Millennium Cell (MCELQ) 10-Q 2006 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2006

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

000-31083

(Commission File Number)

MILLENNIUM CELL INC.

(Exact Name of Registrant as Specified in Its Charter)

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

One Industrial Way West,

Eatontown, New Jersey 07724

(Address of Principal Executive Offices) (Zip Code)

(Registrant's telephone number, including area code) (732) 542-4000

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

Indicate by check mark 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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 47,610,936 shares of Common Stock, par value $.001, were outstanding on May 12, 2006.

MILLENNIUM CELL INC.

(a development stage enterprise)

Index

PART I - FINANCIAL INFORMATION

		Page
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets - March 31, 2006 and December 31, 2005	1
	Consolidated Statements of Operations - Three months ended
	March 31, 2006 and 2005 and cumulative amounts from inception	2
	Consolidated Statements of Cash Flows - Three months ended March 31, 2006 and 2005	3
	and cumulative amounts from inception
	Consolidated Statements of Stockholders’ Equity - Three months ended March 31, 2006	4
	Notes to Consolidated Financial Statements - March 31, 2006	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	18
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 5.	Other Information	19
Item 6.	Exhibits	20

Unless the context otherwise requires, all references to “we,” “us,” “our,” and the “Company” include Millennium Cell Inc., and its wholly-owned subsidiary, MCE Ventures LLC.

Unless the context otherwise requires, all references herein to our Series A Convertible Preferred Stock and Series C Convertible Preferred Stock are references to our Series A2 Convertible Preferred Stock and Series C2 Convertible Preferred Stock, respectively, to reflect the exchange offer we completed on June 30, 2005 with respect to such securities. For more information regarding the exchange offers, please refer to our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 17, 2005.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995). These forward-looking statements reflect our current view about future events and financial performance and are subject to risks and uncertainties. Statements contained herein that are not statements of historical fact may be deemed to be forward-looking information. When we use words such as “plan,” “believe,” “expect,” “anticipate,” “on target” and “intend” or similar expressions, we are making forward-looking statements. Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from our expectations, and we expressly do not undertake any duty to update forward-looking statements or to publicly announce revisions to any of the forward-looking statements, whether as a result of new information, future events or otherwise. These factors include, but are not limited to, the following: (i) the cost and timing of development and market acceptance of, and the availability of components and raw materials required by, a hydrogen battery technology and hydrogen delivery system, (ii) the cost and commercial availability of the quantities of raw materials required by the hydrogen fuel storage and delivery systems, (iii) competition from current, improving and alternate power technologies, (iv) our ability to raise capital at the times, in the amounts and at costs and terms that are acceptable to fund the development and commercialization of our hydrogen battery technology and hydrogen delivery system and our business plan, (v) our ability to protect our intellectual property, (vi) our ability to achieve budgeted revenue and expense amounts, (vii) our ability to generate revenues from the sale or license of, or provision of services related to, our technology, (viii) our ability to enter into agreements with collaborators and strategic partners and the failure of our collaborators and strategic partners to perform under their agreements with us, (ix) our ability to generate design, engineering or management services revenue opportunities in the hydrogen generation or fuel cell markets, (x) our ability to secure government funding of our research and development and technology demonstration projects and (xi) other factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005.

PART I - FINANCIAL INFORMATION

Item 1.Financial Statements (Unaudited).

MILLENNIUM CELL INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31,			December 31,
Assets	2006			2005
Current assets:
Cash and cash equivalents	$	9,089,718		$	11,675,877
Restricted cash		362,942			373,868
Accounts receivable - trade		42,256			36,808
Accounts receivable - government		181,711			112,462
Prepaid expenses		105,483			237,867
Deferred financing costs		100,033			102,270
Total current assets		9,882,143			12,539,152
Property and equipment, net		396,276			450,138
Patents and licenses, net		623,314			654,876
Restricted cash		956,153			1,208,191
Investment in unconsolidated subsidiary (Note 7)		896,173			—
Deferred financing costs		108,369			136,360
Security deposits		45,676			45,676
	$	12,908,104		$	15,034,393
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	496,452		$	521,615
Accrued expenses		941,737			893,868
Short-term portion of capital lease obligation		—			6,173
Short-term portion of refundable grant obligation		—			49,611
Deferred compensation		101,050			101,050
Convertible unsecured debentures (Note 5)		1,899,988			2,399,988
Total current liabilities		3,439,227			3,972,305
Redeemable Series C preferred stock, net of discount (Note 5)		4,989,644			5,035,416
Refundable grant obligation		156,329			156,329
Commitments and contingencies
Stockholders' equity:
Series A preferred stock, $.001 par value; 1,694,724 authorized shares, 155,724 issued and outstanding as of March 31, 2006		2,413,722			2,413,722
Series B preferred stock, $.001 par value; 1,539,000 authorized shares, none issued and outstanding as of March 31, 2006.		—			—
Common stock, $.001 par value; authorized 70,000,000 shares and 47,700,936 and 46,454,375 shares issued and outstanding as of March 31, 2006 and December 31, 2005, respectively		47,701			46,454
Additional paid-in capital		100,460,180			99,942,349
Deferred compensation		—			(596,296	)
Deficit accumulated during development stage		(98,598,699	)		(95,935,886	)
Total stockholders' equity		4,322,904			5,870,343
	$	12,908,104		$	15,034,393

See notes to financial statements.

1

MILLENNIUM CELL INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months			Three Months			Cumulative
	Ended			Ended			Amounts
	March 31, 2006			March 31, 2005			From Inception
Revenue	$	69,882		$	79,901		$	1,871,509
Cost of revenue		69,882			79,901			1,750,182
Gross margin		—			—			121,327
Product development and marketing		905,187			1,081,235			24,478,291
General and administrative		1,018,738			868,758			26,631,203
Restructuring expense		—			—			104,982
Non-cash charges (Note 4)		190,586			505,207			28,946,590
Depreciation and amortization		137,187			77,583			3,124,199
Research and development		195,983			217,742			9,392,239
Total operating expenses		2,447,681			2,750,525			92,677,504
Loss from operations		(2,447,681	)		(2,750,525	)		(92,556,177	)
Interest expense, net		161,832			366,675			4,236,124
Equity in losses of unconsolidated subsidiary (Note 7)		53,300			—			909,378
Loss before income taxes		(2,662,813	)		(3,117,200	)		(97,701,679	)
Benefit from income taxes		—			—			1,253,861
Net loss		(2,662,813	)		(3,117,200	)		(96,447,818	)
Preferred stock amortization		—			—			(2,150,881	)
Net loss applicable to common stockholders	$	(2,662,813	)	$	(3,117,200	)	$	(98,598,699	)
Loss per share — basic and diluted	$	(.06	)	$	(.08	)	$	(3.14	)
Weighted — average number of shares outstanding		46,959,687			40,173,960			31,392,137

See notes to financial statements.

2

MILLENNIUM CELL INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months			Three Months			Cumulative
	Ended			Ended			Amounts
	March 31,			March 31,			From
	2006			2005			Inception
Operating activities
Net loss	$	(2,662,813	)	$	(3,117,200	)	$	(96,447,818	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		137,187			77,583			3,124,199
Amortization of discount on unsecured debentures		54,227			183,903			2,633,056
Amortization of deferred financing costs		30,228			66,151			1,424,311
Non-cash interest charges		133,260			65,399			573,171
Beneficial conversion feature		35,000			98,000			2,057,582
Losses on investment in unconsolidated subsidiary (Note 7)		53,300			—			909,378
Non-cash charges		190,586			505,207			28,946,590
Changes in operating assets and liabilities:
Accounts receivable		(74,697	)		161,013			(223,967	)
Prepaid expenses and other assets		132,384			(35,636	)		(151,158	)
Accounts payable and accrued expenses		(249,755	)		(329,019	)		2,041,482
Deferred income		—			—			2,399,988
Net cash used in operating activities		(2,221,093	)		(2,324,599	)		(52,713,186	)
Investing Activities
Purchase of property and equipment		—			—			(2,885,446	)
Patent registration costs		(51,762	)		(33,272	)		(954,329	)
Investment in unconsolidated subsidiary (Note 7)		(520,484	)		—			(1,376,562	)
(Increase)/decrease in restricted cash		262,964			(8,759	)		(1,319,094	)
Net cash used in investing activities		(309,282	)		(42,031	)		(6,535,431	)
Financing activities
Proceeds from sale of common stock		—			1,172,755			39,394,207
Underwriting and other expenses of initial public offering		—			—			(3,669,613	)
Proceeds from issuance of debentures		—			—			21,428,806
Proceeds from redeemable Series C preferred stock		—			—			10,000,000
Deferred financing costs		—			—			(1,281,656	)
Capital lease obligation payments		(6,173	)		(7,687	)		(86,184	)
Proceeds from capital contribution		—			—			500,000
Payment of note payable		—			—			(250,000	)
(Payments)/proceeds from grant, net		(49,611	)		—			156,329
Proceeds from sale of preferred stock		—			—			2,146,446
Net cash (used in)/provided by financing activities		(55,784	)		1,165,068			68,338,335
Net increase (decrease) in cash and cash equivalents		(2,586,159	)		(1,201,562	)		9,089,718
Cash and cash equivalents, beginning of period		11,675,877			8,217,840			—
Cash and cash equivalents, end of period	$	9,089,718		$	7,016,278		$	9,089,718

Supplemental cash flow information

Please see note 6 for more information

3

MILLENNIUM CELL INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

					Additional											Total
	Common Stock				Paid-in			Deferred			Series A		Accumulated			Stockholders'
	Shares		Amount		Capital			Compensation			Preferred		Deficit			Equity
Balance at December 31, 2005		46,454,375	$	46,454	$	99,942,349		$	(596,296	)	$	2,413,722	$	(95,935,886	)	$	5,870,343
Reclassification of unearned stock compensation
adoption of SFAS 123R		—		—		(596,296	)		596,296			—		—			—
Issuance of common stock from conversion of debentures and
Series C Preferred Stock		395,616		396		599,604			—			—		—			600,000
Beneficial conversion feature on private placement transactions		—		—		35,000			—			—		—			35,000
Issuance of stock for interest payments		92,640		93		133,074			—			—		—			133,167
Issuance of common stock for 401(k)		92,905		93		156,528			—			—		—			156,621
Issuance of restricted stock for merit awards		465,400		465		465	)		—			—		—			—
Issuance of restricted stock for consulting		200,000		200		(200	)		—			—		—			—
Stock compensation expense		—		—		190,586			—			—		—			190,586
Net loss		—		—		—			—			—		(2,662,813	)		(2,662,813	)
Balance at March 31, 2006		47,700,936	$	47,701	$	100,460,180		$	—		$	2,413,722	$	(98,598,699	)	$	4,322,904

See notes to financial statements.

4

MILLENNIUM CELL INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1--BASIS OF PRESENTATION

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 company that was formed in 2002 to engage in limited strategic investment activities. All significant inter-company transactions and accounts have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all known adjustments (which consist primarily of normal recurring adjustments) considered necessary for a fair presentation have been included. The interim statements should be read in conjunction with our Annual Report on Form 10-K/A for the year ended December 31, 2005.

NOTE 2--EARNINGS PER SHARE

Basic earnings per share (“EPS”) are 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. All such securities were anti-dilutive for all periods presented.

NOTE 3--STOCK BASED COMPENSATION

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.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R , “Share-Based Payment” (“SFAS 123R”) using the modified prospective transition method and therefore has not restated results for prior periods. Under this transition method, stock-based compensation expense for the first quarter of 2006 included compensation expense for stock-based compensation awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Stock-based compensation expense for all stock-based compensation awards granted after December 31, 2005 will be based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. During the three months ended March 31, 2006, the Company recognized compensation expense based upon the number of stock options and restricted stock awards expected to vest, which was determined based on historical turnover experience of the Company. The Company will review its forfeiture rate at each balance sheet date and revise its compensation expense, if necessary. The Company generally recognizes these compensation costs using the cliff vesting method over the requisite service period of the award, which is generally the vesting term of three years. Certain restricted stock awards are recognized using the graded vesting attribution method over the requisite service period of the restricted stock award.   Prior to the adoption of SFAS 123R, the Company recognized stock-based compensation expense in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").

5

The impact to the consolidated financial statements, as a result of the Company’s adoption of SFAS 123R compared to continued recognition of stock-based compensation under APB 25, was an increase to net loss of $71,284 for the three months ended March 31, 2006. There was no impact on both basic and diluted earnings per share for the three months ended March 31, 2006. The increase to net loss that resulted from the adoption of SFAS 123R reflected the stock-based compensation expense associated with the unvested stock option awards.

Stock-based compensation expense previously recognized in accordance with APB 25 for restricted stock awards, remains essentially unchanged under the provisions of SFAS 123R. Restricted stock awards are issued at the fair value of the stock on the grant date. Prior to the adoption of FAS 123(R), unearned compensation for grants of restricted stock equivalent to the fair value of the shares at the date of grant was recorded as a separate component of shareholders' equity and subsequently amortized to compensation expense over the awards' vesting period. In accordance with FAS 123(R), shareholders' equity is credited commensurate with the recognition of compensation expense. All unamortized unearned compensation at January 1, 2006 was reclassified to additional paid-in capital.

The following table illustrates the effect on net loss and earnings per share for the three months ended March 31, 2005 as if the Company had applied the fair value recognition provisions of SFAS 123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure.":

Net loss attributable to common stockholders — as reported	$	(3,117,200	)
Add: Total stock-based compensation expense included in net loss		505,207
Deduct: Total stock-based compensation expense determined under fair value based method for all stock option awards		(580,899	)
Net loss attributable to common stockholders — Pro forma	$	(3,192,892	)
Net loss per share attributable to common stockholders — As reported	$	(0.08	)
Net loss per share attributable to common stockholders — Pro forma	$	(0.08	)

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 as of March 31, 2005:

Expected dividend yield	—
Expected stock price volatility	.57
Risk-free interest rate	3.48%
Expected option term	5 years

Based upon the above assumptions, the weighted average fair value of stock options granted at market was $1.22 for the first quarter of 2005.

Stock Options

The Company has awarded stock options to certain employees and directors. Stock options awarded to directors vest immediately. Stock options awarded to employees typically vest over three years. The Company did not issue any stock option awards during the three months ended March 31, 2006.

6

Option activity for all outstanding options, vested and nonvested, from January 1, 2006 through March 31, 2006 was as follows:

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (In years)		Aggregate Intrinsic Value
Outstanding at December 31, 2005		3,994,769	$	3.75		6.4		—
Granted		—		—		—		—
Exercised		—		—		—		—
Forfeited and cancelled		—		—		—		—
Outstanding at March 31, 2006		3,994,769		3.75		6.2	$	29,580
Vested and expected to vest at March 31, 2006		3,795,031		3.75		6.2		1,479
Exercisable at March 31, 2006		3,698,740	$	3.75		6.1	$	5,833

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the closing stock price on the last trading day of the first quarter of 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2006. The intrinsic value changes based on the fair market value of the Company’s common stock.

As of March 31, 2006, there was $0.3 million of total unrecognized compensation expense related to stock options which is expected to be recognized over a weighted-average period of 2.8 years.

Restricted Stock Awards

Restricted stock awards generally vest in three to five years, or earlier, upon meeting certain accelerated vesting criteria, as defined. Restricted stock awards are stock-based awards for which the employee or director does not have a vested right to the stock (“nonvested”) until the requisite service period has been rendered or the required financial performance factor has been reached for each pre-determined vesting date. Restricted stock awards are generally subject to forfeiture if the employee is not employed or a director is not a member of the board of directors on the vesting date. Prior to vesting, restricted stock awards have all of the rights of common stock (other than the right to sell or otherwise transfer). The fair value of restricted stock awards is based on the market price of the Company’s common stock on the grant date of the award.

In March 2006 and 2005, the Company issued 465,400 and 474,800 shares of restricted stock to employees with a fair market value of $763,256 and $1,044,560, respectively. These shares will vest in five years, or earlier, upon meeting certain accelerated vesting criteria, as defined. During the three months ended March 31, 2006, the Company recorded $69,500 in non-cash charges for restricted stock issued to employees during the three months ended March 31, 2006 and 2005. The Company will recognize additional non-cash charges of $208,500 in the remainder of 2006 and an additional $986,646 will be recorded through 2010, or earlier if other accelerated vesting features are met.

The Company issued 200,000 shares of restricted stock awards to Ronald Kelley and Steven Pratt, the principal shareholders of Gecko Energy Technologies, Inc. (See Note 7), during the three months ended March 31, 2006. The issuance is in exchange for two consulting agreements with the Company. 50,000 shares of these restricted stock awards had a fair value of $72,500 at the date of grant and vest over a six-month period and the Company recorded a non-cash charge of $36,250 with respect to the vesting of these awards during the three months ended March 31, 2006. 150,000 shares of these restricted stock awards had a fair value of $232,500 at the date of grant and vest on a graded basis over three years and the Company recorded a non-cash charge of $13,552 with respect to the vesting of such award during the three months ended March 31, 2006. As prescribed by EITF No. 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, restricted stock awards issued to non-employees should be re-measured to fair value at each reporting date until the award vests. The final measurement date is on the date the award vests, rather than the grant-date measurement specified for most employee awards classified as equity. As a result, the Company recorded for both grants non-cash charges for the vested portion of the restricted stock awards to date and marked to market the unvested portion the remaining unvested restricted stock awards.

7

Changes in nonvested restricted stock awards during the three months ended March 31, 2006 were as follows:

	Number of Shares			Weighted- Average Grant Date Fair Value
Nonvested at December 31, 2005		332,480		$	2.25
Granted		615,400			1.62
Vested		(33,743	)		1.48
Forfeited		—			—
Nonvested at March 31, 2006		914,137		$	1.85

As of March 31, 2006, there was $1.5 million unrecognized stock-based compensation expense related to nonvested restricted stock awards. This expense is expected to be recognized over a period of up to five years.

NOTE 4--NON-CASH CHARGES

During the three months ended March 31, 2006 and 2005, the Company recorded non-cash charges for stock-based awards. Please see Note 3 for more information on these awards.

The following is a breakdown by function of non-cash charges for the three months ended March 31:

	2006		2005
Product development and marketing	$	15,779	$	113,195
General and administrative		169,170		351,585
Research and development		5,637		40,427
Total	$	190,586	$	505,207

NOTE 5--PRIVATE PLACEMENTS

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. 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 is required to record a Beneficial Conversion Feature (“BCF”) interest charge if the Company elects to convert debentures early at a discount. During the three months ended March 31, 2006, the Company converted $500,000 of the New Debentures and recorded a BCF of $35,000 associated with such conversions

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 anti-dilution 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 are being amortized as interest expense throughout the term of the Series C or as they are converted, whichever comes first. During the three months ended March 31, 2006, the Company recorded $54,227 for the amortization of the discount.

Under the Series C 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. During the three months ended March 31, 2006, the Company issued 92,640 shares valued at $133,167 in satisfaction of the quarterly dividend payments with respect to Series C. These dividends were recorded as interest expense since the Series C was recorded as a liability as of March 31, 2006. 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. During the three months ended March 31, 2006, the Company converted $100,000 of the Series C in exchange for 64,491 of the Company’s common stock. As of March 31, 2006, approximately $4.6 million of the Series C have been converted into 2,388,234 shares of the Company’s common stock and the Company has transferred $1,065,996 from the restricted cash account for the conversions that were executed and the dividends that were issued.

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, the Company issued 155,724 shares of Series A Preferred Stock to Dow (which shares were subsequently exchanged for a like number of shares of Series A 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 each milestone, as defined in the joint development arrangement, in either military or consumer electronics applications will trigger an equity transaction 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. See Note 8 for more information on milestones achieved with Dow.

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NOTE 6--SUPPLEMENTAL CASH FLOW INFORMATION

The Company issued 92,905 and 46,398 shares of common stock valued at $156,621 and $62,960 to employees as 401(k) Plan employer matching contributions during the first three months of 2006 and 2005, respectively.

The Company issued 465,400 and 474,800 shares of common stock valued at $763,256 and $1,044,560 to employees as restricted stock during the first three months of 2006 and 2005, respectively. The Company also converted Series C and New Debentures during the three months ended March 31, 2006. See note 5 for further details on these conversions.

During the three months ended March 31, 2006, the Company issued 92,640 shares of common stock valued at $133,167 as dividend payments on the Series C Preferred Stock.

During the three months ended March 31, 2006, the Company issued 200,000 shares of common stock valued at $305,000 for two consulting agreements. See Note 3 for more information.

NOTE 7--INVESTMENT IN GECKO ENERGY TECHNOLOGIES, INC.

On February 15, 2006, the Company entered into a three-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 connection with the joint development program, during the three months ended March 31, 2006 the Company 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, which the Company believes is at arms length.  Pursuant to the joint development agreement with Gecko, later in 2006, the Company intends to increase its equity position to a total of 48% of Gecko’s outstanding common stock by investing another $1.05 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 two years of the agreement at fair value of the common stock on the date of the acquisition (excluding shares issuable under Gecko’s benefit plans).

The Company’s investment in Gecko was accounted for using the equity method of accounting since the investment gives the Company the ability to exercise significant influence, but not control, over Gecko. Significant influence is deemed to exist since the Company has approximately 23% ownership interest in the voting stock of Gecko.   The Company has determined that Gecko is not a variable interest entity in accordance with FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities".

NOTE 8--SUBSEQUENT EVENTS

In April of 2006, the Company converted $332,000 of Series C Preferred Stock into 199,178 shares of common stock. Also in April 2006, the Company converted $1,000,000 of the New Debentures into 598,802 shares of common stock. The Company recorded a beneficial conversion feature charge in conjunction with the New Debenture conversion of $70,000.

On May 3, 2006, the Company and The Dow Chemical Company agreed that the delivery by Protonex Technology Corporation of the Protonex P2 soldier power system to the U.S. Air Force achieved the first milestone under the joint development agreement. As a result, Dow is entitled to receive shares of the Company’s Series A Preferred Stock and is entitled to purchase $1.25 million of the Company’s Series B Preferred Stock (based on the dollar volume weighted average price of the Company’s common stock for the 30 trading days preceding the achievement of the first milestone). If Dow purchases shares of Series B Preferred Stock, it will also receive warrants to purchase a number of shares of common stock equal to 25% of the shares of common stock underlying the Series B Preferred Stock. If Dow does not elect to purchase shares of Series B Preferred Stock, it will only be entitled to receive a number of shares of Series A Preferred Stock convertible into a number of shares of common stock that is equal to the greater of (i) the number of shares of common stock that could be purchased for $625,000 (based on the dollar volume weighted average price of the Company’s common stock for the 30 trading days preceding the achievement of the first milestone) and (ii) 2% of the Company’s fully-diluted common stock.  The Company will record a product development and marketing charge during the three months ended June 30, 2006 based on the fair value of the Series A Preferred Stock issued to Dow as a result of achieving the first milestone.

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

The following discussion should be read in conjunction with the accompanying consolidated financial statements and notes thereto included within this report. In addition to historical information, this Form 10-Q and the following discussion contain forward-looking statements that reflect our plans, estimates, intentions, expectations and beliefs. See the discussion contained herein under the caption “Forward-Looking Statements” for more information. Our actual results could differ materially from those discussed in the forward-looking statements. The discussion below should be read in conjunction with the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2005.

General

We were formed as a Delaware limited liability company on December 17, 1998, and organized and began operations on January 1, 1999 (inception date). We were converted into a Delaware corporation on April 25, 2000 when all of the outstanding equity interests of the limited liability company were converted into shares of common stock of the corporation. Unless otherwise indicated, all information that we present in this Form 10-Q for any date or period gives effect to the conversion as if it had occurred on that date or as of the beginning of that period and all references to common stock for periods before the conversion mean our issued and outstanding membership interests.

Overview

We are engaged in the development of hydrogen battery technology for use primarily in portable electronic devices for the, military, medical, industrial and consumer markets. We are developing this technology in partnership with corporate and government entities. Hydrogen on Demand® is the trademarked name for our proprietary hydrogen energy storage and delivery technology. Our technology is based on the culmination of work reflected in more than 90 patents (granted or pending) that collectively provide us with a leading position in the system and fuel blend technology used to convert sodium borohydride to hydrogen energy for use in portable electronic device applications.

Our losses have resulted primarily from costs associated with product development and research and development activities as well as non-cash amortization of preferred stock and non-cash charges related to the issuance of stock options, restricted stock 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 awards, we expect to incur additional operating losses for the foreseeable future.

Results of Operations

Three Months Ended March 31, 2006 versus Three Months Ended March 31, 2005

Revenues. Revenues for the three months ended March 31, 2006 were $69,882 compared to $79,901 for the same period of 2005, a decrease of $10,019. Revenues were earned from engineering and design. While in the development stage, our revenues are expected to fluctuate from year to year with the timing of prototype development and design services.

In the near-term, revenues are expected to be derived substantially from up-front license fees, research contracts with various federal, state and local agencies, collaborations with other companies, management services, and royalty payments or joint venture revenue from licensees or strategic partnerships. Revenues will be recognized in the period in which technology is delivered, licensing revenues are earned, or as services are performed.

Cost of Revenues. Cost of revenues for the three months ended March 31, 2006 were $69,882 compared to $79,901 for the same period of 2005, a decrease of $10,019.  Cost of revenues during the development stage represent the Product Development and Marketing expenses and Research and Development expenses associated with the revenues earned.

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Product Development and Marketing Expense. Product development and marketing expenses for the three months ended March 31, 2006 were $905,187 compared to $1,081,235 for the same period of 2005, a decrease of $176,048. The expenses decreased due to increased cost reimbursements from government funded programs in 2006 from 2005. This was a result of new contracts in late 2005 with the National Center for Manufacturing Services and the U.S. Army.

General and Administrative Expense. General and administrative expenses for the three months ended March 31, 2006 were $1,018,738 compared to $868,758 for the same period of 2005, an increase of $149,980. The increase was mainly the result of the professional and compensation fees associated with the ongoing development and future commercialization of the Company, as well as less general and administration cost recovery associated with the Department of Energy cost sharing arrangement.

Non-cash Charges. Non-cash charges were $190,586 for the three months ended March 31, 2006 compared to $505,207 for the same period of 2005, a decrease of $314,621. During the quarter ended March 31, 2006, we recorded non-cash charges of $49,802 for the amortization of restricted stock awards granted to Ron Kelley and Steve Pratt for two consulting agreements and $69,500 in non-cash charges for restricted stock issued to employees for the amortization of restricted stock issued in March 2006. In the first quarter of 2005, we recorded $449,161 in non-cash charges for restricted stock issued to employees which 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 following is a breakdown by function of non-cash charges for the three months ended March 31:

	2006		2005
Product development and marketing	$	15,779	$	113,195
General and administrative		169,170		351,585
Research and development		5,637		40,427
Total	$	190,586	$	505,207

Depreciation and Amortization. Depreciation and amortization was $137,187 for the three months ended March 31, 2006 compared to $77,583 for the same period of 2005, an increase of $59,604. This increase is mainly attributable to the accelerated amortization of the intellectual property that we are no longer maintaining.

Research and Development Expense. Research and development expenses were $195,983 for the three months ended March 31, 2006 compared to $217,742 for the same period of 2005, a decrease of $21,759. We are reimbursed for expenses under the Department of Energy (“DOE”) program for the joint research of electrochemical pathways to manufacture sodium borohydride, which are recorded as a reduction to research and development expense. Reimbursements under the DOE program totaled $231,083 and $196,192 for 2006 and 2005, respectively.

Interest Expense, net. Net interest expense was $161,832 for the three months ended March 31, 2006 compared to $366,675 for the same period of 2005, a decrease of $204,843. The decrease was mainly attributable to less amortization of the discount associated with the unsecured debentures and the amortization of related deferred financing costs. Interest expense is comprised of interest on Series C Preferred Stock dividends, debenture principal, beneficial conversion features, amortization of original issue discounts and issue costs on our debentures. We converted $500,000 of unsecured debentures and $100,000 of Series C Preferred Stock in the first quarter of 2006 as compared to $3,400,000 of unsecured debentures into common stock for the first quarter of 2005.

Liquidity and Capital Resources

General

Since our inception, we have financed our operations primarily through our initial public offering in August 2000 and private placements of equity and debt securities. The net proceeds from our initial public offering totaled approximately $29.9 million and we generated net proceeds from private placement transactions in 2002 and 2003 totaling $14.1 million. In 2004, we received net proceeds of approximately $9.4 million from a separate private placement transaction. In April 2005, we received net proceeds of approximately $9.6 million for the issuance of redeemable Series C Preferred Stock.

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Convertible Debentures

On November 8, 2002, we 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, we issued an $800,000 secured convertible debenture, in substance identical to the Ballard debenture, to each of the Investors. On November 8, 2005, we 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 us to use the formerly restricted cash for our 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. No gain or loss was required to be recognized by us 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”), we are required to record a Beneficial Conversion Feature (“BCF”) interest charge if we elect to convert debentures early at a discount. During the three months ended March 31, 2006, we have converted $500,000 of the New Debentures and recorded a BCF of $35,000 associated with the conversions. In April 2006, we converted $1,000,000 of the New Debentures into 598,802 shares of common stock. We recorded a beneficial conversion feature charge in conjunction with the New Debentures conversion of $70,000.

Redeemable Series C Preferred Stock

On April 25, 2005, we 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 us). 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 our 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 us three years after issuance and can be settled in cash or with our 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, we issued to the investors three-year warrants to purchase an aggregate of 1.25 million shares of our 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 are being amortized as interest expense throughout the term of the Series C or as they are converted, whichever comes first.

Under the Series C purchase agreement, we are 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 March 31, 2006, we issued 227,373 shares valued at $370,602 in satisfaction of the quarterly dividend payments with respect to Series C. Total dividends of $499,096, 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. During three months ended March 31, 2006, we converted $100,000 of the Series C in exchange for 64,491 of our common stock. As of March 31, 2006, approximately $4.6 million of the Series C have been converted into 2,388,234 shares of our common stock and we have transferred $1,065,996 from the restricted cash account for the conversions that were executed and the dividends that were issued.

Series A Preferred Stock

On April 25, 2005, we 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 us), 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.

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The purpose of the joint development arrangement is for us and Dow 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 our 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 our Series B Preferred Stock which is convertible into a number of shares of our 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 our Series B Preferred Stock, Dow will also receive warrants to purchase a number of shares of our 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 our Series B Preferred Stock in such instances, we will issue to Dow additional shares of Series A Preferred Stock such that Dow will own ,together with the Series B shares and warrants, 4% of our fully diluted common stock. If Dow elects not to purchase shares of our Series B Preferred Stock upon completion of any milestone, we will issue to Dow a lesser number of additional shares of Series A Preferred Stock.

On May 3, 2006, Millennium Cell and The Dow Chemical Company agreed that the delivery by Protonex Technology Corporation of the Protonex P2 soldier power system to the U.S. Air Force achieved the first milestone under the joint development agreement. As a result, Dow is entitled to receive shares of our Series A Preferred Stock and is entitled to purchase $1.25 million of our Series B Preferred Stock (based on the dollar volume weighted average price of our common stock for the 30 trading days preceding the achievement of the first milestone). If Dow purchases shares of Series B Preferred Stock, it will also receive warrants to purchase a number of shares of common stock equal to 25% of the shares of common stock underlying the Series B Preferred. If Dow does not elect to purchase shares of Series B Preferred Stock, it will only be entitled to receive a number of shares of Series A Preferred Stock convertible into a number of shares of common stock that is equal to the greater of (i) the number of shares of common stock that could be purchased for $625,000 (based on the dollar volume weighted average price of our common stock for the 30 trading days preceding the achievement of the first milestone) and (ii) 2% of our fully-diluted common stock.

Investment in Gecko Energy Technologies, Inc.

On February 15, 2006, we 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 connection with the joint development program, during the three months ended March 31, 2006, we 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, which we believe is at arms length. Pursuant to the joint development agreement with Gecko, later in the year, we intend to increase our equity position to a total of 48% of Gecko’s outstanding common stock by investing another $1.05 million in cash or our common stock. As part of the transaction, we received the right to acquire, at our sole option, up to 80% of Gecko’s outstanding common stock over the remaining 2 years of the agreement at fair value of the common stock on the date of the acquisition (excluding shares issuable under Gecko’s benefit plans).

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We issued 200,000 shares of restricted stock awards to Ronald Kelley and Steven Pratt, the principal shareholders of Gecko, during the three months ended March 31, 2006. The issuance is in exchange for two consulting agreements with us. 50,000 shares of these restricted stock awards had a $72,500 fair value at the date of grant and vest over a six-month period and we recorded a non-cash charge of $36,250 with respect to the vesting of these award during the three months ended March 31, 2006. 150,000 shares of these restricted stock awards had a $232,500 fair value at the date of grant and vest on a graded basis over three years and we recorded a non-cash charge of $13,552 with respect to the vesting of these awards during the three months ended March 31, 2006.

As prescribed by EITF No. 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, restricted stock awards issued to non-employees should be re-measured to fair value at each reporting date until the award vests. The final measurement date is on the date the award vests, rather than the grant-date measurement specified for most employee awards classified as equity. As a result, we recorded for both grants non-cash charges for the vested portion of the restricted stock awards to date and marked to market the unvested portion the remaining unvested restricted stock awards.

Sources and Uses of Cash

As of March 31, 2006, we had $9,089,718 in cash and cash equivalents and restricted cash of $1,319,095. Cash used in operations totaled $2,221,093 and $2,324,599 during the three months ended March 31, 2006 and 2005, respectively, and related to primarily funding our net operating losses.

Excluding changes in restricted cash, investing activities used cash of $572,246 and $33,272 during the three months ended March 31, 2006 and 2005, respectively. The primary driver for the increase in investing activities, was the $520,484 investment in Gecko. Restricted cash is comprised of $0.7 million as security on Series C Preferred dividends and $0.6 million of cash used for collateral as security deposit held by our landlord in connection with the amended lease agreement. These funds will not be available for use in operations until the letters of credit have been reduced or terminated. The $0.7 million of restricted cash related to the Series C Preferred will be available to us ratably as dividends are paid to the holders or as they are converted, whichever comes first.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of March 31, 2006.

Commitments and Contingencies

In April 2001, we amended our main operating lease to provide for additional space for our principal operating offices and laboratories. The amended lease will expire in 2008 and contains options to renew for an additional eight years and requires us to pay our allocated share of taxes and operating costs in addition to the annual base rent payment.

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

Between January 1999 and April 2000, we received an aggregate of $227,522 from a recoverable grant award from the State of New Jersey Commission on Science and Technology. The funds were used to partially fund costs directly related to development of our technology. The recoverable grant is required to be repaid when we generate net sales in a fiscal year. The repayment obligation, which began in March 2001, ranges from 1% to 5% of net sales over a ten-year period. We are obligated to repay the unpaid amount of the original grant at the end of the ten-year period. As of March 31, 2006, we have repaid approximately $71,193.

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.

Our contractual obligations are outlined in the table below:

	Payment due in fiscal years
	Contractual Obligations Total		2006 (Nine months remaining)		2007		2008		2009		2010
Operating lease - Facility	$	1,291,493	$	363,233	$	484,310	$	443,950	$	¾	$	¾
Refundable grant obligation		156,329		¾		¾		¾		—		156,329
Gecko Energy Technologies, Inc. (1)		1,050,000		1,050,000		¾		¾		¾		¾
Convertible unsecured debentures (2)		1,899,988		¾		1,899,988		¾		¾		¾
Redeemable Series C Preferred Stock (2)		4,989,644		—		—		4,989,644		—		—
Total	$	9,387,454	$	1,413,233	$	2,384,298	$	5,433,594	$	—	$	156,329

(1)Gecko Energy Technologies, Inc can be satisfied with cash or with shares of our common stock.

(2)Redeemable Series C Preferred Stock and Convertible Unsecured Debentures are convertible into common stock or can be satisfied with cash.

We believe that our current cash and cash equivalents will be sufficient to satisfy anticipated cash needs of our operations through 2007. We may raise additional funds through public or private financing, collaborative relationships or other arrangements at any time. Additional funding, if sought, may not be available or, if available, may be offered at terms not favorable to us. Further, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed may harm our business and operating results.

Critical Accounting Policies

Application of Critical Accounting Policies

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

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

Our significant accounting policies are more fully described in Note 2 to our December 31, 2005 consolidated financial statements on Form 10K/A. Not all of these significant accounting policies, however, require management to make difficult, complex or subjective judgments or estimates. Our management has discussed our accounting policies with the audit committee of our board of directors, and we believe that our estimates relating to revenue recognition, convertible debt and stock options described below fit the definition of "critical accounting estimates."

Revenue Recognition

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

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Convertible Debt and Series C Preferred Stock

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

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

Stock-Based Compensation

In the first quarter of 2006, we adopted SFAS No. 123(R), which requires the measurement at fair value and recognition of compensation expense for all share-based payment awards. Effective January 1, 2006, we began using the fair value method to apply the provisions of FAS 123(R) with a modified prospective application which provides for certain changes to the method for valuing share-based compensation. Under the modified prospective approach, the valuation provisions of FAS 123(R) apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Under the modified prospective application, prior periods are not revised for comparative purposes.

In accordance with FAS 123(R), we estimate the value of stock option awards on the date of grant using the Black-Scholes option-pricing model. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.

If factors change and we employ different assumptions in the application of FAS 123(R) in future periods, the compensation expense that we record under FAS 123(R) may differ significantly from what we have recorded in the current period. In addition, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements.

Item 3.Quantitative and Qualitative Disclosures about Market Risk.

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

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

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Item 4.Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We maintain a system of internal and disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported on a timely basis, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e)) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer they have concluded that, as of the evaluation date, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to us required to be included in our reports filed or submitted under the Securities Exchange Act of 1934.

Our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of any changes in internal controls over financial reporting that occurred during the last fiscal quarter. That evaluation did not identify any significant changes to the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

(b) Changes in Internal Controls

Since the evaluation date, there have not been any significant changes in our internal control over financial reporting or in other factors that could significantly affect our internal control over financial reporting.

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PART II

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005.

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

During the period covered by this report on Form 10-Q, we issued the following shares of our common stock (“Shares”) to an institutional and accredited investor (“Investor”) upon conversion of an aggregate amount of $500,000 principal amount of our unsecured convertible debentures and $100,000 of Series C Preferred Stock owned by the Investor:

Date	Amount of Unsecured Convertible Debentures	Number of Shares of Common Stock Issued
February 24, 2006	$166,667	110,375
February 24, 2006	$166,667	110,375
February 28, 2006	$166,666	110,375

Date	Amount of Series C Preferred Stock	Number of Shares of Common Stock Issued
February 28, 2006	$100,000	64,491

We issued the shares of common stock set forth above in reliance upon the exemption from registration under Section 3(a)(9) of the Securities Act of 1933. Section 3(a)(9) is available because the shares of common stock were exchanged by the Company with an existing security holder and no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange. The resale of the Shares by the Investor is registered pursuant to a registration statement declared effective by the Securities and Exchange Commission.

Item 3.Defaults Upon Senior Securities.

None.

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

None.

Item 5.Other Information.

None.

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Item 6.  Exhibits

10.1†	—	Joint Development Agreement, dated as of February 15, 2006, by and between Millennium Cell Inc. and Gecko Energy Technologies, Inc. incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the SEC on February 15, 2006
10.2†	—	Stock Purchase Agreement, dated as of February 15, 2006, by and between Gecko Energy Technologies, Inc. incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the SEC on February 15, 2006
10.3†	—	Stockholders Agreement, dated as of February 15, 2006, by and among Gecko Energy Technologies, Inc. and Ronald J. Kelley and Steven D. Pratt. incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the SEC on February 15, 2006
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.

** Furnished herewith.

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SIGNATURES

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

MILLENNIUM CELL INC.

(Registrant)

60; 

 By: /s/ H. David Ramm

 H. David Ramm

 Chief Executive Officer

  By: /s/ John Giolli

John Giolli

Chief Financial Officer

May 15, 2006

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