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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, 2002
|_| 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 |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 29,027,491
shares of Common Stock, par value $.001, were outstanding on November 11, 2002.
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MILLENNIUM CELL INC.
(a development stage enterprise)
Index
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheet - September 30, 2002 and December 31, 2001......................... 1
Condensed Statements of Operations - Three and Nine months ended
September 30, 2002 and 2001.................................................................. 2
Condensed Statements of Cash Flows - Nine months ended September 30, 2002 and 2001......... 3
Notes to Condensed Financial Statements - September 30, 2002............................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 11
Item 4. Controls and Procedures.................................................................... 11
PART II - OTHER INFORMATION
- ---------------------------
Item 2. Changes in Securities and Use of Proceeds.................................................. 12
Item 6. Exhibits and Reports on Form 8-K........................................................... 13
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED BALANCE SHEET
(unaudited)
September 30, December 31,
2002 2001
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 8,423,057 $ 6,348,763
Accounts receivable............................................................. 81,454 129,000
Prepaid expenses................................................................ 819,468 352,198
Held-to-maturity investments.................................................... -- 11,067,175
----------------- ---------------
Total current assets............................................................... 9,323,979 17,897,136
Property and equipment, net........................................................ 1,704,488 1,177,483
Patents and licenses, net.......................................................... 574,347 530,706
Other assets....................................................................... 600,794 634,648
----------------- ---------------
$ 12,203,608 $ 20,239,973
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 259,896 $ 223,101
Accrued expenses................................................................ 555,072 1,395,727
Deferred income................................................................. 2,408,988 2,528,988
----------------- ---------------
Total current liabilities.......................................................... 3,223,956 4,147,816
Refundable grant obligation........................................................ 227,522 227,522
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 authorized shares, none issued and
outstanding
Common stock, $.001 par value; authorized 70,000,000 shares,
28,438,701 and 27,292,077 shares issued and outstanding
as of September 30, 2002 and December 31, 2001, respectively................. 28,439 27,292
Additional paid-in capital...................................................... 59,577,496 54,140,914
Deficit accumulated during development stage.................................... (50,853,805) (38,303,571)
----------------- ---------------
Total stockholders' equity......................................................... 8,752,130 15,864,635
----------------- ---------------
$ 12,203,608 $ 20,239,973
================ ===============
See notes to financial statements.
-1-
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENT OF OPERATIONS
(unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended Cumulative
September 30, September 30, September 30, September 30, Amounts From
2002 2001 2002 2001 Inception
Revenue........................................ $ 106,455 $ -- $ 486,737 -- $ 486,737
Cost of revenue................................ 106,455 -- 486,737 -- 486,737
Gross margin................................... -- -- -- -- --
Product development and marketing.............. 1,312,558 1,504,203 4,511,502 3,672,240 10,024,674
General and administrative
(excluding non-cash charges)................. 891,083 1,278,646 3,370,239 3,495,547 11,435,128
Non-cash charges............................... 987,829 1,667,100 3,181,153 6,135,256 21,307,995
Restructuring expense.......................... -- -- 104,982 -- 104,982
Depreciation and amortization.................. 180,195 116,027 534,639 322,350 1,321,497
Research and development....................... 249,008 906,541 1,153,848 2,029,244 6,730,483
---------- ---------- ---------- ---------- ----------
Total operating expenses....................... 3,620,673 5,472,517 12,856,363 15,654,637 50,924,759
---------- ---------- ---------- ---------- ----------
Loss from operations........................... (3,620,673) (5,472,517) (12,856,363) (15,654,637) (50,924,759)
Interest income................................ 52,162 247,946 306,129 972,431 2,221,835
---------- ---------- ---------- ---------- ----------
Net loss....................................... (3,568,511) (5,224,571) (12,550,234) (14,682,206) (48,702,924)
Preferred stock amortization................... -- -- -- -- 2,150,881
---------- ---------- ---------- ---------- ----------
Net loss applicable to common stockholders..... $(3,568,511) $ (5,224,571) $(12,550,234) $ (14,682,206) $(50,853,805)
=========== ============= ============ ============= ============
Loss per share -- basic and diluted............ $ (.13) $ (.19) $ (.45) $ (.54) $ (1.96)
=========== ============= ============ ============= ============
Weighted -- average number of shares outstanding 28,428,334 27,252,820 27,751,179 27,201,679 25,916,072
=========== ============= ============ ============= ============
See notes to financial statements.
-2-
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENT OF CASH FLOWS
(unaudited)
Nine Months Nine Months
Ended Ended Cumulative
September 30, September 30, Amounts from
2002 2001 Inception
OPERATING ACTIVITIES
Net loss.................................... $ (12,550,234) $ (14,682,206) $ (48,702,924)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization............... 534,649 322,350 1,321,507
Non-cash charges............................ 3,181,153 6,135,256 21,307,995
Changes in operating assets and liabilities:
Accounts receivable......................... 47,546 -- (81,454)
Prepaid expenses and other assets........... (467,270) (185,295) (865,144)
Accounts payable and accrued expenses....... (721,485) 1,118,971 897,343
Deferred income............................. (120,000) -- 2,408,988
-------------- -------------- --------------
Net cash used in operating activities....... (10,095,641) (7,290,924) (23,713,689)
INVESTING ACTIVITIES
Purchase of property and equipment.......... (1,017,406) (405,290) (2,797,919)
Patent registration costs................... (87,889) (94,403) (552,423)
Cash restricted for lease deposit........... 33,854 -- (555,118)
(Purchase) sale of investments, net........ 11,067,175 (17,090,194) --
------------ -------------- -------------
Net cash provided by (used in) investing
activities............................... 9,995,734 (17,589,887) (3,905,460)
FINANCING ACTIVITIES
Proceeds from issuance of common stock...... 81,201 36,250 34,994,851
Underwriting and other expenses of initial
public offering.......................... -- -- (3,669,613)
Proceeds from private placement, net of fees 2,093,000 -- 2,093,000
Proceeds from capital contribution.......... -- 500,000
Payment of note payable..................... -- -- (250,000)
Proceeds from grant......................... -- -- 227,522
Proceeds from sale of preferred stock....... -- -- 2,146,446
------------ ------------- ------------
Net cash provided by financing activities... 2,174,201 36,250 36,042,206
------------ ------------- ------------
Net change in cash and cash equivalents..... 2,074,294 (24,844,561) 8,423,057
Cash and cash equivalents, beginning of
period................................... 6,348,763 30,098,701 --
------------- ------------- -------------
Cash and cash equivalents, end of period.... $ 8,423,057 $ 5,254,140 $ 8,423,057
============= ============= =============
Non-Cash Transactions:
In July 2002, the Company issued 43,356 shares of common stock valued at
$82,375 to employees as 401(k) Plan employer matching contributions.
See notes to financial statements.
-3-
MILLENNIUM CELL INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States 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 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
for the year ended December 31, 2001.
NOTE 2--IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Standard addresses financial
accounting and reporting for costs associated with exit or disposal activities
and requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. This Standard nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)". This
Standard is effective for exit or disposal activities initiated after December
31, 2002. We do not expect this to have a material effect on our financial
position or results of operations.
NOTE 3--EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing income
available to common stockholders by the weighted average number of common
shares actually outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the Company. All such
securities were anti-dilutive for all periods presented.
NOTE 4--OPTIONS, WARRANTS AND NON-CASH CHARGES
In the third quarter of 2002, the Company recorded a non-cash charge
of approximately $1.0 million related to options issued to employees in 2000.
The Company will incur additional non-cash charges related to employees of
approximately $3.1 million for options over the vesting period as follows:
Fourth quarter 2002-$1.0 million and 2003-$2.1 million.
Certain affiliates have the ability to earn new awards based on
certain milestones and service periods. The accounting methodology requires a
re-valuing of certain earned warrants at each period ending market price using
a Black-Scholes pricing model. Due to this variable accounting methodology, it
is difficult to predict the amount of additional non-cash charges the Company
will incur related to these warrants.
NOTE 5-FINANCING TRANSACTIONS
On June 19, 2002, the Company entered into a private placement
financing transaction with two institutional and accredited investors pursuant
to the terms of a securities purchase agreement among the Company and the
purchasers. The private placement was exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) of such Act. The
placement consisted of the sale of common stock for gross proceeds of $3.0
million and related warrants. The shares of common stock issued and issuable
upon exercise of the warrants that were registered for resale on Form S-3 with
the Securities and Exchange Commission (the "SEC") during the third quarter.
Pursuant to the terms of the June 19, 2002 purchase agreement, one of
the investors was obligated to acquire $12 million in secured convertible
debentures, convertible into common stock of the Company, subject to certain
terms and conditions, and related warrants. Subsequent to this transaction, the
Company and the investor agreed the debentures would not be issued under the
June 19, 2002 purchase agreement. Accordingly, the Company withdrew its request
-4-
for registration on Form S-3 with the SEC for the common stock underlying the
debentures and related warrants.
On October 31, 2002, the Company entered into a private placement
financing transaction with the same two institutional and accredited investors
pursuant to the terms of a new purchase agreement among the Company and the
purchasers. The private placement was exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) of such Act. The
placement consisted of the sale of 588,790 shares of common stock and warrants
(with an exercise price of $2.32) to purchase 147,198 shares of common stock of
the Company for gross proceeds of $1.0 million. Pursuant to the terms of the
purchase agreement, one of the investors agreed to acquire $12 million of
secured and unsecured debentures, convertible into common stock of the Company,
subject to certain terms and conditions, and warrants. Convertible unsecured
debentures with a principal amount of $3.5 million and warrants to acquire
242,678 shares will be issued upon effectiveness of the registration statement
relating to the underlying shares of common stock and the remaining $8.5
million of secured debentures and warrants to acquire 589,376 shares will be
issued if, among other things, shareholder approval, as required by the Rules
of the NASDAQ, is received. The unsecured debentures will be due June 30, 2003,
subject to six thirty day extensions and the secured debentures will be due
three years from the date of issuance.
The secured debentures will be secured by a standby letter of credit
issued by Wachovia Bank, National Association, with an aggregate face amount
equal to the outstanding principal of the secured debentures. The Company will
pledge to the bank as collateral the proceeds from the sale of the secured
debentures. Therefore, the Company will not have the ability to use the
proceeds from the sale of the secured debentures until the bank pledges are
released upon conversion to unsecured debentures.
The unsecured debentures will be convertible into shares of the
Company's common stock, subject to certain terms and conditions. The Company is
obligated to register the resale of the shares sold in the private placement
and the common stock issuable upon the conversion of the unsecured debentures
and exercise of the related warrants. Once the principal amount of outstanding
unsecured debentures is less than $1.0 million, the $8.5 million of secured
debentures will automatically convert into unsecured debentures in increments
of $3.0 million, $3.0 million and $2.5 million upon effectiveness of the
registration statement relating to the underlying shares of common stock.
The Company filed Registration Statement No. 333-101061 on Form S-3
with the SEC on November 7, 2002. As of the time of filing of this report, the
SEC has not yet declared the registration statement effective and the Company
can not provide assurance as to when, if at all, the SEC will declare the
registration statement effective and the unsecured debentures will be funded.
If the SEC does not declare the registration statement effective as to the
shares of common stock issuable upon conversion of the unsecured debentures and
the related warrants by January 31, 2003, the purchaser will no longer be
obligated to purchase the debentures. Penalties will be payable by the Company
if, among other things, the registration statement is not declared effective by
January 31, 2003.
NOTE 6-SUBSEQUENT EVENT
In October 2000, we received $2.4 million in cash from Ballard Power
Systems Inc. as an advance for prospective royalties pursuant to a product
development agreement between us and Ballard. In addition, we granted to
Ballard a warrant to purchase up to 400,000 shares of our common stock, which
was terminated as part of the strategic investment discussed below. Upon
completion of certain stages of product development, the parties agreed to
negotiate in good faith for the grant of a license of the Company's technology
to Ballard in certain fields of use, at which time prepaid royalties may be
earned and the warrants will be issued and recorded at fair value.
On November 8, 2002, the Company and Ballard agreed that the product
development milestones have been achieved and agreed to convert the $2.4
million refundable royalty payment into an investment in the Company in the
form of secured convertible debentures. The Ballard debentures will be secured
by a standby letter of credit issued by Wachovia Bank, National Association,
with an aggregate face amount equal to the outstanding principal and will
expire 3 years from the date of issuance. The Company will pledge to the bank
as collateral funds previously reported under cash and cash equivalents on the
accompanying balance sheet. The Company will not have the ability to use this
cash until the bank pledges are released upon conversion of the Ballard
debentures to common stock. As part of the purchase agreement entered into
between Ballard and the Company, Ballard retains the option to license the
non-exclusive right to manufacture and sell products with our Hydrogen on
Demand(TM) technology for specific portable fuel cell products and stationary
internal combustion engine generators.
-5-
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 Condensed 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 for the year ended December 31,
2001.
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
Millennium Cell Inc. is a technology solutions company in the
hydrogen-fuel generation and storage marketplace. We seek to license our
proprietary technology and to provide system design, engineering and management
services to governments and commercial entities. We have developed and are
pursuing a multi-faceted patent portfolio in the United States and abroad to
protect and advance a proprietary process called Hydrogen on Demand(TM) that
safely generates pure hydrogen from environmentally friendly raw materials. In
the process, the energy potential of hydrogen is carried in the chemical bonds
of sodium borohydride--a derivative of borax. Borax is found in substantial
natural reserves globally. Hydrogen from this system can be used to power fuel
cells, as well as fed directly to internal combustion engines. We also have a
patented design for boron-based longer-life batteries and fuel cells.
Our goal is to convert our technology from the research and
development stage to commercialization by solving particular technological
challenges for our customers. Our potential revenue for the next several years
is likely to include 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.
We incurred net losses in the third quarter of 2002 and 2001 of
$3,568,511 and $5,224,571, respectively. As of September 30, 2002, we had an
accumulated deficit of $50,853,805. The following table disaggregates the
Company's net operating losses from incurred non-cash charges and preferred
dividends:
Non-Cash
Net Loss Charges
Excluding and
Non-cash Preferred Accumulated
Charges Dividends Deficit
Period from January 1, 1999 (inception) to June 30, 2000............. $ (2,237,759) $ (1,424,757) $ (3,662,516)
Period from July 1, 2000 to December 31, 2000*....................... (3,677,221) (11,511,505) (15,188,726)
Period from January 1, 2001 to December 31, 2001..................... (12,110,868) (7,341,461) (19,452,329)
Period from January 1, 2002 to September 30, 2002.................... (9,369,081) (3,181,153) (12,550,234)
-------------- -------------- -------------
Cumulative Amount From Inception..................................... $ (27,394,929) $ (23,458,876) $ (50,853,805)
============= ============== =============
* Our initial public offering was completed on August 9, 2000.
-6-
Our losses have resulted primarily from costs associated with research
and product development activities as well as non-cash amortization of
preferred stock and non-cash charges related to the issuance of stock options
and warrants to employees and third parties. As a result of planned
expenditures in the areas of research, product development and marketing and
additional non-cash charges relating to employee stock options, we expect to
incur additional operating losses for the foreseeable future.
RESULTS OF OPERATIONS
Nine months ended September 30, 2002 compared to the nine months ended
September 30, 2001.
Revenues. We recorded $486,737 of revenues during the nine months
ended September 30, 2002. The revenues were attributable to sales of prototype
Hydrogen on Demand(TM) systems. There were no revenues in the nine months ended
September 30, 2001.
In the near-term, revenues are expected to be derived substantially
from up-front license fees, research contracts with various federal, state and
local agencies, collaborations with other companies, management services, and
royalty payments or joint venture revenue from licensees or strategic
partnerships. Revenues will be recognized in the period in which technology is
delivered, licensing revenues are earned, or as services are performed.
Up-front payments related to licensing or services agreements will be amortized
over the license or servicing term.
Cost of Revenues. We recorded $486,737 cost of revenues during the
nine months ended September 30, 2002. There was no cost of revenues in the nine
months ended September 30, 2001.
Product Development and Marketing Expenses. Product development and
marketing expenses for the nine months ended September 30, 2002 were $4,511,502
compared to $3,672,240 in the nine months ended September 30, 2001, an increase
of $839,262. This increase is mostly attributable to the growth of our design
and engineering capabilities in the latter half of 2001 to support our
technology's evolution from research to commercialization. Expenses also rose
due to an increase in business development and marketing capabilities since
early 2001 to support our business plan.
General and Administrative Expenses. General and administrative
expenses were $3,370,239 for the nine months ended September 30, 2002 compared
to $3,495,547 in the nine months ended September 30, 2001, a decrease of
$125,308. The decrease was a result of increased efficiency of our
administrative and finance organizations as well as the impact of headcount
reductions in those organizations during the second quarter of 2002.
Non-cash Charges. Non-cash charges were $3,181,153 for the nine months
ended September 30, 2002 compared to $6,135,256 in the nine months ended
September 30, 2001, a decrease of $2,954,103. The decrease was mostly
attributable to the completion of vesting in 2001 of warrants issued to
affiliates during 2000 and the forfeiture of unvested employee options during
the fourth quarter of 2001.
Restructuring Expense. Restructuring expense was $104,982 for the nine
months ended September 30, 2002. These costs were incurred for employee
separations during the quarter ended June 30, 2002 in conjunction with our
announced cost reduction plan. There was no restructuring expense in 2001.
Depreciation and Amortization. Depreciation and amortization was
$534,639 for the nine months ended September 30, 2002 compared to $322,350 in
the nine months ended September 30, 2001, an increase of $212,289. This
increase reflects spending to expand our lab facilities and to purchase
additional equipment during 2002. We expect depreciation and amortization to
increase slightly as we incur the full quarter impact of our recently completed
expansion of our laboratories and continue to pursue patents on new
technologies.
Research and Development Expenses. Research and development expenses
were $1,153,848 for the nine months ended September 30, 2002 compared to
$2,029,244 in the nine months ended September 30, 2001, a decrease of $875,396.
The decrease is primarily attributable to the rationalization of certain
research programs in conjunction with our cost reduction efforts announced in
May 2002 as well as the recovery of project-specific research costs from sales
of prototype units during the nine months ended September 30, 2002.
-7-
Interest Income. Net interest income was $306,129 for the nine months
ended September 30, 2002 compared to $972,431 in the nine months ended
September 30, 2001, a decrease of $666,302. The decrease in net interest income
was the result of declining average cash balances and interest rate decreases
from 2001 to 2002.
LIQUIDITY AND CAPITAL RESOURCES
Since the inception date, we have financed our operations primarily
through our initial public offering in August 2000 and private placements of
equity securities. In 1999, we issued $1,250,000 of membership interests in
Millennium Cell LLC for cash, which subsequently were converted into our common
stock as of April 25, 2000. We also received a capital contribution of $500,000
in the first quarter of 2000, and in May 2000, we sold 759,368 shares of Series
A preferred stock, which automatically converted into 759,368 shares of common
stock upon the completion of our initial public offering. The net proceeds from
our initial public offering totaled approximately $29.9 million.
In October 2000, we received $2.4 million in cash from Ballard Power
Systems Inc. as an advance for prospective royalties pursuant to a product
development agreement between us and Ballard. In addition, we granted to
Ballard a warrant to purchase up to 400,000 shares of our common stock, which
was terminated as part of the strategic investment discussed below. Upon
completion of certain stages of product development, the parties agreed to
negotiate in good faith for the grant of a license of the Company's technology
to Ballard in certain fields of use, at which time prepaid royalties may be
earned and the warrants will be issued and recorded at fair value.
On November 8, 2002, the Company and Ballard agreed that the product
development milestones have been achieved and agreed to convert the $2.4
million refundable royalty payment into an investment in the Company in the
form of secured convertible debentures. The Ballard debentures will be secured
by a standby letter of credit issued by Wachovia Bank, National Association,
with an aggregate face amount equal to the outstanding principal and will
expire 3 years from the date of issuance. The Company will pledge to the bank
as collateral funds previously reported under cash and cash equivalents on the
accompanying balance sheet. The Company will not have the ability to use this
cash until the bank pledges are released upon conversion of the Ballard
debentures to common stock. As part of the purchase agreement entered into
between Ballard and the Company, Ballard retains the option to license the
non-exclusive right to manufacture and sell products with our Hydrogen on
Demand(TM) technology for specific portable fuel cell products and stationary
internal combustion engine generators.
On June 19, 2002, the Company entered into a private placement
financing transaction with two institutional and accredited investors pursuant
to the terms of a securities purchase agreement among the Company and the
purchasers. The private placement was exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) of such Act. The
placement consisted of the sale of common stock for gross proceeds of $3.0
million and related warrants. The shares of common and the shares of common
stock issuable upon exercise of the warrants were registered for resale on Form
S-3 with the Securities and Exchange Commission (the "SEC") during the third
quarter.
Pursuant to the terms of the June 19, 2002 purchase agreement, one of
the investors was obligated to acquire $12 million in secured convertible
debentures, convertible into common stock of the Company, subject to certain
terms and conditions, and related warrants. Subsequent to this transaction, the
Company and the investor agreed the debentures would not be issued under the
June 19, 2002 purchase agreement. Accordingly, the Company withdrew its request
for registration on Form S-3 with the SEC for the common stock underlying the
debentures and related warrants.
On October 31, 2002, the Company entered into a private placement
financing transaction with the same two institutional and accredited investors
pursuant to the terms of a new purchase agreement among the Company and the
purchasers. The private placement was exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) of such Act. The
placement consisted of the sale of 588,790 shares of common stock and warrants
(with an exercise price of $2.32) to purchase 147,198 shares of common stock of
the Company for gross proceeds of $1.0 million. Pursuant to the terms of the
purchase agreement, one of the investors agreed to acquire $12 million of
secured and unsecured debentures, convertible into common stock of the Company,
subject to certain terms and conditions, and warrants. Convertible unsecured
debentures with a principal amount of $3.5 million and warrants to acquire
242,678 shares will be issued upon effectiveness of the registration statement
relating to the underlying shares of common stock and the remaining $8.5
million of secured debentures and warrants to acquire 589,376 shares will be
issued if, among other things, shareholder approval, as required by the Rules
of the NASDAQ, is received. The unsecured debentures will be due June 30, 2003,
subject to six thirty day extensions and the secured debentures will be due
three years from the date of issuance.
-8-
The secured debentures will be secured by a standby letter of credit
issued by Wachovia Bank, National Association, with an aggregate face amount
equal to the outstanding principal of the secured debentures. The Company will
pledge to the bank as collateral the proceeds from the sale of the secured
debentures. Therefore, the Company will not have the ability to use the
proceeds from the sale of the secured debentures until the bank pledges are
released upon conversion to unsecured debentures.
The unsecured debentures will be convertible into shares of the
Company's common stock, subject to certain terms and conditions. The Company is
obligated to register the resale of the shares sold in the private placement
and the common stock issuable upon the conversion of the unsecured debentures
and exercise of the related warrants. Once the principal amount of outstanding
unsecured debentures is less than $1.0 million, the $8.5 million of secured
debentures will automatically convert into unsecured debentures in increments
of $3.0 million, $3.0 million and $2.5 million upon effectiveness of the
registration statement relating to the underlying shares of common stock.
The Company filed Registration Statement No. 333-101061 on Form S-3
with the SEC on November 7, 2002. As of the time of filing of this report, the
SEC has not yet declared the registration statement effective and the Company
can not provide assurance as to when, if at all, the SEC will declare the
registration statement effective and the unsecured debentures will be funded.
If the SEC does not declare the registration statement effective as to the
shares of common stock issuable upon conversion of the unsecured debentures and
the related warrants by January 31, 2003, the purchaser will no longer be
obligated to purchase the debentures. Penalties will be payable by the Company
if, among other things, the registration statement is not declared effective by
January 31, 2003.
As of September 30, 2002, we had $8.8 million in cash and cash
equivalents. Cash used in operations totaled $10,095,641 and $7,290,924 in the
first nine months of 2002 and 2001, respectively. This increase was
substantially due to the higher operating cost of our expanded facilities and
higher average staffing in 2002. Investing activities provided cash of
$9,995,734 and used cash of $499,693 in the first nine months of 2002 and 2001,
respectively. Investing activities in the first nine months of 2002 consisted
primarily of the maturity of held-to-maturity investments. Excluding the impact
of held-to-maturity investments, cash used in investing activities in the first
nine months of 2002 increased $571,748 from the same period of 2001, mostly due
to increased spending on leasehold improvements to complete our new
laboratories for their intended use. Our capital spending during the nine
months ended September 30, 2002 was $1.0 million. We do not expect capital
spending in the fourth quarter of 2002 to be significant. We expect to spend a
total of $0.1 million to register and pursue patents on our technology during
2002. Therefore, the total capital spending and capitalized patent costs for
fiscal 2002 are expected to be approximately $1.1 million.
Between January 1999 and April 2000, we received an aggregate of
$227,522 from a recoverable grant award from the State of New Jersey Commission
on Science and Technology. The funds were used to partially fund costs directly
related to development of our fuel cell technology. The recoverable grant is
required to be repaid when we generate net income in a fiscal year. The
repayment obligation, which began in June 2001, ranges from 1% to 5% of net
income over a ten-year period and shall not exceed 200% of the original grant.
We are obligated to repay the unpaid amount of the original grant at the end of
the ten-year period.
During the second quarter of 2002, the Company incurred and paid
restructuring costs of approximately $0.1 million for severance and legal costs
related to 14 employee separations. The plan of restructuring was communicated
and all employee separations were completed prior to June 30, 2002. As of
September 30, 2002, the Company has 40 employees. Additionally, during the
third quarter, the Company took other cost savings actions to reduce our
operating expenses.
After the impact of the cost savings actions, our operating expenses for fiscal
year 2002 are estimated as follows:
Operating Expenses: Actual Actual Actual Estimate Estimate
(dollars in millions) Q1 Q2 Q3 Q4 Fiscal 2002
------------------- ------ ------ ------ -------- ------------
Cash operating expenses $3.6 $3.1 (1) $2.6 $2.5 $11.8
Depreciation, amortization and non-cash charges 1.3 1.2 1.0 1.1 4.6
---- ---- ---- --- -----
Total operating expenses $4.9 $4.3 $3.6 $3.6 $16.4
==== ==== ==== ==== =====
(1) Includes a restructuring charge of $0.1 million.
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We believe that our current cash and cash equivalents, together
with cash available from the financings (see footnote 5) announced on June 19,
2002 and October 31, 2002 will be sufficient to satisfy anticipated cash needs
of our operations into the latter half of 2004. If cash consumption is higher
than anticipated or the realization of savings as a result of the restructuring
plan is different than anticipated or the recent financing is not ultimately
funded and released from the pledge to the bank, we may seek additional
financing within this timeframe. We may raise additional funds through public
or private financings, collaborative relationships or other arrangements. We
cannot assure you that additional funding, if sought, will be available or will
be on terms favorable to us. Further, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Our failure to raise capital when needed may harm our
business and operating results.
Critical Accounting Policies
Our financial statements are based on the selection and application of
significant accounting policies, which require management to make significant
estimates and assumptions. We believe that the following are some of the more
critical judgment areas in the application of our accounting policies that
currently affect our financial condition and results of operations.
Revenue Recognition
In the near-term, the Company's revenues are expected to be derived
substantially from up-front license fees, research contracts with various
federal, state and local agencies, collaborations with other companies,
management services, and royalty payments or joint venture revenue from
licensees or strategic partnerships. Revenues will be recognized in the period
in which technology is delivered, licensing revenues are earned, or as services
are performed. Up-front payments related to licensing or services agreements
will be amortized over the license or servicing term.
Stock Options
The Company has recorded non-cash charges in the third quarter of
2002, in fiscal 2001 and 2000 for the fair value of warrants issued to certain
affiliates and third parties. Certain affiliates have the ability to earn new
awards based on defined milestones and service periods. The accounting
methodology requires a re-valuing of the related earned warrants at each
reporting period using a Black-Scholes pricing model. Due to this variable
accounting methodology, it is difficult to predict the amount of additional
non-cash charges the Company will incur related to these warrants. The fair
value of the Company's options and warrants issued to affiliates was estimated
at the date of grant using a Black-Scholes option-pricing model.
The Company also records non-cash charges for the difference between
the grant price and market price on the date of grant related to certain stock
options issued to employees and elected directors below market prices as
defined by APB No. 25. The non-cash charge is recognized ratably over the
related vesting period of the respective option contracts.
Impact of Recently Issued Accounting Standards
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Standard addresses financial
accounting and reporting for costs associated with exit or disposal activities
and requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. This Standard nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)". This
Standard is effective for exit or disposal activities initiated after December
31, 2002. As all costs related to our May 14, 2002 restructuring activities
were incurred as of June 30, 2002, we do not expect this to have a material
effect on our financial position or results of operations.
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements (within the meaning
of the Private Securities Litigation Reform Act of 1995) that 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," "intend" or similar
expressions, we are making forward-looking statements. You should not rely on
forward-looking statements because they are subject to a number of assumptions
concerning future events, and are subject to a number of uncertainties and
other factors, many of which are outside of our control, that could cause
actual results to differ materially from those indicated. Please note that we
disclaim any intention or obligation to update or revise any 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 fuel storage and delivery
system, (ii) competition from current, improving and alternate power
technologies, (iii) our ability to raise capital at the times, in the amounts
and at costs and terms that are acceptable to fund our business plan, (iv) our
ability to protect our intellectual property, (v) our ability to achieve
budgeted revenue and expense amounts, (vi) our ability to generate revenues
from the sale or license of, or provision of services related to, our
technology , (vii) our ability to form strategic alliances or partnerships to
help promote our technology and achieve market acceptance, (viii) our ability
to generate design, engineering, or management services revenue opportunities
in the hydrogen generation or fuel cell markets, and (ix) other factors
discussed under the caption "Investment Considerations" in our Annual Report on
Form 10-K for the year ended December 31, 2001.
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. There can be no assurance that we will be able
to enter into these agreements to protect against price increases.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended) as of a date within 90 days prior to the
filing date of this quarterly report. Based on such evaluation, such officers
have concluded that, as of the evaluation date, the Company's disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to the Company required to be included in the
Company's reports filed or submitted under the Exchange Act.
(b) Changes in Internal Controls.
Since the evaluation date, there have not been any significant changes
in the Company's internal controls or in other factors that could significantly
affect such controls.
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PART II
Item 2. Changes in Securities and Use of Proceeds.
(a) None.
(b) None.
(c) On October 31, 2002, we entered into a private placement
transaction with two institutional and accredited investors pursuant to which
we sold 588,790 shares of common stock at a discount to the then current market
price for gross proceeds of $1,000,000 and warrants to purchase 147,198 shares
of common stock. In addition, subject to satisfaction of certain conditions,
one of the purchasers is obligated to purchase $3.5 million principal amount of
unsecured convertible debentures and warrants to acquire 242,678 shares of
common stock, and $8.5 million principal amount of letter of credit secured
convertible debentures and warrants to acquire 589,376 shares of common stock.
The private placement transaction was made in reliance upon the exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended.
The unsecured convertible debentures are convertible to common stock
at a conversion price of $4.25, subject to anti-dilution and other conversion
price adjustments. The letter of credit secured debentures are convertible to
common stock at an initial conversion price of $4.25, subject to anti-dilution
adjustments.
In connection with the sale of the common stock in October 2002 and to
be granted in connection with the issuance of the unsecured convertible
debentures, an aggregate of 147,198 and 242,678 shares of common stock are
issuable upon exercise of warrants, respectively, at an exercise price of $2.32
and $3.00, respectively, which may change in the future based on certain
anti-dilution adjustments. In addition, the Company is obligated to grant
warrants to purchase 589,376 shares of common stock in connection with the
issuance of $8.5 million aggregate principal amount of letter of credit secured
convertible debentures, exercisable upon issuance at an exercise price of
$3.93, subject to anti-dilution adjustments. All warrants may not be exercised
and all debentures may not be converted to the extent that a holder thereof
would then beneficially own, together with its affiliates, more than 9.999% of
our common stock then outstanding subsequent to the applicable conversion or
exercise.
For a more detailed description of the transaction, refer to the
Company's filing with the SEC on Form S-3 Registration Statement No.
333-101061.
On November 8, 2002, the Company and Ballard Power Systems Inc. agreed
that the product development milestones set forth in a product development
agreement have been achieved and agreed to convert the $2.4 million refundable
royalty payment into an investment in the Company in the form of secured
convertible debentures. The debentures may be converted into common stock upon
the effectiveness of the registration statement relating to the underlying
shares of common stock at a price of $4.25, subject to certain adjustments, or,
if converted at the option of the Company, at the lesser of $4.25 or the volume
weighted average price for the five consecutive trading days immediately prior
to the date that the registration statement relating to the shares underlying
the debentures is first declared effective by the SEC. The private placement
transaction was made in reliance upon the exemption from registration under
Section 4(2) and Regulation S of the Securities Act of 1933, as amended. See
Note 6 to Notes to Financial Statements.
(d) None.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Exhibit
Number Index
- ------- -------
4.13+ Secured Convertible Debenture dated November 8, 2002 issued to Ballard Power Systems Inc.
10.18+ Option Agreement dated as of November 8, 2002, between the Company and Ballard.
10.19+ Securities Purchase Agreement dated as of November 8, 2002 between the Company and Ballard.
10.20+ Registration Rights Agreement dated as of November 8, 2002 between the Company and Ballard.
99.1+ Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2+ Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
- -----------------
+ Filed herewith.
(b) Reports on Form 8-K
On November 5, 2002, the Company filed a Form 8-K under Item 5 (Other
Events) to report the issuance of common stock and related warrants and
execution of a securities purchase agreement providing for the issuance to one
of the investors, upon satisfaction of certain conditions outside the control
of the investor, of secured and unsecured convertible debentures and related
warrants.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MILLENNIUM CELL INC.
(Registrant)
By: /s/ Norman R. Harpster, Jr.
Norman R. Harpster, Jr.
Vice President-Finance and
International Business
and Chief Financial Officer
November 14, 2002
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Stephen S. Tang, President and Chief Executive Officer of Millennium Cell
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Millennium Cell Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By /s/ Stephen S. Tang
Stephen S. Tang
President and Chief Executive Officer
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CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Norman R. Harpster, Jr., Chief Financial Officer of Millennium Cell Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Millennium Cell Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By /s/ Norman R. Harpster, Jr.
Norman R. Harpster, Jr.
Chief Financial Officer
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