Millennium Cell (MCELQ) 10-K/A 2005 FY Annual report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K/A

(Amendment No. 1)

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2005

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

000-31083

(Commission File Number)

MILLENNIUM CELL INC.

(Exact Name Of Registrant As Specified In Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)	22-3726792 (I.R.S. Employer Identification Number)
1 Industrial Way West, Eatontown, New Jersey (Address Of Principal Executive Offices)	07724 (Zip Code)

(732) 542-4000

(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in the Rule 405 of the Securities Act of 1933. Yes ☐ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes ☐ No þ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (as defined See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934).

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes ☐ No þ

The aggregate market value of the registrant's common stock held by non-affiliates as of March 22, 2006 was $72,982,432.

The number of shares outstanding of the registrant's common stock as of March 22, 2006 was 47,700,936.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement dated March 27, 2006 to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on May 2, 2006 are incorporated by reference into Part III.

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A amends our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed with the Securities and Exchange Commission (SEC) on March 29, 2006 to correct clerical errors in the Balance Sheet in Item 8 (Financial Statements and Supplemental Data); to add the consent of our Independent Registered Public Accounting Firm as Exhibit 23.1; and to update the certifications of our principal executive and principal financial officers. The clerical errors in the Balance Sheet were made in the process of converting and formatting the Form 10-K to an electronic format suitable for filing with the SEC. The Balance Sheet included in our Annual Report mailed to stockholders contained the correct amounts. Except as set forth herein, there have been no other changes to the Form 10-K as originally filed.

In order to comply with certain technical requirements of the SEC’s rules in connection with the filing of this amendment on Form 10-K/A; we are including in this amendment the complete text of Item 8. Financial Statements and Supplementary Data and Item 15. Exhibits and Financial Statement Schedules, each as amended.

This Amendment No. 1 to the Form 10-K does not reflect events occurring after the filing of the original Form 10-K, or modify or update the disclosures therein in any way other than as required to reflect the amendment described above.

 

TABLE OF CONTENTS

Item	Description	Page
Item 8.	Financial Statements and Supplementary Data	1
Item 15.	Exhibits and Financial Statement Schedules	20
	Signature Page	22

i

INDEX TO FINANCIAL STATEMENTS

	Page
Report of Independent Auditors	2
Balance Sheet as of December 31, 2005 and 2004	3
Statement of Operations for the fiscal years ended December 31, 2005, 2004 and 2003 and cumulative amounts from inception	4
Statement of Stockholders' Equity for the period from December 31, 2002 to December 31, 2005	5
Statement of Cash Flows for the fiscal years ended December 31, 2005, 2004 and 2003 and cumulative amounts from inception	7
Notes to Financial Statements	8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Millennium Cell Inc.

We have audited the accompanying consolidated balance sheets of Millennium Cell Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years then ended, and for the period of January 1, 1999 (inception) through December 31, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and 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, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years then ended, and for the period January 1, 1999 (inception) through December 31, 2005, in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

New York, New York

February 10, 2006

2

MILLENNIUM CELL INC.

(a development stage enterprise)

CONSOLIDATED BALANCE SHEETS

	December 31,			December 31,
Assets	2005			2004
Current assets:
Cash and cash equivalents	$	11,675,877		$	8,217,840
Restricted cash		373,868			2,445,500
Accounts receivable- trade		36,808			73,474
Accounts receivable - government		112,462			372,776
Prepaid expenses		237,867			261,467
Deferred financing costs		102,270			97,366
Total current assets		12,539,152			11,468,423
Property and equipment, net		450,138			663,576
Patents and licenses, net		654,876			538,802
Restricted cash		1,208,191			589,521
Deferred financing costs		136,360			—
Security deposits		45,676			45,676
	$	15,034,393		$	13,305,998
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	521,615		$	282,586
Accrued expenses		893,868			593,698
Accrued separation costs		—			318,368
Short-term portion of capital lease obligation		6,173			37,036
Short-term portion of refundable grant obligation		49,611			28,766
Deferred compensation		101,050			65,037
Convertible unsecured debentures		2,399,988			5,137,335
Convertible secured debentures		—			2,399,988
Deferred income		—			85,000
Total current liabilities		3,972,305			8,947,814
Redeemable Series C preferred stock, net of discount		5,035,416			—
Refundable grant obligation		156,329			177,174
Capital lease obligation		—			2,669
Commitments and contingencies
Stockholders' equity:
Series A preferred stock, $.001 par value; 1,694,724 authorized shares, 155,724 issued and outstanding as of December 31, 2005		2,413,722			—
Series B preferred stock, $.001 par value; 1,539,000 authorized shares, none issued and outstanding as of December 31, 2005.		—			—
Common stock, $.001 par value; authorized 70,000,000 shares and 46,454,375 and 39,113,963 shares issued and outstanding as of December 31, 2005 and 2004, respectively		46,454			39,114
Additional paid-in capital		99,942,349			85,663,479
Deferred compensation		(596,296	)		(188,805	)
Deficit accumulated during development stage		(95,935,886	)		(81,335,447	)
Total stockholders' equity		5,870,343			4,178,341
	$	15,034,393		$	13,305,998

See accompanying notes.

3

MILLENNIUM CELL INC.

(a development stage enterprise)

CONSOLIDATED STATEMENTS OF OPERATIONS

	Twelve Months			Twelve Months			Twelve Months			Cumulative
	Ended			Ended			Ended			Amounts
	December 31, 2005			December 31, 2004			December 31, 2003			From Inception
Revenue	$	416,902		$	198,474		$	466,859		$	1,801,627
Cost of revenue		382,318			198,474			409,449			1,680,300
Gross margin		34,584			—			57,410			121,327
Product development and marketing		3,580,729			3,396,469			5,294,419			23,573,104
General and administrative		5,396,694			4,262,066			3,835,873			25,612,465
Restructuring expense		—			—			—			104,982
Non-cash charges		3,519,991			796,286			2,164,634			28,756,004
Depreciation and amortization		291,649			516,172			681,358			2,987,012
Research and development		609,534			474,609			1,020,102			9,196,256
Total operating expenses		13,398,597			9,445,602			12,996,386			90,229,823
Loss from operations		(13,364,013	)		(9,445,602	)		(12,938,976	)		(90,108,496	)
Interest expense, net		(1,623,118	)		(1,770,102	)		(2,897,077	)		(4,074,292	)
Equity in losses of affiliates		—			—			(488,364	)		(856,078	)
Loss before income taxes		(14,987,131	)		(11,215,704	)		(16,324,417	)		(95,038,866	)
Benefit from income taxes		386,692			410,726			221,480			1,253,861
Net loss		(14,600,439	)		(10,804,978	)		(16,102,937	)		(93,785,005	)
Preferred stock amortization		—			—			—			(2,150,881	)
Net loss applicable to common stockholders	$	(14,600,439	)	$	(10,804,978	)	$	(16,102,937	)	$	(95,935,886	)
Loss per share — basic and diluted	$	(.34	)	$	(.29	)	$	(.51	)	$	(3.11	)
Weighted — average number of shares outstanding		43,405,306			37,226,377			31,564,345			30,843,984

See accompanying notes.

4

MILLENNIUM CELL INC.

(a development stage enterprise)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

	Common Stock				Additional Paid-in			Deferred			Series A		Accumulated			Total  Stockholder's
	Shares		Amount		Capital			Compensation			Preferred		Deficit			Equity
Balance at December 31, 2002		29,027,491		29,027		61,679,267			—			—		(54,427,532	)		7,280,762
Issuance of common stock in private placement transactions		5,468,001		5,468		11,294,533			—			—		—			11,300,001
Beneficial conversion feature on private placement transactions		—		—		1,356,825			—			—		—			1,356,825
Fair value of warrants issued with secured debentures		—		—		471,923			—			—		—			471,923
Issuance of common stock from exercise of options		50,000		50		144,950			—			—		—			145,000
Issuance of restricted stock in conjunction with tender offer		197,599		198		395,000			(395,198	)		—		—			—
Common stock under deferred compensation plan		—		—		—			(32,315	)		—		—			(32,315	)
Amortization of deferred compensation for restricted stock		—		—		—			69,086			—		—			69,086
Issuance of common stock to Board of Directors		201,289		201		404,354			—			—		—			404,555
Issuance of common stock for 401(k)		84,672		85		143,139			—			—		—			143,224
Non-cash compensation charges for issuance of stock options		—		—		1,894,961			—			—		—			1,894,961
Net loss		—		—		—			—			—		(16,102,937	)		(16,102,937	)
Balance at December 31, 2003		35,029,052	$	35,029	$	77,784,952		$	(358,427	)	$	—	$	(70,530,469	)	$	6,931,085
Issuance of common stock in private placement transactions		3,162,034		3,162		5,296,839			—			—		—			5,300,001
Beneficial conversion feature on private placement transactions		—		—		497,757			—			—		—			497,757
Issuance of stock for deferred financing costs		377,846		378		813,445			—			—		—			813,823
Issuance of common stock from exercise of options		115,532		115		345,208			—			—		—			345,323
Common stock under deferred compensation plan		—		—		(27,216	)		169,622			—		—			142,406
Issuance of stock for interest payments		90,671		91		142,426			—			—		—			142,517
Issuance of common stock to Board of Directors		126,817		127		226,751			—			—		—			226,878
Issuance of stock for merit program		51,800		52		130,996			—			—		—			131,048
Issuance of stock for executive compensation		100,000		100		199,900			—			—		—			200,000
Issuance of common stock for 401(k)		60,211		60		103,712			—			—		—			103,772
Non-cash compensation charges for issuance of stock options		—		—		148,709			—			—		—			148,709
Net loss		—		—		—			—			—		(10,804,978	)		(10,804,978	)
Balance at December 31, 2004		39,113,963	$	39,114	$	85,663,479		$	(188,805	)	$	—	$	(81,335,447	)	$	4,178,341

(continued)

5

MILLENNIUM CELL INC.

(a development stage enterprise)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(continued)

	Common Stock				Additional Paid-in		Deferred			Series A		Accumulated			Total Stockholder's
	Shares		Amount		Capital		Compensation			Preferred		Deficit			Equity
Balance at December 31, 2004		39,113,963	$	39,114	$	85,663,479	$	(188,805	)	$	—	$	(81,335,447	)	$	4,178,341
Issuance of common stock in private placement transactions		5,625,205		5,625		9,918,373		—			—		—			9,923,998
Beneficial conversion feature on private placement transactions		—		—		168,000		—			—		—			168,000
Issuance of stock for deferred financing costs		52,477		53		62,447		—			—		—			62,500
Issuance of common stock from exercise of options		120,288		120		288,571		—			—		—			288,691
Common stock under deferred compensation plan		—		—		—		127,181			—		—			127,181
Issuance of stock for interest payments		178,829		179		297,215		—			—		—			297,394
Issuance of common stock to Board of Directors		138,485		138		219,148		—			—		—			219,286
Issuance of stock for warrants		589,376		589		883,475		—			—		—			884,064
Issuance of stock for executive compensation		50,000		50		85,450		—			—		—			85,500
Issuance of common stock for 401(k)		110,952		111		163,920		—			—		—			164,031
Issuance of restricted stock for merit awards		474,800		475		1,044,085		(1,044,560	)		—		—			—
Vesting of restricted stock awards		—		—		—		417,824			—		—			417,824
Amortization of restricted stock awards		—		—		—		125,347			—		—			125,347
Warrants issued in connection with Series C preferred stock		—		—		1,021,928		—			—		—			1,021,928
Issuance of Series A preferred stock, 155,724 shares issued		—		—		—		—			2,413,722		—			2,413,722
Deferred compensation plan		—		—		—		(33,283	)		—		—			(33,283	)
Non-cash compensation charges for issuance of stock options		—		—		126,258		—			—		—			126,258
Net loss		—		—		—		—			—		(14,600,439	)		(14,600,439	)
Balance at December 31, 2005		46,454,375	$	46,454	$	99,942,349	$	(596,296	)	$	2,413,722	$	(95,935,886	)	$	5,870,343

See accompanying notes.

6

MILLENNIUM CELL INC.

(a development stage enterprise)

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Twelve Months			Twelve Months			Twelve Months
	Ended			Ended			Ended			Cumulative
	December 31,			December 31,			December 31,			Amounts From
	2005			2004			2003			Inception
Operating activities
Net loss	$	(14,600,439	)	$	(10,804,978	)	$	(16,102,937	)	$	(93,785,005	)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization		291,649			516,172			681,358			2,987,012
Amortization of discount on unsecured debentures		856,509			773,623			926,832			2,578,829
Amortization of deferred financing costs		429,507			367,932			582,054			1,394,083
Non-cash interest charges		297,394			142,517			—			439,911
Beneficial conversion feature on PIPE financing		168,000			497,757			1,356,825			2,022,582
Losses on investment in affiliate		—			—			488,364			856,078
Non-cash charges		3,519,991			796,286			2,164,634			28,756,004
Changes in operating assets and liabilities:
Accounts receivable		296,980			(405,006	)		192,771			(149,270	)
Prepaid expenses and other assets		23,600			3,993			72,130			(283,542	)
Accounts payable and accrued expenses		445,218			754,842			(218,856	)		2,291,237
Deferred income		(85,000	)		85,000			—			2,399,988
Net cash used in operating activities		(8,356,591	)		(7,271,862	)		(9,856,825	)		(50,492,093	)
Investing Activities
Purchase of property and equipment		—			(97,585	)		(7,409	)		(2,885,446	)
Patent registration costs		(194,286	)		(46,057	)		(77,591	)		(902,567	)
Investment in affiliate		—			—			(320,952	)		(856,078	)
Increase/(decrease) in restricted cash		1,452,963			(36,642	)		(35,329	)		(1,582,058	)
Net cash (used in) provided by investing activities		1,258,677			(180,284	)		(441,281	)		(6,226,149	)
Financing activities
Proceeds from sale of common stock		1,172,755			345,324			145,000			39,394,207
Underwriting and other expenses of initial public offering		—			—			—			(3,669,613	)
Proceeds from issuance of debentures		—			9,428,806			8,500,000			21,428,806
Proceeds from redeemable Series C preferred stock..		10,000,000			—			—			10,000,000
Deferred financing costs		(583,272	)		(79,077	)		(291,027	)		(1,281,656	)
Capital lease obligation payments		(33,532	)		(29,240	)		(17,239	)		(80,011	)
Proceeds from capital contribution		—			—			—			500,000
Payment of note payable		—			—			—			(250,000	)
Proceeds from grant, net		—			—			(21,582	)		205,940
Proceeds from sale of preferred stock		—			—			—			2,146,446
Net cash provided by financing activities		10,555,951			9,665,813			8,315,152			68,394,119
Net increase (decrease) in cash and cash equivalents		3,485,037			2,213,667			(1,982,954	)		11, 675,877
Cash and cash equivalents, beginning of period		8,217,840			6,004,173			7,987,127			—
Cash and cash equivalents, end of period	$	11,675,877		$	8,217,840		$	6,004,173		$	11,675,877

Supplemental Cash Flow Data:

Please see Note 3 for more information.

See accompanying notes.

7

MILLENNIUM CELL INC.

(a development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 1 — Basis of Presentation

Millennium Cell Inc. (the "Company"), was incorporated on December 17, 1998 and organized on January 1, 1999 (inception). 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 is focused on commercialization of hydrogen batteries for use primarily in portable electronic devices for the military, medical, industrial and consumer markets. These hydrogen batteries offer runtime, weight, safety and cost advantages in an attractive form factor versus traditional batteries. Millennium Cell is developing this technology in partnership with corporate and government entities.

Note 2 — Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, MCE Ventures LLC. MCE Ventures is a Delaware limited liability corporation that was formed in 2002 to engage in limited strategic investment activities. All significant inter-company transactions and accounts have been eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with an initial maturity of three months or less to be cash equivalents.

Accounts receivable

Accounts receivable - trade is comprised of agreements with third parties from revenue agreements. Accounts receivable - government represents amounts due under the Company’s cost-sharing programs.

Concentration of Credit Risk

Financial instruments, which potentially expose the Company to concentrations of credit risk, consist principally of cash investments and trade receivables. The Company places its cash investments with highly rated financial institutions and in U.S. government issued securities. At times, such investments may be in excess of the FDIC insurance limit. The Company’s limited customer base increases its concentrations of credit risk with respect to trade receivables. The Company routinely assesses the financial strength of its customers.

Long-Lived Assets

The Company records impairment losses on long-lived assets when events and circumstances indicate that the assets might be impaired and the undiscounted estimated cash flows to be generated by the related assets are less than the carrying amount of those assets.

Property and Equipment

Property and equipment are stated at cost. Machinery and equipment and furniture and fixtures are depreciated over three years. Leasehold improvements are amortized over the estimated useful lives of the assets or initial lease terms, whichever is shorter. Repairs and maintenance are charged to expense as incurred.

Patents and Licenses

Certain costs associated with obtaining and licensing patents and trademarks are capitalized as incurred and are amortized on a straight-line basis over their estimated useful lives of 10 to 17 years unless the asset is determined to be impaired. Amortization of such costs begins once the patent has been issued. The Company evaluates the recoverability of its patent costs when events and circumstances indicate that the assets might be impaired and the undiscounted estimated cash flows to be generated by the related assets are less than the carrying amount of those assets.

8

MILLENNIUM CELL INC.

(a development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Investment in Affiliate

Investments in which Millennium Cell does not have control, but has the ability to exercise significant influence over the operating and financial policies, are accounted for under the equity method. Millennium Cell's share of net earnings and losses from investments is included in the consolidated statement of operations.

In July 2002, the Company agreed to acquire a 50% non-controlling interest in a European alkaline fuel cell company (the "Affiliate"). During the period from July 2002 to June 2003, the Company directly and indirectly provided limited funding for their proportionate share of the Affiliate’s operating expenses. As of June 30, 2003, the Company had written off its Investment in Affiliate on the balance sheet and determined the fair value of the investment was zero. During the third quarter of 2003, the Company decided to abandon its interest in the Affiliate. No gain or loss was recognized upon this event.

Restricted Cash

Cash that is pledged as collateral under the Company's amended facilities lease agreement and restricted funds for future dividends on the Redeemable Series C Preferred Stock (“Series C”) is classified as restricted cash on the consolidated balance sheet.

Revenue Recognition

Revenues over the past three fiscal years were derived primarily from engineering and design services. While in the development stage, the Company’s revenue is expected to fluctuate from year to year with the timing of prototype development and design services.

The Company's near term revenues will be derived substantially from contracts that require the Company to deliver engineering, design and management services, hydrogen battery technology, prototype systems and licensing of technology. Revenues are recognized in the period in which the services are performed, technology and/or prototype is delivered or licensed revenue is earned.

Cost-Sharing Programs

The Company participates in a number of government programs, which provide the Company with funding to offset the costs of product development and research. As the Company’s full costs are not billable under these programs, the billable costs are shown as reductions of operating expenses in the accompanying consolidated statements of operations in the period in which the costs are incurred on a time and materials basis.

The following table is a breakdown of the reduction of operating expenses as a result of the cost-sharing programs, by function, which began in 2004:

	Twelve Months Ended December 31,
	2005	2004
Product development expense	$ 141,743	$ 233,629
General and administrative expense	$ 293,252	$ 229,033
Research and development expense	$ 605,103	$ 745,446
Total	$ 1,040,098	$ 1,208,108

Product Development and Marketing Costs

Product development and marketing costs are expensed as incurred.

9

MILLENNIUM CELL INC.

(a development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

Research and Development Costs

Research and development costs are expensed as incurred.

Stock Based Compensation

In December 2002, the Financial Accounting Standards Board ("FASB") issued FAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. FAS 148 amends FAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of FAS 148 are effective for financial statements for fiscal years and interim periods ending after December 15, 2002. The disclosure provisions of FAS 148 have been adopted by the Company. FAS 148 did not require the Company to change to the fair value based method of accounting for stock-based compensation.

Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).

The following table illustrates the effect on net loss and loss per share, if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:

	Year Ended December 31,
	2005			2004			2003
Net loss attributable to common stockholders - as reported	$	(14,600,439	)	$	(10,804,978	)	$	(16,102,937	)
Plus: Stock-based compensation expense included in reported net loss		1,106,269			796,286			2,164,634
Less: Total stock-based compensation expense determined using the fair value method		(1,636,608	)		(1,576,863	)		(6,125,215	)
Net loss attributable to common stockholders - pro forma	$	(15,130,778	)	$	(11,585,555	)	$	(20,063,518	)
Net loss per share attributable to common stockholders - As reported	$	(0.34	)	$	(0.29	)	$	(0.51	)
Net loss per share attributable to common stockholders - Pro forma	$	(0.35	)	$	(0.31	)	$	(0.64	)

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Year Ended December 31,
	2005	2004	2003
Expected dividend yield	—	—	—
Expected stock price volatility	.89	.57	.69
Risk-free interest rate	4.45%	3.48%	3.68%
Expected option term	5 years	5 years	5 years

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company's options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. Based upon the above assumptions, the weighted average fair value of stock options granted at market were $1.28, $1.14 and $1.44 in fiscal 2005, 2004 and 2003, respectively.

10

MILLENNIUM CELL INC.

(a development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123R will become effective for all registrants as of the first fiscal year beginning after June 15, 2005. Therefore, the Company’s required effective date is January 1, 2006. The Company’s current estimate of the annual net loss effect in 2006 of adopting SFAS 123R in January 2006 is approximately $340,000. The Company will use the prospective method and the Black-Scholes option valuation model to record compensation expense for stock options.

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders by the weighted average number of common shares actually outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Basic and diluted EPS were the same for all periods presented herein.

In October 2004, the FASB ratified Emerging EITF No. 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings Per Share." Their conclusion was that beginning with reporting periods ending after December 15, 2004 (i) contingently convertible debt instruments are subject to the if-converted method under SFAS No. 128, "Earnings Per Share," regardless of the contingent features included in the instrument, and (ii) prior period earnings per share would have to be restated. With the ratification of EITF No. 04-8, the Company was required to include such potentially issuable shares, if dilutive, in its diluted earnings per share calculation beginning with the fourth quarter 2004 reporting period. Our secured and unsecured convertible debentures, as well as our Series C Preferred Stock, are contingently convertible debt instruments that are potentially convertible into approximately 4,600,000, 3,700,000 and 300,000 shares of common stock for 2005, 2004 and 2003, respectively. These contingently convertible shares have not been included in the computation of diluted net loss per share for the years ended December 31, 2005, 2004 and 2003, respectively, as their effects would have been anti-dilutive. Please see Notes 7 and 11 for more information.

Options to purchase 4,277,249, 4,017,191 and 4,422,476 shares of common stock have not been included in the computation of diluted net loss per share for the years ended December 31, 2005, 2004 and 2003, respectively, as their effects would have been anti-dilutive. Please see Note 12 for more information.

Warrants to purchase 2,066,015, 1,405,391 and 1,405,391 shares of common stock have not been included in the computation of diluted net loss per share for the years ended December 31, 2005, 2004 and 2003, respectively, as their effects would have been anti-dilutive. Please see Notes 7 and 12 for more information.

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 $33,609,000 and $29,609,000 at December 31, 2005 and 2004, 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 carryforwards 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.

11

MILLENNIUM CELL INC.

(a development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Other Recently Issued Accounting Standards

 In May 2005, the FASB issued SFAS Statement No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 is a replacement of Accounting Principles Board Opinion No. 20 (“APB 20”) and FASB Statement No. 3. SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and the Company will adopt this standard on January 1, 2006. The Company does not expect that the adoption of SFAS 154 will have any impact on the Company’s consolidated results of operations, financial condition and cash flows.

Reclassifications

Amounts previously reported as "Product Development and Engineering" have been reclassified and shown as "Research and Development" for all periods presented. Additionally, sales of net operating losses in the State of New Jersey previously recorded as “Other Income” have been reclassified and shown as “Benefit from Income Taxes” for all periods presented. Certain other amounts have been reclassified to conform to the current year's presentation.

Note 3 — Supplemental Cash Flow Information

The Company funded its vested matching contributions in connection with its 401(k) plan for employees with 110,952, 60,211 and 84,672 shares of common stock with a market value of $164,031, $103,772 and $143,224 in fiscal 2005, 2004 and 2003, respectively.

The Company made non-cash payments to the members of the Board of Directors in lieu of cash compensation of $219,286, $226,878 and $404,555 in 2005, 2004 and 2003, respectively.

In March 2005, the Company issued 474,800 shares of restricted stock to employees with a fair market value of $1,044,560. These shares will vest in five years, or earlier, upon meeting certain accelerated vesting criteria, as defined. During the twelve months ended December 31, 2005, the Company recorded $543,171 in non-cash charges for restricted stock issued to employees that includes the amortization of restricted stock issued in March 2005 and the vesting of 189,920 shares of restricted stock during March 2005 based on the Company’s performance of certain acceleration of vesting features in the restricted stock plan. The Company will recognize additional non-cash charges of $501,389 through 2009, or earlier if other accelerated vesting features are met.

Interest paid during 2005, 2004 and 2003 totaled $128,493, $88,749 and $104,337, respectively. Non-cash interest during 2005 and 2004 was $297,394 and $142,517, respectively. The Company also issued debentures in 2005, 2004 and 2003 which resulted in non-cash transactions. Please see Note 11 for more information.

In December 2005, the Company issued 100,000 options to a member of the Board of Directors for his contribution towards the negotiation of the joint development arrangement. The Company recorded a non-cash charge of $126,258. Please see Note 13 for more information.

Note 4 — Income Taxes

The components of the benefit for income taxes are as follows:

                                                                                  Year Ended December 31,

	2005			2004			2003
Current benefit:
Federal	$	—		$	—		$	—
State		(386,692	)		(410,726	)		(221,480	)
Deferred provision:
Federal		—			—			—
State		—			—			—
Total	$	(386,692	)	$	(410,726	)	$	(221,480	)

12

MILLENNIUM CELL INC.

(a development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The income tax benefits recorded for the years ended December 31, 2005, 2004 and 2003 were derived from the Company's participation in the New Jersey Emerging Technology and Biotechnology Financial Assistance Program. This program allows certain qualified companies to be compensated for the transfer of their New Jersey net operating losses to other companies.

Significant components of the Company’s net deferred taxes as of December 31, 2005 and 2004 are as follows:

                                                                          Year Ended December 31,

	2005			2004
Stock based compensation	$	8,898,000		$	8,757,000
Net operating loss carryforwards		22,545,000			18,946,000
Research and development credits		1,770,000			1,490,000
Depreciation and amortization		396,000			382,000
Deferred revenue		—			34,000
Other		—			—
Valuation reserve		(33,609,000	)		(29,609,000	)
Net deferred tax asset		—			—

The Company has provided a full valuation allowance in 2005 and 2004 for its deferred tax assets since the realization of these future benefits is not considered more likely than not. The amount of deferred tax assets considered realizable is subject to change based on estimates of future taxable income during the carryforward period. If the Company achieves profitability, these deferred tax assets would be available to offset future income taxes. The Company assesses the need for the valuation allowance at each balance sheet date based on all available evidence.

As of December 31, 2005, the Company had available net operating loss carryforwards of approximately $57,300,000 for federal income tax purposes and approximately $41,500,000 for state income tax purposes. The federal carryforwards will begin to expire in 2020, and the state carryforwards will begin to expire in 2007. In addition, at December 31, 2005 the Company had available federal research and development tax credit carryforwards of approximately $1,180,000 that begin to expire in 2020 and state research and development credits of approximately $590,000.

The reconciliation of income tax expense computed at the U.S. federal statutory rate to the recorded provision (benefit) for income taxes is as follows:

                                                                Year Ended December 31,

	2005			%			2004			%			2003			%
Tax at U.S. statutory rate	$	(5,246,000	)		35.0		$	(3,925,000	)		35.0		$	(5,636,000	)		35.0
State tax (benefit), net of federal tax effect		(584,000	)		3.9			(647,000	)		5.8			(942,000	)		5.8
Research and experimentation tax credit		(58,000	)		0.4			(130,000	)		1.2			(193,000	)		1.2
Interest expense		681,000			(4.5	)		655,000			(6.1	)		—			—
Other		13,308			(0.1	)		(4,726	)		—			94,000			(0.5	)
Valuation allowance		4,807,000			(32.1	)		3,641,000			(32.2	)		6,455,520			(40.1	)
Provision (benefit) for income taxes	$	(386,692	)		2.6		$	(410,726	)		3.7		$	(221,480	)		1.4

Note 5 — Property And Equipment

Property and equipment consist of the following at December 31:

	2005			2004
Machinery and equipment	$	1,329,655		$	1,329,655
Furniture and fixtures		402,125			402,125
Leasehold improvements		1,290,078			1,290,078
		3,021,858			3,021,858
Accumulated depreciation		(2,571,720	)		(2,358,282	)
Property and equipment, net	$	450,138		$	663,576

13

MILLENNIUM CELL INC.

(a development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 

The Company recorded depreciation expense of $213,438, $443,523 and $611,062 for the fiscal years ended December 31, 2005, 2004 and 2003, respectively.

In the second quarter of 2003, the Company entered into a three-year capital lease for approximately $86,000 to purchase software. The software is classified as machinery and equipment and the amortization of the leased assets are included in depreciation expense in the accompanying financial statements. The lease term is three years and contains a bargain purchase option at the end of the lease.

Note 6 — Patents and Licenses

Patent and license costs consist of the following at December 31:

	2005			2004
Patent and license costs	$	1,010,496		$	816,211
Accumulated amortization		(355,620	)		(277,409	)
Patents and licenses, net	$	654,876		$	538,802

The Company recorded amortization expense of $78,211, $72,649 and $70,296 for the fiscal years ended December 31, 2005, 2004 and 2003, respectively. Amortization of patents and licenses is estimated to be approximately $78,000 per year over the next five years and $265,000 thereafter.

Note 7 — Convertible Debentures

On November 8, 2002, the Company issued to the Ballard Power Systems Inc. (“Ballard”) a $2.4 million secured convertible debenture with a maturity date of November 8, 2005. On September 30, 2005, Ballard sold its debenture in equal amounts to three accredited institutional investors (the “Investors”) in a private transaction. In connection with such transfer, the Company issued an $800,000 secured convertible debenture, in substance identical to the Ballard debenture, to each of the Investors. On November 8, 2005, the Company issued an amended and restated convertible debenture (each, a “New Debenture”) to each of the Investors as consideration for the Investors’ agreement to surrender their original debentures and cancel the standby letters of credit issued by Wachovia Bank, National Association, that secured the original debentures, thus enabling the Company to use the formerly restricted cash for the Company’s operations. The principal changes to the term of the debentures consisted of the reduction of the initial conversion price from $4.25 to $2.25 per share, an extension of the maturity date to September 30, 2007, and the provision for 6% quarterly interest payments to the holders. The Company relied on the exemption from registration under Section 3(a)(9) of the Securities Act in connection with the issuance of the New Debentures. No gain or loss was required to be recognized by the Company upon the exchange. In accordance with EITF 00-27 (“Application of Issue No. 98-5 to Certain Convertible Instruments”) and EITF 98-5 (“Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”), the Company will be required to record a Beneficial Conversion Feature (“BCF”) interest charge if the Company elects to convert debentures early at a discount.

Note 8 — Grant Obligation

Between January 1999 and April 2000, the Company received an aggregate of $227,522 from a recoverable grant award from the State of New Jersey Commission on Science and Technology. The funds were used to partially fund costs directly related to development of the Company’s technology. The recoverable grant is required to be repaid when the Company generates net sales in a fiscal year. The repayment obligation, which began in June 2001, escalates from 1% to 5% of net sales over a ten-year period. The Company is obligated to repay the unpaid amount of the original grant at the end of the ten-year period. As of December 31, 2005, the Company has repaid approximately $21,000 and an additional $49,611 was paid in the first quarter of 2006.

14

 

MILLENNIUM CELL INC.

(a development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 9 — Commitments And Contingencies

In April 2001, the Company amended its main operating lease to provide for additional space for the Company's principal operating offices and laboratories. The amended lease will expire in 2008 and will contain options to renew for an additional eight years and will require the Company to pay its allocated share of taxes and operating cost in addition to the annual base rent payment. Future minimum annual lease commitments excluding estimated allocated taxes and maintenance under the amended operating leases are as follows:

2006		484,310
2007		484,310
2008		443,950
Total	$	1,412,570

Rent expense under the operating lease was approximately $649,956, $640,523 and $546,710 for the years ended December 31, 2005, 2004, and 2003, 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.

In 2005, the Company began leasing 5,000 square feet to an unrelated third party. The lease is a one-year agreement, with an option for a six month extension. The lessee agreed to pay the Company a fixed monthly rent of $9,275 per month.

From time to time, the Company is involved in litigation relating to claims arising in the normal course of business. The Company does not believe that any such litigation would have a material adverse effect on the Company’s results of operations or financial condition.

Note 10 — Rabbi Trust

In 2003, the Company established a deferred compensation arrangement whereby a portion of certain Board of Directors fees could be withheld and placed in a Rabbi Trust at their option. The Company adopted the provisions of Emerging Issues Task Force (EITF) 97-14 "Accounting for Deferred Compensation Arrangement Where Amounts Are Earned and Held in a Rabbi Trust and Invested" which requires the Company to consolidate into its financial statements the net assets of the trust. The deferred compensation obligation has been classified as a current liability. The fair value of the Rabbi Trust was $101,050 and is payable in cash or the Company’s common stock upon the holders’ request.

Note 11 — Private Placement Transactions

Private Placement Transactions

During 2002, 2003 and 2004, we entered into a series of private placement financing transactions with three different institutional and accredited investors pursuant to the terms of separate securities purchase agreements among the Company and the purchasers. The private placements were exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) of such Act. The placements collectively raised $26.0 million dollars through the sale of $4.0 million in common stock and the issuance of $22.0 million in convertible debentures. As of December 31, 2005, all $22.0 million of debentures had been converted into 11,931,537 shares of common stock. Due to these conversions, the Company incurred BCF interest charges for the years ended December 31, 2005, 2004 and 2003 of $168,000, $497,757 and $1,356,825, respectively.

Redeemable Series C Preferred Stock

On April 25, 2005, the Company consummated a private placement financing transaction with seven institutional and accredited investors who paid $10 million for 10,000 shares of our redeemable Series C Preferred Stock (“Series C”) (which shares were subsequently exchanged for a like number of shares of redeemable Series C2 Preferred Stock in an exchange offer conducted by the Company). Each Series C share is convertible into 500 hundred shares of our common stock, at any time, at an initial conversion price equal to $2 per share subject to adjustment based upon customary anti-dilution provisions, or lower based upon the market price of our common stock during the ten trading days preceding conversion. The shares of Series C bear a 7% cumulative dividend payable quarterly in shares of common stock or cash, at the Company’s option and are junior to the Series A and Series B preferred stock in liquidation preference. The Series C is subject to mandatory redemption by the Company three years after issuance and can be settled in cash or with the Company’s common stock. As a result, the Series C is recorded as a liability in accordance with FAS 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”). Additionally, the Company issued to the investors three-year warrants to purchase an aggregate of 1.25 million shares of the Company’s common stock at an exercise price equal to $2 per share, subject to adjustment based on customary antidilution protections. The warrants were valued at $1,021,928 at the date of issuance and were recorded as a discount to debt and as additional paid-in-capital on the balance sheet and is amortized as interest expense throughout the term of the Series C or as they are converted, whichever comes first.

15

 

MILLENNIUM CELL INC.

(a development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Under the purchase agreement, the Company is required to restrict funds for future dividends to be paid to Series C holders. As a result, these funds, which amounted to approximately $1,800,000 at issuance, were classified as restricted cash on the balance sheet. As of December 31, 2005, the Company issued 54,117 shares valued at $109,128 in satisfaction of the quarterly dividend payments with respect to Series C. Total dividends of $369,753, which include dividends paid in cash and common stock were recorded as interest expense since the Series C was recorded as a liability as of December 31, 2005. According to the Series C purchase agreement, as dividends are issued or paid, and conversions are executed, the restricted cash is released ratably to our non-restricted cash accounts. As of December 31, 2005, approximately $4.5 million of the Series C have been converted into 2,323,743 shares of the Company’s common stock and the Company has transferred $796,286 from the restricted cash account for the conversions that were executed.

Series A Preferred Stock

On April 25, 2005, the Company consummated the first closing under a joint development arrangement with The Dow Chemical Company (“Dow”). In connection with the closing, we issued 155,724 shares of Series A Preferred Stock to Dow (which shares were subsequently exchanged for a like number of shares of Series A2 Preferred Stock in an exchange offer conducted by the Company), each share of which is convertible into ten shares of our common stock. As a result of the Series A issuance in exchange for services rendered by Dow in conjunction with the joint development arrangement, we recorded a non-cash charge of $2,413,722 as product development expense based on the market value of the underlying common stock as of April 25, 2005. The Series A has substantially the same rights of our common stock, therefore the Series A was valued based on the close of our common stock on April 25, 2005.

The purpose of the joint development arrangement is for the two companies to jointly develop portable power solutions based on our Hydrogen on Demand® energy systems coupled with a fuel cell. The joint development arrangement has a three year term and each party may terminate the joint development arrangement under certain conditions. The joint development arrangement contemplates a series of four milestones designed to culminate in a commercially available product. The milestones are focused on military and/or consumer electronics applications. Achievement of milestones, as defined in the joint development arrangement, in either military or consumer electronics applications will trigger equity transactions at Dow’s option to purchase an additional $1.25 million of the Company’s preferred stock based on the market value of the common stock as defined in the joint development arrangement.

Upon the successful completion of each of the four milestones, Dow has a right, but not an obligation, to purchase a number of shares of the Company’s Series B Preferred Stock which is convertible into a number of shares of the Company’s common stock that could be purchased for $1,250,000 (based upon a purchase price equal to the volume weighted average price for the 30-trading day period prior to the date of issuance). If Dow purchases shares of the Company’s Series B Preferred Stock, Dow will also receive warrants to purchase a number of shares of the Company’s common stock that equals 25% of the number of shares of common stock issuable upon conversion of the Series B Preferred Stock. If Dow purchases shares of the Company’s Series B Preferred Stock in such instances, the Company will issue to Dow additional shares of Series A Preferred Stock such that Dow will own a certain percentage of the Company’s capital stock as of the date of issuance as provided in the Dow Stock Purchase Agreement. If Dow elects not to purchase shares of the Company’s Series B Preferred Stock upon completion of any milestone, the Company will issue to Dow a lesser number of additional shares of Series A Preferred Stock.

16

MILLENNIUM CELL INC.

(a development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 12 — Stock Options and Employee Benefit Plans

2000 Stock Option Plan

In July 2000, the Company adopted the Amended and Restated 2000 Stock Option Plan and reserved 8,500,000 shares of common stock, which includes shares that are allotted under the 401(k) plan. The plan provides for the granting of the following types of awards: stock options, stock warrants, stock appreciation rights, restricted stock awards, performance unit awards and stock bonus awards. Options and warrants issued under this plan have a life of ten years and generally vest ratably over three years. The specific terms and conditions of awards granted under the plan are specified in a written agreement between the Company and the participant.

The following table summarizes option activity under the Plan:

				Weighted
				Average
	Number Of			Exercise Price
	Options			Per Share
Balance at December 31, 2002		4,345,829		$	5.06
Granted at fair value		1,122,840			2.30
Forfeited or terminated		(996,093	)		7.46
Exercised		(50,000	)		2.90
Balance at December 31, 2003		4,422,576		$	3.84
Granted at fair value		642,038			2.33
Forfeited or terminated		(931,891	)		3.61
Exercised		(115,532	)		2.98
Balance at December 31, 2004		4,017,191		$	3.79
Granted at fair value		632,800			2.83
Forfeited or terminated		(252,454	)		2.73
Exercised		(120,288	)		2.40
Balance at December 31, 2005		4,277,249		$	3.50

The following is additional information relating to options granted and outstanding under the plan as of December 31, 2005:

					Remaining
			Weighted		Weighted				Weighted
			Average		Average				Average
Exercise Price Range	Options Outstanding		Exercise Price		Life (Years)		Options Exercisable		Exercise Price
$0.01 - $ 2.00		496,347	$	0.67		9.89		22,534	$	1.95
$2.01 - $ 2.90		2,969,170		2.70		5.10		2,626,842		2.75
$2.91 - $ 9.58		381,536		5.60		6.14		381,536		5.60
$10.00 - $19.63		430,196		10.39		6.00		430,196		10.39
		4,277,249	$	3.50		6.46		3,461,108	$	4.01

The stock option table above excludes the warrants to purchase 1,250,000 shares of the Company’s common stock issued in connection with the Series C, as well as warrants to purchase 816,015 shares of the Company’s common stock that begin to expire in 2010.

The Company also incurred non-cash charges of $0.1 million, $0.2 million and $0.5 million in 2005, 2004 and 2003, respectively, related to the fair value of warrants issued to affiliates and a board member. The accounting methodology for these warrants requires a re-valuing of the warrants at each period ending market price using a Black-Scholes pricing model. Due to the variable nature of this accounting methodology, it is difficult to predict the amount of additional non-cash charges the Company will incur related to these warrants during future periods.

17

MILLENNIUM CELL INC.

(a development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Savings Plan

In December 2000, the Company enacted a savings plan that complies with Section 401(k) of the Internal Revenue Code. The plan allows employees to contribute a portion of their compensation on a pre-tax and/or after-tax basis in accordance with specified guidelines. The Company matches in company stock in July and December of each fiscal year, on a one-to-one basis the vested portion of employee contributions up to 6% of eligible compensation. Employee contributions to this plan began in January 2001. Employer matching stock contributions vest ratably over three years. The Company funded the vested matching contributions to the plan with 110,952, 60,211 and 84,672 shares of common stock with an issued market value of $164,031, $103,772 and $143,224 in fiscal 2005, 2004 and 2003, respectively.

Note 13 — Related Party Transactions

In October 2004, the Company’s Board of Directors approved a financial advisory services agreement with Andersen, pursuant to which Andersen is to act as the Company’s Senior Financial Advisor. As Senior Financial Advisor, Andersen is required to support the Company’s efforts to raise capital through transactions that contemplate issuances of debt, equity and/or convertible securities by Millennium to strategic entities and financial investors. In consideration therefore, the Company paid Andersen a non-refundable retainer in the amount of $62,500 in 2004. Further, upon the execution and delivery of definitive agreements with respect to a strategic transaction in 2005, Andersen was entitled to and received fee equal to $62,500 payable which was paid in shares of restricted Common Stock.

In 2005 and 2004, respectively, the Company entered into an Employment Agreement and a Restricted Stock Grant Agreement with Mr. H. David Ramm, a member of the Board of Directors, and the Chief Executive Officer, and an Agreement with DKRW Energy LLC (“DKRW”), a limited liability company of which Mr. Ramm is a member. The Company made a grant to Mr. Ramm of 50,000 and 100,000 shares of restricted stock in 2005 and 2004, respectively in accordance with the restricted stock agreement. Under the DKRW agreement, the Company agreed to pay a monthly retainer of $12,500 and $25,000 to DKRW in connection with Mr. Ramm’s serving as the Chief Executive Officer in 2005 and 2004, respectively. The agreement will automatically renew on a month-to-month basis unless terminated in writing by either party.

In December 2005, Zoltan Merszei, a member of the Company’s Board of Directors, was awarded 100,000 options to purchase the Company’s common stock with an exercise price of $1.48 per share.  These options will vest ratably over three years.  In December 2005, the Company recorded a non-cash charge of $126,258 based on the fair value of the options.  The options were awarded by the Board of Directors in recognition of Mr. Merszei’s contributions towards the negotiation of the joint development arrangement with Dow, which was executed in April 2005 (see note 11). Mr. Merszei is a former member of the Board of Directors of Dow and has a family member who is currently employed there as well.

Note 14 — Subsequent Events (Unaudited)

Gecko

On February 15, 2006, the Company entered into a 3-year joint development program with Gecko Energy Technologies, Inc. (“Gecko”) to collaborate on the development and commercialization of portable fuel cell systems for use in military, medical, industrial and consumer electronics applications. These products will pair the company’s patented Hydrogen on Demand® technology with Gecko’s thin planar Proton Exchange Membrane (PEM) fuel cells to create a hydrogen battery that is lighter, smaller and less expensive than traditional batteries for a variety of applications. Gecko’s efforts are focused on the development of an easy-to-manufacture fuel cell that provides portable device makers with design flexibility by allowing the thin power source to be part of the exterior surface of the device itself.

In addition to the joint development program, the Company has acquired approximately 23% of the outstanding common stock of Gecko in exchange for $0.5 million in cash and a one-year, commitment of services and facilities valued at $0.5 million. Later in the year, the Company will increase its position to a total of 48% of Gecko’s outstanding common stock by investing another $1.0 million in cash or the Company’s common stock. As part of the transaction, the Company received the right to acquire, at its sole option, up to 80% of Gecko over the remaining 2 years of the agreement at fair value of the common stock on the date of the acquisition.

New Debenture Conversion

On February 24, 2006, the Company converted an aggregate $500,000 of the New Debentures into 331,125 shares of common stock. The Company recorded a beneficial conversion feature charge of $35,000 in conjunction with the conversion.

18

MILLENNIUM CELL INC.

(a development stage enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 15 — Quarterly Information (Unaudited) (1)

	Fiscal Year Quarters
	First			Second			Third			Fourth			Total
	(in 000's, except per share amounts)
Fiscal Year ended December 31, 2005
Revenue	$	80		$	48		$	140		$	149		$	417
Cost of revenue		80			48			101			153			382
Gross margin		—			—			39			(4	)		35
Product development & marketing		1,081			799			867			834			3,581
General and administrative		869			1,858			1,438			1,232			5,397
Non-cash charges		505			2,525			102			388			3,520
Depreciation and amortization		78			64			75			75			292
Research and development		218			207			99			85			609
Total operating expenses		2,751			5,453			2,581			2,614			13,399
Loss from operations		(2,751	)		(5,453	)		(2,542	)		(2,618	)		(13,364	)
Interest expense, net		(367	)		(331	)		(817	)		(108	)		(1,623	)
Equity in losses of affiliates		—			—			—			—			—
Loss before income taxes		(3,118	)		(5,784	)		(3,359	)		(2,726	)		(14,987	)
Benefit from income taxes		—			—			—			387			387
Net loss		(3,118	)		(5,784	)		(3,359	)		(2,339	)		(14,600	)
Loss per share — basic and diluted	$	(.08	)	$	(.14	)	$	(.08	)	$	(.05	)	$	(.34	)
Weighted — average number of shares outstanding		40,174			42,612			44,360			46,410			43,405
	(in 000's, except per share amounts)
		First			Second			Third			Fourth			Total
Fiscal Year ended December 31, 2004
Revenue	$	25		$	90		$	10		$	73		$	198
Cost of revenue		25			90			10			73			198
Gross margin		—			—			—			—			—
Product development & marketing		1,003			773			904			717			3,396
General and administrative		1,611			630			783			1,238			4,262
Non-cash charges		322			270			126			78			796
Depreciation and amortization		142			150			128			95			516
Research and development		(10	)		101			28			356			475
Total operating expenses		3,068			1,923			1,969			2,484			9,445
Loss from operations		(3,068	)		(1,923	)		(1,969	)		(2,484	)		(9,445	)
Interest expense, net		(314	)		(987	)		(365	)		(103	)		(1,770	)
Equity in losses of affiliates		—			—			—			—			—
Loss before income taxes		(3,382	)		(2,911	)		(2,335	)		(2,587	)		(11,215	)
Benefit from income taxes		—			—			—			411			411
Net loss		(3,382	)		(2,911	)		(2,335	)		(2,176	)		(10,804	)
Loss per share — basic and diluted	$	(.10	)	$	(.08	)	$	(.06	)	$	(.06	)	$	(.29	)
Weighted — average number of shares outstanding		35,399			36,986			37,701			38,804			37,226

(1)   Some columns and rows may not foot or cross-foot due to rounding.

19

Item 15. Exhibits and Financial Statement Schedules.

(a) Documents filed as part of this report

1. Financial Statements

The financial statements and notes are listed in the Index to Financial Statements on page F-1 of this report.

2. Financial Statement Schedules

None of the schedules for which provision is made in the applicable accounting regulations under the Securities Exchange Act of 1934, as amended, are required.

3. Exhibits

The following documents are filed as Exhibits to this Annual Report on Form 10-K or incorporated by reference herein. Any document incorporated by reference is identified by a parenthetical referencing the SEC filing which included such document.

Exhibit No.		Description
2.1†	—	Certificate of Conversion of Millennium Cell LLC to Millennium Cell Inc. (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 333-37896)
3.1†	—	Certificate of Incorporation of Millennium Cell Inc. (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 333-37896)
3.2†	—	By-Laws of Millennium Cell Inc. (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 333-37896)
3.3†	—	Certificate of Amendment to Certificate of Incorporation of Millennium Cell Inc. (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 333-37896)
3.4†	—	Certificate Eliminating Reference to the Series A Convertible Preferred Stock from the Certificate of Incorporation of Millennium Cell Inc. (incorporated by reference to Exhibit 3.4 to the Quarterly Report on Form 10-Q filed on May 13, 2002)
3.5†	—	Certificate of Amendment of Certificate of Incorporation of Millennium Cell Inc. (incorporated by reference to Exhibit 3.5 to the Quarterly Report on Form 10-Q filed on May 13, 2002)
3.6†	—	Designations of Preferences, Limitations, and Relative Rights of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on April 26, 2005 (first filing))
3.7†	—	Designations of Preferences, Limitations, and Relative Rights of Series B Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on April 26, 2005 (first filing))
3.8†	—	Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on April 26, 2005 (second filing))
3.9†	—	Designations of Preferences, Limitations, and Relative Rights of Series A2 Convertible Preferred Stock (incorporated by reference to Exhibit 3.9 to Registration Statement No. 333-126418 on Form S-3 filed on July 6, 2005)
3.10†	—	Certificate of Amendment to the Designations of Preferences, Limitations, and Relative Rights of Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.10 to Registration Statement No. 333-126418 on Form S-3 filed on July 6, 2005)
3.11†	—	Certificate of Designations, Preferences and Rights of Series C2 Convertible Preferred Stock (incorporated by reference to Exhibit 3.11 to Registration Statement No. 333-126418 on Form S-3 filed on July 6, 2005)
3.12†	—	Certificate Eliminating Reference to the Series A Convertible Preferred Stock from the Certificate of Incorporation of Millennium Cell Inc. (incorporated by reference to Exhibit 3.12 to the Annual Report on Form 10-K filed on March 29, 2006)
3.13†	—	Certificate Eliminating Reference to the Series C Convertible Preferred Stock from the Certificate of Incorporation of Millennium Cell Inc. (incorporated by reference to Exhibit 3.13 to the Annual Report on Form 10-K filed on March 29, 2006)
4.1†	—	Specimen stock certificate representing the Registrant's Common Stock (incorporated by reference to the Registration Statement filed on Form S-1, Registration No. 333-37896)
4.2†	—	First Warrant to Purchase 224,014 shares of Common stock dated June 19, 2002 (incorporated by reference to Exhibit 4.5 to the Current Report on Form 8-K filed on June 26, 2002)
4.3†	—	First Warrant to Purchase 44,803 shares of Common Stock dated June 19, 2002 (incorporated by reference to Exhibit 4.6 to the Current Report on Form 8-K filed on June 26, 2002)
4.4†	—	Closing Warrant No. 1 to purchase 73,599 shares of Common Stock dated October 31, 2002 (incorporated by reference to Exhibit 4.7.1 to the Annual Report on Form 10-K filed on March 17, 2003)
4.5†	—	Closing Warrant No. 2 to purchase 73,599 shares of Common Stock dated October 31, 2002 (incorporated by reference to Exhibit 4.7.2 to the Annual Report on Form 10-K filed on March 17, 2003)
4.6†	—	First Warrant to purchase 242,678 shares of Common Stock dated December 26, 2002 (incorporated by reference to Exhibit 4.8 to the Annual Report on Form 10-K filed on March 17, 2003)
4.7†	—	Form of Warrant issuable to The Dow Chemical Company (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K filed on February 28, 2005)
4.8†	—	Form of Warrant to Purchase Common Stock dated April 25, 2005 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on April 26, 2005 (second filing))
4.9†	—	Form of Convertible Debenture Due on September 30, 2007 (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on November 14, 2005)
4.10†	—	Warrant to purchase 195,000 of Common Stock dated April 25, 2005 (incorporated by reference to Exhibit 4.10 to the Annual Report on Form 10-K filed on March 29, 2006)
10.1†	—	Agreement for Recoverable Grant Award, dated as of April 1999, by and between State of New Jersey Commission on Science and Technology and Millennium Cell LLC (incorporated by reference to Exhibit the Registration Statement filed on Form S-1, Registration No. 333-37896)
10.2†	—	Amended and Restated Millennium Cell Inc. 2000 Stock Option Plan, Amended effective December 1, 2001 (incorporated by reference to Exhibit 10.6 to the Annual Report on Form 10-K filed on March 25, 2002)
10.3†	—	Securities Purchase Agreement dated as of June 19, 2002 between the Company and the Purchasers (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K filed on June 26, 2002)
10.4†	—	Registration Rights Agreement dated as of June 19, 2002 between the Company and the Purchasers (incorporated by reference to Exhibit 4.4 to the Current Report on Form 8-K filed on June 26, 2002)
10.5†	—	Securities Purchase Agreement dated as of October 31, 2002 among the Company and the Purchasers named therein (incorporated by reference to Exhibit 10.16 to Registration Statement No. 333-101061 on Form S-3 filed on November 7, 2002)
10.6†	—	Registration Rights Agreement dated as of October 31, 2002 among the Company and the Purchasers named therein (incorporated by reference to Exhibit 10.17 to Registration Statement No. 333-101061 on Form S-3 filed on November 7, 2002)
10.7†	—	Securities Purchase Agreement dated as of November 8, 2002 Company and Ballard Power Systems, Inc. (incorporated by reference to Exhibit 10.19 to the Quarterly Report on Form 10-Q filed on November 14, 2002)
10.8†	—	Registration Rights Agreement dated as of November 8, 2002 between the Company and Ballard Power Systems, Inc. (incorporated by reference to Exhibit 10.20 to the Quarterly Report on Form 10-Q filed on November 14, 2002)
10.9†	—	Change-in-Control Agreement between the Company and Adam Briggs dated as of July 28, 2004 and Schedule of Other Change-in-Control Agreements. (incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K filed on March 29, 2006)
10.10†	—	Securities Purchase Agreement dated as of January 16, 2004 between the Company and the purchaser named therein. (incorporated by reference to Exhibit 10.24 to Registration Statement No. 333-112519 on Form S-3 filed on February 5, 2004)
10.11†	—	Registration Rights Agreement dated as of January 16, 2004 between the Company and the purchaser named therein. (incorporated by reference to Exhibit 10.25 to Registration Statement No. 333-112519 on Form S-3 filed on February 5, 2004)
10.12†	—	Employment Agreement, dated as of July 20, 2004, by and between Millennium Cell Inc. and H. David Ramm. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on July 28, 2004)
10.13†	—	Restricted Stock Grant Agreement, dated as of July 20, 2004, by and between Millennium Cell Inc. and H. David Ramm. (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on July 28, 2004)
10.14†	—	Agreement, dated as of July 20, 2004, by and between Millennium Cell Inc. and DKRW Energy LLC. (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on July 28, 2004)
10.15†	—	Employment Agreement, dated as of August 12, 2005, by and between Millennium Cell Inc. and H. David Ramm. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on August 12, 2005)
10.16†	—	Restricted Stock Grant Agreement, dated as of August 12, 2005, by and between Millennium Cell Inc. and H. David Ramm. (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on August 12, 2005)
10.17†	—	Agreement, dated as of August 12, 2005, by and between Millennium Cell Inc. and DKRW Energy LLC. (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on August 12, 2005)
10.18†	—	Stock Purchase Agreement, dated February 28, 2005, by and between Millennium Cell Inc. and The Dow Chemical Company (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on February 28, 2005)
10.19†	—	Amendment No. 1, dated as April 25, 2005, to Stock Purchase Agreement by and between Millennium Cell Inc. and The Dow Chemical Company (incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K filed on April 26, 2005 (first filing))
10.20†	—	Registration Rights Agreement, dated as April 25, 2005, by and between Millennium Cell Inc. and The Dow Chemical Company (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed on April 26, 2005 (first filing))
10.21†	—	Investor Rights Agreement, dated April 25, 2005, by and between Millennium Cell Inc. and The Dow Chemical Company (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed on February 28, 2005)
10.22†	—	Joint Development Agreement, dated April 25, 2005, by and between Millennium Cell Inc. and The Dow Chemical Company (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on February 28, 2005)
10.23†	—	Cross Licensing and Intellectual Property Agreement, dated April 25, 2005, by and between Millennium Cell Inc. and The Dow Chemical Company (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on February 28, 2005)
10.24†	—	Standstill Agreement, dated April 25, 2005, by and between Millennium Cell Inc. and The Dow Chemical Company (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed on February 28, 2005)
10.25†	—	Patent Assignment Agreement and License, dated April 25, 2005, by and between Millennium Cell Inc. and The Dow Chemical Company (incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K filed on February 28, 2005)
10.26†	—	Securities Purchase Agreement, dated April 20, 2005, by and among Millennium Cell Inc. and the investors listed on the Schedule of Buyers attached thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on April 26, 2005 (second filing))
10.27†	—	Registration Rights Agreement, dated April 20, 2005, by and among Millennium Cell Inc. and the investors listed on the Schedule of Buyers attached thereto (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on April 26, 2005 (second filing))
10.28†	—	Form of Voting Agreement, dated April 25, 2005, by and among Millennium Cell Inc. and the stockholders name therein (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed on April 26, 2005 (second filing))
10.29†	—	Security Agreement, dated April 25, 2005, by Millennium Cell Inc. in favor of Portside Growth & Opportunity Fund, as collateral agent for the Buyers (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed on April 26, 2005 (second filing))
10.30†	—	Account Control Agreement, dated April 25, 2005, by and among Millennium Cell Inc., Portside Growth & Opportunity Fund, as agent for the Buyers, and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed on April 26, 2005 (second filing))
23.1*	—	Consent of Independent Registered Public Accounting Firm
31.1*	—	Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2*	—	Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1*	—	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

† Previously filed.

* Filed herewith.

20

The Company will furnish, without charge, to a security holder upon request a copy of the proxy statement, portions of which are incorporated herein by reference thereto. The Company will furnish any other exhibit at cost.

(b) Reports on Form 8-K

  The following reports were filed under Form 8-K during the last quarter of the period covered by this report:

Date Filed or Furnished	Item No.	Description
October 27, 2005	Item 2.02	Millennium Cell Inc. issued a press release to report its financial results for the quarter ending, September 30, 2005.
November 15, 2005	Item 3.02	Millennium Cell Inc. issued an amended and restated convertible debenture to each of three institutional investors (the “Investors”) as consideration for the Investors’ agreement (i) to surrender their secured convertible debentures, maturing on November 8, 2005, that they had purchased from an unaffiliated third party on September 30, 2005 (the “Original Debentures”) and (ii) to cancel the standby bank letters of credit that secured the Original Debentures.

21

 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.

 0; By: /s/ H. DAVID RAMM

  0; H. David Ramm

   0; Chief Executive Officer

Date: April 13, 2006

22