U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10–Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended
September 30, 2004
Commission file number: 0-30391
MEDIS TECHNOLOGIES LTD.
(Exact Name of Registrant as Specified in its Charter)
|
Delaware (State or other jurisdiction of incorporation or organization) |
13–3669062 (I.R.S. Employer Identification Number) |
805 Third Avenue
New York, New York 10022
(Address
of Principal Executive Offices and Zip Code)
(212) 935–8484
(Registrant’s Telephone Number, Including Area Code)
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 by check mark whether Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes [X] No [ ]
The number of shares of Common Stock, par value $.01 per share, outstanding as of November 5, 2004 was 26,286,590.
| Page Number | ||||||||||||||||
| PART I. | FINANCIAL INFORMATION | |||||||||||||||
| Item 1. |
Financial Statements | |||||||||||||||
| |
Condensed Consolidated Balance Sheets December 31, 2003 and September 30, 2004 (Unaudited) |
1 | ||||||||||||||
| |
Condensed Consolidated Statements of Operations (Unaudited) Three and nine months ended September 30, 2003 and 2004 |
2 | ||||||||||||||
| |
Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30, 2003 and 2004 |
3 | ||||||||||||||
| |
Notes to Condensed Consolidated Financial Statements (Unaudited) | 4 | ||||||||||||||
| Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
9 | ||||||||||||||
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 14 | ||||||||||||||
| Item 4. |
Controls and Procedures | 14 | ||||||||||||||
| PART II. | OTHER INFORMATION | |||||||||||||||
| Item 6. | Exhibits | 15 | ||||||||||||||
| December 31, 2003 |
September 30, 2004 |
|||||||
|---|---|---|---|---|---|---|---|---|
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 6,620,000 | $ | 13,774,000 | ||||
| Accounts receivable—trade, net | 74,000 | — | ||||||
| Accounts receivable—other | 237,000 | 132,000 | ||||||
| Prepaid expenses and other current assets | 110,000 | 178,000 | ||||||
| Total current assets | 7,041,000 | 14,084,000 | ||||||
| Property and equipment, net | 1,470,000 | 1,923,000 | ||||||
| Goodwill, net | 58,205,000 | 58,205,000 | ||||||
| Intangible assets, net | 880,000 | 724,000 | ||||||
| Long-term note | 158,000 | 272,000 | ||||||
| Severance pay fund | 697,000 | 800,000 | ||||||
| Total assets | $ | 68,451,000 | $ | 76,008,000 | ||||
| LIABILITIES AND | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 323,000 | $ | 803,000 | ||||
| Accrued expenses and other current liabilities | 958,000 | 1,491,000 | ||||||
| Total current liabilities | 1,281,000 | 2,294,000 | ||||||
| Accrued severance pay | 1,193,000 | 1,384,000 | ||||||
| Total Liabilities | 2,474,000 | 3,678,000 | ||||||
| Commitments and contingent liabilities | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock, $.01 par value; 10,000 shares authorized; none | ||||||||
| issued | — | — | ||||||
| Common stock, $.01 par value; 38,000,000 shares authorized; | ||||||||
| 24,538,268 and 26,263,770 shares issued and outstanding, at | ||||||||
| December 31, 2003 and September 30, 2004, respectively | 245,000 | 263,000 | ||||||
| Additional paid-in capital | 173,185,000 | 190,952,000 | ||||||
| Accumulated deficit | (107,453,000 | ) | (118,885,000 | ) | ||||
| Total stockholders’ equity | 65,977,000 | 72,330,000 | ||||||
| Total liabilities and stockholders’ equity | $ | 68,451,000 | $ | 76,008,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
| Three Months Ended | Nine Months Ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, | September 30, | |||||||||||||
| 2003 | 2004 | 2003 | 2004 | |||||||||||
| Sales | $ | 38,000 | $ | — | $ | 113,000 | $ | — | ||||||
| Cost of sales | 16,000 | — | 43,000 | — | ||||||||||
| Gross profit | 22,000 | — | 70,000 | — | ||||||||||
| Operating expenses: | ||||||||||||||
| Research and development | ||||||||||||||
| costs, net | 1,179,000 | 2,459,000 | 3,632,000 | 6,683,000 | ||||||||||
| Selling, general and | ||||||||||||||
| administrative expenses | 1,055,000 | 1,695,000 | 2,929,000 | 4,069,000 | ||||||||||
| Amortization of intangible assets | 52,000 | 52,000 | 945,000 | 156,000 | ||||||||||
| Total operating expenses | 2,286,000 | 4,206,000 | 7,506,000 | 10,908,000 | ||||||||||
| Loss from operations | (2,264,000 | ) | (4,206,000 | ) | (7,436,000 | ) | (10,908,000 | ) | ||||||
| Other income (expenses) | ||||||||||||||
| Interest income | 37,000 | 65,000 | 98,000 | 184,000 | ||||||||||
| Interest expense | (4,000 | ) | (16,000 | ) | (36,000 | ) | (37,000 | ) | ||||||
| 33,000 | 49,000 | 62,000 | 147,000 | |||||||||||
| NET LOSS | $ | (2,231,000 | ) | $ | (4,157,000 | ) | $ | (7,374,000 | ) | $ | (10,761,000 | ) | ||
| Value of warrants issued or extended | (1,226,000 | ) | (671,000 | ) | (1,226,000 | ) | (671,000 | ) | ||||||
| Net loss attributable to common | ||||||||||||||
| shareholders | $ | (3,457,000 | ) | $ | (4,828,000 | ) | $ | (8,600,000 | ) | $ | (11,432,000 | ) | ||
| Basic and diluted net loss per share | $ | (.15 | ) | $ | (.18 | ) | $ | (.37 | ) | $ | (.44 | ) | ||
| Weighted-average number of shares used | ||||||||||||||
| in computing basic and diluted net | ||||||||||||||
| loss per share | 23,591,557 | 26,252,602 | 23,201,704 | 26,106,480 | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
| Nine Months Ended September 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2004 | |||||||||
| Cash flows from operating activities | ||||||||||
| Net loss | $ | (7,374,000 | ) | $ | (10,761,000 | ) | ||||
| Adjustments to reconcile net loss to net cash used in | ||||||||||
| operating activities | ||||||||||
| Depreciation and amortization of property and | ||||||||||
| equipment | 233,000 | 354,000 | ||||||||
| Amortization of intangible assets | 945,000 | 156,000 | ||||||||
| Non-cash stock based compensation expense | 378,000 | 1,186,000 | ||||||||
| Changes in operating assets and liabilities | ||||||||||
| Accounts receivable--trade | (14,000 | ) | 74,000 | |||||||
| Accounts receivable--other | (55,000 | ) | 100,000 | |||||||
| Prepaid expenses and other current assets | (160,000 | ) | (68,000 | ) | ||||||
| Accounts payable | 94,000 | 480,000 | ||||||||
| Accrued expenses and other current liabilities | 6,000 | 533,000 | ||||||||
| Accrued severance pay, net | 77,000 | 88,000 | ||||||||
| Net cash used in operating activities | (5,870,000 | ) | (7,858,000 | ) | ||||||
| Cash flows from investing activities | ||||||||||
| Capital expenditures | (279,000 | ) | (807,000 | ) | ||||||
| Investment in short-term deposits | — | (12,198,000 | ) | |||||||
| Maturity of short-term deposits | — | 12,198,000 | ||||||||
| Long-term note | (155,000 | ) | (109,000 | ) | ||||||
| Net cash used in investing activities | (434,000 | ) | (916,000 | ) | ||||||
| Cash flows from financing activities | ||||||||||
| Proceeds from issuance of common stock, net | 5,410,000 | 15,928,000 | ||||||||
| Proceeds received on account of shares, net | 3,458,000 | — | ||||||||
| Net cash provided by financing activities | 8,868,000 | 15,928,000 | ||||||||
| Net increase in cash and cash equivalents | 2,564,000 | 7,154,000 | ||||||||
| Cash and cash equivalents at beginning of period | 6,036,000 | 6,620,000 | ||||||||
| Cash and cash equivalents at end of period | $ | 8,600,000 | $ | 13,774,000 | ||||||
| Supplemental disclosures of cash flow information: | ||||||||||
| Cash paid during the period for: | ||||||||||
| Interest | $ | 25,000 | $ | 24,000 | ||||||
| Non-cash investing and financing activities: | ||||||||||
| Acquisition of shares of majority-owned subsidiary - | ||||||||||
| Purchase price allocated to intangible assets | $ | 1,045,000 | $ | — | ||||||
| Financed as follows: | ||||||||||
| Issuance of common stock | $ | 525,000 | $ | — | ||||||
| Cost of option purchased in prior period | $ | 520,000 | $ | — | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Medis Technologies Ltd. (“MTL”), a Delaware corporation, is a holding company, which through its wholly-owned subsidiaries, Medis El Ltd. (“Medis El”) and More Energy Ltd. (“More Energy”) (collectively, the “Company”), engages in research and development of technology products to license, sell, or enter into joint ventures with large corporations. The Company’s primary business focus is on the advanced development, manufacturing, marketing and distribution of direct liquid fuel cell products for portable electronic devices. Included in this category are the most modern cell phones with a full range of functionality, digital cameras, PDAs, MP3 players, other devices with similar power requirements and a broad array of military devices. The Company’s other technologies, which are in various stages of development, include the CellScan, inherently conductive polymers, the toroidal engine, stirling cycle system, and the Rankin cycle linear compressor.
The accompanying condensed consolidated financial statements should be read in conjunction with the following notes and with the consolidated financial statements for the year ended December 31, 2003 and related notes included in the Company’s Annual Report on Form 10-K. The condensed consolidated financial statements as of September 30, 2004 and for the three and nine months ended September 30, 2003 and 2004 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim financial information and the rules and regulations promulgated by the Securities and Exchange Commission. Accordingly, such condensed consolidated financial statements do not include all of the information and footnote disclosures required in annual financial statements. In the opinion of the Company’s management, the unaudited condensed consolidated interim financial statements include all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of such condensed consolidated financial statements. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the entire year.
The condensed consolidated balance sheet as of December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements.
| 1. | Private Placements of Common Stock – In January 2004, MTL issued 1,425,000 shares of its common stock in a private placement to institutional investors, for gross proceeds of approximately $14,588,000, less related costs of approximately $309,000. |
| 2. | Exercise of Stock Options – From January 1 through September 30, 2004, MTL issued 252,534 shares of its common stock pursuant to the exercise of stock options granted under its 1999 Stock Option Plan, as amended, for aggregate proceeds of approximately $1,442,000. |
| 3. | Exercise of Warrants — From January 1 through September 30, 2004, MTL issued 47,968 shares of its common stock pursuant to the exercise of warrants, at exercise prices ranging from $4.92 to $9.60 per share, for aggregate proceeds of approximately $283,000. |
| 4. | Grant of Warrants – On June 6, 2004, the Company granted warrants to purchase an aggregate of 7,946 shares of the Company’s common stock to those shareholders who exercised warrants |
4
received in the Company’s 2002 shareholder loyalty program prior to the November 13, 2003 completion of the Company’s offer to exchange and exercise. Such warrants have the same terms as those issued in connection with the offer to exchange and exercise and, accordingly, vested upon issuance, provide for an exercise price of $9.60 per share and expire on November 14, 2004. Using the Black-Scholes option pricing model assuming a 1.5% risk free interest rate, 0% dividend yield, expected life of 0.5 years and 54% volatility, the Company has estimated the fair value of such warrants to be approximately $43,000. |
| 5. | Extension of Outstanding Options – In August 2004, MTL extended through December 31, 2006 the expiration dates of its outstanding options that were scheduled to expire on December 31, 2004 and January 31, 2005. The Company has estimated the value of the extension of the expiration dates of such options to be approximately $825,000 and has recorded such amount as an expense during the nine and three months ended September 30, 2004. |
| 6. | Extension of Outstanding Warrants – In August 2004, MTL extended through December 31, 2005 the expiration dates of its outstanding warrants that were issued to shareholders of the Company in connection with the Company’s November 13, 2003 offer to exchange and exercise and those issued on June 6, 2004 (see note B-4, above). Such warrants had original expirations dates of November 14, 2004. Using the Black-Scholes option pricing model assuming a 2.0% risk free interest rate, 0% dividend yield, expected life of 1.35 years and 63% volatility, the Company has estimated the fair value of the extension of such warrants to be approximately $671,000 and has accounted for such amount as a preferred dividend. |
| 7. | Stock-based Compensation — SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS No. 148”) amends SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) to provide alternative methods of transition for a voluntary change to the fair value based methods of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. |
| As provided for in SFAS No. 148, the Company has elected to continue to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation,” in accounting for its employee stock options, under which compensation expense, if any, is generally based on the difference between the exercise price of an option or the amount paid for the award and the market price or fair value of the underlying common stock at the date of the grant. To the extent that compensation expense is recognized with respect to stock options issued to employees or directors, such expense is amortized over the vesting period of such options. Stock-based compensation arrangements involving non-employees or non-directors are accounted for under SFAS No. 123 and Emerging Issues Task Force No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” under which such arrangements are accounted for based on the fair value of the option or award. |
| Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant dates for all awards, the Company’s net loss and basic and diluted net loss per share would have been the pro forma amounts indicated below: |
5
| Unaudited | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||
| 2003 | 2004 | 2003 | 2004 | |||||||||||
| Net loss, as reported | $ | (3,457,000 | ) | (4,828,000 | ) | $ | (8,600,000 | ) | $ | (11,432,000 | ) | |||
| Add: Total stock-based | ||||||||||||||
| employee | ||||||||||||||
| compensation | ||||||||||||||
| expense included in | ||||||||||||||
| the reported net loss | 32,000 | 721,000 | 32,000 | 832,000 | ||||||||||
| Deduct: Total stock- | ||||||||||||||
| based employee | ||||||||||||||
| compensation | ||||||||||||||
| expense determined | ||||||||||||||
| under fair value | ||||||||||||||
| based method | (155,000 | ) | (4,051,000 | )* | (799,000 | ) | (4,665,000 | )* | ||||||
| Pro forma net loss | ||||||||||||||