Millennium Cell 10Q 2007 Q1 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 September 30, 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 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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 49,440,209 shares of Common Stock, par value $.001, were outstanding on November 14, 2006.

MILLENNIUM CELL INC.

(a development stage enterprise)

Index

PART I - FINANCIAL INFORMATION

		Page
Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets - September 30, 2006 and December 31, 2005	1

	Consolidated Statements of Operations - Three and nine months ended
	September 30, 2006 and 2005 and cumulative amounts from inception	2

	Consolidated Statements of Cash Flows -Nine months ended September 30, 2006 and 2005	3
	and cumulative amounts from inception

	Consolidated Statements of Stockholders’ Equity - Nine months ended September 30, 2006	4

	Notes to Consolidated Financial Statements - September 30, 2006	5

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	20


PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	21

Item 1A.	Risk Factors	21

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21

Item 3.	Defaults Upon Senior Securities	21

Item 4.	Submission of Matters to a Vote of Security Holders	21

Item 5.	Other Information	21

Item 6.	Exhibits	21

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 the 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)

	September 30,			December 31,
Assets	2006			2005
Current assets:
Cash and cash equivalents	$	6,052,536		$	11,675,877
Restricted cash		466,221			373,868
Accounts receivable - trade		32,794			36,808
Accounts receivable - government		141,422			112,462
Prepaid expenses		232,171			237,867
Deferred financing costs		94,239			102,270
Total current assets		7,019,383			12,539,152

Property and equipment, net		295,673			450,138
Patents and licenses, net		648,555			654,876
Restricted cash		866,238			1,208,191
Investment in unconsolidated subsidiary (Note 9)		1,217,498			—
Deferred financing costs		53,962			136,360
Security deposit		45,676			45,676
Total assets	$	10,146,985		$	15,034,393

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	267,995		$	521,615
Accrued expenses		726,254			893,868
Short-term portion of capital lease obligation		—			6,173
Short-term portion of refundable grant obligation		4,350			49,611
Deferred compensation		105,132			101,050
Deferred revenue		66,653			—
Convertible unsecured debentures (Note 6)		899,988			2,399,988
Total current liabilities		2,070,372			3,972,305

Redeemable Series C preferred stock, net of discount (Note 6)		4,765,639			5,035,416
Refundable grant obligation		151,979			156,329
Commitments and contingencies
Stockholders equity:
Series A preferred stock, $.001 par value; 1,694,724 authorized shares, 293,874
and 155,724 issued and outstanding as of September 30, 2006 and
December 31, 2005, respectively		4,527,417			2,413,722
Series B preferred stock, $.001 par value; 1,539,000 authorized shares, 71,429
and 0 issued and outstanding as of September 30, 2006 and December 31, 2005,
respectively		1,090,773			—
Common stock, $.001 par value; authorized 70,000,000 shares and 48,752,703
and 46,454,375 shares issued and outstanding as of September 30, 2006 and
December 31, 2005, respectively		48,752			46,454
Additional paid-in capital		102,909,100			99,942,349
Deferred compensation		—			(596,296	)
Deficit accumulated during development stage		(105,417,047	)		(95,935,886	)
Total stockholders’ equity		3,158,995			5,870,343
Total liabilities and stockholders’ equity	$	10,146,985		$	15,034,393

See notes to financial statements

MILLENNIUM CELL INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three			Three			Nine			Nine
	Months			Months			Months			Months			Cumulative
	Ended			Ended			Ended			Ended			Amounts
	Sept 30,			Sept 30,			Sept 30,			Sept 30,			From
	2006			2005			2006			2005			Inception
Revenue	$	4,900		$	140,148		$	87,004		$	268,475		$	1,888,631
Cost of revenue		4,900			100,673			87,004			229,000			1,767,304
Gross margin		—			39,475			—			39,475			121,327

Product development and marketing		732,395			867,219			2,467,468			2,747,853			26,040,572
General and administrative		645,567			1,438,435			2,696,296			4,165,469			28,308,761
Restructuring expense		—			—			—			—			104,982
Non-cash charges (Note 5)		395,716			102,308			3,049,470			3,132,590			31,805,474
Depreciation and amortization		72,272			75,433			287,597			216,583			3,274,609
Research and development		15,345			98,984			237,694			524,162			9,433,950
Total operating expenses		1,861,295			2,582,379			8,738,525			10,786,657			98,968,348

Loss from operations		(1,861,295	)		(2,542,904	)		(8,738,525	)		(10,747,182	)		(98,847,021	)

Interest expense, net		137,105			816,853			510,662			1,514,582			4,584,954
Equity in losses of unconsolidated
subsidiary (Note 9)		94,567			—			231,974			—			1,088,052
Loss before income taxes		(2,092,967	)		(3,359,757	)		(9,481,161	)		(12,261,764	)		(104,520,027	)

Benefit from income taxes		—			—			—			—			1,253,861

Net Loss		(2,092,967	)		(3,359,757	)		(9,481,161	)		(12,261,764	)		(103,266,166	)

Series B preferred stock dividends		(18,904	)		—			(25,479	)		—			(25,479	)
Preferred stock amortization		—			—			—			—			(2,150,881	)

Net loss applicable to common stockholder	$	(2,111,871	)	$	(3,359,757	)	$	(9,506,640	)	$	(12,261,764	)	$	(105,442,526	)
Loss per share - basic and diluted	$	(0.04	)	$	(0.08	)	$	(0.20	)	$	(0.29	)	$	(3.24	)
Weighted average number of shares outstanding		48,504,794			44,360,337			47,946,603			42,392,779			32,494,396

See notes to financial statements

MILLENNIUM CELL INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months			Nine Months			Cumulative
	Ended			Ended			Amounts
	September 30,			September 30,			From
	2006			2005			Inception
Operating activities
Net loss	$	(9,481,161	)	$	(12,261,764	)	$	(103,266,166	)
Adjustments to reconcile net loss to net cash used in operation activities
Depreciation and amortization		287,597			216,583			3,274,609
Amortization of discount on unsecured debentures		162,224			782,063			2,741,053
Amortization of deferred financing costs		90,430			388,021			1,484,513
Non-cash interest charges		308,078			232,106			747,989
Beneficial conversion feature		105,000			168,000			2,127,582
Losses on investment in unconsolidated subsidiary (Note 9)		231,974			—			1,088,052
Non-cash charges		3,049,470			3,132,590			31,805,474
Changes in operating assets and liabilities:
Accounts receivable		(24,946	)		241,071			(174,216	)
Prepaid expenses and other assets		5,696			(11,439	)		(277,846	)
Accounts payable and accrued expenses		(349,140	)		500,239			1,942,097
Deferred income		66,653			—			2,466,641
Net cash used in operating activities		(5,548,125	)		(6,612,530	)		(56,040,218	)

Investing activities
Purchase of property and equipment		—			—			(2,885,446	)
Patent registration costs		(126,811	)		(131,097	)		(1,029,378	)
Investment in unconsolidated subsidiary (Note 9)		(1,392,221	)		—			(2,248,299	)
(Increase)/decrease in restricted cash		249,600			(1,019,096	)		(1,332,459	)
Net cash used in investing activities		(1,269,432	)		(1,150,193	)		(7,495,582	)

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			10,000,000
Proceeds from Series B preferred stock		1,250,000			—			1,250,000
Deferred financing costs		—			(583,272	)		(1,281,656	)
Capital lease obligation payments		(6,173	)		(21,626	)		(86,185	)
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 provided by financing activities		1,194,216			10,567,857			69,588,334
Net increase (decrease) in cash and cash equivalents		(5,623,341	)		2,805,132			6,052,536
Cash and cash equivalents, beginning of period		11,675,877			8,217,840			—
Cash and cash equivalents, end of period		6,052,536			11,022,972			6,052,536

See notes to financial statements

Supplemental cash flow information

Please see note 8 for more information

MILLENNIUM CELL INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

							Additional														Total
	Common Stock						Paid-in			Deferred			Series A		Series B			Accumulated			Stockholders’
	Shares			Amount			Capital			Compensation			Preferred		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 in connection with adoption of SFAS 123R		—			—			(596,296	)		596,296			—		—			—			—
Issuance of common stock from conversion of debentures and Series C preferred stock		1,193,596			1,194			1,930,806			—			—		—			—			1,932,000
Beneficial conversion feature on private placement transactions		—			—			105,000			—			—		—			—			105,000
Issuance of stock for BOD compensation		105,455			105			150,695			—			—		—			—			150,800
Issuance of stock for interest payments		216,096			216			308,474			—			—		—			—			308,690
Issuance of common stock for 401(k)		154,314			154			252,546			—			—		—			—			252,700
Issuance of restricted stock for merit awards		465,400			465			(465	)		—			—		—			—			—
Issuance of restricted stock for consulting		200,000			200			(200	)		—			—		—			—			—
Issuance of restricted stock for executive compensation expense		50,000			50			(50	)		—			—		—			—			—
Stock compensation expense		—			—			717,799			—			—		—			—			717,799
Deferred compensation plan		(86,533	)		(86	)		(35,306	)		—			—		—			—			(35,392	)
Issuance of Series A preferred stock, 138,150 shares issued		—			—			—			—			2,113,695		—			—			2,113,695
Issuance of Series B preferred stock, 71,429 shares issued		—			—			—			—			—		1,250,000			—			1,250,000
Warrants issued in connection with Series B preferred stock		—			—			159,227			—			—		(159,227	)		—			—
Series B preferred dividends		—			—			(25,479	)		—			—		—			—			(25,479	)
Net loss		—			—			—			—			—		—			(9,481,161	)		(9,481,161	)
Balance at September 30, 2006		48,752,703		$	48,752		$	102,909,100		$	—		$	4,527,417	$	1,090,773		$	(105,417,047	)	$	3,158,995

See notes to financial statements

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—NEW ACCOUNTING PROUNOUNCEMENTS

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). This interpretation increases the relevancy and comparability of financial reporting by clarifying the way companies account for uncertainty in income taxes. FIN 48 prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring such tax positions for financial statement purposes. The interpretation also requires expanded disclosure with respect to the uncertainty in income taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the potential impact of this interpretation on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 will be applied under other accounting principles that require or permit fair value measurements, as this is a relevant measurement attribute. This statement does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact of this statement on its consolidated financial statements.

NOTE 3—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 4—STOCK BASED COMPENSATION

In July 2000, the Company adopted the Amended and Restated 2000 Stock Option Plan and reserved 6,000,000 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 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 nine months ended September 30, 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 is based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. As of September 30, 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 reviews 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"). In March 2005, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 107 ("SAB 107") regarding the SEC's interpretation of SFAS 123R and the valuation of share-based payments for public companies. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.

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 $57,845 and $186,651 for the three and nine months ended September 30, 2006, respectively. The increase in the net loss resulted in a $0.01 increase on the net loss per share to both basic and diluted earnings per share for the nine months ended September 30, 2006. There was no impact to both basic and diluted earnings per share for the three months ended September 30, 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 and nine months ended September 30, 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.":

	Three Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2005			2005
Net loss attributable to common stockholders — as reported	$	(3,359,757	)	$	(12,261,764	)
Add: Total stock-based compensation expense included in net loss		102,308			718,868
Deduct: Total stock-based compensation expense determined under fair value based method for all stock option awards		(115,204	)		(645,785	)
Net loss attributable to common stockholders — Pro forma	$	(3,372,653	)	$	(12,188,681	)
Net loss per share attributable to common stockholders — As reported	$	(0.08	)	$	(0.29	)
Net loss per share attributable to common stockholders — Pro forma	$	(0.08	)	$	(0.29	)

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 during the three and nine months ended September 30, 2005:


Expected dividend yield	—
Expected stock price volatility	.80
Risk-free interest rate	4.89%
Expected option term	5 years

Based upon the above assumptions, the weighted average fair value of stock options granted was $1.22 for the nine months ended September 30, 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 granted 75,000 stock options to a director during the nine months ended September 30, 2006 and the fair value of the award was recorded as stock compensation expense on the grant date. The Company did not issue options to employees during the nine months ended September 30, 2006.

Option activity for all outstanding options, vested and nonvested, from January 1, 2006 through September 30, 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		—		—
Granted		75,000		1.47		—		—
Exercised		—		—		—		—
Forfeited and cancelled		—		—		—		—
Outstanding at September 30, 2006		4,069,769	$	3.70		5.7	$	—
Vested and expected to vest at September 30, 2006		3,866,281	$	3.70		5.7	$	—
Exercisable at September 30, 2006		3,716,970	$	3.70		5.6	$	—

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 third 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 September 30, 2006. The intrinsic value changes based on the fair market value of the Company’s common stock.

As of September 30, 2006, there was $0.2 million of total unrecognized compensation expense related to stock options which is expected to be recognized over a weighted-average period of 2.1 years.

Restricted Stock Awards

Restricted stock awards will vest in 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.

During the nine months ended September 30, 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 nine months ended September 30, 2006 and 2005, the Company recorded $208,499 and $94,010, respectively in non-cash charges for restricted stock issued to employees. The Company will recognize additional non-cash charges of $70,000 in the remainder of 2006 and an additional $917,145 will be recorded through 2010, or earlier if other accelerated vesting features are met.

On May 8, 2006 the Company issued 50,000 restricted shares to H. David Ramm, Chief Executive Officer. These shares had a fair value of $89,500 and vest ratably through December 31, 2006. As a result, the Company recorded non-cash charges during the nine months ended September 30, 2006 of $67,125 for the vested shares.

During the nine months ended September 30, 2006, 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 9). The issuance was made pursuant to two consulting agreements between the Company and those individuals. The initial 50,000 shares of the restricted stock had a fair value of $72,500 on the date of grant and are fully vested as of September 30, 2006. 150,000 shares of the restricted stock had a fair value of $232,500 on the date of grant and vest on a graded basis over three years. The Company recorded non-cash charges of $165,529 associated with these shares during the nine months ended September 30, 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.

Changes in nonvested restricted stock awards during the nine months ended September 30, 2006 were as follows:

	Number of Shares			Weighted- Average Grant Date Fair Value
Nonvested at December 31, 2005		282,480		$	2.25
Granted		715,400			1.63
Vested		(148,704	)		1.58
Forfeited		—			—
Nonvested at September 30, 2006		849,176		$	1.88

As of September 30, 2006, there was $1.2 million of unrecognized stock-based compensation expense related to nonvested restricted stock awards. This expense is expected to be recognized as the shares vest.

NOTE 5—NON-CASH CHARGES

During the three months ended September 30, 2006 and 2005, the Company recorded non-cash charges for stock-based awards. During the nine months ended September 30, 2006 and 2005, the Company recorded non-cash charges for stock-based awards and Series A Preferred Stock. Please see Note 4 for more information on these awards and Note 7 for more information on the Series A Preferred Stock.

The following is a breakdown by function of non-cash charges for the three and nine months ended September 30:

	Three months ended Sept., 30				Nine months ended Sept., 30
	2006		2005		2006		2005
Product development and marketing	$	15,780	$	20,031	$	1,754,072	$	2,568,680
General and administrative		374,301		77,431		1,278,493		515,571
Research and development		5,635		4,846		16,905		48,339
Total	$	395,716	$	102,308	$	3,049,470	$	3,132,590

NOTE 6—CONVERTIBLE DEBTENTURES AND REDEEMABLE SERIES C PREFERRED STOCK

Convertible Debentures

On November 8, 2002, the Company issued a $2.4 million secured convertible debenture with a maturity date of November 8, 2005 to Ballard Power Systems Inc. (“Ballard”). 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 the 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 holders 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. As of September 30, 2006, the Company converted $1,500,000 of the New Debentures in exchange for 929,927 shares of the Company’s common stock and recorded a BCF of $105,000 associated with such conversions. On October 24, 2006, the Company converted $450,000 of the New Debentures in exchange for 422,535 shares of common stock.

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”). Each Series C share is initially convertible into 500 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 a higher number of shares at a lower conversion price 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 are being amortized as interest expense throughout the term of the Series C or as they are converted, whichever comes first. During the nine months ended September 30, 2006 and 2005, the Company recorded $162,224 and $519,398, respectively 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 nine months ended September 30, 2006, the Company issued 216,096 shares valued at $308,690 in satisfaction of the quarterly dividend payments for the Series C. These dividends were recorded as interest expense since the Series C was recorded as a liability as of September 30, 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 nine months ended September 30, 2006, the Company converted $432,000 of the Series C in exchange for 263,669 shares of the Company’s common stock. As of September 30, 2006, approximately $5.0 million of the Series C have been converted into 2,587,412 shares of the Company’s common stock and the Company had released $1,065,996 from restricted cash for the conversions and dividends paid.

NOTE 7—SERIES A AND SERIES B PREFERRED STOCK

Series A and Series B 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, each share of which is initially convertible into ten shares of the Company’s common stock. As a result of the Series A issuance in exchange for services rendered by Dow in conjunction with the joint development arrangement, the Company 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 closing price of the Company’s 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 in military or consumer electronics applications. The milestones are focused on military and/or consumer electronics applications.

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 elects to purchase shares of the Company’s Series B Preferred Stock, the Company will also issue to Dow additional shares of Series A Preferred Stock at market value 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 also issue to Dow a lesser number of additional shares of Series A Preferred Stock at market value.

On May 3, 2006, the Company and Dow agreed that the first milestone under the joint development agreement was met. Dow elected to purchase 71,429 shares of Series B Preferred Stock for $1,250,000, and received detachable warrants to purchase 178,571 shares of the Company’s common stock with an exercise price of $2.10 per share which were recorded as a discount to Series B Preferred Stock for $159,227 based on the fair value of the warrants at the date of the issuance. Series B Preferred Stock is initially convertible into ten shares of the Company’s common stock. The shares of Series B Preferred Stock bear a 6% cumulative dividend payable in shares of common stock or cash, at the Company’s option and are junior to Series A Preferred Stock. In accordance with the joint development arrangement and achievement of the first milestone, the Company also issued 138,150 shares of Series A Preferred Stock that were earned by Dow through human resource and intellectual property contributions toward achievement of the first milestone. As a result of the issuance of Series A Preferred Stock, the Company recorded a non-cash charge of $2,113,695 as product development expense based on the market value of the underlying common stock as of May 26, 2006.

NOTE 8—SUPPLEMENTAL CASH FLOW INFORMATION

The Company issued 154,314 and 110,952 shares of common stock valued at $252,700 and $164,030 to employees as 401(k) Plan employer matching contributions during the first nine months of 2006 and 2005, respectively. The Company also issued 105,455 and 98,659 shares of common stock to the Board of Directors members in lieu of cash compensation of $150,800 and $158,188 during the nine months ended September 30, 2006 and 2005, respectively.

The Company issued 465,400 and 474,800 shares of restricted stock valued at $763,256 and $1,044,560 to employees as restricted stock during the nine months ended September 30, 2006 and 2005, respectively. The Company also converted Series C and New Debentures during the nine months ended September 30, 2006. See note 6 for further details on these conversions.

During the nine months ended September 30, 2006, the Company issued 216,096 shares of common stock valued at $308,690 as dividend payments on the Series C Preferred Stock.

During the nine months ended September 30, 2006, the Company issued 200,000 shares of restricted stock for two consulting agreements. See Note 9 for more information on this issuance of restricted stock.

NOTE 9—INVESTMENT IN GECKO ENERGY TECHNOLOGIES, INC.

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 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 based on direct expenses to be incurred by the Company throughout 2006. In July 2006, the Company increased its equity position to a total of 34.8% of Gecko’s outstanding common stock by investing another $0.5 million in cash. The Company is obligated to further increase its equity position to a total of 48% of Gecko’s outstanding stock by investing another $0.55 million in cash or the Company’s common stock no later than December 31, 2006. As part of the transaction, the Company received the right to purchase an additional $4 million of Gecko’s common stock payable in cash and services, at its sole option, for up to 80% of Gecko over the remaining 2 years of the agreement (excluding shares issuable under Gecko’s benefit plans). The Company must elect to purchase this additional common stock during the fourth quarter of 2006. Any purchased stock will be valued at fair value on the date of the acquisition.

The Company’s investment in Gecko is accounted for using the equity method of accounting as the investment gives the Company the ability to exercise significant influence, but not control, over Gecko. Significant influence is deemed to exist as of September 30, 2006 since the Company had an approximately 35% ownership interest in the voting stock of Gecko as of such date. As of September 30, 2006, the Company’s investment in Gecko represented approximately 12% of the Company’s total assets.

As of September 30, 2006, the investment in Gecko was approximately $1.2 million. Of the $1.2 million investment in Gecko, approximately $0.7 million is equity method goodwill. This equity method goodwill is not amortized. Equity method goodwill arises when the Company's investment in Gecko exceeds its applicable share of the fair market value of Gecko's net assets at the investment date. In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” equity method goodwill is not amortized or tested for impairment in accordance with this standard. The Company reviews the equity method goodwill in accordance with APB 18, “The Equity Method of Accounting for Investments in Common Stock”, under which the Company would recognize an impairment loss when there is a loss in the value of the equity method investment which is deemed to be other than a temporary decline. No impairments were recognized during the three and nine months ended September 30, 2006. The following is a summary of aggregate financial information for the Company’s investment in Gecko for the nine months ended, September 30, 2006:

Condensed consolidated statement of operations data
Net loss	$	859,398
Company’s share of net loss		231,974

Condensed consolidated balance sheet data at period end
Assets	$	907,018
Liabilities		7,221
Equity		899,787
Company’s investment in equity investee	$	1,217,498

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 September 30, 2006 versus Three Months Ended September 30, 2005

Revenues. Revenues for the three months ended September 30, 2006 were $4,900 compared to $140,148 for the same period of 2005, a decrease of $135,248. 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 catalyst sales, 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 which technology is delivered, licensing revenues are earned, or as services are provided.

Cost of Revenues. Cost of revenues for the three months ended September 30, 2006 were $4,900 compared to $100,673 for the same period of 2005, a decrease of $95,773. Cost of revenues during the development stage represent the Product Development and Marketing expenses and Research and Development expenses associated with the revenue earned.

Product Development and Marketing Expense. Product development and marketing expenses for the three months ended September 30, 2006 were $763,085 compared to $867,219 for the same period of 2005, a decrease of $104,134. The expenses decreased due to increased cost reimbursements under government funded programs as compared to the same period last year.

General and Administrative Expense. General and administrative expenses for the three months ended September 30, 2006 were $645,567 compared to $1,438,435 for the same period of 2005, a decrease of $792,868. The decrease was mainly the result of the non-recurrence of professional fees associated with strategic and financial transactions closed in 2005.

Non-cash Charges. Non-cash charges were $395,716 for the three months ended September 30, 2006 compared to $102,308 for the same period of 2005, an increase of $293,408. During the three months ended September 30, 2006, we recorded non-cash charges of $369,888 for the amortization of restricted stock awards granted to the founders of Gecko under two consulting agreements, the amortization of restricted stock issued to employees, the issuance of Board of Directors compensation and the issuance of 401(K) match to employees, compared to $102,308 for the amortization of restricted stock awards recorded during the three months ended September 30, 2005.

The following is a breakdown by function of non-cash charges for the three months ended September 30:

	2006		2005
Product development and marketing	$	15,779	$	20,032
General and administrative		374,302		77,430
Research and development		5,635		4,846
Total	$	395,716	$	102,308

Depreciation and Amortization. Depreciation and amortization was $72,272 for the three months ended September 30, 2006 compared to $75,433 for the same period of 2005, a decrease of $3,161. The decrease reflects the impact of assets that have been fully depreciated.

Research and Development Expense. Research and development expenses were $15,345 for the three months ended September 30, 2006 compared to $98,984 for the same period of 2005, a decrease of $83,639. 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 $450,224 and $230,072 for 2006 and 2005, respectively, and were primarily responsible for the decrease year over year.

Interest Expense, net. Net interest expense was $137,105 for the three months ended September 30, 2006 compared to $816,853 for the same period of 2005, a decrease of $679,748. The decrease was mainly attributable to fewer conversions of convertible securities which result in beneficial conversion feature charges, accelerated discount amortization, amortization of original issue discounts and issue costs on our debentures.

Nine Months Ended September 30, 2006 versus Nine Months Ended September 30, 2005

Revenues. Revenues for the nine months ended September 30, 2006 were $87,004 compared to $268,475 for the same period of 2005, a decrease of $181,471. While in the development stage, our revenues are expected to fluctuate from year to year with the timing of prototype development and design services.

Cost of Revenues. Cost of revenues for the nine months ended September 30, 2006 were $87,004 compared to $229,000 for the same period of 2005, a decrease of $141,996. Cost of revenues during the development stage represent the Product Development and Marketing expenses and Research and Development expenses associated with the revenue earned.

Product Development and Marketing Expense. Product development and marketing expenses for the nine months ended September 30, 2006 were $2,498,158 compared to $2,747,853 for the same period of 2005, a decrease of $249,695. The expenses decreased due to an increased number government funded programs and subsequent cost reimbursements compared to the same period last year.

General and Administrative Expense. General and administrative expenses for the nine months ended September 30, 2006 were $2,756,466 compared to $4,165,469 for the same period of 2005, a decrease of $1,409,003. The decrease was mainly the result of the non-recurrence of professional fees associated with strategic and financial transactions closed in 2005.

Non-cash Charges. Non-cash charges were $3,049,470 for the nine months ended September 30, 2006 compared to $3,132,590 for the same period of 2005, a decrease of $83,120. During the nine months ended September 30, 2006, and 2005, we recorded non-cash charges of $2,113,695 and $2,413,722, respectively for the issuance of Series A Preferred Stock to the Dow Chemical Company. During the nine months ended September 30, 2006, we recorded non-cash charges of $967,793 for the amortization of restricted stock awards granted to the founders of Gecko under two consulting agreements, the amortization of restricted stock issued to employees, the vesting of stock options and the issuance of stock options to a director, compared to $718,868 for the amortization of restricted stock awards recorded during the nine months ended September 30, 2005.

The following is a breakdown by function of non-cash charges for the nine months ended September 30:

	2006		2005
Product development and marketing	$	1,754,072	$	2,568,680
General and administrative		1,278,493		515,571
Research and development		16,905		48,339
Total	$	3,049,470	$	3,132,590

Depreciation and Amortization. Depreciation and amortization was $287,597 for the nine months ended September 30, 2006 compared to $216,583 for the same period of 2005, an increase of $71,014. The increase is mainly attributable to the accelerated amortization of non-core intellectual property we chose to abandon.

Research and Development Expense. Research and development expenses were $237,694 for the nine months ended September 30, 2006 compared to $524,162 for the same period of 2005, a decrease of $286,468. 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 $1,027,393 and $593,880 for 2006 and 2005, respectively, and were primarily responsible for the decrease year over year.

Interest Expense, net. Net interest expense was $510,662 for the nine months ended September 30, 2006 compared to $1,514,582 for the same period of 2005, a decrease of $1,003,920. The decrease was mainly attributable to fewer conversions of convertible securities which result in beneficial conversion feature charges, accelerated discount amortization, amortization of original issue discounts and issue costs on our debentures.

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 in a private placement of our redeemable Series C Preferred Stock. In May 2006, we received proceeds of $1.25 million in a private placement of Series B Preferred Stock.

Convertible Debentures

On November 8, 2002, we issued a $2.4 million secured convertible debenture with a maturity date of November 8, 2005 to Ballard Power Systems Inc. (“Ballard”). 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 holders 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 nine months ended September 30, 2006, we have converted $1,500,000 of the New Debentures in exchange for 929,927 of our common stock and recorded a BCF of $105,000 associated with the conversions. On October 24, 2006, we converted $450,000 of the New Debentures in exchange for 422,535 shares of common stock.

Redeemable Series C Preferred Stock

On April 25, 2005, the 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”). Each Series C share is initially convertible into 500 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 a higher number of shares at a lower conversion price 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 the Company 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. During the nine months ended September 30, 2006 and 2005, we recorded $162,224 and $519,398, respectively for the amortization of the discount.

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. During the nine months ended September 30, 2006, we issued 216,096 shares valued at $308,690 in satisfaction of the quarterly dividend payments for the Series C. These dividends were recorded as interest expense since the Series C was recorded as a liability as of September 30, 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 nine months ended September 30, 2006, we converted $432,000 of the Series C in exchange for 263,669 shares of our common stock. As of September 30, 2006, approximately $5.0 million of the Series C have been converted into 2,587,412 shares of our common stock and we have released $1,065,996 from restricted cash for the conversions and dividends paid.

Series A and Series B 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 each share of which is initially 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 closing price of our common stock on April 25, 2005.

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 elects to purchase shares of our Series B Preferred Stock in such instances, we will issue to Dow additional shares of Series A Preferred Stock at market value such that Dow will own a certain percentage of our capital stock as of the date of issuance as provided in the Dow Stock Purchase Agreement. 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 at market value.

On May 3, 2006, we both agreed that the first milestone under the joint development agreement was met. Dow elected to purchase 71,429 shares of Series B Preferred Stock for $1,250,000, and received detachable warrants to purchase 178,571 shares of our common stock with an exercise price of $2.10 per share which were recorded as a discount to Series B Preferred Stock for $159,227 based on the fair value of the warrants at the date of the issuance. Series B Preferred Stock is initially convertible into ten shares of our common stock. The shares of Series B Preferred Stock bear a 6% cumulative dividend payable in shares of common stock or cash, at our option and are junior to Series A Preferred Stock. In accordance with the joint development arrangement and achievement of the first milestone, we issued 138,150 shares of Series A Preferred Stock that were earned by Dow through human resource and intellectual property contributions toward achievement of the first milestone. As a result of the issuance of Series A Preferred Stock, we recorded a non-cash charge of $2,113,695 as product development expense based on the market value of the underlying common stock as of May 26, 2006.

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 addition to the joint development program, 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. In July 2006, we increased our equity position to a total of 34.8% of Gecko’s outstanding common stock by investing another $0.5 million in cash. We are obligated to further increase its equity position to a total of 48% of Gecko’s outstanding stock by investing another $0.55 million in cash or shares of our common stock no later than December 31, 2006. As part of the transaction, we received the right to purchase an additional $4 million of Gecko’s common stock payable in cash and services, at its sole option, for up to 80% of Gecko over the remaining 2 years of the agreement (excluding shares issuable under Gecko’s benefit plans). We must elect elect to purchase this additional common stock during the fourth quarter of 2006. Any purchased stock will be valued at fair value on the date of the acquisition.

We issued 200,000 shares of restricted stock awards to Ronald Kelley and Steven Pratt, the principal shareholders of Gecko, during the nine months ended September 30, 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 is fully vested as of September 30, 2006. 150,000 shares of these restricted stock award had a $232,500 fair value at the date of grant and vests on a graded basis over three years and we recorded a non-cash charge of $165,529 with respect to the vesting of this award during the nine months ended September 30, 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 September 30, 2006, we had $6,052,536 in cash and cash equivalents and restricted cash of $1,332,459. Cash used in operations totaled $5,548,125 and $6,612,530 during the nine months ended September 30, 2006 and 2005, respectively, and related to primarily funding our net operating losses.

Excluding changes in restricted cash, investing activities used cash of $1,519,032 and $131,097 during the nine months ended September 30, 2006 and 2005, respectively. The increase in 2006 from 2005 was directly related to our 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 our amended lease agreement (see contractual obligations table below). 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 September 30, 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 September 30, 2006, we have repaid approximately $71,193.

Our contractual obligations are in the table outlined below:

Payment due in fiscal years
			2006
	Contractual Obligations		(three months
	Total		remaining)		2007		2008		2009		2010
Operating lease - facility	$	1,049,338	$	121,078	$	484,310	$	443,950	$	—	$	—
Refundable grant obligation		156,329		—		4,350		—		—		151,979
Gecko Energy Technologies, Inc. (1)		550,000		550,000		—		—		—		—
Convertible unsecured debentures (2)		899,988		—		899,988		—		—		—
Redeemable Series C Preferred Stock (2)		4,765,639		—		—		4,765,639
Total	$	7,421,294	$	671,078	$	1,388,648	$	5,209,589	$	—	$	151,979

(1) The Gecko Energy Technologies, Inc obligation 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, based upon our current cash and cash equivalents and our projection for the source and uses of our cash during the fourth quarter, we will have a sufficient cash and cash equivalents to satisfy anticipated cash needs for the first nine months of 2007. We expect to complete an additional financing no later than the first quarter of 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.

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 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.

Recent Accounting Pronouncements

See Note 2 for more information related to new accounting pronouncements.

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.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining a system of adequate internal and disclosure controls and procedures over our financial reporting. Such controls and procedures are 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 all members of 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, has 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 covered by this Quarterly Report. 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. We have implemented an upgrade of our accounting and timekeeping systems to help further manage our business.

PART II

Item 1. Legal Proceedings.

(a) None.

Item 1A. Risk Factors.

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

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

None.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits

10.1†	—	Entry into a Material Definitive Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on September 29, 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.

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)
Date: November 14, 2006	By:	/s/ H. David Ramm
		H. David Ramm
		Chief Executive Officer


	MILLENNIUM CELL INC.
	(Registrant)
Date: November 14, 2006	By:	/s/ John D. Giolli
		John D. Giolli
		Chief Financial Officer

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