UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2005 or
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____ to _____
Commission file number:
| Electro Energy Inc. |
| (Exact name of small business issuer in its charter) |
| |
| Florida | | 59-3217746 |
(State or other jurisdiction of incorporation or
organization) | | (I.R.S. Employer Identification No.) |
30 Shelter Rock Road
Danbury, CT | | 06810 |
| (Address of principal executive offices) | | (Zip Code) |
Issuer's telephone number: (203) 797-2699
Securities Registered Under Section 12(b) of the Exchange Act:None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
(Title of class)
Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act
during the past 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 No
As of May 3, 2005, 12,884,047 shares of Common Stock, par value $.001 per share, were outstanding.
Transitional Small Business Disclosure Format (Check one): Yes No
ELECTRO ENERGY INC.
INDEX
| | | Description | Page
Number |
| Part I | | FINANCIAL INFORMATION | |
| Item 1 | | Financial Statements | 1 |
| Item 2 | | Management's Discussion and Analysis or Plan of Operation | 2 |
| Item 3 | | Controls and Procedures | 5 |
| | | | |
| Part II | | OTHER INFORMATION | |
| Item 1 | | Legal Proceedings | 5 |
| Item 2 | | Unregistered Sales of Equity Securities and Use of Proceeds | 5 |
| Item 3 | | Defaults Upon Senior Securities | 6 |
| Item 4 | | Submission of Matters to a Vote of Security Holders | 6 |
| Item 5 | | Other Information | 6 |
| Item 6 | | Exhibits and Reports on Form 8-K | 6 |
| | | | |
| Signatures | | | 7 |
ii
Forward-looking Statement Disclaimer
Forward-looking statements in this report, including without limitation, statements related to the Company’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) the Company’s plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company; (ii) the Company’s plans and results of operations will be affected by the Company’s ability to manage its growth; and (iii) other risks and uncertainties indicated from time to time in the Company’s filings with the Securities and Exchange Commission.
In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this report.
PART I
Item 1. FINANCIAL STATEMENTS.
The full text of the Company’s unaudited condensed consolidated financial statements for the three months ended March 31, 2005 and 2004 begins on page F-1 of this Report.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
You should read the following discussion and analysis together with the financial statements and related notes included elsewhere in this report. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in any forward-looking statements as a result of many factors.
Results of Operations
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
Net Revenue
Consolidated net revenue for the three months ended March 31, 2005 was $1,050,314 compared with $1,824,004 for 2004, a decrease of $773,690, or 42.4%. Of the revenue decrease, $931,970 was attributable to a reduction of revenues of Mobile Energy Products, Inc. (“MEP”), whose product manufacturing operations were acquired on October 1, 2003 from EaglePicher Technologies, LLC (“EaglePicher”) offset by revenue increases of $158,280 for the services operations.
Consolidated net revenue included net revenue pursuant to a supply agreement with EaglePicher amounting to $100,964 or 9.6%, and $1,106,439, or 60.7% for the three months ended March 31, 2005 and 2004, respectively.
Net revenue from services for the three months ended March 31, 2005 was $863,734 compared with $705,454 for 2004, an increase of $158,280, or 22.4%. The primary reason for the increase in the research and development services operations business was related to the recovery of increased estimated overhead and general and administrative fixed rates billable to existing U.S. government research and development contracts. Contract backlog as of March 31, 2005 was $1,023,388.
1
The underlying government and commercial contracts pertaining to net revenue from services for the periods mentioned are primarily with the U.S. Air Force, U.S. Army, U.S. Navy, Department of Energy, and commercial customers with performance periods that commenced July 1, 2000 and continue through March 15, 2006 requiring deliverables involving periodic status reports and in certain cases prototypes. Most government contracts are negotiated as cost plus fixed fee (“CPFF”), while others are firm fixed price (“FFP”), milestone or cost plus cost share (“CPCS”) type contracts. Commercial orders are contracted by purchase order (“PO”). At the completion of each contract and after all contract requirements have been met, a final invoice is submitted, audited, and satisfied. In the event overhead and general and administrative rates are recalculated at less than billed amounts, a credit is issued to the buying party. In past history, the Company has received complete contract funding on all awards as agreed.
Net revenue from products for the three months ended March 31, 2005 was $186,580 and $1,118,550 for the three months ended March 31, 2004, a decrease of $931,970, or 83.3%. The primary reason for the decrease resulted from the reduction in order volume pursuant to a supply agreement with EaglePicher amounting to $100,964, or 54.1%, and $1,106,439, or 98.9% for the three months ended March 31, 2005 and 2004, respectively. The Company expects this trend to continue into the first half of 2005.
Gross Profit
Consolidated gross (loss) profit for the three months ended March 31, 2005 was $(385,355) (-36.7% of net revenue) compared to $363,840 (19.9% of net revenue) for the three months ended March 31, 2004, a decrease of $749,195, or 205.9%. The gross profit decrease was mainly driven by consolidating the revenues and cost of revenues of MEP. MEP operated below full capacity in the first quarter of 2005. As a result, the Company’s operating margin included unabsorbed overhead incurred in the period. The Company expects this trend to continue into the first half of 2005.
Gross (loss) profit from services for the three months ended March 31, 2005 was $(19,507) (-2.3% of net revenue) compared to $51,859 (7.4% of net revenue) for the three months ended March 31, 2004. The gross profit from services pertains to gross profit earned on the Company’s research and development contracts with the U.S. government and its agencies. The typical gross profit attainable under these contracts ranges from 6-10%. The decrease in gross profit was mainly driven by a non cash expense related to the value of warrants issued in connection with a development agreement entered into on March 31, 2005 with a private venture capital firm. See Related Parties below.
The components of costs of revenues for services include direct materials, direct labor, an operating overhead allocation based upon direct labor usage, and a general and administrative overhead allocation based upon the percentage of contract costs relative to the total. Overhead and general and administrative expenses are billable at contracted fixed rates during the course of the year. Spending in excess of the contracted amount can be recovered provided there are funds available in the contract sufficient to cover the excess expenses and the adjustment is approved by the Defense Contract Audit Agency. A rate of spending below the billed contracted fixed rates during the course of the year may result in a return of funds to the contract.
Gross (loss) profit from products for the three months ended March 31, 2005 was $(365,848)(-196.1% of net revenue) and gross profit from products for the three months ended March 31, 2004 was $311,981 (27.9% of net revenue). MEP operated below full capacity in the first quarter of 2005. As a result, the Company’s operating margin included unabsorbed overhead incurred in the period. The Company expects this trend to continue into the first half of 2005.
The components of costs of revenues for products include direct materials, direct labor, and an operating overhead allocation based upon direct labor usage. An operating overhead cost pool is estimated to support the forecasted manufacturing activities in advance of the year. The overhead is assigned as product is produced based upon direct labor usage using an absorption method. Any unabsorbed overhead is expensed in the period incurred.
2
General and Administrative Expenses
�� General and administrative (“G&A”) expenses for the three months ended March 31, 2005 were $589,753 (56.2% of net revenue) compared with $220,821 (12.1% of net revenue) for the three months ended March 31, 2004, an increase of $368,932. The increase in G&A for the three months ended March 31, 2005 was primarily a result of increasing the Company’s support from professional service providers and increasing its general and administrative staffing to satisfy compliance with reporting requirements as a public company since the reverse merger in June 2004. The increase in G&A for the three months ended March 31, 2005 included accounting and legal services of $164,122, salaries for a chief financial officer and executive assistant of $39,079, selling expenses of $52,274, investor relations expenses of $44,949, other public company related expenses of $19,021, and other expenses of $39,987. The Company expects to continue to experience similar expenditures into 2005. Additionally, an increase of $9,500 of expense was related to the amortization of stock-based employee compensation expense related to the issuance of stock options to employees for 2004. The deferred compensation expense related to stock options issued to employees during 2004 was $1,592,178. The remaining balance as of March 31, 2005 was $1,075,623 and will be fully amortized through December 2007.
Research and Development Expenses
Research and development (“R&D”) expenses for the three months ended March 31, 2005 were $31,308 (3.0% of net revenue). No R&D expenses were incurred in the three months ended March 31, 2004. The primary nature of the R&D expenses in the three months ended March 31, 2005 relate to a milestone contract from a venture capital firm for research of certain battery technologies. In March 2004, EEI had issued warrants to purchase 156,250 shares of its EEI Preferred Stock in connection with a contract to receive a total of $500,000 in cash funding from a venture capital firm for intended use in the research and development of certain battery technologies. The contract provided for scheduled payments to the Company if it performed certain research and development activities over a nine-month period. The Company fulfilled its obligation under this contract in the first quarter of 2005.
Interest (Income) Expense
Interest income, net for the three months ended March 31, 2005 was $2,118, compared with interest expense, net of $97,191 for the three months ended March 31, 2004, a decrease of $99,309. The decrease was primarily related to the accretion of deferred interest related to the notes payable to related parties for the three months ended March 31, 2004. Concurrent with the merger, the Company converted its notes payable to related parties and related accrued interest amounting to $1,100,000 and $86,000, respectively into shares of its common stock. The notes carried interest at 10% per annum and were due on demand maturing in November 2004.
Net (Loss) Income
Net loss for the three months ended March 31, 2005 was $(1,004,298) or $(0.08) cents per share (basic and diluted), compared to net income of $45,828 or $0.01 per share (basic and diluted) for the three months ended March 31, 2004.
Related Parties
The Company has agreements with certain related parties who provide consulting services to the Company. Related party services of an administrative nature were included in general and administrative-related parties as an operating expense in the amount of $10,485 for the three months ended March 31, 2005 compared with $21,904 for the three months ended March 31, 2004. The Company has an agreement with the owner of E.F.S. Management Systems, a shareholder of the Company’s common stock, to provide accounting and business management services and supervision of accounting personnel. The Company has an agreement with Jack T. Brown, a shareholder of the Company’s common stock, to provide consulting services.
On March 31, 2005, the Company entered into a development agreement to receive a total of $450,000 in cash funding from a private venture capital firm, a shareholder of the Company’s common stock, for intended use in the research and development of certain battery technologies. The contract provides for scheduled payments to the Company if it performs certain research and development activities over a 24-month period. The Company has entered into a sub-contract agreement with Rutgers University to perform certain of these activities for $350,000. In connection with this development agreement, the Company entered into an agreement whereby the Company will issue warrants containing certain cashless provisions to purchase up to 15,000 shares of the Company’s common stock upon exercise. The warrants are exercisable at $9.06 per share over a four-year period expiring in March 2009. The weighted average fair value of the warrants at the date of issuance using the Black Scholes option-pricing model is estimated at $5.58 per warrant. The total estimated value of the warrants, amounting to $83,767 was recorded as cost of services-related parties expense and other accrued liability. Further, a deferred contract cost and additional paid-in capital was recorded as of the date of issuance. The number of warrants that are exercisable are directly proportional to the amount of the scheduled payments that are received by the Company for performance of the development agreement.
3
Financial Condition
Liquidity and Capital Resources
The Company's working capital, current ratio and long-term debt to equity ratio are as follows:
| | As of March 31, 2005 | As of December 31, 2004 | |
| | Working capital | $3,091,207 | | $3,971,928 | |
| | Current ratio | 4.87 | | 7.37 | |
| | Long-term debt to equity ratio | 7.5% | | 6.1% | |
The Company has a non-interest bearing note payable to EaglePicher requiring three annual installments of $150,000 that commenced in October 2004 and is secured by assets acquired in connection with the purchase of its Colorado Springs energy business. As of March 31, 2005, the note payable had a face value of $300,000 with a remaining discount to fair value of $15,362. During the three months ended March 31, 2005, the Company accreted an additional $3,451 of interest at an effective rate of 5%, increasing the fair value of the note payable to $284,638.
The Company has a note payable with Connecticut Innovations, Incorporated (“CII”) in the amount of $183,579. The note payable has a three-year term with principal payments of $61,193 plus applicable interest at a fixed rate of 5% to be made annually on December 31st.
During the three months ended March 31, 2005, warrants were exercised for proceeds of $60,000 in exchange for 292,594 shares of common stock. As of March 31, 2005, 1,821,590 warrants are outstanding with expiration dates ranging from July 16, 2007 through March 31, 2009. The maximum potential future proceeds from the exercise of the warrants outstanding are $3,553,046. The weighted average exercise price of the outstanding warrants is $1.95.
The Company’s government contracts are each individually negotiated under their own terms and conditions with reference to the Federal Acquisition Regulations and are typically fully funded cost-reimbursement type. There is usually an 85% limitation placed on the fixed fee whereby 15% is withheld by the government until all contract requirements are satisfied and closeout documents submitted. There are no obligations for royalties.
Net cash used in operating activities totaled $751,124 and $170,044 for the three months ended March 31, 2005 and 2004, respectively. Seventeen percent of accounts receivable as of March 31, 2005 are past due compared with 51% as of March 31, 2004. The past due accounts receivable are primarily with three customers and the Company believes those accounts will be collected in full during the second quarter of 2005. During the three months ended March 31, 2005, the Company began to build inventory components for future use. The Company made certain advance payment to suppliers for equipment in the amount of $151,500. The Company accrued expenses primarily relating to legal and accounting services in connection with the preparation of its SEC filings.
The Company invested $153,798 in property and equipment for the three months ended March 31, 2005, compared with $8,804 for the three months ended March 31, 2004. Current year additions relate primarily to the construction in progress for production equipment for the development of its nickel metal hydride and lithium-ion product lines. Prior year additions relate primarily to the purchase of electronic data processing.
Cash expected to be generated from operating activities, together with funds available resulting from the proceeds of the private placement of series A convertible preferred stock, are expected, under current conditions, to be sufficient to finance the Company’s planned operations over the next twelve months. Over that same period, the Company expects to make an investment of $700,000 in plant, property, and equipment to expand its manufacturing capabilities to manufacture its patented bipolar nickel-metal hydride batteries.
4
Item 3. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the filing date of this report (the “Evaluation Date”), concluded that the Company’s disclosure controls and procedures were effective and designed to ensure that material information relating to the Company is accumulated and would be made known to them by others as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Controls
The Company does not believe that there are significant deficiencies in the design or operation of its internal controls that could adversely affect its ability to record, process, summarize and report financial data. Although there were no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the Evaluation Date, the Company’s senior management, in conjunction with its Board of Directors, continuously reviews overall company policies and improves documentation of important financial reporting and internal control matters. The Company is committed to continuously improving the state of its internal controls, corporate governance and financial reporting.
Limitations on the Effectiveness of Controls
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that its disclosure or internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II
Item 1. LEGAL PROCEEDINGS.
None.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On June 9, 2004, the Company completed a "reverse merger" transaction, in which the Company caused EEI Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the Company, to be merged with and into Electro Energy, Inc., a Delaware corporation engaged in the business of developing, manufacturing and commercializing high-powered, rechargeable bipolar nickel-metal hydride batteries for use in a wide range of applications (hereinafter referred to as "EEI"). As a result of the merger, EEI became the Company's wholly-owned subsidiary with EEI's former security holders acquiring a majority of the outstanding shares of the Company's common stock. The reverse merger was consummated under Delaware law, pursuant to an Agreement of Merger and Plan of Reorganization, dated May 7, 2004 (the "Merger Agreement"), as discussed below. Concurrently with the closing of the reverse merger, the Company completed a private placement to new investors of shares of its series A convertible preferred stock and warrants to purchase common stock.
During the year ended December 31, 2004, the Company sold an aggregate of 5,501 units in a private placement financing for gross proceeds of $5,501,000. Each unit consists of one share of series A convertible preferred stock and a warrant to purchase shares of common stock. Each share of preferred stock is convertible initially into 400 shares of our common stock, and each warrant entitles the holder to purchase 200 shares of common stock at an exercise price of $2.50 per share for three years after the date of closing.
The shares of series A convertible preferred stock and the warrants issued in the private placement have customary anti-dilution protection in the event of stock dividends, stock splits, combinations of shares, recapitalizations or other like events.
5
The private placement was made solely to “accredited investors,” as that term is defined in Regulation D under the Securities Act of 1933. The shares of series A convertible preferred stock and warrants to purchase common stock were not registered under the Securities Act of 1933, or the securities laws of any state, and were offered and sold in reliance on the exemption from registration afforded by Section 4(2) and Regulation D (Rule 506) under the Securities Act of 1933 and corresponding provisions of state securities laws.
The Company expects to use the net proceeds of the private placement to finance the commercialization of its battery technologies approximately as follows:| | Application of Proceeds | Amount | | Percentage of
Proceeds | |
| |
|
|
|
| |
| | Research and Development | $ 300,000 | | 5% | |
| | Manufacturing | 2,250,000 | | 41% | |
| | General and Administrative | 350,000 | | 6% | |
| | Sales and Marketing | 1,050,000 | | 19% | |
| | Transaction Costs(1) | 911,000 | | 17% | |
| | Working Capital | 390,000 | | 7% | |
| | Capital Markets Initiatives(2) | 250,000 | | 5% | |
| | |
|
|
| |
| | Total | $ 5,501,000 | | 100% | |
| | |
|
|
| |
| | (1) | Includes fees of $377,000 payable to the placement agent for the private placement, Brookshire Securities, and $150,000 payable to Matrix USA, LLC. | |
| | | | |
| | (2) | Includes amounts to be used for expenditures related to being a public company such as creating investor awareness, and held in a separate bank account pending utilization in each case as approved by our financial advisor. | |
The Company reserves the right to modify the allocation of proceeds.
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 AND REPORTS ON FORM 8-K.
(a) Exhibits.
(1) Filed herewith.6
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | ELECTRO ENERGY INC. |
| | | | |
| | | | |
| | | By: | /s/ Martin G. Klein |
| | | |
|
| | | | Name: Martin G. Klein |
| | Date: May 16, 2005 | | Title: Chairman and Chief Executive Officer |
7
ELECTRO ENERGY INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 2005 (unaudited) and
December 31, 2004 | F-2 |
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2005 and 2004 (unaudited) | F-4 |
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 and 2004 (unaudited) | F-5 |
| Notes to Condensed Consolidated Financial Statements (unaudited) | F-7 |
F-1
ELECTRO ENERGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| | | | | | |
| ASSETS | | | | | |
| | | | | | |
| | As of March 31, | | | As of December 31, |
| | 2005 | | | 2004 |
| | (UNAUDITED) | | | |
| |
|
| |
|
|
| CURRENT ASSETS | | | | | |
| Cash and cash equivalents | $ | 2,627,564 | | $ | 3,372,486 |
| Accounts receivable, net of allowance for doubtful accounts of $20,554 | | 713,104 | | | 851,632 |
| Inventories | | 314,064 | | | 244,492 |
| Prepaid expenses and other current assets | | 235,745 | | | 126,475 |
| |
|
| |
|
|
| | | | | | |
| Total Current Assets | | 3,890,477 | | | 4,595,085 |
| | | | | | |
| PROPERTY AND EQUIPMENT, Net | | 666,147 | | | 533,273 |
| | | | | | |
| SECURITY DEPOSIT | | 8,471 | | | 8,471 |
| |
|
| |
|
|
| | | | | | |
| TOTAL ASSETS | $ | 4,565,095 | | $ | 5,136,829 |
| |
|
| |
|
|
| | | | | | |
| The accompanying notes are an integral part of these condensed consolidated financial statements. |
F-2
ELECTRO ENERGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | |
| | | | | | |
| | As of March 31, | | | As of December 31, |
| | 2005 | | | 2004 |
| | (UNAUDITED) | | | |
| |
|
| |
|
|
| CURRENT LIABILITIES | | | | | |
| Current maturities of long-term debt | $ | 211,193 | | $ | 211,193 |
| Accounts payable | | 170,643 | | | 144,425 |
| Accounts payable - related parties | | 3,000 | | | 7,525 |
| Interest payable | | 2,295 | | | - |
| Accrued expenses and other current liabilities | | 412,139 | | | 260,014 |
| |
|
| |
|
|
| Total Current Liabilities | | 799,270 | | | 623,157 |
| |
|
| |
|
|
| | | | | | |
| OTHER LIABILITIES | | | | | |
| Long term debt, less current maturities | | 257,024 | | | 253,573 |
| Deferred rent | | 78,150 | | | 84,660 |
| |
|
| |
|
|
| Total Other Liabilities | | 335,174 | | | 338,233 |
| |
|
| |
|
|
| TOTAL LIABILITIES | | 1,134,444 | | | 961,390 |
| |
|
| |
|
|
| COMMITMENTS AND CONTINGENCIES | | | | | |
| STOCKHOLDERS' EQUITY | | | | | |
Preferred stock, $0.001 par value, 10,000 shares authorized;
Series A Convertible Preferred Stock, 5,600 shares designated; 5,501
shares issued, 4,691 and 4,951 outstanding in 2005 and 2004,
respectively ($4,691,000 and $4,951,000 liquidation preference) | | 5 | | | 5 |
Common stock, $0.001 par value, 50,000,000 shares
authorized; 12,844,047 shares issued and outstanding in 2005,
12,447,453 shares issued and outstanding in 2004 | | 12,844 | | | 12,448 |
| Additional paid-in capital | | 12,976,174 | | | 12,832,804 |
| Deferred compensation expense | | (1,075,623) | | | (1,175,134) |
| Deferred contract costs | | (83,767) | | | - |
| Warrant subscription receivable | | (50,000) | | | (150,000) |
| Accumulated deficit | | (8,348,982) | | | (7,344,684) |
| |
|
| |
|
|
| TOTAL STOCKHOLDERS' EQUITY | | 3,430,651 | | | 4,175,439 |
| |
|
| |
|
|
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 4,565,095 | | $ | 5,136,829 |
| |
|
| |
|
|
| | | | | | |
| The accompanying notes are an integral part of these condensed consolidated financial statements. |
F-3
ELECTRO ENERGY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended March 31, 2005 and 2004
|
| | | | | |
| | 2005 | | | 2004 |
| |
|
| |
|
|
| NET REVENUE | | | | | |
| Services | $ | 863,734 | | $ | 705,454 |
| Products | | 186,580 | | | 1,118,550 |
| |
|
| |
|
|
| TOTAL NET REVENUE | | 1,050,314 | | | 1,824,004 |
| |
|
| |
|
|
| COST OF REVENUE | | | | | |
| Cost of services | | 799,474 | | | 653,595 |
| Cost of services - related parties | | 83,767 | | | - |
| Cost of products | | 552,428 | | | 806,569 |
| |
|
| |
|
|
| TOTAL COST OF REVENUE | | 1,435,669 | | | 1,460,164 |
| |
|
| |
|
|
| GROSS (LOSS) PROFIT | | (385,355) | | | 363,840 |
| |
|
| |
|
|
| OPERATING EXPENSES | | | | | |
General and administrative (including non cash compensation of $99,511
and $90,011 in 2005 and 2004, respectively) | | 579,268 | | | 198,917 |
| General and administrative - related parties | | 10,485 | | | 21,904 |
| Research and development | | 31,308 | | | - |
| |
|
| |
|
|
| TOTAL OPERATING EXPENSES | | 621,061 | | | 220,821 |
| |
|
| |
|
|
| OPERATING (LOSS) INCOME | | (1,006,416) | | | 143,019 |
| | | | | | |
| INTEREST EXPENSE | | | | | |
| Interest (income) expense | | (2,118) | | | 11,093 |
| Interest expense - related parties | | - | | | 86,098 |
| |
|
| |
|
|
| TOTAL INTEREST (INCOME) EXPENSE | | (2,118) | | | 97,191 |
| |
|
| |
|
|
| NET (LOSS) INCOME | $ | (1,004,298) | | $ | 45,828 |
| |
|
| |
|
|
| BASIC (LOSS) INCOME PER SHARE | $ | (0.08) | | $ | 0.01 |
| |
|
| |
|
|
| DILUTED (LOSS) INCOME PER SHARE | $ | (0.08) | | $ | 0.01 |
| |
|
| |
|
|
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC | | 12,754,954 | | | 8,043,811 |
| |
|
| |
|
|
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED | | 12,754,954 | | | 8,986,095 |
| |
|
| |
|
|
| The accompanying notes are an integral part of these condensed consolidated financial statements. |
F-4
ELECTRO ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended March 31, 2005 and 2004
|
| | | | | | |
| | | 2005 | | | 2004 |
| |
|
| |
|
|
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
| Net (loss) income | $ | (1,004,298) | | $ | 45,828 |
| |
|
| |
|
|
Adjustments to reconcile net (loss) income to net
cash used in operating activities: | | | | | |
| Deferred rent | | (6,510) | | | 65,115 |
| Interest accretion | | 3,451 | | | 63,236 |
| Depreciation and amortization | | 20,924 | | | 19,170 |
| Deferred expenses, net | | 183,278 | | | 90,011 |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | | 138,528 | | | (149,222) |
| Inventories | | (69,572) | | | (179,959) |
| Prepaid expenses and other current assets | | (109,271) | | | 10,150 |
| Accounts payable | | 26,218 | | | (4,105) |
| Accounts payable - related parties | | (4,525) | | | (14,397) |
| Interest payable | | 2,295 | | | 3,705 |
| Interest payable - related parties | | - | | | (32,375) |
| Accrued expenses and other current liabilities | | 68,358 | | | (87,201) |
| |
|
| |
|
|
| TOTAL ADJUSTMENTS | | 253,174 | | | (215,872) |
| |
|
| |
|
|
| | | | | | |
NET CASH USED IN
OPERATING ACTIVITIES | | (751,124) | | | (170,044) |
| |
|
| |
|
|
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
| Purchases of property and equipment | | (153,798) | | | (8,804) |
| Receipt of security deposit | | - | | | (11,655) |
| |
|
| |
|
|
NET CASH USED IN
INVESTING ACTIVITIES | $ | (153,798) | | $ | (20,459) |
| |
|
| |
|
|
| | | | | | |
| The accompanying notes are an integral part of these condensed consolidated financial statements. |
F-5
ELECTRO ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended March 31, 2005 and 2004
|
| | | | | | |
| | | 2005 | | | 2004 |
| |
|
| |
|
|
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
| Repayments of long term debt | | - | | | (30,318) |
| Repayments under notes payable - related parties | | - | | | (50,000) |
| Proceeds from issuance of warrants | | - | | | 150,000 |
| Proceeds from warrant subscription receivable | | 100,000 | | | - |
| Proceeds from exercise of warrants and employee stock options | | 60,000 | | | 7,000 |
| |
|
| |
|
|
| | | | | | |
NET CASH PROVIDED BY
FINANCING ACTIVITIES | | 160,000 | | | 76,682 |
| |
|
| |
|
|
| NET DECREASE IN CASH AND CASH EQUIVALENTS | | (744,922) | | | (113,821) |
| | | | | | |
| CASH AND CASH EQUIVALENTS - Beginning | | 3,372,486 | | | 269,970 |
| |
|
| |
|
|
| | | | | | |
| CASH AND CASH EQUIVALENTS - Ending | $ | 2,627,564 | | $ | 156,149 |
| |
|
| |
|
|
| | | | | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | |
| Cash paid for: | | | | | |
| Interest | $ | - | | $ | 62,625 |
| Income taxes | $ | 1,314 | | $ | - |
| | | | | | |
| The accompanying notes are an integral part of these condensed consolidated financial statements. |
F-6
ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -The Company
Organization
On June 9, 2004, Electro Energy, Inc. (“EEI”), a Delaware corporation, entered into a merger with MCG Diversified, Inc. (“MCG”), incorporated in December 1993 in the State of Florida. MCG issued 9,497,557 unregistered shares of common stock for 100% of the outstanding common stock of EEI on a one-to-one basis. As MCG did not have any meaningful operations prior to the merger, the transaction was treated as a recapitalization of EEI, and accounted for, on an historical cost basis, for all periods presented. Moreover, the financial statements set forth in this report for all periods, prior to the recapitalization, are the financial statements of EEI and the common stock of EEI has been retroactively restated to give effect to the exchange for MCG common stock. Immediately following the merger, MCG changed its name to Electro Energy Inc. (“New EEI”).
The condensed consolidated financial statements presented are those of New EEI and its wholly-owned subsidiary, EEI. Additionally, the accounts of EEI include the accounts of Mobile Energy Products, Inc. (“MEP”), a wholly-owned subsidiary incorporated June 11, 2003, from its inception. Collectively, they are referred to herein as the “Company.” On October 1, 2003 the Company, through its MEP subsidiary acquired the Colorado Springs energy business of EaglePicher Technologies, LLC (“EaglePicher”).
Nature of Business
The Company is engaged in the development of products for use in providing energy and specifically focuses upon development of bipolar nickel metal hydride batteries and other battery chemistries and primarily provides contract research and development to the United States Government or its agencies.
Additionally, the Company also has commercially viable products marketed and sold primarily to the United States Government or its agencies. These products include batteries for aircraft, satellite and satellite launch vehicles.
NOTE 2 -Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with Form 10-QSB and Item 310 of Regulation S-B of the Securities and Exchange Commission. Accordingly, they do not contain all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to make the financial position of the Company as of March 31, 2005 and the results of its operations and its cash flows for the three months ended March 31, 2005 and 2004 not misleading. The condensed consolidated financial statements should be read in conjunction with the audited financial statements for the years ended December 31, 2004 and 2003 contained in Form 10-KSB/A filed on April 29, 2005.
Operating results for the three months ended March 31, 2005 are not necessarily indicative of results that would be expected for the year ended December 31, 2005.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of New EEI and MEP. All significant intercompany balances and transactions have been eliminated in consolidation.
F-7
ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Reclassifications
Certain accounts in the prior year financial statements have been reclassified for comparative purposes to conform with the presentation in the current year financial statements. These reclassifications have no effect on previously reported income.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and accounts receivable.
The Company maintains its cash accounts at financial institutions with balances, at times, in excess of federally insured limits. As of March 31, 2005, the Company had cash balances in excess of federally insured limits of $294,713. The Company also has substantial cash balances which are invested in a money market account with a bank.
Concentrations of credit risk with respect to accounts receivable are limited because the Company’s customers are primarily the United States Government or its agencies. Credit risk with respect to trade accounts receivable from private entities is not significant.
Revenue Recognition
In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. The following policies reflect specific criteria for the various revenues streams of the Company:
Revenue is recognized at the time the product is delivered. Provision for sales returns will be estimated based on the Company’s historical return experience. Revenue is presented net of returns.
Revenue on the Company’s research and development type contracts with the U.S. Government and its’ agencies are typically “cost plus” type contracts that contain a fixed fee element and/or a cost sharing arrangement. The Company is reimbursed for actual material, labor and overhead costs as incurred up to the funding limit of the contract. The Company submits a cost structure annually to the Defense Contract Audit Agency (DCAA) for approval to use the Company’s rates on government contracts. Throughout the life of each contract we estimate the cost to complete. When the Company estimates that a contract will exceed the funding amount management will seek additional funding from our customer or another outside source. Contract terms allow the Company to stop work should additional funding not be available. Should management decide to complete a contract without funding the Company will expense the cost as incurred.
Contracts with milestone billing provisions are fixed cost type contracts. Revenue is recognized once the milestone has been achieved.
Revenue on commercial contracts is recognized when the Company delivers batteries or services have been rendered.
F-8
ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Significant Customers
The Company had three customers with sales of 10% or more of total sales for the three months ended March 31, 2005. Net sales to the Company’s three major customers, U.S. Airforce Mantech, U.S. Army Cecom, and Sandia National Laboratories represented approximately 84.2% in the three months ended March 31, 2005. Accounts receivable from these customers amounted to $411,867 and $514,325 as of March 31, 2005 and December 31, 2004, respectively. The Company had three customers with sales of 10% or more of total sales for the three months ended March 31, 2004. Net sales to such customers, EaglePicher, Department of Energy, and Airforce Mantech represented approximately 94% in the three months ended March 31, 2004.
Stock-Based Compensation
As permitted under SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which amended SFAS No. 123 (“SFAS 123”), “Accounting for Stock Based Compensation,” the Company has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements, as defined by Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees,” and related interpretations including Financial Accounting Standards Board Interpretations No. 44, “Accounting for Certain Transactions Involving Stock Compensation,” an interpretation of APB No. 25. For the three months ended March 31, 2005 and 2004, the Company recorded compensation expense in general administrative expenses amounting to $99,511 and $90,011, respectively, related to stock options granted to employees.
Prior to the merger discussed in Note 1, the Company accounted for options granted to employees by computing proforma compensation cost utilizing the Black Scholes option pricing model and the minimum value method. This method computes the value assigned to the options based on a number of valuation assumptions but excludes the concept of volatility which measures the changes in value that publicly traded securities regularly experience. Pursuant to the aforementioned merger, the Company continues to compute the fair value of newly granted options utilizing the Black Scholes option pricing model but now includes the volatility measure which generally gives rise to a higher amount of proforma compensation than the minimum value method as the volatility utilized in the calculation increases the value of the options and therefore the proforma compensation charge also increases.
The following table illustrates the effect on net (loss) income if the Company had applied the fair and minimum value recognition provisions of SFAS 123 to stock-based compensation for the three months ended March 31, 2005 and 2004:
| | | 2005 | | 2004 |
| | |
|
| |
|
|
| | Net (loss) income as reported | $ | (1,004,298) | | $ | 45,828 |
| | Add: stock-based employee compensation expense included
in reported net (loss) income | | 99,511 | | | 90,011 |
| | Deduct: total stock-based employee compensation expense
determined under fair and minimum value-based methods for all options | | (213,435) | | | (205,220) |
| | |
|
| |
|
|
| | Proforma net loss attributable to common stockholders | $ | (1,118,222) | | $ | (69,381) |
| | |
|
| |
|
|
| | Proforma net loss per share attributable to common stockholders
(basic and diluted) | $ | (0.09) | | $ | (0.01) |
| | |
|
| |
|
|
F-9
ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The fair value and minimum value of options at date of grant was estimated using an option-pricing model with the following weighted average assumptions:
| | | 2005 | | 2004 |
| | |
|
| |
|
|
| | Expected Life (Years) | | -- | | | 10 |
| | Interest Rate | | --% | | | 3.250% |
| | Annual Rate of Dividends | | --% | | | --% |
| | Volatility | | --% | | | 177.510% |
The weighted average fair value and minimum value of the options at date of grant using the Black Scholes option-pricing model is estimated at $1.97 per option for the three months ended March 31, 2004. No options were granted in the three months ended March 31, 2005.
(Loss) Income Per Share
Basic (loss) income per share is computed by dividing the net (loss) income applicable to common shares by the weighted average number of common shares outstanding during the period. The weighted average number of shares has been given retroactive effect to the recapitalization. Diluted (loss) income per share adjusts basic (loss) income per share for the effects of convertible securities, warrants, stock options and other potentially dilutive financial instruments, only in the periods in which such effect is dilutive. The shares issuable upon the conversion of preferred stock, the exercise of stock options and warrants are excluded from the calculation of net loss per share as their effect would be antidilutive.
Securities that could potentially dilute earnings per share (“EPS”) in the future that were not included in the computation of diluted (loss) income per share consist of the following as of March 31, 2005:
| | | 2005 |
| | |
|
| | | |
| | Preferred stock convertible into common stock | 1,876,400 |
| | Notes payable – related parties convertible into common stock | - |
| | Warrants to purchase common stock | 1,821,590 |
| | Options to purchase common stock | 2,332,121 |
| | |
|
| | Total potential common shares | 6,030,111 |
| | |
|
F-10
ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3 - Inventories
| | Inventories consists of the following as of March 31, 2005 and December 31, 2004: |
| | | 2005 | | 2004 |
| | |
|
| |
|
|
| | Raw materials | $ | 219,868 | | $ | 202,531 |
| | Work in progress | | 94,196 | | | 41,961 |
| | |
|
| |
|
|
| | Total | $ | 314,064 | | $ | 244,492 |
| | |
|
| |
|
|
NOTE 4 - Property and Equipment
| | Property and equipment consists of the following as of March 31, 2005 and December 31, 2004: |
| | | 2005 | | 2004 | | Useful Lives |
| | |
|
| |
|
| |
|
|
| | Equipment | $ | 859,988 | | $ | 706,190 | | | 5 to 7 Years |
| | Leasehold improvements | | 30,359 | | | 30,359 | | | 3 Years |
| | |
|
| |
|
| | | |
| | | | 890,347 | | | 736,549 | | | |
| | | | | | | | | | |
| | Less: Accumulated depreciation and amortization | | 224,200 | | | 203,276 | | | |
| | |
|
| |
|
| | | |
| | Property and Equipment, Net | $ | 666,147 | | $ | 533,273 | | | |
| | |
|
| |
|
| | | |
Depreciation and amortization expense for the three months ended March 31, 2005 and 2004 was $20,924 and $19,170, respectively.
F-11
ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5 -Long-Term Debt
Long-term debt consists of the following as of March 31, 2005 and December 31, 2004:
| | | | | 2005 | | 2004 |
| | | | |
|
| |
|
|
| | Note payable to Connecticut Innovations, Incorporated (“CII”) commencing December 2004 and maturing December 2007 with interest at 5% per annum and annual installments of $61,193 | | $ | 183,579 | | $ | 183,579 |
| | | | |
|
| |
|
|
| | | | | | | | | |
| | Non-interest bearing note payable to EaglePicher Technologies, LLC requiring three annual installments of $150,000 commencing in October 2004 and is secured by assets acquired in connection with the purchase of its Colorado Springs energy business: | | | | | | |
| | | Face Value | | | 300,000 | | | 300,000 |
| | | Remaining discount to fair value (effective interest rate of 5%) | | | (15,362) | | | (18,813) |
| | | | |
|
| |
|
|
| | | Fair Value | | | 284,638 | | | 281,187 |
| | | | |
|
| |
|
|
| | | Total long-term debt | | | 468,217 | | | 464,766 |
| | Less: current maturities | | | 211,193 | | | 211,193 |
| | | | |
|
| |
|
|
| | | Total long-term debt, less current maturities | | $ | 257,024 | | $ | 253,573 |
| | | | |
|
| |
|
|
Interest expense related to the long-term debt of CII amounted to $2,295 and $3,516 for the three months ended March 31, 2005 and 2004, respectively.
Accretion of the discount related to the long-term debt of EaglePicher Technologies, LLC amounted to $3,451 and $5,055 for the three months ended March 31, 2005 and 2004, respectively.
Maturities of long-term debt as of March 31, 2005 are as follows:
For the Year Ending
December 31, | Amount |
|
|
|
| 2005 | $ | 211,193 |
| 2006 | | 195,831 |
| 2007 | | 61,193 |
|
|
|
| Total | $ | 468,217 |
|
|
|
F-12
ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6 -Stockholders' Equity
Preferred Stock
The Company has authorized 10,000 shares of preferred stock, par value $0.001 per share, of which 5,600, are designated as Series A Convertible Preferred Stock (“Series A Preferred”) as specified in the Certificate of Designation (the “Certificate”).
Each share of Series A Preferred is convertible at the option of the holder and automatically upon the occurrence of certain events, as defined in the Certificate, into 400 shares of the Company’s common stock and has a liquidation preference of $1,000 per share. The conversion rate and liquidation preference are subject to adjustment as specified in the Certificate. Each share of the Series A Preferred is entitled to votes equal to the number of shares of common stock it is convertible into at the time of the voting.
During the three months ended March 31, 2005, 260 shares of Series A Preferred were converted into 104,000 shares of common stock.
Common Stock
The Company has authorized 50,000,000 shares of common stock, par value $0.001. As of March 31, 2005, the Company had reserved 3,000,000 shares of common stock for issuance under its 1993 Stock Compensation Plan (the “1993 Plan”).
During the three months ended March 31, 2005, warrants were exercised for proceeds of $60,000 in exchange for 292,594 shares of common stock.
Warrants
In March 2004, EEI had issued warrants to purchase 156,250 shares of its EEI Preferred Stock in connection with a contract to receive a total of $500,000 in cash funding from a venture capital firm for intended use in the research and development of certain battery technologies. The outstanding warrant subscription receivable was $50,000 as of March 31, 2005. The Company satisfied its contractual obligations in the first quarter of 2005.
On March 31, 2005, the Company issued warrants to purchase 15,000 shares of the Company’s common stock in connection with a contract to receive a total of $450,000 in cash funding from a venture capital firm for intended use in the research and development of certain battery technologies. See Note 7.
NOTE 7 -Related Parties
Consulting Services
Certain stockholders and parties related to stockholders have provided consulting services to the Company for various technical and general and administrative services. Consulting fees incurred amounted to $10,485 and $21,904 for the three months ended March 31, 2005 and 2004, respectively. Amounts due to these related parties as of March 31, 2005 and December 31, 2004 were $3,000 and $7,525, respectively.
Development Agreement
On March 31, 2005, the Company entered into a development agreement to receive a total of $450,000 in cash funding from a private venture capital firm, a shareholder of the Company’s common stock, for intended use in the research and development of certain battery technologies. The contract provides for scheduled payments to the Company if it performs certain research and development activities over a 24-month period. The Company has entered into a sub-contract agreement with Rutgers University to perform certain of these activities for $350,000. In connection with this development agreement, the Company entered into an agreement whereby the Company will issue warrants containing certain cashless provisions to purchase up to 15,000 shares of the Company’s common stock upon exercise. The warrants are exercisable at $9.06 per share over a four-year period expiring in March 2009. The weighted average fair value of the warrants at the date of issuance using the Black Scholes option-pricing model is estimated at $5.58 per warrant. The total estimated value of the warrants, amounting to $83,767 was recorded as cost of services-related parties expense and other accrued liability. Further, a deferred contract cost and additional paid-in capital was recorded as of the date of issuance. The number of warrants that are exercisable are directly proportional to the amount of the scheduled payments that are received by the Company for performance of the development agreement.
F-13
ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 8 -Commitments and Contingencies
Operating Leases
The Company conducts its operations from two facilities that are leased under noncancelable operating leases expiring in July 2005 and March 2010 requiring minimum monthly payments of $9,344 and $23,875, respectively. The Company has an option to renew the lease related to one of its facilities through July 2006 with substantially similar terms. Rental expense related to facilities under operating leases amounted to $94,190 and $92,833 for the three months ended March 31, 2005 and 2004, respectively.
Future minimum rental payments under the above noncancelable operating leases as of December 31, 2005 are as follows:
For the Year Ending
December 31, | Amount |
|
|
|
| 2005 | $ | 298,970 |
| 2006 | | 351,907 |
| 2007 | | 286,500 |
| 2008 | | 286,500 |
| 2009 | | 286,500 |
| Thereafter | | 71,625 |
|
|
|
| $ | 1,582,002 |
|
|
|
Supply Agreement
The Company has entered into a five-year agreement to supply EaglePicher with certain products at agreed-upon prices. Under the agreement, the Company is the sole source supplier for components for battery power systems used in military satellites and military aircraft. Pricing under the agreement is fixed, subject to possible adjustment under periodic value engineering reviews and based on material cost escalations. The agreement is renewable upon the mutual consent of the parties. The agreement expires September 2008 with renewal options annually thereafter. Net sales to EaglePicher Technologies, LLC represented approximately 9.6% and 60.7% of total sales for the three months ended March 31, 2005 and 2004, respectively. Accounts receivable from EaglePicher Technologies, LLC amounted to $28,330 and $50,228 as of and March 31, 2005 and December 31, 2004, respectively. On April 11, 2005 EaglePicher, Inc. and its affiliates (“EaglePicher”) announced its voluntary Chapter 11 bankruptcy filing.
Executive Compensation
The Company entered into an employment agreement effective January 1, 2004 through December 31, 2005 with its President and Chief Operating Officer. The agreement provided for compensation of $235,000 per annum, 343,800 stock options, certain other benefits and severance payments under certain circumstances, including termination of employment. Effective March 22, 2005, the Board of Directors accepted the resignation of Michael Eskra as Director, President, and Chief Operating Officer. In accordance with the employment agreement, the Company paid him 30 days compensation.
F-14
ELECTRO ENERGY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Development Agreement
On March 31, 2005, the Company entered into a development agreement to receive a total of $450,000 in cash funding from a private venture capital firm, a shareholder of the Company’s common stock, for intended use in the research and development of certain battery technologies. See Note 7.
NOTE 9 -Subsequent Events
Employment Agreement
Effective May 2, 2005 (“Effective Date”), the Company entered into an Employment Agreement (the “Agreement”) with Michael E. Reed, pursuant to which Mr. Reed will serve as the Company’s President and Chief Operating Officer. Mr. Reed’s employment will be at-will, and will carry an annual base salary of $190,000. Mr. Reed will be eligible for an annual bonus based on goals and objectives set by the Board of Directors in consultation with him. In addition, the Company has agreed to reimburse Mr. Reed for expenses in connection with his relocation to the Danbury, Connecticut area, in an amount not to exceed $15,000. The Agreement provides that Mr. Reed will receive options to purchase 200,000 shares of common stock of the Company, subject to shareholder approval of a new stock option plan (the “plan”). If this plan is approved, Mr. Reed’s options will vest in equal installments over four years, commencing on the Effective Date. The options carry an exercise price equal to the market price of the Company’s common stock on the date the plan is approved by the Company’s shareholders.
Letter of Intent to Acquire Assets
On May 13, 2005, the Company entered into a non-binding Letter of Intent with Topspin Partners, LP (“Topspin”). Should the transaction contemplated under the Letter of Intent be consummated, the Company will purchase certain assets relating to Topspin’s lithium-ion and nickel based rechargeable cell and battery manufacturing divisions. The Company will not assume any liabilities or obligations of Topspin under the proposed transaction. The consideration for the proposed asset purchase will be 5,500,000 unregistered shares (the “Consideration Shares”) of the common stock of the Company. The Consideration Shares will be subject to lock-up restrictions. Additionally, the Company will have an option to potentially enter into triple net equity leases by the Company for use of the facilities housing the Lithium-Ion Assets, (the “Property”), at discounted rental rates, offset by additional warrants to Topspin. The proposed transactions are subject to a due diligence review, as well as a requirement that Topspin maintain the assets which are the subject of the proposed transactions and the Property in the ordinary course of business and no material adverse change in the assets or Property occurring prior to close. The transaction is also subject to the Company’s ability to obtain financing on terms acceptable to the Company. There is no assurance that any of the conditions to closing will be achieved or that the proposed transactions will be consummated.
F-15
