equal to the outstanding principal of the secured debentures and are due in January 2006. The Company pledged to the bank as collateral the proceeds from the sale of the secured debentures. Therefore, the Company does not have the ability to use the proceeds from the sale of the secured debentures until the bank pledges are released upon conversion to unsecured debentures.
The Company is obligated in the future to register the resale of shares issuable on conversion of the $8.5 million principal amount of secured debentures following exchange of such secured debentures for unsecured debentures. Each time the principal amount of outstanding unsecured debentures is less than $1.0 million, a portion of the $8.5 million of secured debentures will automatically convert into unsecured debentures in increments of $3.0 million, $3.0 million and $2.5 million upon effectiveness of the registration statement relating to the underlying shares of common stock.
The following table summarizes the number of common shares that have been registered by the Company for potential resale in conjunction with (i) the sale of shares by the Company to private accredited investors in June and October 2002, (ii) shares issuable upon exercise of outstanding warrants and (iii) shares issuable upon conversion of $3.5 million principal amount of outstanding unsecured debentures:
| | | | | | | | | | | | | | | | | | | | | | |
Registration
Statement Number | | Effective Date
of Registration
Statement | | Sales of
Common Stock | | Common Stock
Issuable Upon
Exercise of
Warrants | | Common Stock
Issuable Upon
Conversion of
$3.5 Million
Unsecured
Debentures | | Total Common
Stock Registered |
| 333-92144 | | 10/04/02 | | | 1,075,268 | | | | 268,817 | | | | — | | | | 1,344,085 | |
| 333-101061 | | 12/23/02 | | | 588,790 | | | | 389,876 | | | | 2,973,847 | | | | 3,952,513 | |
| 333-103104 | | 2/25/03 | | | — | | | | 589,376 | | | | — | | | | 589,376 | |
| Total | | | | | 1,664,058 | | | | 1,248,069 | | | | 2,973,847 | | | | 5,885,974 | |
|
The unsecured convertible debentures in principal amount of $3.5 million are convertible under three different scenarios:
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| • | At the option of the holder, at any time and from time to time at $4.25 per share. |
| • | At the option of the Company, if (1) the average closing prices of the Company's common stock during any consecutive 30 trading days is equal to or greater than $5.10 per share and (2) the closing price for each of 15 trading days which need not be consecutive is equal to or greater than $5.10. |
| • | The Company may also convert $300,000 (or up to $2.5 million with investor consent) of unsecured debentures each 10 trading days at an adjusted conversion price equal to the volume weighted average of current market prices discounted from 4% to 12%. The discount to the adjusted conversion price depends on the cumulative amount of debentures converted as of the respective dates of conversion. |
The secured convertible debentures in principal amount of $8.5 million are convertible at the option of the holder, at any time and from time to time at $4.25 per share. Following exchange of secured debentures for unsecured debentures, the debentures so exchanged are convertible at the option of the Company under the two circumstances set forth above.
In order to exercise the Company's options to convert the debentures certain equity conditions must be satisfied as follows:
| (i) | the number of authorized but unissued and otherwise unreserved shares of common stock is sufficient for such issuance; |
| (ii) | such shares of common stock are registered for resale pursuant to an effective registration statement, and the prospectus thereunder is available for use to sell such shares or all such shares may be sold without volume restrictions pursuant to Rule 144(k) under the Securities Act; |
| (iii) | the common stock is listed or quoted (and is not suspended from trading) on The NASDAQ National Market or SmallCap Market or other eligible market and such shares of common stock are approved for listing; |
| (iv) | no event of default nor any event that with the passage of time and without being cured would constitute an event of default has occurred and not been cured, and |
| (v) | no public announcement of a pending or proposed change of control transaction has occurred that has not been consummated. |
Warrants may not be exercised and debentures may not be converted to the extent that a holder thereof would then beneficially own, together with its affiliates, more than 9.999% of our common stock then outstanding subsequent to the applicable conversion or exercise.
In accordance with APB No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants", the Company determined that the relative fair value of the unsecured debentures was $3,008,017 after issuance. The resulting discount of $491,983 is being amortized as interest expense, using the effective interest method, over the original maturity period of six months. During the year ended December 31, 2002, the Company recognized a non-cash charge to interest expense of $21,865 for the amortization of the discount. To the extent conversions of unsecured debentures into common stock are made prior to the maturity date of the debentures, the Company will record as interest expense a ratable proportion of the discount associated with the face value of the debentures converted.
In accordance with Emerging Issues Task Force ("EITF") No. 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments" ("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"), and after considering the terms of the transaction, the Company determined that the unsecured debentures contained an initial beneficial conversion feature ("BCF"). The BCF existed because of a discount that will be given to the investor in the event of a company-initiated conversion of the unsecured debentures prior to maturity. These discounts will range from 4% to 12%, depending on the amount of debentures converted into common stock. Accordingly, at time of conversion, the Company will record as interest expense any applicable BCF based on the fair value of the conversion feature on that date in the event of an early conversion of the unsecured debentures into
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common stock. As no unsecured debentures were converted as of December 31, 2002, no interest expense was recorded for BCF during that period. The secured debentures will have similar features.
Sources and Uses of Cash
As of December 31, 2002, we had $7,987,127 in cash and cash equivalents and restricted cash of $2,963,050. Cash used in operations totaled $11,388,768, $11,139,147 and $1,525,538 in 2002, 2001 and 2000, 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 the Company and $0.6 million of cash used for collateral as security deposit held by our landlord in connection with the Company's amended lease agreement. These funds used will not be available for use in operations until the letters of credit have been reduced or terminated.
Investing activities provided/(used) cash of $7,037,933, $(12,751,441) and $(701,659) in 2002, 2001 and 2000, respectively. Investing activities consisted primarily of purchases and maturities of investments in high-grade government bonds and bank certificates of deposit, purchases of laboratory equipment necessary for the continuation of our research and development activities, cash restricted as collateral, and patent registration costs. We expect capital expenditures to decrease substantially as the Company completed its facilities and lab expansion in 2002. We will continue to register, pursue and defend patents on our technology.
In July 2002, the Company agreed to acquire a 50% interest in a European alkaline fuel cell company. The Company's investment is accounted for by the equity method. According to the purchase agreement, the Company was responsible to record its portion of the Affiliate's losses from July 1, 2002 through December 31, 2002. The losses recorded by the Company during this period were $367,714. The Company's investment in the Affiliate was $167,412 at December 31, 2002 and approximated the underlying fair value of our portion of the net assets of the Affiliate at that date.
In April 2001, the Company amended its main operating lease to provide for additional space for the Company's principal operating offices and laboratories. As of November 2001, we occupy all facilities contemplated in the lease agreement. 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 including allocated taxes and maintenance under the amended operating leases are as follows:
| | | | | | |
| 2003 | | $ | 484,310 | |
| 2004 | | | 484,310 | |
| 2005 | | | 484,310 | |
| 2006 | | | 484,310 | |
| 2007 | | | 484,310 | |
| Thereafter | | | 443,950 | |
| Total | | $ | 2,865,500 | |
|
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Rent expense under the operating lease was approximately $507,310, $288,498 and $128,435 for the years ended December 31, 2002, 2001, and 2000, 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.
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 fuel cell technology. The recoverable grant is required to be repaid when we generate net income in a fiscal year. The repayment obligation, which begins in June 2001, ranges from 1% to 5% of net income over a ten-year period and shall not exceed 200% of the original grant. We are obligated to repay the unpaid amount of the original grant at the end of the ten-year period. As of December 31, 2002, no repayments have been made.
In December 2002, the Company received net proceeds of $234,963 from the sale of New Jersey Net Operating Losses in conjunction with the New Jersey Emerging Technology and Biotechnology Financial Assistance Program. This program allows certain companies to apply to transfer New Jersey Net Operating Losses to other companies. This program, if continued by the state in future years, may produce similar cash inflows for the Company.
We believe that our current cash and cash equivalents, together with cash available from the financings (see footnote 11) together with future conversions of the secured and unsecured debentures will be sufficient to satisfy anticipated cash needs of our operations into the latter half of 2004. If cash consumption is higher than anticipated, we may seek additional financing within this time frame. We may raise additional funds through public or private financings, collaborative relationships or other arrangements. We cannot assure you that additional funding, if sought, will be available or will be on terms favorable to us. Further, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed may harm our business and operating results.
Critical Accounting Policies
Application of Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses, and other financial information. Actual results may differ significantly from these estimates under different assumptions and conditions. In addition, our reported financial condition and results of operations could vary due to a change in the application of a particular accounting standard.
We regard an accounting estimate underlying our financial statements as a "critical accounting estimate" if the accounting estimate requires us to make assumptions about matters that are highly uncertain at the time of estimation and if different estimates that reasonably could have been used in the current period, or changes in the estimate that are reasonably likely to occur from period to period, would have had a material effect on the presentation of financial condition, changes in financial condition, or results of operations.
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
The Company's near term revenues will be derived substantially from contracts that require the Company to deliver hydrogen generation technology, management services, system design and prototype
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systems and licensing of technology for test and evaluation. It is anticipated that revenues will be recognized in the period in which the technology is delivered or licensed revenue is earned.
Convertible Debt
The Company accounts for the issuance and conversion of convertible debt in accordance with APB No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants". As a result, the Company has 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, the Company will record as interest expense a ratable proportion of the discount associated with the face value of the debt converted.
The Company accounts for issuances of convertible debt in accordance with Emerging Issues Task Force ("EITF") No. 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments" ("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 the Company's outstanding debt instruments, the Company will record interest expense resulting from Beneficial Conversion Features as described under the caption "Liquidity and Capital Resources" above.
Stock Options
The Company has recorded non-cash charges in 2002, 2001 and 2000 to the fair value of warrants issued to certain affiliates and third parties. Certain affiliates have the ability to earn new awards based on defined milestones and service periods. The accounting methodology requires a re-valuing of the related earned warrants at each reporting period using a Black-Scholes pricing model. Due to this variable accounting methodology, it is difficult to predict the amount of additional non-cash charges the company will incur related to these warrants. The fair value of the Company's options and warrants issued to affiliates was estimated at the date of grant using a Black-Scholes option-pricing model.
The Company also records non cash charges for the difference between the grant price and market price on the date of grant related to certain stock options issued to employees and elected directors below market prices as defined by APB No. 25. The non-cash charge is recognized ratably over the related vesting period of the respective option contracts.
The Company also discloses pro forma information regarding net income and earnings per share that is required by SFAS No. 148. This information is required to be determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value of options granted for the fiscal years ended December 31, 2002, 2001 and 2000 has been estimated at the date of grant using a Black-Scholes option-pricing model.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company's options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. Due to these highly subjective assumptions, the non-cash charges incurred in 2002, 2001 and 2000 for warrants issued to affiliates and the pro forma disclosures of net loss and loss per share for fiscal 2002, 2001 and 2000, 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 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
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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 (see Note 2 of the Notes to the Consolidated Financial Statements). FAS 148 did not require the Company to change to the fair value based method of accounting for stock-based compensation.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This Standard addresses financial accounting and reporting for costs associated with exit or disposal activities and requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This Standard nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". This Standard is effective for exit or disposal activities initiated after December 31, 2002. As all costs related to our May 14, 2002 restructuring activities were incurred as of June 30, 2002, we do not expect this to have a material effect on our financial position or results of operations.
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.
Investment Considerations
We have decided to make disclosures in accordance with Item 303 of SEC Regulation S-K of important qualitative risk factors that should be considered along with those described in our other filings with the Securities and Exchange Commission prior to making an investment in our common stock. Our business, the results of operations and the trading price of our common stock could be harmed by any of the following factors:
| • | We are a development stage company, which has 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, your basis for evaluating us is limited. |
| • | 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. |
| • | A substantial number of shares of 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. |
20
| • | Our debentures are subject to a number of restrictive covenants, including a requirement that our common stock remain listed on a National Exchange and requirements as to the trading prices of our common stock. If we are unable to maintain a listing on either 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, shareholders might find it more difficult to liquidate their investment. |
| • | We have appealed a notice of delisting from the NASDAQ National Market. If we are not successful in the appeal, the shares of our common stock will not be traded on the NASDAQ National Market but instead, if we meet the continued listing requirements of the NASDAQ SmallCap Market, trading of our common stock would be conducted on the NASDAQ SmallCap Market or other nationally recognized markets or the over the counter market on the so called "pink sheets" or, if available, NASD's "Electronic Bulletin Board." |
| • | 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 stockholders to sell their shares. |
| • | The proceeds of the unsecured debentures and the secured debentures, when available to us, are expected to be used to fund our product development and commercialization plans. Access to the funds from the secured debentures is subject to numerous conditions and is dependent on consent of the holder to an accelerated conversion schedule. We can provide no assurance that all the proceeds of the secured debentures will ultimately be available. Even if all the proceeds of the secured debentures are available to us, additional funding may nonetheless be necessary if budgeted expenses exceed expectations or revenues fall short of projections. If we are able to raise additional capital, it may be on unacceptable terms to us, may dilute your ownership or may 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 may be unable to complete development of commercially viable hydrogen generation systems. |
| • | 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. 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. |
| • | A mass market for fuel cells, hydrogen generation systems or batteries may never develop or may take longer to develop than we anticipate. |
| • | 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. |
| • | Failure to meet cost or performance goals with potential customers could delay or impede commercialization of our technology. |
21
| • | Changes in environmental policies could result in automobile manufacturers abandoning their interest in fuel cell powered vehicles. This may substantially 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. |
| • | 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. |
| • | We do not intend to pay any dividends. |
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.
22
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated herein by reference is the information appearing under the caption "Election of Directors" in the Company's definitive proxy statement for its 2003 Annual Meeting of Stockholders.
Item 11. Executive Compensation.
Incorporated herein by reference is the information appearing under the caption "Executive Compensation" in the Company's definitive proxy statement for its 2003 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Equity Compensation Plan Information
| | | | | | | | | | | | | | |
| As of December 31, 2002 | | Number of securities
to be issued upon exercise
of outstanding options,
warrants and rights | | Weighted-average
exercise price of
outstanding options,
warrants and rights | | Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a)) |
| Plan category | | (a) | | (b) | | (c) |
| Equity compensation plan approved by security holders(1) | | | 4,345,829 | | | $ | 5.06 | | | | 4,154,171 | |
| Equity compensation plans not approved by security holders | | | — | | | | — | | | | — | |
| Total | | | 4,345,829 | | | $ | 5.06 | | | | 4,154,171 | |
|
| (1) | This plan is our Amended and Restated 2000 Stock Option Plan. |
Other information required by this Item is incorporated by reference from the information appearing under the caption "Common Stock Ownership of Principal Stockholders and Management" in our definitive proxy statement for our 2003 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Party Transactions.
Incorporated herein by reference is the information appearing under the caption "Certain Transactions" in the Company's definitive proxy statement for its 2003 Annual Meeting of Stockholders.
Item 14. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer and Acting Chief Financial Officer has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) as of a date within 90 days prior to the filing date of this annual report. Based on such evaluation, he has concluded that, as of the evaluation date, the Company's disclosure controls and procedures are effective in alerting him on a timely basis to material information relating to the Company required to be included in the Company's reports filed or submitted under the Exchange Act.
(b) Changes in Internal Controls.
Since the evaluation date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect such controls.
23
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
| (a) | Documents filed as part of this report |
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.
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 the Quarterly Report on Form 10-Q filed on May 13, 2002) |
| | | | | |
| 3.5† | | —
| | Certificate of Amendment of Certificate of Incorporation of Millennium Cell Inc. (incorporated by reference to the Quarterly Report on Form 10-Q filed on May 13, 2002) |
| | | | | |
| 4.2† | | — | | 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) |
| | | | | |
| 4.5† | | — | | 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) |
| | | | | |
| 4.6† | | — | | 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) |
| | | | | |
| 4.7.1 | | —
| | Closing Warrant No. 1 to purchase 73,599 shares of Common Stock dated October 31, 2002 |
| | | | | |
| 4.7.2 | | —
| | Closing Warrant No. 2 to purchase 73,599 shares of Common Stock dated October 31, 2002 |
| | | | | |
| 4.8 | | — | | First Warrant to purchase 242,678 shares of Common Stock dated December 26, 2002 |
| | | | | |
| 4.9 | | — | | Second Warrant to purchase 589,376 shares of Common Stock dated January 30, 2003 |
| | | | | |
|
24
| | | | | | | | | | |
| Exhibit No. | | | | Description |
| |
| 4.10.1 | | — | | Unsecured Convertible Debenture No. 1 dated December 26, 2002 |
| | | | | |
| 4.10.2 | | — | | Unsecured Convertible Debenture No. 2 dated December 26, 2002 |
| | | | | |
| 4.11† | | — | | Form of Exchange Convertible Debenture (incorporated by reference to Registration Statement No. 333-101061 on Form S-3 filed on November 7, 2002) |
| | | | | |
| 4.12 | | — | | Secured Convertible Debenture in aggregate principal amount of $8.5 million dated January 30, 2003 |
| | | | | |
| 4.13† | | — | | Secured Convertible Debenture issued to Ballard Power Systems, Inc. (incorporated by reference to Exhibit 4.13 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2002) |
| | | | | |
| 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 the Registration Statement filed on Form S-1, Registration No. 333-37896) |
| | | | | |
| 10.2† | | —
| | Amended and Restated Agreement, dated as of August 1, 2000, by and among Millennium Cell Inc., GP Strategies Corporation and Steven Amendola (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 333-37896) |
| | | | | |
| 10.3† | | —
| | Assignment, dated as of May 24, 2000, by Steven Amendola in favor of Millennium Cell Inc. (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 333-37896) |
| | | | | |
| 10.4† | | —
| | Employment Agreement, dated as of May 16, 2000, by and between Stephen S. Tang and Millennium Cell Inc. (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 333-37896) |
| | | | | |
| 10.5† | | —
| | Employment Agreement, dated as of August 2, 2000, by and between Steven C. Amendola and Millennium Cell Inc. (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 333-37896) |
| | | | | |
| 10.6† | | —
| | 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) |
| | | | | |
| 10.7† | | —
| | Proprietary Rights Agreement, effective as of May 1, 2000, between DaimlerChrysler Corporation and Millennium Cell Inc. (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 333-37896) |
| | | | | |
| 10.8† | | —
| | Assignment and Assumption of License Agreement, dated as of December 17, 1998, by and between GP Strategies Corporation and Millennium Cell LLC (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 333-37896) |
| | | | | |
| 10.9† | | —
| | Employment Agreement, dated as of September 6, 2000, by and between Millennium Cell Inc. and Norman R. Harpster, Jr. (incorporated by reference to the Quarterly Report on Form 10-Q filed on November 1, 2000) |
| | | | | |
| 10.10† | | —
| | Lease Agreement, dated as of April 4, 2001, by and between Millennium Cell Inc. and Ten-Thirty Five Associates, Limited Partnership (incorporated by reference to the Quarterly Report on Form 10-Q filed on May 11, 2001) |
|
25
| | | | | | | | | | |
| Exhibit No. | | | | Description |
| |
| 10.11† | | —
| | Separation Agreement, dated as of December 11, 2001, by and between Millennium Cell Inc. and Steven C. Amendola (incorporated by reference to the Annual Report on Form 10-K filed on March 25, 2002) |
| | | | | |
| 10.12† | | —
| | Consulting Agreement, dated as of December 11, 2001, by and between Millennium Cell Inc. and Steven C. Amendola (incorporated by reference to the Annual Report on Form 10-K filed on March 25, 2002) |
| | | | | |
| 10.13† | | —
| | Confidentiality Agreement, dated as of December 11, 2001, by and between Millennium Cell Inc. and Steven C. Amendola (incorporated by reference to the Annual Report on Form 10-K filed on March 25, 2002) |
| | | | | |
| 10.14† | | —
| | Securities Purchase Agreement dated as of June 19, 2002 between the Company and the Purchasers (incorporated by reference as Exhibit 4.3 to the Current Report on Form 8-K filed on June 26, 2002) |
| | | | | |
| 10.15† | | —
| | Registration Rights Agreement dated as of June 19, 2002 between the Company and the Purchasers (incorporated by reference as Exhibit 4.4 to the Current Report on Form 8-K filed on June 26, 2002.) |
| | | | | |
| 10.16† | | —
| | 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) |
| | | | | |
| 10.17† | | —
| | 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) |
| | | | | |
| 10.18† | | —
| | Option Agreement dated as of November 8, 2002, between the Company and Ballard Power Systems, Inc. (incorporated by reference to Exhibit 10.18 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2002) |
| | | | | |
| 10.19† | | —
| | 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 for the quarter ended September 30, 2002) |
| | | | | |
| 10.20† | | —
| | 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 for the quarter ended September 30, 2002) |
| | | | | |
| 10.21† | | —
| | 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) |
| | | | | |
| 10.22† | | —
| | 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) |
| | | | | |
| 10.23† | | —
| | 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.) |
| | | | | |
| 10.24 | | — | | Severance, Release and Consulting Agreement between the Company and Norman "Chip" Harpster, Jr. effective February 14, 2003. |
|
26
| | | | | | | | | | |
| Exhibit No. | | | | Description |
| | | | | |
| 10.25 | | — | | Amended and Restated Employment Agreement between the Company and Stephen S. Tang dated as of January 1, 2002. |
| | | | | |
| 10.26 | | — | | 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. |
| | | | | |
| 10.27 | | — | | 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. |
| | | | | |
| 10.28 | | — | | Letter of Credit securing $2.4 million Secured Convertible Debentures issued for the benefit of Ballard Power Systems, Inc. |
| | | | | |
| 23.1 | | — | | Consent of Ernst & Young |
| | | | | |
| 99.1† | | —
| | License Agreement, dated July 31, 1997, by and between Steven C. Amendola and National Patent Development Corporation (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 333-37896) |
| | | | | |
| 99.2 | | — | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
| | | | | |
| 99.3 | | — | | Certification of Acting Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
|
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.
The following reports were filed under Form 8-K during the last quarter of the period covered by this report:
Form 8-K filed November 5, 2002. On October 31, 2002, we entered into a $1 million private placement transaction with two accredited investors. Accordingly, we issued 588,790 shares of common stock and warrants to purchase 147,198 shares of common stock at an exercise price of $2.32 to the investors.
Form 8-K filed December 13, 2002. On December 13, 2002, we reported that we had presented a compliance program to The NASDAQ Stock Market, Inc. after receiving their letter informing us that as of September 30, 2002, we did not meet the minimum $10 million stockholders' equity requirement for continued listing on the NASDAQ National Market under Maintenance Standard 1, as set forth in the NASDAQ Marketplace Rule 4450(a)(3).
27
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.
By: /s/ STEPHENS.TANG
Stephen S. Tang
President, Chief Executive Officer,
Acting Chief Financial Officer
Date: March 17, 2003
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/ STEPHENS.TANG | | President, Chief Executive Officer,
Acting Chief Financial Officer, and Director | | March 17, 2003 |
| Stephen S. Tang |
| | | | | |
| | | | | |
| /S/ JOHND.GIOLLI | | Controller and Principal
Accounting Officer | | March 17, 2003 |
| John D. Giolli |
| | | | | |
| /s/ G.CHRISANDERSEN | | Director | | March 17, 2003 |
| G. Chris Andersen | | | | |
| | | | | |
| /s/ KENNETHR.BAKER | | Director | | March 17, 2003 |
| Kenneth R. Baker | | | | |
| | | | | |
| /s/ WILLIAMH.FIKE | | Director | | March 17, 2003 |
| William H. Fike | | | | |
| | | | | |
| /s/ ALEXANDERMACLACHLAN | | Director | | March 17, 2003 |
| Alexander MacLachlan | | | | |
| | | | | |
| /s/ ZOLTANMERSZEI | | Director | | March 17, 2003 |
| Zoltan Merszei | | | | |
| | | | | |
| /s/ H.DAVIDRAMM | | Director | | March 17, 2003 |
| H. David Ramm | | | | |
| | | | | |
| /s/ JAMESL.RAWLINGS | | Director | | March 17, 2003 |
| James L. Rawlings | | | | |
|
28
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Stephen S. Tang, President and Chief Executive Officer of Millennium Cell Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Millennium Cell Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
By: /s/ STEPHEN S. TANG
Stephen S. Tang
President and Chief Executive Officer
March 17, 2003
29
CERTIFICATION OF ACTING CHIEF FINANCIAL OFFICER
I, Stephen S. Tang, Acting Chief Financial Officer of Millennium Cell Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Millennium Cell Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
By: /s/ STEPHEN S. TANG
Stephen S. Tang
Acting Chief Financial Officer
March 17, 2003
30
INDEX TO FINANCIAL STATEMENTS
| | | | | | |
| | | Page |
| Report of Independent Auditors | | | F-2 | |
| Balance Sheet as of December 31, 2002 and 2001 | | | F-3 | |
| Statement of Operations for the fiscal years ended December 31, 2002, 2001 and 2000 | | | F-4 | |
| Statement of Stockholders' Equity for the period from January 1, 2000 to December 31, 2002 | | | F-5 | |
| Statement of Cash Flows for the fiscal years ended December 31, 2002, 2001 and 2000 | | | F-6 | |
| Notes to Financial Statements | | | F-7 | |
|
F-1
REPORT OF INDEPENDENT AUDITORS
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, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. 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 generally accepted in the 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, 2002 and 2001 and the results of its consolidated operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States.
/s/ ERNST &YOUNG LLP
New York, New York
February 10, 2003
F-2
MILLENNIUM CELL INC.
(a development stage enterprise)
BALANCE SHEET
| | | | | | | | | | |
| Assets | | December 31,
2002 | | December 31,
2001 |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 7,987,127 | | | $ | 6,348,763 | |
| Accounts receivable | | | 234,015 | | | | 129,000 | |
| Prepaid expenses | | | 337,589 | | | | 352,198 | |
| Deferred financing costs | | | 313,690 | | | | — | |
| Held-to-maturity investments | | | — | | | | 11,067,175 | |
| Total current assets | | | 8,872,421 | | | | 17,897,136 | |
| Property and equipment, net | | | 1,526,983 | | | | 1,177,483 | |
| Intangible assets, net | | | 590,269 | | | | 530,706 | |
| Investment in affiliate | | | 167,412 | | | | — | |
| Restricted cash | | | 2,963,050 | | | | 588,972 | |
| Security deposits | | | 45,676 | | | | 45,676 | |
| | | $ | 14,165,811 | | | $ | 20,239,973 | |
| Liabilities and stockholders' equity | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 612,651 | | | $ | 223,101 | |
| Accrued employee compensation | | | — | | | | 940,837 | |
| Accrued expenses | | | 615,006 | | | | 454,890 | |
| Convertible unsecured debentures (face value of $3.5 million, net of discount) | | | 3,029,882 | | | | — | |
| Deferred income | | | — | | | | 2,528,988 | |
| Total current liabilities | | | 4,257,539 | | | | 4,147,816 | |
| | | | | | | | | |
| Convertible secured debentures | | | 2,399,988 | | | | — | |
| Refundable grant obligation | | | 227,522 | | | | 227,522 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| Stockholders' equity: | | | | | | | | |
Preferred stock, $.001 par value; 5,000,000 authorized
shares, none issued and outstanding | | | — | | | | — | |
Common stock, $.001 par value; authorized 70,000,000
shares and 29,027,491 and 27,292,077 shares issued and
outstanding as of December 31, 2002 and 2001, respectively | | | 29,027 | | | | 27,292 | |
| Additional paid-in capital | | | 61,679,267 | | | | 54,140,914 | |
| Deficit accumulated during development stage | | | (54,427,532 | ) | | | (38,303,571 | ) |
| Total stockholders' equity | | | 7,280,762 | | | | 15,864,635 | |
| | | $ | 14,165,811 | | | $ | 20,239,973 | |
|
See accompanying notes.
F-3
MILLENNIUM CELL INC.
(a development stage enterprise)
STATEMENT OF OPERATIONS
| | | | | | | | | | | | | | | | | | |
| | | Twelve Months
Ended
December 31,
2002 | | Twelve Months
Ended
December 31,
2001 | | Twelve Months
Ended
December 31,
2000 | | Cumulative
Amounts From
Inception |
| Revenue | | $ | 719,392 | | | $ | — | | | $ | — | | | $ | 719,392 | |
| Cost of revenue | | | 690,059 | | | | — | | | | — | | | | 690,059 | |
| Gross margin | | | 29,333 | | | | — | | | | — | | | | 29,333 | |
| Product development and marketing | | | 5,788,315 | | | | 5,513,172 | | | | — | | | | 11,301,487 | |
| General and administrative | | | 4,052,943 | | | | 4,726,543 | | | | 3,173,393 | | | | 12,117,832 | |
| Restructuring expense | | | 104,982 | | | | — | | | | — | | | | 104,982 | |
| Non-cash charges | | | 4,148,251 | | | | 7,341,461 | | | | 10,785,381 | | | | 22,275,093 | |
| Depreciation and amortization | | | 710,975 | | | | 473,031 | | | | 256,820 | | | | 1,497,833 | |
| Research and development | | | 1,515,376 | | | | 2,624,823 | | | | 2,131,684 | | | | 7,092,011 | |
| Total operating expenses | | | 16,320,842 | | | | 20,679,030 | | | | 16,347,278 | | | | 54,389,238 | |
| Loss from operations | | | (16,291,509 | ) | | | (20,679,030 | ) | | | (16,347,278 | ) | | | (54,359,905 | ) |
| Other income | | | 234,963 | | | | — | | | | — | | | | 234,963 | |
| Interest income, net | | | 300,299 | | | | 1,226,701 | | | | 678,194 | | | | 2,216,005 | |
| Equity in losses of affiliate | | | (367,714 | ) | | | — | | | | — | | | | (367,714 | ) |
| Net loss | | | (16,123,961 | ) | | | (19,452,329 | ) | | | (15,669,084 | ) | | | (52,276,651 | ) |
| Preferred stock amortization | | | — | | | | — | | | | 2,150,881 | | | | 2,150,881 | |
Net loss applicable to common
stockholders | | $ | (16,123,961 | ) | | $ | (19,452,329 | ) | | $ | (17,819,965 | ) | | $ | (54,427,532 | ) |
| Loss per share — basic and diluted | | $ | (.58 | ) | | $ | (.71 | ) | | $ | (.69 | ) | | $ | (2.08 | ) |
| Weighted — average number of shares outstanding | | | 28,022,872 | | | | 27,217,591 | | | | 25,787,672 | | | | 26,111,405 | |
|
See accompanying notes.
F-4
MILLENNIUM CELL INC.
(a development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Preferred Stock | | Additional
Paid-in
Capital | | Accumulated
Deficit | | Total
Stockholder's
Equity |
| | | Shares | | Amount | | Shares | | Amount |
| Balance at January 1, 2000 | | | 23,679,714 | | | $ | 23,680 | | | | — | | | $ | — | | | $ | 1,226,320 | | | $ | (1,031,277 | ) | | $ | 218,723 | |
| Capital contribution | | | — | | | | — | | | | — | | | | — | | | | 500,000 | | | | — | | | | 500,000 | |
| Redemption of common stock held by GPS and termination of royalty agreement | | | (623,401 | ) | | | (623 | ) | | | — | | | | — | | | | 2,068,763 | | | | — | | | | 2,068,140 | |
Issuance of preferred
stock | | | — | | | | — | | | | 759,368 | | | | 2,146,446 | | | | — | | | | — | | | | 2,146,446 | |
| Conversion of preferred stock to common stock | | | 759,368 | | | | 759 | | | | (759,368 | ) | | | (2,146,446 | ) | | | 2,145,687 | | | | — | | | | — | |
| Amortization of preferred stock | | | — | | | | — | | | | — | | | | — | | | | 2,150,881 | | | | (2,150,881 | ) | | | — | |
Issuance of common stock
from initial public offering | | | 3,352,300 | | | | 3,352 | | | | — | | | | — | | | | 29,850,865 | | | | — | | | | 29,854,217 | |
| Non-cash compensation charges for issuance of stock options | | | — | | | | — | | | | — | | | | — | | | | 8,716,411 | | | | — | | | | 8,716,411 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (15,669,084 | ) | | | (15,669,084 | ) |
| Balance at December 31, 2000 | | | 27,167,981 | | | | 27,168 | | | | — | | | | — | | | | 46,658,927 | | | | (18,851,242 | ) | | | 27,834,853 | |
| Issuance of common stock from exercise of options | | | 48,500 | | | | 48 | | | | — | | | | — | | | | 140,602 | | | | — | | | | 140,650 | |
| Issuance of common stock from exercise of warrants | | | 75,596 | | | | 76 | | | | — | | | | — | | | | (76 | ) | | | — | | | | — | |
| Non-cash compensation charges for issuance of stock options | | | — | | | | — | | | | — | | | | — | | | | 7,341,461 | | | | — | | | | 7,341,461 | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (19,452,329 | ) | | | (19,452,329 | ) |
| 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 | |
|
See accompanying notes.
F-5
MILLENNIUM CELL INC.
(a development stage enterprise)
STATEMENT OF CASH FLOWS
| | | | | | | | | | | | | | | | | | |
| | | Twelve Months
Ended
December 31,
2002 | | Twelve Months
Ended
December 31,
2001 | | Twelve Months
Ended
December 31,
2000 | | Cumulative
Amounts From
Inception |
| Operating activities | | | | | | | | | | | | | | | | |
| Net loss | | $ | (16,123,961 | ) | | $ | (19,452,329 | ) | | $ | (15,669,084 | ) | | $ | (52,276,651 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 710,975 | | | | 473,031 | | | | 256,820 | | | | 1,497,833 | |
| Amortization of discount on unsecured debentures | | | 21,865 | | | | — | | | | — | | | | 21,865 | |
| Amortization of deferred financing costs | | | 14,590 | | | | — | | | | — | | | | 14,590 | |
| Losses on investment in affiliate | | | 367,714 | | | | — | | | | — | | | | 367,714 | |
| Non-cash charges | | | 4,148,251 | | | | 7,341,461 | | | | 10,785,381 | | | | 22,275,093 | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | |
| Accounts receivable | | | (105,015 | ) | | | (129,000 | ) | | | — | | | | (234,015 | ) |
| Prepaid expenses and other assets | | | 14,609 | | | | (186,256 | ) | | | (148,393 | ) | | | (383,265 | ) |
Accounts payable and accrued
expenses | | | (308,796 | ) | | | 684,946 | | | | 879,750 | | | | 1,310,032 | |
| Due to affiliate | | | — | | | | — | | | | (30,000 | ) | | | — | |
| Deferred income | | | (129,000 | ) | | | 129,000 | | | | 2,399,988 | | | | 2,399,988 | |
Net cash used in operating
activities | | | (11,388,768 | ) | | | (11,139,147 | ) | | | (1,525,538 | ) | | | (25,006,816 | ) |
| Investing activities | | | | | | | | | | | | | | | | |
| Purchase of property and equipment | | | (999,939 | ) | | | (956,854 | ) | | | (493,568 | ) | | | (2,780,452 | ) |
| Patent registration costs | | | (120,099 | ) | | | (138,440 | ) | | | (208,091 | ) | | | (584,633 | ) |
| Investment in affiliate | | | (535,126 | ) | | | — | | | | — | | | | (535,126 | ) |
| Increase in restricted cash | | | (2,374,078 | ) | | | (588,972 | ) | | | — | | | | (2,963,050 | ) |
| (Purchase)/redemption of held-to-maturity investments, net | | | 11,067,175 | | | | (11,067,175 | ) | | | — | | | | — | |
| Net cash provided by (used in) investing activities | | | 7,037,933 | | | | (12,751,441 | ) | | | (701,659 | ) | | | (6,863,261 | ) |
| Financing activities | | | | | | | | | | | | | | | | |
| Proceeds from sale of common stock | | | 81,200 | | | | 140,650 | | | | 33,523,000 | | | | 34,994,850 | |
Underwriting and other expenses of
initial public offering | | | — | | | | — | | | | (3,669,613 | ) | | | (3,669,613 | ) |
| Proceeds from issuance of unsecured debentures | | | 3,500,000 | | | | — | | | | — | | | | 3,500,000 | |
| Proceeds from equity private placement | | | 2,736,279 | | | | — | | | | — | | | | 2,736,279 | |
| Deferred financing costs | | | (328,280 | ) | | | — | | | | — | | | | (328,280 | ) |
| Proceeds from capital contribution | | | — | | | | — | | | | 500,000 | | | | 500,000 | |
| Payment of note payable | | | — | | | | — | | | | (250,000 | ) | | | (250,000 | ) |
| Proceeds from grant | | | — | | | | — | | | | 33,900 | | | | 227,522 | |
| Proceeds from sale of preferred stock | | | — | | | | — | | | | 2,146,446 | | | | 2,146,446 | |
| Net cash provided by financing activities | | | 5,989,199 | | | | 140,650 | | | | 32,283,733 | | | | 39,857,204 | |
| Net increase (decrease) in cash and cash equivalents | | | 1,638,364 | | | | (23,749,938 | ) | | | 30,056,536 | | | | 7,987,127 | |
| Cash and cash equivalents, beginning of period | | | 6,348,763 | | | | 30,098,701 | | | | 42,165 | | | | — | |
| Cash and cash equivalents, end of period | | $ | 7,987,127 | | | $ | 6,348,763 | | | $ | 30,098,701 | | | $ | 7,987,127 | |
|
Non-Cash Transactions:
In August 2002, the Company issued 43,356 shares of common stock with an issued value of $82,375 to the Company's 401(k) Plan as employer matching contributions.
In November 2002, the Company and Ballard Power Systems agreed to convert a cash advance for deferred royalty income paid by Ballard in October 2000 to a strategic investment in the form of Secured Debentures of $2.4 million.
See accompanying notes.
F-6
MILLENNIUM CELL INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
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), with an initial cash capital contribution of $1.25 million of which GPS contributed $50,000.
The Company is a development stage company, as defined in Statement of Financial Accounting Standards No. 7, "Accounting and Reporting by Development Stage Enterprises." The Company was formed based on an invented, patented and developed proprietary chemical process ("Invention") that generates hydrogen and electricity from safe, environmentally friendly raw materials. The Company's core capability is in the design of a sodium borohydride process which can generate hydrogen as a high-energy fuel for the transportation and fuel cell markets. The Company has also designed and produced prototype direct fuel cells and batteries that utilize the sodium borohydride process to provide electricity for the portable and stationary power markets.
Note 2 — Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Millennium Cell Inc. and its wholly owned subsidiary, MCE Ventures LLC. MCE Ventures is a Delaware limited liability corporation that was formed in 2002 to engage in limited strategic investment activities. All significant inter-company transactions and accounts have been eliminated.
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.
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. To date, no impairments have occurred.
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:
| | | | | | |
| Asset Classification | | Estimated
Useful Life |
| Machinery and equipment | | 3 years |
| Furniture and fixtures | | 3 years |
| Leasehold improvements | | 3 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.
Intangible Assets
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,
F-7
MILLENNIUM CELL INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
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 at each balance sheet date based on estimated undiscounted future cash flows.
Investment in Affiliate
In July 2002, the Company agreed to acquire a 50% interest in a European alkaline fuel cell company (the "Affiliate"). The Company's investment is accounted for by the equity method. According to the purchase agreement, the Company was responsible to record its portion of the Affiliate's losses from July 1, 2002 through December 31, 2002. The losses recorded by the Company during this period were $367,714.
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. At December 31, 2002, the carrying value of the investments approximates fair value, which is based on the value of the underlying collateral.
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 is classified as restricted cash on the balance sheet.
Revenue Recognition
Revenues for the year ended December 31, 2002 were derived primarily from engineering and design services and sales of prototype systems used by our customers to evaluate and demonstrate our technology.
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.
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.
F-8
MILLENNIUM CELL INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
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:
| | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2002 | | 2001 | | 2000 |
Net loss attributable to common stockholders —
As reported | | $ (16,123,961) | | $ (19,452,329) | | $ (17,819,965) |
| Deduct: Total stock-based compensation expense determined under fair value based method for all stock option awards | | (131,765) | | (1,705,051) | | (638,983) |
Net loss attributable to common stockholders —
Pro forma | | $(16,255,726) | | $(21,157,380) | | $(18,458,948) |
| Net loss per share attributable to common stockholders — As reported | | $(0.58) | | $(0.71) | | $(0.69) |
| Net loss per share attributable to common stockholders — Pro forma | | $(0.58) | | $(0.78) | | $(0.72) |
|
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:
| | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2002 | | 2001 | | 2000 |
| Expected dividend yield | | — | | — | | — |
| Expected stock price volatility | | .69 | | .83 | | .92 |
| Risk-free interest rate | | 3.68% | | 3.07% – 4.79% | | 6.25% |
| Expected option term | | 5 years | | 3 years | | 0 – 3 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 $3.10 and $4.13 in fiscal 2002 and 2001, respectively. In 2000, the fair value of stock options granted below market value was $8.39 and the fair value of stock options granted at market value was $4.09 per share.
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.
F-9
MILLENNIUM CELL INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
Options to purchase 4,345,829, 4,766,720 and 3,684,471 shares of common stock have not been included in the computation of diluted net loss per share for the years ended December 31, 2002, 2001 and 2000, respectively, as their effects would have been antidilutive.
Warrants to purchase 658,693, 400,000 and 400,000 shares of common stock have not been included in the computation of diluted net loss per share for the years ended December 31, 2002, 2001 and 2000, respectively, as their effects would have been antidilutive.
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 $14,230,516 and $7,780,932 at December 31, 2002 and 2001, 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.
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.
Reclassifications
Amounts previously reported as "Product Development and Engineering" have been reclassified and shown as "Research and Development" for all periods presented. Certain other amounts have been reclassified to conform to the current year's presentation.
Note 3 — Investments
At December 31, 2001, the Company held $11.1 million of held-to-maturity investments in U.S. government agency bonds stated at amortized cost, with a weighted-average yield of 5.1%. At December 31, 2001, amortized cost approximated fair value. Interest income is recognized using the straight-line method over the lives of the securities. There were no held-to-maturity investments at December 31, 2002.
Note 4 — Property and Equipment
Property and equipment consist of the following at December 31:
| | | | | | | | | | |
| | | 2002 | | 2001 |
| Machinery and equipment | | $ | 1,144,527 | | | $ | 1,106,981 | |
| Furniture and fixtures | | | 402,125 | | | | 356,340 | |
| Leasehold improvements | | | 1,284,028 | | | | 367,420 | |
| | | | 2,830,680 | | | | 1,830,741 | |
| Accumulated depreciation | | | (1,303,697 | ) | | | (653,258 | ) |
| Property and equipment, net | | $ | 1,526,983 | | | $ | 1,177,483 | |
|
The Company recorded depreciation expense of $650,439, $425,223, and $234,303 for the fiscal years ended December 31, 2002, 2001 and 2000, respectively.
F-10
MILLENNIUM CELL INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
Note 5 — Intangible Assets
Patent and license costs consist of the following at December 31:
| | | | | | | | | | |
| | | 2002 | | 2001 |
| Patent and license costs | | $ | 734,633 | | | $ | 614,534 | |
| Accumulated amortization | | | (144,364 | ) | | | (83,828 | ) |
| | | $ | 590,269 | | | $ | 530,706 | |
|
The Company recorded amortization expense of $60,536, $47,808, and $22,517 for the fiscal years ended December 31, 2002, 2001 and 2000, respectively.
Note 6 — Restructuring Charges
During the second quarter of 2002, the Company incurred and paid restructuring expenses of approximately $105,000 for severance and legal costs related to 14 employee separations. The plan of restructuring was communicated and all employee separations were complete prior to June 30, 2002. The costs of separation were consistent with the amounts charged to restructuring expense during the second quarter of 2002. There are no restructuring reserves at December 31, 2002.
Note 7 — Product Development Agreement
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 have 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 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. We pledged to the bank as collateral $2.4 million of funds previously reported under cash and cash equivalents on the accompanying balance sheet. 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 the Company initiates the conversion. As part of the purchase agreement entered into between Ballard and us, Ballard retains the option to license the non-exclusive right to manufacture and sell products with ourHydrogen on DemandTM technology for specific portable fuel cell products and stationary internal combustion engine generators.
Note 8 — Grant Obligation
In April 1999, the Company received a recoverable grant award from the State of New Jersey Commission on Science and Technology ("NJS&T"). The funds were used to partially fund costs directly related to the Borohydride Fuel Cell technology development. The recoverable grant is required to be repaid to NJS&T upon the Company generating net income in a fiscal year. The repayment obligation ranges from 1% to 5% of net income over a ten-year period and shall not exceed 200% of the original grant. If at the end of the tenth year the Company has not repaid at least 100% of the original grant, the
F-11
MILLENNIUM CELL INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
Company is obligated to repay the difference between that amount and the cumulative repayments made to date. The original grant amount has been recorded as a liability. Additional liability, if any, will be recorded upon the attainment of net income in excess of the amount required to establish such additional liability.
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. As of November 2001, we occupy all facilities contemplated in the lease agreement. 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 including allocated taxes and maintenance under the amended operating leases are as follows:
| | | | | | |
| 2003 | | $ | 484,310 | |
| 2004 | | | 484,310 | |
| 2005 | | | 484,310 | |
| 2006 | | | 484,310 | |
| 2007 | | | 484,310 | |
| Thereafter | | | 443,950 | |
| Total | | $ | 2,865,500 | |
|
Rent expense under the operating lease was approximately $507,310, $288,498 and $128,435 for the years ended December 31, 2002, 2001, and 2000, 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. We do not believe that any such litigation would have a material adverse effect on our results of operations or financial condition.
Note 10 — Capital Transactions
In May 2000, in exchange for approximately $2.2 million, the Company sold 759,368 shares of Series A preferred stock, which automatically converted into 759,368 shares of common stock upon completion of the Company's initial public equity offering in August 2000. As the issuance price was substantially less than the initial public offering price the Company incurred additional preferred dividends of approximately $2.2 million from the date of issuance to the initial public offering.
Also in May 2000 (as amended in August 2000), the Company terminated a royalty agreement with GPS and Steven Amendola by issuing to them options to purchase 250,000 common shares at the initial public offering price and 206,897 shares of common stock, respectively. These agreements resulted in a non-cash charge of approximately $2.8 million.
In September 2000, the Company completed its initial public offering issuing 3,352,300 shares resulting in net proceeds to the Company of approximately $29.9 million.
In December 2001, the Company entered into a separation agreement with Steven C. Amendola, its then chief scientific advisor ("CSA") and also entered into a consulting agreement and a confidentiality agreement with a company wholly owned by the CSA, which expired in September 2002. The significant terms of the agreements are:
F-12
MILLENNIUM CELL INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
| • | $230,000 of severance to the CSA was paid in 2001. |
| • | Accelerated vesting of 166,607 stock options initially granted to the CSA while he was an employee of the Company under the Amended and Restated 2000 Stock Option Plan. This resulted in a non-cash charge of $142,602. |
| • | Forfeiture by the CSA of approximately 503,321 unvested options. CSA's total vested options equaled 503,322 at December 31, 2001. |
The agreements also require the CSA to honor certain non-compete restrictions.
Note 11 — Private Placement Transactions and Subsequent Financing Events
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).
Pursuant to the terms of the June 19, 2002 purchase agreement, one of the investors was obligated to acquire $12 million in secured convertible debentures, convertible into common stock of the Company, subject to certain terms and conditions, and related warrants. Subsequent to this transaction, the Company and the investor agreed the debentures would not be issued under the June 19, 2002 purchase agreement. Accordingly, the Company withdrew its request for registration on Form S-3 with the SEC for the common stock underlying the debentures and related warrants.
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. Convertible unsecured debentures with a principal amount of $3.5 million and warrants to acquire 242,678 shares (with an exercise price of $3.00 per share) were issued on December 26, 2002 following effectiveness of the registration statement relating to the underlying shares of common stock. Interest accrues at a rate of 4% per annum with payments due quarterly. The unsecured debentures are due June 30, 2003, subject to six thirty-day extensions, subject to the mutual consent of the Company and the investor.
On January 23, 2003, the Company's shareholders approved the issuance of $8.5 million of secured debentures and warrants to acquire 589,376 shares at a special meeting of shareholders and the secured debentures were issued on January 30, 2003. Interest accrues at money market rates with payments due quarterly. The secured debentures are secured by a standby letter of credit issued by Wachovia Bank, National Association, with an aggregate face amount equal to the outstanding principal of the secured debentures and are due in January 2006. The Company pledged to the bank as collateral the proceeds from the sale of the secured debentures. Therefore, the Company does not have the ability to use the proceeds from the sale of the secured debentures until the bank pledges are released upon conversion to unsecured debentures.
The Company is obligated in the future to register the resale of shares issuable on conversion of the $8.5 million principal amount of secured debentures following exchange of such secured debentures for
F-13
MILLENNIUM CELL INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
unsecured debentures. Each time the principal amount of outstanding unsecured debentures is less than $1.0 million, a portion of the $8.5 million of secured debentures will automatically convert into unsecured debentures in increments of $3.0 million, $3.0 million and $2.5 million upon effectiveness of the registration statement relating to the underlying shares of common stock.
The following table summarizes the number of common shares that have been registered by the Company for potential resale in conjunction with (i) the sale of shares by the Company to private accredited investors in June and October 2002, (ii) shares issuable upon exercise of outstanding warrants and (iii) shares issuable upon conversion of $3.5 million principal amount of outstanding unsecured debentures:
| | | | | | | | | | | | | | | | | | | | | | |
| Registration Statement Number | | Effective Date
of Registration
Statement | | Sales of
Common Stock | | Common Stock
Issuable Upon
Exercise of
Warrants | | Common Stock
Issuable Upon
Conversion of $3.5
Million Unsecured
Debentures | | Total Common
Stock Registered |
| 333-92144 | | | 10/04/02 | | | | 1,075,268 | | | | 268,817 | | | | — | | | | 1,344,085 | |
| 333-101061 | | | 12/23/02 | | | | 588,790 | | | | 389,876 | | | | 2,973,847 | | | | 3,952,513 | |
| 333-103104 | | | 2/25/03 | | | | — | | | | 589,376 | | | | — | | | | 589,376 | |
| Total | | | | | | | 1,664,058 | | | | 1,248,069 | | | | 2,973,847 | | | | 5,885,974 | |
|
The unsecured convertible debentures in principal amount of $3.5 million are convertible under three different scenarios:
| • | At the option of the holder, at any time and from time to time at $4.25 per share. |
| • | At the option of the Company, if (1) the average closing prices of the Company's common stock during any consecutive 30 trading days is equal to or greater than $5.10 per share and (2) the closing price for each of 15 trading days which need not be consecutive is equal to or greater than $5.10. |
| • | The Company may also convert $300,000 (or up to $2.5 million with investor consent) of unsecured debentures each 10 trading days at an adjusted conversion price equal to the volume weighted average of current market prices discounted from 4% to 12%. The discount to the adjusted conversion price depends on the cumulative amount of debentures converted as of the respective dates of conversion. |
The secured convertible debentures in principal amount of $8.5 million are convertible at the option of the holder, at any time and from time to time at $4.25 per share. Following exchange of secured debentures for unsecured debentures, the debentures so exchanged are convertible at the option of the Company under the two circumstances set forth above.
In order to exercise the Company's options to convert the debentures certain equity conditions must be satisfied as follows:
| (vi) | the number of authorized but unissued and otherwise unreserved shares of common stock is sufficient for such issuance; |
| (vii) | such shares of common stock are registered for resale pursuant to an effective registration statement, and the prospectus thereunder is available for use to sell such shares or all such shares may be sold without volume restrictions pursuant to Rule 144(k) under the Securities Act; |
| (viii) | the common stock is listed or quoted (and is not suspended from trading) on The NASDAQ National Market or SmallCap Market or other eligible market and such shares of common stock are approved for listing; |
F-14
MILLENNIUM CELL INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
| (ix) | no event of default nor any event that with the passage of time and without being cured would constitute an event of default has occurred and not been cured, and |
| (x) | no public announcement of a pending or proposed change of control transaction has occurred that has not been consummated. |
Warrants may not be exercised and debentures may not be converted to the extent that a holder thereof would then beneficially own, together with its affiliates, more than 9.999% of our common stock then outstanding subsequent to the applicable conversion or exercise.
In accordance with APB No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants", the Company determined that the relative fair value of the unsecured debentures was $3,008,017 after issuance. The resulting discount of $491,983 is being amortized as interest expense, using the effective interest method, over the original maturity period of six months. During the year ended December 31, 2002, the Company recognized a non-cash charge to interest expense of $21,865 for the amortization of the discount. To the extent conversions of unsecured debentures into common stock are made prior to the maturity date of the debentures, the Company will record as interest expense a ratable proportion of the discount associated with the face value of the debentures converted.
In accordance with Emerging Issues Task Force ("EITF") No. 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments" ("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"), and after considering the terms of the transaction, the Company determined that the unsecured debentures contained an initial beneficial conversion feature ("BCF"). The BCF existed because of a discount that will be given to the investor in the event of a company-initiated conversion of the unsecured debentures prior to maturity. These discounts will range from 4% to 12%, depending on the amount of debentures converted into common stock. Accordingly, at time of conversion, the Company will record as interest expense any applicable BCF based on the fair value of the conversion feature on that date in the event of an early conversion of the unsecured debentures into common stock. As no unsecured debentures were converted as of December 31, 2002, no interest expense was recorded for BCF during that period. The secured debentures will have similar features.
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.
F-15
MILLENNIUM CELL INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
The following table summarizes activity under the Plan:
| | | | | | | | | | |
| | | Number of
Options
and Warrants | | Weighted
Average
Exercise Price
per Share |
| Balance at December 31, 2000 | | | 3,684,471 | | | $ | 3.87 | |
| Granted at fair value | | | 1,714,166 | | | | 7.21 | |
| Forfeited or terminated | | | (507,821 | ) | | | 2.91 | |
| Exercised | | | (124,096 | ) | | | 2.90 | |
| 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 | |
|
The following is additional information relating to options and warrants granted and outstanding under the plan as of December 31, 2002:
| | | | | | | | | | | | | | | | | | | | | | |
| Exercise Price Range | | Options
Outstanding | | Weighted
Average
Exercise Price | | Remaining
Weighted
Average
Life (Years) | |
Options
Exercisable | | Weighted
Average
Exercise Price |
| $ 2.90 – $ 2.90 | | | 2,521,760 | | | $ | 2.90 | | | | 7.5 | | | | 2,009,260 | | | $ | 2.90 | |
| 2.91 – 8.12 | | | 711,450 | | | | 4.67 | | | | 8.9 | | | | 84,831 | | | | 5.39 | |
| 8.13 – 12.49 | | | 1,048,564 | | | | 9.84 | | | | 8.1 | | | | 613,378 | | | | 9.89 | |
| 12.50 – 19.63 | | | 64,055 | | | | 16.02 | | | | 7.9 | | | | 43,711 | | | | 16.29 | |
| | | | 4,345,829 | | | $ | 5.06 | | | | 7.9 | | | | 2,751,180 | | | $ | 4.75 | |
|
The Company recorded non-cash charges of approximately $3.8 million, $5.9 million and $5.8 million in 2002, 2001, and 2000, respectively, related to options issued below market to employees and the Board of Directors in 2000. The Company will incur additional non-cash charges of approximately $1.9 million for these options in 2003.
The Company also incurred non-cash charges of $0.1 million, $1.4 million and $2.9 million in 2002, 2001, and 2000, respectively, related to the fair value of warrants issued to affiliates. Certain affiliates have the ability to earn new awards based on certain milestones and service periods. The accounting methodology requires a re-valuing of certain earned warrants at each period ending market price using a Black-Scholes pricing model. Due to this variable accounting methodology, it is difficult to predict the amount of additional non-cash charges the company will incur related to these warrants.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
F-16
MILLENNIUM CELL INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2002 | | 2001 | | 2000 |
| Expected dividend yield | | — | | — | | — |
| Expected stock price volatility | | .69 | | .83 | | .92 |
| Risk-free interest rate | | 3.68% | | 3.07% – 4.79% | | 6.25% |
| Expected option term | | 5 years | | 3 years | | 0 – 3 years |
|
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 3 years based on the length of service of the employee. In 2002, the Company funded the vested matching contributions to the plan with 43,356 shares of common stock with an issued market value of $82,375. The Company has reserved 180,000 shares of common stock for the 401(k) plan.
Note 13 — Quarterly Information (unaudited)(1)
| | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Quarters |
| | | First | | Second | | Third | | Fourth | | Total |
| | | (in 000's, except per share amounts) |
| Fiscal Year ended December 31, 2002 | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 360 | | | $ | 20 | | | $ | 106 | | | $ | 233 | | | $ | 719 | |
| Cost of revenue | | | 360 | | | | 20 | | | | 106 | | | | 204 | | | | 690 | |
| Gross Margin | | | — | | | | — | | | | — | | | | 29 | | | | 29 | |
| Product development & marketing | | | 1,729 | | | | 1,470 | | | | 1,313 | | | | 1,277 | | | | 5,788 | |
| General and administrative | | | 1,498 | | | | 981 | | | | 891 | | | | 683 | | | | 4,053 | |
| Restructuring expense | | | — | | | | 105 | | | | — | | | | — | | | | 105 | |
| Non-cash charges | | | 1,118 | | | | 1,075 | | | | 988 | | | | 967 | | | | 4,148 | |
| Depreciation and amortization | | | 174 | | | | 181 | | | | 180 | | | | 176 | | | | 711 | |
| Research and development | | | 364 | | | | 541 | | | | 249 | | | | 362 | | | | 1,515 | |
| Total operating expenses | | | 4,883 | | | | 4,353 | | | | 3,621 | | | | 3,465 | | | | 16,321 | |
| Loss from operations | | | (4,883 | ) | | | (4,353 | ) | | | (3,621 | ) | | | (3,436 | ) | | | (16,292 | ) |
| Other income | | | — | | | | — | | | | — | | | | 235 | | | | 235 | |
| Interest income (expense) | | | 158 | | | | 96 | | | | 52 | | | | (6 | ) | | | 300 | |
| Equity in losses of affiliates | | | — | | | | — | | | | — | | | | (368 | ) | | | (368 | ) |
| Net loss | | $ | (4,725 | ) | | $ | (4,256 | ) | | $ | (3,569 | ) | | $ | (3,574 | ) | | $ | (16,124 | ) |
| Loss per share — basic and diluted | | $ | (.17 | ) | | $ | (.15 | ) | | $ | (.13 | ) | | $ | (.12 | ) | | $ | (.58 | ) |
Weighted — average number of shares
outstanding | | | 27,306 | | | | 27,507 | | | | 28,428 | | | | 28,829 | | | | 28,023 | |
|
| (1) | Some columns and rows may not foot or cross-foot due to rounding. |
F-17
MILLENNIUM CELL INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Quarters |
| | | First | | Second | | Third | | Fourth | | Total |
| | | (in 000's, except per share amounts) |
| Fiscal Year ended December 31, 2001(1) | | | | | | | | | | | | | | | | | | | | |
| Product development & marketing | | $ | 861 | | | $ | 1,307 | | | $ | 1,504 | | | $ | 1,841 | | | $ | 5,513 | |
| General and administrative | | | 849 | | | | 1,368 | | | | 1,279 | | | | 1,231 | | | | 4,727 | |
| Non-cash charges | | | 2,525 | | | | 1,943 | | | | 1,667 | | | | 1,206 | | | | 7,341 | |
| Depreciation and amortization | | | 94 | | | | 113 | | | | 116 | | | | 150 | | | | 473 | |
| Research and development | | | 490 | | | | 633 | | | | 907 | | | | 595 | | | | 2,625 | |
| Total operating expenses | | | 4,819 | | | | 5,364 | | | | 5,473 | | | | 5,023 | | | | 20,679 | |
| Loss from operations | | | (4,819 | ) | | | (5,364 | ) | | | (5,473 | ) | | | (5,023 | ) | | | (20,679 | ) |
| Interest income | | | 399 | | | | 326 | | | | 248 | | | | 254 | | | | 1,227 | |
| Net loss | | $ | (4,420 | ) | | $ | (5,038 | ) | | $ | (5,225 | ) | | $ | (4,769 | ) | | $ | (19,452 | ) |
| Loss per share — basic and diluted | | $ | (.16 | ) | | $ | (.19 | ) | | $ | (.19 | ) | | $ | (.17 | ) | | $ | (.71 | ) |
| Weighted — average number of shares outstanding | | | 27,168 | | | | 27,183 | | | | 27,253 | | | | 27,265 | | | | 27,218 | |
|
| (1) | Some columns and rows may not foot or cross-foot due to rounding. |
F-18
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE