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SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
______________
FORM
10-K
ANNUAL
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2004
Commission
file number: 0-30391
MEDIS
TECHNOLOGIES LTD.
(Exact
name of registrant as specified in its charter)
Delaware |
|
13-3669062 |
(State
of incorporation) |
|
(I.R.S.
Employer Identification No.) |
805
Third Avenue
New
York, New York 10022
(Address
of principal executive offices, including zip code)
(212)
935-8484
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $.01 per share
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) had been subject to such filing requirements for
the past 90 days. Yes ý
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes ý
No o
As
of June 30, 2004, the aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant was approximately $257,864,000.
As
of March 10, 2005,
there were outstanding 27,115,487
shares of the registrant’s common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s Proxy Statement for the 2005 Annual Meeting of Stockholders
are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III.
TABLE
OF CONTENTS
|
Part
I |
|
1 |
|
Item
1. |
Business |
1 |
|
Item
2. |
Properties |
15 |
|
Item
3. |
Legal
Proceedings |
15 |
|
Item
4. |
Submission
of Matters to a Vote of Security Holders |
15 |
| |
|
|
|
Part
II |
|
16 |
| |
|
|
|
Item
5. |
Market
For Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities |
16 |
|
Item
6. |
Selected
Financial Data |
16 |
|
Item
7. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
18 |
|
Item
7A. |
Quantitative
and Qualitative Disclosures About Market Risk |
34 |
|
Item
8. |
Financial
Statements and Supplementary Data |
35 |
|
Item
9A. |
Controls
and Procedures |
35 |
|
Item
9B. |
Other
Information |
37 |
| |
|
|
|
Part
III |
|
37 |
| |
|
|
|
Item
10. |
Directors
and Executive Officers of the Registrant |
37 |
|
Item
11. |
Executive
Compensation |
37 |
|
Item
12. |
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
37 |
|
Item
13. |
Certain
Relationships and Related Transactions |
37 |
|
Item
14. |
Principal
Accounting Fees and Services |
37 |
| |
|
|
|
Part
IV |
|
38 |
| |
|
|
|
Item
15. |
Exhibits
and Financial Statement Schedules |
38 |
References
in this Annual Report to “we,” “us,” or “our” are to Medis Technologies Ltd. and
its direct and indirect subsidiaries, unless the context specifies or requires
otherwise.
PART
I
Introduction
Our
primary business focus is on the development, manufacturing, marketing and
distribution of direct liquid fuel cell products for portable electronic
devices, for the consumer (personal and professional) and military markets. A
discussion of our direct liquid fuel cell products and technology and of our
other technologies, including our CellScan, inherently conductive polymers,
stirling cycle system, toroidal technologies and Rankin cycle liner compressor,
follows.
We are a
Delaware corporation organized in April 1992. Our executive offices are located
at 805 Third Avenue, New York, New York 10022. Our telephone number is (212)
935-8484. Our website is located at www.medistechnologies.com. We make available
free of charge through our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we electronically
filed such material with, or furnished it to, the Securities and Exchange
Commission. The information on our website is not part of this Annual
Report.
Fuel
Cells
Introduction
Our
primary business focus is on the development, manufacturing, marketing and
distribution of direct liquid fuel cell products to power and charge portable
electronic devices, such as most cell phones (including the most advanced “3G”
cell phones with a full range of functionality), digital cameras, PDAs (both for
personal and professional use, including wireless versions with e-mail
capability), MP3 players, hand-held video games and other devices with similar
power requirements, as well as a broad array of military devices.
Our first
planned consumer fuel cell product, which we call our “Power Pack,” is a
disposable, portable auxiliary power source capable of providing power to
operate and charge many of the most advanced portable electronic devices. When a
device’s battery is running low or is discharged, the Power Pack allows the
continued use of the device while at the same time charging the battery. When
the Power Pack has depleted its fuel, it can be disposed of by the consumer. By
contrast, the military product we are developing and what we anticipate will be
a second generation consumer product, is refuelable rather than disposable. When
the fuel in those Power Packs is depleted, the user employs a removable fuel
cartridge that replaces the fuel and the electrolyte in a matter of
seconds.
A fuel
cell is an electro-chemical device that converts the chemical energy of a fuel,
such as our patented fuel, hydrogen or methanol, into electrical energy. There
are a number of different types of fuel cells being developed for commercial
applications, some of which are intended for large scale applications such as
automobiles and stationary power generation. By contrast, our fuel cells are not
derivative or a miniaturization of these larger systems; rather we have
specifically designed our system for small scale applications, and in particular
for use with portable electronic devices. We also believe that certain
technologies used in our fuel cells, particularly our patented fuel, may be
applicable in the development of larger fuel cells delivering tens of kilowatts
of power. While we have no current intention to divert our resources or funds to
develop or manufacture larger fuel cells, we would consider the possibility of
joint activity or licensing relationship with an appropriate company in that
arena.
Central
to our fuel cell products is our patented highly-advanced liquid fuel. As
reflected in our patents, the basic components of our fuels are borohydride -
alkaline solutions combined with alcohols. These compounds are characterized by
high levels of electrochemical activity which results in high levels of power
density and energy capacity at a broad range of temperatures, even including
room temperatures. These are important conditions for working with portable
power sources. Our fuel is not flammable and the pH level of our fuel is
approximately the same as that of alkaline batteries. This contrasts with
methanol, the traditional fuel used in small fuel cells being developed for
portable electronic devices, which has severe limitations due to its high
flammability and toxicity levels.
Our
Fuel Cells Compared to Rechargeable Batteries
Fuel
cells for small-scale applications have many of the characteristics of
rechargeable batteries and in certain applications could compete with them. A
key distinguishing feature between fuel cells and rechargeable batteries is that
a fuel cell transforms its fuel directly into electrical power and produces
power as long as the fuel is supplied. Batteries are energy storage devices that
release power until the chemical reactant stored in the battery is depleted.
Once the chemical reactant is depleted, the battery must be recharged or
discarded.
As
portable electronic devices continue to advance and to offer greater
capabilities and functionality, the power gap that already exists between those
ever-increasing power demands of electronic applications and the power that is
available from batteries continues to widen. We believe that mobile operators
(wireless carriers/service providers) and device manufacturers will seek
significantly increased and longer lasting power to satisfy consumer desires.
Since we believe that batteries presently used in these devices are approaching
their technological limit, we expect the Power Pack to help fill that
gap.
Our
Fuel Cells Compared to Other Fuel Cells
Much of
the traditional fuel cell development for the portable electronic device market
centers around direct methanol fuel cells using a solid polymer membrane (proton
exchange membrane, or PEM), unlike our use of our patented fuel and an alkaline
electrolyte. Although the proton exchange membrane, itself, has the advantage of
requiring less space than a liquid electrolyte, we believe that the use of PEM
technology has other disadvantages which make it more difficult to reduce the
overall size of the fuel cell, and increase the power densities to an amount
needed for portable electronic devices at commercially acceptable temperature
levels for broad consumer use. In a direct methanol fuel cell with a PEM, the
concentration of methanol used in the fuel cell stacks is usually limited to 3%
to 6%, reducing the performance of the fuel cell. In order to achieve such
reduced concentrations of methanol, most traditional direct methanol fuel cells
are constructed with an external cartridge delivery system containing
concentrations of methanol as high as 99.5 to 100 percent to feed the methanol
into the fuel cell system and a regulator to control and reduce the flow of
methanol. We believe that such high concentrations of methanol raise issues of
consumer health and safety and would preclude bringing such a methanol fuel cell
in an airplane cabin, as well as impose other restrictions on transportability.
Other direct methanol fuel cell external support systems may include a water
management system, a temperature control system and where fuel cells are
arranged in a stack, a forced air system. Such direct methanol fuel cell support
systems could result in increased size, complexity and cost. Direct methanol
fuel cells generally also use platinum or other expensive noble metals on both
the anode and the cathode.
Other
companies have announced their use of reformers inside their fuel cells to
convert methanol into hydrogen which is then used to create power. The public
announcements thus far suggest the presence of heat of over 200 degrees Celsius
in these products. Other announcements have suggested the planned use of
nanotechnology methods to create new forms of fuel cells. We are not aware of
any
concrete
evidence of successful development of fuel cells using nanotechnology. It should
be noted, however, that considerable resources are being applied by many large
companies to develop fuel cells using all of these, as well as other methods,
and we can give no assurance that a fuel cell product will not be developed
using highly concentrated methanol, reformers, nanotechnology or other
approaches that would be competitive to our products.
We have
developed a fuel cell that we believe has obviated many of the problems that
have affected traditional PEM-based fuel cells. Our fuel cell technology enables
us to use a safer patented fuel which is not flammable, avoiding methanol’s
levels of toxicity and flammability. Our fuel cell is self-regulating, meaning
it provides sufficient power to meet the draw-down of power as needed. It does
not require an external fuel delivery or regulating system so it can be made as
a disposable product or it can use a cartridge that replaces the fuel in a
matter of seconds and need not constantly sit in the fuel cell. Furthermore, our
fuel cell does not require a water management system, a forced air system, a
heat control system, a reformer or other complex system. Instead, our fuel cell
has a very simple design and architecture, consisting of an anode, a cathode, a
chamber for the liquid electrolyte and a fuel chamber. We have also eliminated
the use of platinum on the cathode, and while we are still using limited amounts
of platinum on the anode, we are seeking to eliminate the use of any platinum on
the anode, thereby eliminating all platinum and other noble metals in our fuel
cells. In addition, the cost of the liquid electrolyte in our fuel cell is
substantially lower than the cost of a PEM. Eliminating complex systems, using a
low cost electrolyte and reducing or eliminating platinum from our fuel cells,
we believe enables us to lower the component costs of our product significantly.
Finally, our fuel cell technology has allowed us to improve our fuel cell’s
performance in power output and operating time relative to size and weight. As a
result, we are able to use a single fuel cell in making a product, such as our
Power Pack, rather than stacking a number of fuel cells with the additional
complexity that approach may require. Since the initial voltage created by our
fuel cell is 0.35 to 1.0 volt, our system uses a DC to DC converter that we have
developed to be able to increase the initial voltage from 0.35 to 5
volts.
State
Of Our Fuel Cell Products
Our first
two fuel cell products are our disposable Power Pack for the consumer (both
personal and professional) market and our refuelable Power Pack for military
use.
Disposable
Power Pack
Our
disposable Power Pack is a portable auxiliary power source that allows the
continued use of a portable electronic device whose battery is depleted, while
at the same time charging the battery. The disposable Power Pack is expected to
provide sufficient power to operate and charge most of the advanced portable
electronic devices on the market today, such as most cell phones (including the
most advanced “3G” cell phones and those with built-in cameras), digital
cameras, PDAs (both for personal and professional use, including wireless
versions with e-mail capability), MP3 players, hand-held video games and other
devices with similar power requirements, since our patent pending power
management system provides the capability of charging a number of different
devices using inexpensive connectors that access the particular device’s
battery. When used to power a cell phone, each disposable Power Pack is expected
to deliver the equivalent of 15 to 20 hours of talk time, or about two to five
full charges of the battery, depending on the individual cell phone power
consumption and battery type. When used to power a rechargeable digital camera,
the disposable Power Pack is expected to deliver two to five full charges of the
battery, depending on the individual camera’s power consumption and battery
type. Before its use, the Power Pack is expected to have a shelf life in excess
of a year. Once it is started, the disposable Power Pack is expected to be
usable for four to six weeks.
The
disposable Power Pack has an anticipated maximum size of 80 x 50 x 30 mm (3.2 x
2 x 1.2 inches) and anticipated weight of up to 200 to 250 grams fully fueled.
The disposable Power Pack is expected to have a price of $10.00 to $15.00 when
offered by mobile operators to their subscribers and a suggested retail price of
$19.99 when sold through traditional retail channels. By comparison with
battery-operated portable cell phone chargers in the market today, we expect our
disposable Power Pack to offer many advantages, including: substantially more
hours of operation relative to cost; the ability to start a cell phone depleted
of power in seconds rather than minutes; the ability to power a number of
different devices; the use of a built-in fuel gauge that tells the user how much
fuel is still available; and the avoidance of reverse polarity which discharges
the cell phone battery when the charger is left connected.
We expect
that as manufacturers of portable electronic devices continue to offer new
products and add functionality to existing products which require increased
battery power and battery life, batteries now on the market will not be able to
operate these new devices to the consumer’s satisfaction. We expect that our
Power Pack, by being able to supply power to operate continuously and charge the
device repeatedly, will offer significant benefits to the mobile operators, the
device manufacturers and the consumer. We anticipate that mobile operators will
benefit by providing increased use time for the new products and functions,
thereby increasing their average revenue per user (“ARPU”) and the mobile
operators also will have the opportunity to earn a new source of revenues on the
sale of Power Packs to their existing customer base. Device manufacturers will
benefit by the availability of more power for operation of their new products
with increased capabilities. And consumers will be able to take greater
advantage of the new device capabilities and benefit from the convenience and
freedom of being able to operate and charge portable devices on the
go.
In June
2004, we successfully demonstrated our refuelable military Power Pack operating
an advanced PDA together with General Dynamics C4 Systems at a fuel cell
conference, and demonstrated both the military Power Pack and our disposable
consumer Power Pack products charging and operating cell phones and digital
cameras both at meetings attended by original equipment manufacturers (OEM’s)
and by our shareholders and members of the investment community. Starting at the
end of February of 2005 and expected to continue through mid-May 2005, we have
been making available pre-mass production units of our disposable Power Packs
for review by different potential customers. These pre-mass-production Power
Packs are able to demonstrate the capabilities of our planned volume production
products. We plan to demonstrate these units to our distributors, Kensington
Technology Group, Superior Communications and ASE International Inc. and with
them to demonstrate the units to some of their key customers. Furthermore, we
are meeting with major mobile operators in the United States and Europe as well
as large OEM’s to demonstrate our Power Pack products. We are seeking feedback
from these potential customers, which we will use to prepare our final designs
as well as rely on as an indication of future orders. We plan to fix the final
design for the disposable Power Pack and seek firm orders from our customers by
May-June of 2005, which we expect will enable us to begin volume production at
the end of 2005, with the aim by the second half of 2006 of having at least one
full line running capable of producing up to 1.5 million units per month. To
carry out this program on this schedule will require us at that time to have
sufficient orders from our customers to warrant production lines; complete the
tooling for production; have run the line and solved any problems that typically
occur in new production lines; have production lines in place for the
electrodes, the fuel and the balance of the Power Pack products, including
funding for such lines; and have contracts with one or more manufacturers to
produce our Power Pack. While we are making considerable progress towards our
goals, there can be no assurance that all of these requirements will be met in a
timely fashion and that there will be no delays in meeting our production
program. We are already engaged in discussions with potential contract
manufacturers capable of producing our Power Packs.
Refuelable
Power Pack
The
refuelable Power Pack, which we anticipate will be a second generation consumer
product, is expected to allow the user to refuel the Power Pack by using a
cartridge which transfers new fuel and electrolyte into the Power Pack,
replacing any remaining fuel, electrolyte and water by-products which are
returned to the refueling cartridge. This refueling process is expected to take
a matter of seconds and the cartridge can then be discarded.
Pursuant
to an agreement with General Dynamics, we are designing and developing a
refuelable Power Pack capable of providing auxiliary power to a rugged PDA being
developed by General Dynamics to meet military specifications. Under the present
system, the PDA would be charged by a battery sleeve with eight lithium
manganese oxide batteries. For a 72 hour mission, always on, the present system
would require the military team to carry about 140 batteries costing
approximately $450. Our refuelable Power Pack is expected to provide
approximately 72 hours of operating time with the use of only six refueling
cartridges, making it lighter and less expensive than the present system. In
December 2004, we delivered sixteen fully functional prototype fuel cell Power
Packs and fuel cartridges to General Dynamics for testing in connection with the
rugged PDA. Each Power Pack is currently capable of delivering five watts and
five volts of continuous power. Our technical team is working closely with
General Dynamics to evaluate the ability of the Power Packs and cartridges to
meet extended mission requirements and military environmental specifications
with a view to incorporating product enhancements in future
designs.
We are
also progressing in the development of a more powerful Power Pack of about eight
watts for a tablet computer to fulfill an order we received from General
Dynamics in August 2004, pursuant to a contract awarded to General Dynamics by
the USAF. Delivery of the prototypes for that product to General Dynamics is
planned for the third quarter of 2005.
State
of Our Fuel Cell Technology
Even as
we develop completed fuel cell products like our Power Packs, we continue to
work towards substantial advances in the development of our technology to
enhance the commercial value of our products. These advances include: supplying
increased energy while also reducing size and weight; perfecting the discharge
characteristics and length of operating time (discharge characteristics
determine how much power the fuel cell can deliver over a period of time);
improving the engineering design; and integrating our individual fuel cells into
a seamless power source. We are also working to finalize the production model of
the converter used in our power pack to step up voltage together with the power
management system that allows the Power Pack to respond to differing voltage
requirements of different devices.
During
2004, we entered into the following two agreements to advance our fuel cell
products and move towards volume production:
On May
25, 2004, we entered into a Development Agreement with Eastman Kodak Company’s
Global Manufacturing Services operation for advancing the development of
refueling cartridges and chemicals to be used in our fuel cell
products.
On May 3,
2004, we entered into a Product and Manufacturing Development Agreement with
Flextronics International Ltd. In connection with this relationship, Flextronics
developed a small Application Specific Integrated Circuit (ASIC) for our
proprietary DC to DC converter to increase the voltage without having to
connect a number of fuel cells in a series. We have also developed an innovative
proprietary power management system (patent pending) that enables our Power
Pack to
respond to the voltage requirements of different devices using only an
inexpensive connector to those devices. We have integrated the power management
system with the DC to DC converter and, based on a new proprietary approach we
have developed, we expect to significantly reduce the size of the combined unit
in our Power Pack products. We have also succeeded in designing our Power Pack
to allow for operation in any orientation.
Market
Opportunities
Portable
Electronic Device Market
We
estimate based on various reports of cell phone sales that there are currently
over 2.0 billion users of portable electronic devices world wide, of which
approximately 150 million are in the United States, with reported annual sales
of approximately 650 million devices per year, representing new and replacement
sets. In this market, device manufacturers are continuing to add more and more
entertainment, communication and other features on their handsets, particularly
phone manufacturers who are incorporating into the latest 3G cell phones
functionality that includes digital cameras, internet access, video games, video
clips, text messaging, PDA applications, MP3 players, FM radios and even
television broadcasts. Thus, the cell phone which at the outset was simply a
communications device has evolved into an entertainment device offering video,
music, and sports and other programs. We believe that this trend is consistent
with the strategies of mobile operators (service providers) worldwide who are
requiring that products they make available to their subscribers have greater
functionality in order to increase their income from air time usage. Published
comments made by mobile operators and others suggest that they believe that the
battery life of the cell phones being delivered by cell phone OEM’s fall short
of satisfying the consumer and prevents the consumer from making full use of all
the capabilities presently being offered and planned for the phones and other
devices. We believe that this affords us a significant market opportunity if the
mobile operators decide to offer our Power Pack to their subscribers both when
the subscriber first signs up for a cell phone, by an offer sent together with
the bill or by providing the subscriber with a phone number to dial that
activates the delivery of a Power Pack to the subscriber and bills the
subscriber. Such an offer could suggest that the subscriber can solve the
problem of “power frustration” by signing up for a number of Power Packs a year
and having the charge included in the subscriber’s monthly bill.
Based on
what we have learned from company-sponsored attitude surveys and focus groups
dealing with cell phone use, we expect there to be a high level of demand for
the Power Pack by those cell phone/PDA users who travel frequently and who would
use the Power Pack to keep their devices charged while traveling. Also discerned
from these groups was a surprisingly high level of demand by stay-at-home
parents, a very high percentage of whom stated in these surveys and focus groups
that they would purchase and frequently use a Power Pack-type product.
Stay-at-home parents also make many of the purchasing decisions for their
households and a very large percentage stated that they would purchase a Power
Pack for their children who had cell phones, as well. By contrast, we would
expect that cell phone users who charge their phones each night and work in an
office during the day are less likely to buy a Power Pack unless they
contemplate a trip, and others might buy it to keep in survival kits to protect
against loss of power by reason of blackouts or for emergency use in case of
natural disasters.
One
market that we believe has considerable potential for our Power Pack is the
“kidult” market - the 13 to 24 year olds who represent prime users for many
advanced portable devices. We, and our distributors believe that the Power Pack
products offer a valuable opportunity for the distributors and their customers
to access this very important market early in their lives as a way of relating
to this consumer group as they grow older. Another growing market where we
believe the Power Pack will be attractive is the “enterprise” market which
focuses on the high-usage business market, which uses increasingly advanced
portable devices to access corporate applications and data bases.
At the
same time, there is a fast growing market for digital cameras - expected to
reach almost 100 million sold by the end of 2005, according to published
reports. Yet, we have been advised by some digital camera OEM’s that the single
biggest consumer complaint about the performance of the digital camera is
battery life. In our company-sponsored attitude surveys and focus groups, thus
far, a very large percentage of those interviewees who owned a rechargeable
digital camera said they would purchase and use a Power Pack to prevent failed
battery life at a crucial picture taking time or a warning of reduced battery
life that would result in rationing pictures. We would also expect that
customers whose initial primary motivation to purchase a Power Pack was for use
in connection with their digital cameras will soon start using the same Power
Pack as a matter of convenience to charge their cell phones and other portable
electronic devices and quickly make it a part of their every day lives.
Similarly, we expect that cell phone Power Pack users would use them for
charging their digital cameras and other portable devices.
Military
Applications
The U.S.
Department of Defense has stated that it has a pressing need for lighter and
more compact electrical power sources as the modern soldier is increasingly
equipped with many new portable electronic devices. As with the latest portable
electronics for consumers, these devices require significant power sources and
are currently dependent on batteries that are heavy and expensive and must be
recharged frequently at a central charging source. We intend that our refuelable
Power Pack will satisfy these power needs. In May 2002, we received a $75,000
order from General Dynamics towards development of a fuel cell product. On May
5, 2003, we announced an agreement with General Dynamics to design and develop a
pre-production prototype of our fuel cell military Power Pack product for the
rugged personal digital assistant (PDA) system that they are developing for the
military. In December 2004, we delivered sixteen fully functional prototype fuel
cell Power Packs and fuel cartridges to General Dynamics for testing pursuant to
this agreement. The total price for our services provided for in the agreement
is $500,000, with an initial payment of $100,000 and the balance in accordance
with the payment and performance milestones established in the agreement through
2005. Under these two agreements with General Dynamics we have already received
nine payments totaling $475,000. We anticipate further payments totaling
$100,000 during 2005, as we achieve the final two milestones.
In August
2004, we received an additional order from General Dynamics to deliver five
prototype fuel cell power packs and associated cartridges as power sources for
10 prototype tablet computers in support of the United States Air Force (USAF)
Wearable Computer Power Program. The order provides for 10 milestone payments of
$42,500 each through June 2005, or a total of $425,000. The order was issued
pursuant to a contract awarded to General Dynamics by the USAF and announced on
August 20, 2004. We have already received six payments totaling $255,000 under
this order. We expect to deliver the five prototype fuel cell Power Packs and
associated cartridges in the third quarter of 2005.
Together
with General Dynamics we are also evaluating other military products where our
fuel cells could be valuable. General Dynamics has received the contract for the
multiple department of defense instruments and applications including Joint
Tactical Radio Systems (JTRS). Other military related areas that may offer
potential are products carried by foot soldiers in the Land Warrior program of
the U.S. Department of Defense. The Land Warrior program is designed to make
each individual soldier function as a complete weapon system, integrating small
arms with high-tech equipment such as special communications devices, weapons
imaging systems, video, and global positioning systems.
Business
Strategy
Our
business strategy with respect to our fuel cell technology is to translate our
advanced fuel cell technology into commercially viable products sold to
consumers
throughout the world and sold to military users both in the United States and
other countries. To accomplish those goals, we have put into place and are
continuing to put in place manufacturing, marketing and distributions systems
capable of providing, initially, for the commercial production, distribution and
sale of our disposable Power Pack to the consumer and potentially, as a second
generation product, for the refuelable Power Pack and attendant cartridges, as
well as for our military fuel cell products.
Manufacturing
and Distribution
It is our
target to begin volume production of our disposable Power Packs starting at the
end of 2005 with the capability of manufacturing thousands of Power Packs units
per month and increasing in volume to the point of having a full line in place
during the second half of 2006 that is capable of manufacturing up to 1.5
million Power Pack units per month. We have focused much effort, human power and
cost towards meeting this target. One key area for us has been the
pre-production preparations for volume production. Because micro fuel cell
products have never been produced in commercial volume before, we had to
internally develop most of the tooling and processes for volume production.
Towards this end, we have engaged the services of Eastman Kodak Company’s Global
Manufacturing Services operation. Additionally, we have engaged a number of
Israel-based subcontractors and highly respected scientific groups world wide -
university, government and commercial - to help us develop the engineering
required for volume production of our electrodes, catalysts, fuel, electronics
and other elements.
Additionally,
as part of the pre-production preparations for volume production, we have
developed a line for electrode production and we expect to add to our electrode
production capability during the coming months. We have recently exercised an
option on 4,000 square feet as part of our new facility in Lod, Israel that we
plan to use for our electrode production and we already have in place pilot
production capability for our fuel and catalysts using machinery specifically
designed by us. Our plan is to start our production program using the electrode,
catalyst and fuel production lines in our own facilities. At the appropriate
time in the development of the demand for our products we would consider making
a technology transfer to manufacturing partners who would upscale these lines
for higher rate production, while maintaining in our facility the basic
capability at all times.
Our goal
is to have firm orders for our Power Pack products from mobile operators,
distributors and/or OEM’s sufficient to warrant constructing production line(s)
capable of producing at least one million Power Packs per month. Sometime around
the middle of 2005, we would look to firm up a relationship with one or more
large-scale manufacturers to start tooling for producing our disposable Power
Packs and later for producing our refuelable Power Packs and the cartridges. We
are already in discussions with recognized international companies capable of
high volume production and our goal is to finalize a transaction by the middle
of 2005.
There is
no assurance that we can successfully complete our production lines to meet our
planned schedule, or that we will have firm orders sufficient to warrant
construction of such lines or that we will be able to enter into a satisfactory
production arrangement, including acceptable pricing, with a contract
manufacturer.
Our
initial estimate is that a construction line to make 1.5 million Power Packs a
month will cost around $22 million. As part of this program, we are considering
different ways of financing the production lines. These include financing from
the producing party, financing from a third party based on firm orders, and
equity financing from us. The approximately $5.6 million of equity funding we
obtained during December 2004 and January 2005 will help provide more
flexibility regarding those decisions. Preparing for volume production has been
a major effort in 2004, requiring significantly increased expenditures on our
part, and we expect it to continue in even greater scale during 2005 as we ready
for
production.
There is no assurance that we will be able to finance the construction of our
Power Packs from any of the sources described above.
During
this past year we put in place key distribution relationships for our Power Pack
products.
On March
9, 2004, we entered into a distribution agreement with Kensington Technology
Group, a leading maker of computer accessories and a division of ACCO Brands,
Inc., a subsidiary of Fortune Brands, Inc. Pursuant to the distribution
agreement, among other things, we have granted Kensington a limited, exclusive
right to market and distribute our Power Pack and other products using our fuel
cell technology under the Kensington and Medis brand names. We anticipate that
Kensington/ACCO Brands will distribute our Power Pack products to the “big box”
stores like Best Buy and Circuit City as well as office supply stores such as
Office Max and Office Depot, which we expect will be excellent sources for the
“enterprise” market. Kensington has a full time manager devoted to working with
our team and they provide valuable resources for marketing, packaging and design
know how.
On August
3, 2004, we entered into a distribution agreement with Superior Communications,
which provides wireless accessories to major mobile operators, retailers and
distributors across the United States, for the distribution of the Company’s
fuel cell Power Packs, primarily to those stores where Superior Communications
has relationships, namely to the Cingular, AT&T Wireless, T Mobile and
Alltel stores where they provide important services such as supply chain
management, product mix management and sales training for retail
associates.
On August
10, 2004, we entered into a distribution agreement with ASE International Inc.,
for the distribution of our fuel cell Power Pack products through various
outlets not otherwise covered by our other distribution agreements. ASE has a
broad outreach to various channels such as drugstores, convenience stores,
department stores, airport stores and duty free shops, representing an estimated
50,000 “doors" in the United States and Canada.
Finally,
we view mobile operators as potentially a very significant distribution channel
for our Power Pack products. With large existing subscriber bases and existing
distribution networks to reach those subscribers, we believe that mobile
operators are in a uniquely advantageous position to efficiently distribute our
products. We believe that the mobile operators in turn will benefit by providing
increased air time for their new products and functions, thereby increasing
their average revenue per user (“ARPU”) and at the same time, develop a new
source of recurring revenues on the sale of Power Packs to their existing
subscriber base.
During
2004, we successfully demonstrated our Power Pack products. In June 2004, in
Palo Alto, California, we demonstrated disposable and refuelable working Power
Packs to representatives of major Original Equipment Manufacturers (OEMs) and
other potential customers and later, in New York, we demonstrated them to
shareholders and members of the investment community. Presentations were made at
those showings from executives of Eastman Kodak Global Manufacturing Services,
Flextronics International and General Dynamics Corporation.
Competition
We expect
to compete against other fuel cell developers as well as against other advanced
battery technologies and battery chargers. Our primary direct competitors are
companies developing small fuel cells for the portable electronics market. These
include Manhattan Scientifics Inc., which has reported that it is developing a
fuel cell to provide auxiliary power to cellular phones and pagers. Motorola,
with technology licensed from the Los Alamos National Laboratory in New Mexico,
has been developing a direct methanol fuel cell for mobile phones and now is
developing a fuel cell using a reformer.
Mechanical
Technology Inc., which is working with a number of scientists formerly with the
Los Alamos National Laboratory, has also licensed certain fuel cell technology
from Los Alamos National Laboratory to further its efforts to develop direct
methanol fuel cells. Lawrence Livermore National Laboratory has also announced
that it is developing small fuel cells for portable electronic devices. Other
companies that have announced that they are developing fuel cells for portable
electronic devices are PolyFuel, Inc. (which has announced that it has developed
a new membrane that is superior to others) and Neah Powers Systems, Inc., with
respect to both of these companies it has been announced that Intel has made
investments and Smart Fuel Cell GmbH.
We
believe other large cell phone and portable electronic device companies are also
be developing fuel cells for the portable electronics market. Some of such
companies providing public information about their fuel cell development
programs include Toshiba Corporation, NEC Corporation, Hitachi, Ltd., Casio
Computer Co. Ltd., Samsung Electronics Co. Ltd. and Sony Corporation. Toshiba,
Hitachi and other Japanese corporations have announced their intention to unify
the technical standards for micro fuel cells powered by methanol they are each
developing, in the hope of boosting the market for such fuel cells. We believe
that there are other companies that we may not know of that are developing fuel
cells for portable electronic devices.
In
addition, there are other fuel cell companies focusing on different markets than
the portable electronic device market that we are targeting. These companies,
including Plug Power, Avista Systems Inc. and Fuel Cell Energy Inc., are not
primarily targeting the portable electronics market, although at any time these
companies could introduce new products that compete directly in the markets we
are targeting. Ballard Power Inc., a recognized leader in PEM fuel cell
technology, has announced that it is developing a direct methanol fuel cell for
transportation and portable applications, however, we do not know if this is
intended for the portable electronic device market.
Additionally,
we expect to compete with companies that develop, manufacture, and sell
battery-operated chargers for portable electronic devices, including alkaline
batteries, lithium battery packages and zinc-air batteries offered as chargers
for cell phones, PDAs and other portable electronic devices that target many of
the same markets we intend to target with our Power Pack.
We also
expect indirect competition from battery manufacturers who utilize existing
battery technologies (both rechargeable and non-rechargeable). Existing battery
technologies have the significant advantage of having commercially available
products today, and are backed by companies who are continuously investing in
marketing and further research and development to improve their existing
products and explore alternative technologies.
We expect
our fuel cell products to compete on the bases of size and weight, length of
operating time, flexibility of use on different portable devices, ease of use
and cost.
Our
Other Technologies
Starting
with our formation in 1992, we have been working to develop and commercialize
new technologies. The first of these technologies, the CellScan, was the primary
product of our indirect subsidiary, Medis El Ltd., through 1996. At the time of
our formation, Medis El granted us distribution rights to the CellScan in the
United States and its territories and possessions. In 1994, Medis El acquired
its stirling cycle linear technologies and over the ensuing years, acquired
additional technologies, including our direct liquid fuel cell technology and
the other technologies listed below. In 1998, we became Medis El’s exclusive
agent in North America for coordinating licensing arrangements with respect to
the stirling cycle and other technologies. In 2000, Medis El became our
indirect, wholly-owned subsidiary. With the exception of our fuel cells, our
inherently conductive polymers and our CellScan
system,
all of our technologies are in the development stage and no successful
commercial prototypes have as yet been developed, nor can we assure you that any
such prototypes will be developed or, if developed, commercialized.
CellScan
The
CellScan is a static cytometer; an instrument for measuring fluorescence
emanating from living cells while the cells are in a static state. A key element
of the CellScan is its patented cell carrier which can accommodate up to 10,000
cells, each in individual wells. Each well holds one living cell, such as a
lymphocyte or a tumor cell. The CellScan can repeatedly and continuously monitor
the fluorescence intensity and polarization emitted from stained living cells
for purposes of cell research, disease diagnostics and determining the optimal
chemotherapy to be given to a specific patient.
We have
completed the development and have built a much smaller and less expensive
version of our original CellScan system which fits on a desk top and which has
improved performance characteristics, including the number of cells that can be
screened and analyzed per hour and the number of individual tests that can be
completed per day. In using the new version of the CellScan, we continue to
improve the methodology and the efficacy of the testing. As a result of this
experience, we have updated our production drawings, and have built two
CellScans during 2004.
We are in
the process of developing a new cell carrier specifically designed to allow the
CellScan to measure cell reaction in cell configurations different from those
that can currently be studied. If this program is successful, we expect that
this new cell carrier will open another dimension of possible applications for
the CellScan, including working with stem-like cancer cells.
Our first
focus for commercialization of the product is an in vitro test for determining
chemosensitivity of a patient’s cancer; that is to measure whether a patient’s
cancer cell is responsive to a particular chemotherapy protocol. In that
connection, we are in the process of performing testing in conjunction with
hospitals in Israel and establishing the system to carry out such testing in a
commercial setting. After establishing a commercial test for chemosensitivity,
we may also seek to offer other commercial tests, such as for atherosclerosis
and drug allergies. As part of the commercialization process, we are also
reviewing the practicality of entering into distribution agreements for the
CellScan with entities that have strong marketing and distribution capabilities
in various parts of the world.
In the
context of our program of moving towards commercialization of the CellScan, we
are seeking to obtain quality certifications and regulatory authority marketing
approval of the CellScan technology and its applications. Accordingly, we are in
the process of seeking ISO 9001 (International Organization of Standardization)
certification and CE marking (European Conformity). In addition, we are
upgrading our equipment, techniques, and protocols to meet FDA pre marketing
standards, with a view towards seeking FDA approval of the CellScan and
eventually, our proposed test for chemosensitivity. We have retained counsel to
begin working with us on this program. We cannot assure you that we will succeed
in receiving FDA approval for our tests.
Our
strategy for the CellScan is to seek to create a viable commercial business and
based on that business model, to carry out a program that would enable us to
spin-off the assets relating to the CellScan and transfer the personnel to a
subsidiary that has been formed for the commercialization of the CellScan. As
part of such a program, we expect to seek public investment or private venture
financing for the subsidiary or seek to enter into a transaction with a company
in the biotechnology field whereby that company would acquire all or part of our
interest in the CellScan. We can give no assurance that such a program can be
carried out successfully.
We are
also continuing to collaborate with third-party researchers and institutions in
the development of potential applications for the CellScan, including
determining the efficacy of chemotherapeutic drugs for specific tumors,
atherosclerosis, lupus, tuberculosis and drug allergy.
Recent,
on-going and planned studies for several CellScan applications include the
following:
Chemosensitivity. We have
on-going studies both in our laboratory in Israel and in collaboration with the
Oncological Institute in Cluj, Romania, to determine whether the CellScan could
be used as a tool in determining the efficacy of chemotherapy drugs for specific
tumors. The first phase of a multi-patient study at the Oncological Institute
was completed in 2004. We are continuing the study with more advanced stage
cancer patients.
Breast
Cancer. In two
studies performed at Rebecca Sieff Medical Center in Israel and published in the
scientific journal The
Breast, the
CellScan was used for both early detection of breast cancer and testing for the
risk of benign tumors developing into malignant breast cancer tumors. We have
established a CellScan laboratory in Tashkent, Uzbekistan and have performed a
multi-patient breast cancer study in collaboration with the Uzbekistan Health
Ministry, using a tetramer enhanced antigen, which is a new biological reagent.
The initial phase of the study was completed in December 2003, and a subsequent
phase of the study was completed in March 2004. The results of the study in
Uzbekistan were consistent with those at Rebecca Sieff Medical Center in
Israel.
Tuberculosis. The
CellScan is taking part in a comparative multi center multidisciplinary clinical
study of Tuberculosis in Tashkent, Uzbekistan during 2005 using the conventional
PPD antigen in conjunction with a novel and more specific recently developed
antigen.
Autoimmune
diseases. In
collaboration with Sheba Medical Center in Israel, we have investigated in our
laboratory the potential of the CellScan in the detection of autoimmune diseases
such as Systemic Lupus Erythematosus (SLE) and atherosclerosis. The results
published in the scientific journal Clinical
Applications of Immunology state a
strong correlation between CellScan results and other tests that measure cell
stimulation, suggesting that the CellScan, used in conjunction with nucleosomal
antigen, may be an efficient and much easier tool in the diagnosis and
monitoring of lupus patients. CellScan was also used to determine the
possibility of identifying patients with severe coronary heart disease through
monitoring the response of their lymphocytes to disease-associated antigens. The
report from Clinical
Applications of Immunology states
that results to date have demonstrated that approximately 85% of patients with
severe coronary heart disease manifested a significant difference in
fluorescence polarization when their lymphocytes were exposed to high doses of
certain antigens.
Drug
Allergy. In
collaboration with Sheba Medical Center in Israel, there is an on going
multi-year study underway in our laboratory to determine whether the CellScan
can be used as a new method of diagnosing adverse reactions to drugs. The
results recently published in the scientific journal Clinical
& Developmental Immunology indicate
that the CellScan is a promising apparatus for monitoring drug allergies. The
study is expected to be expanded and improved during 2005 using new recombinant
allergens as lymphocytes stimulators.
Inherently
Conductive Polymers
In
allocating our limited resources of personnel and funds, we decided to hold off
any efforts to establish sales programs for our inherently conductive polymers
and we are currently not producing any ICPs for third parties. We are
maintaining the know-how to produce ICPs in the future if we decide to actively
pursue this business opportunity.
Stirling
Cycle System
Our
stirling cycle system is a refrigeration system using our stirling cycle
technologies and a compressor powered by two of our linear reciprocating motors.
We believe that our stirling cycle system can offer advantages for certain
applications over conventional refrigeration systems, including greater energy
efficiency and environmental advantages due to the use of helium as its working
gas instead of freon or freon compounds, which are commonly believed to be
depleting the earth’s ozone layer and contributing to the greenhouse effect and
global warming. Because of our limited resources, we decided to hold off any
efforts to further develop the stirling cycle system and are not actively
investing in the further development and commercialization of this technology at
this time. We are maintaining the know-how in case a third party is interested
in the technology or we return to its development.
Toroidal
Engine
We have
been developing and have patents relating to a toroidal engine which would use a
rotary motion as contrasted with the up and down motion of pistons in a
conventional internal combustion engine. We believe that if we are able to
successfully develop our toroidal engine, it could offer advantages over a
conventional internal combustion engine. We have developed and have recently
completed initial testing of an approximately 61 cubic inch demonstration engine
(“GR 1000”) based upon our toroidal technologies. In order to increase power and
reduce fuel consumption, a new external and internal combustion system has been
designed and is being manufactured by our contractor. Our contractor is now in
receivership but we have been advised that it intends to continue this program.
At this stage of development, we can give no assurance that contactor will
complete the project or that such a toroidal engine can be successfully
developed, manufactured or licensed or sold.
Rankin
Cycle Linear Compressor
We have
built an engineering prototype of a Rankin cycle linear compressor with circular
magnet motors and we are developing a linear motor with flat magnets that we
believe the low cost and simplicity of which will enhance the attractiveness of
the Rankin cycle linear compressor. We intend to present our Rankin cycle linear
compressor to major appliance manufacturers. We can give no assurance that the
linear compressor will perform as we plan or that it will attract interest from
such appliance manufacturers.
We have also been carrying out experiments to develop
a device to detect explosive materials. After preliminary testing of the device,
we have decided to make various changes in the device before testing it again,
which we intend to do later in 2005.
Research
And Development
Our
research and development programs are generally pursued by scientists employed
by us in Israel on a full-time basis or hired as per diem consultants. Most of
the scientists working in the fuel cell field are from the former Soviet Union.
We are also working with subcontractors in developing specific components of our
technologies.
The
primary objective of our research and development program is to advance the
development of our direct liquid fuel cell technology to enhance the commercial
value of our products and technology. Another objective of our research and
development program is to expand the applications for our CellScan, while we
seek to commercialize the product. We also continue to carry on limited research
related to completing development of certain of our other technologies and
products, and continue to evaluate new technologies for
development.
We have
incurred research and development costs of approximately $4,054,000 for the year
ended December 31, 2002, $4,804,000 for the year ended December 31, 2003 and
$9,799,000 for the year ended December 31, 2004, net of credits aggregating
approximately $299,000 and $153,000 recognized during 2003 and
2004.
Government
Regulation
Currently,
the only regulations we encounter are the regulations that are common to all
businesses, such as employment legislation, implied warranty laws, and
environmental, health and safety standards, both in the United States and
Israel, to the extent applicable. We will also encounter in the future
industry-specific government regulations that would govern our fuel cell
products, such as Underwriter Laboratory regulations and U.S. Department of
Transportation regulations, as well as regulations that would govern our other
technologies, if and when developed for commercial use. It may become the case
that other regulatory approvals will be required for the design and manufacture
of our fuel cells and the use of our proprietary fuel, and other components of
the fuel cell such as the electrolyte. Furthermore, we must obtain from the
State of Israel permits to work with certain chemicals used to make our fuel
cells. To the extent that there are delays in gaining regulatory approval, our
development and growth may be materially affected.
Intellectual
Property
We rely
on a combination of patent, copyright, trademark, trade secret and contract
laws, as well as international treaties, to protect our proprietary rights to
our intellectual property which includes technical know-how, designs, special
materials, manufacturing techniques, test equipment and procedures for fuel
cells, fuel cell components and fuel cell systems, as well as our other
technologies. Our policy is to secure, directly or through licensing
arrangements, patent protection for significant innovations to the fullest
extent practicable.
We have
been issued seven U.S. patents relating to our fuel cell technologies, four of
which pertain to our liquid fuel. Furthermore, we have several other patents
pending which we are pursuing and we continue to prepare new patent applications
in the United States with respect to various aspects of our fuel cell
technology, including our fuel, catalyst, electrodes, cartridge system and fuel
cells.
Corresponding
applications have been filed or are intended to be filed under the Patent
Cooperation Treaty, which allows us limited protection in member countries for
periods ranging from 20-30 months from the initial filing date, during which
time patent applications can be filed in such countries. Patent applications
have been filed in 23 foreign countries (including Europe, Japan, China, Korea
and Russia). Patent applications filed in foreign countries are subject to laws,
rules and procedures which differ from those of the United States, and even if
foreign patent applications issue, some foreign countries provide significantly
less patent protection than the United States.
We have
been granted two patents relating to our stirling cycle system, four patents
relating to our toroidal technologies (one of which is owned by a 75% indirect
subsidiary), one patent relating to our reciprocating electrical machine and one
patent relating to our direct current regulating device (which is owned by a 75%
indirect subsidiary). We also have one patent pending relating to our inherently
conductive polymers. Each of such patents expires either 17 years from the issue
date of such patent or 20 years from the initial filing date of such patent,
depending on the issue date of the patent, the earliest of which will be in
2014.
Furthermore,
we are the exclusive worldwide licensee of Bar-Ilan University’s patents, patent
applications and any other proprietary rights relating to the CellScan. Bar-Ilan
owns, or has applied for, corresponding patents in Europe, Japan, Israel, Canada
and various other countries, of which we are the licensees. We are required to
pay Bar-Ilan a royalty through 2005 at the rate of 6.5% of proceeds of sales,
after deducting sales commissions and other customary charges, and 4.5% of any
fees received on account of the grant of territorial rights, and for the ensuing
ten years a royalty of 3.5% of all revenues, whether from sales or fees. In
addition, we are required to pay $100,000 to Bar-Ilan during the first year
in which
our post-tax profits relating to the CellScan exceed $300,000. The license
contains provisions relating to the joint protection of the licensed patent
rights and other provisions customary in such instruments. We have also been
issued a patent relating to our CellScan cell carrier.
In
addition to patent protection, we rely on the laws of unfair competition and
trade secrets to protect our licensed or proprietary rights. We attempt to
protect our trade secrets and other proprietary information through agreements
with our collaborators, through confidentiality agreements with employees,
consultants, potential joint ventures and licensees and other security
measures.
Employees
As of
December 31, 2004, in addition to our chief executive officer and our president,
we had 72 full time employees, of which approximately 58 were engineers,
scientists and degreed professionals and 14 were technical, administrative and
manufacturing support personnel. There are also approximately 15 engineers,
scientists and degreed professionals who work with us as consultants researching
and developing our technologies on a part time basis. We consider relations with
our employees to be satisfactory.
We
presently maintain our U.S. executive offices in premises of approximately 3,000
square feet at 805 Third Avenue, New York, New York 10022 under a sublease from
the Stanoff Corporation, which is controlled by Robert K. Lifton, our chairman
and chief executive officer, and Howard Weingrow, our president. We pay
approximately $117,000 for rent per year. The sublease is on a month to month
basis.
Our
research laboratory and technology center, production facilities and Israel
based executive offices and back office functions are located at leased
facilities of approximately 38,000 square feet in Lod, Israel. The lease
covering approximately 35,400 square feet of such facilities has an initial term
of five years until November 30, 2009 with two options of a duration of 30
months each extending to November 30, 2014. The lease covering approximately
2,600 square feet has a initial term of five years until October 31, 2008. Both
leases have a condition that we can unilaterally terminate the lease three years
from the date of their inception; however, we would be required in the event of
any such early termination to reimburse the lessor for a portion of the
leasehold improvement costs paid by the lessor. The annual aggregate rent is
approximately $435,000. We believe that our facilities are adequate for our
present purposes and for the foreseeable future.
|
Item
3. |
Legal
Proceedings |
We are
not party to any material litigation, and we are not aware of any threatened
litigation that would have a material adverse effect on us or our
business.
|
Item
4. |
Submission
of Matters to a Vote of Security
Holders |
No
matters were submitted to a vote of securityholders during the fourth quarter of
the fiscal year ended December 31, 2004.
PART
II
|
Item
5. |
Market
For Registrant’s Common Equity, Related Stockholder
Matters
and Issuer Purchases of Equity
Securities |
Our
common stock has traded on the Nasdaq National Market under the symbol “MDTL”
since October 3, 2000. Between June 6, 2000 and October 2, 2000, our common
stock was traded on the Nasdaq SmallCap Market under the same symbol. Prior to
June 6, 2000, there was no public market for our common stock. The closing high
and low sales prices of our common stock, as reported by the Nasdaq National
Market, for the quarters indicated are as follows:
| |
|
High |
|
Low |
|
2003: |
|
|
|
|
|
First
Quarter |
|
$ |
5.320 |
|
$ |
3.310 |
|
Second
Quarter |
|
|
8.880 |
|
|
5.350 |
|
Third
Quarter |
|
|
12.490 |
|
|
7.401 |
|
Fourth
Quarter |
|
|
12.070 |
|
|
8.450 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
2004: |
|
|
|
|
|
|
|
First
Quarter |
|
$ |
16.42 |
|
$ |
10.95 |
|
Second
Quarter |
|
|
16.73 |
|
|
12.04 |
|
Third
Quarter |
|
|
15.90 |
|
|
8.75 |
|
Fourth
Quarter |
|
|
18.35 |
|
|
11.75 |
|
As of
March 10, 2004, there were approximately 579 stockholders of record of our
common stock. Such number does not include beneficial owners holding shares
through nominee names.
We have
never declared or paid any dividends on our common stock. We currently
anticipate that we will retain all of our future earnings for use in the
expansion and operation of our business. Thus, we do not anticipate paying any
cash dividends on our common stock in the foreseeable future. Our future
dividend policy will be determined by our board of directors and will depend on
various factors, including our results of operations, financial condition,
capital requirements and investment opportunities. In addition, the terms of our
credit facility restrict our ability to pay dividends on our common
stock.
|
Item
6. |
Selected
Financial Data |
The
selected consolidated statement of operations data for the years ended December
31, 2000 and 2001 and the selected consolidated balance sheet data as of
December 31, 2000, 2001 and 2002 have been derived from audited financial
statements not included in this Annual Report. The selected consolidated
statement of operations data for the years ended December 31, 2002, 2003, and
2004 and the selected consolidated balance sheet data as of December 31, 2003
and 2004 have been derived from our audited financial statements included
elsewhere in this Annual Report. Such consolidated financial statements include
the financial statements of all of our direct and indirect subsidiaries. The
data should be read in conjunction with the consolidated financial statements
and the notes to such statements and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this Annual
Report.
Statement
of Operations Data:
| |
|
For
the Year Ended December 31, |
|
| |
|
|
2000 |
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
Sales |
|
$ |
— |
|
$ |
— |
|
$ |
192,000 |
|
$ |
131,000 |
|
$ |
— |
|
|
Cost
of sales |
|
|
— |
|
|
— |
|
|
130,000 |
|
|
46,000 |
|
|
— |
|
Gross
profit |
|
|
— |
|
|
— |
|
|
62,000 |
|
|
85,000 |
|
|
— |
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development costs, net |
|
|
4,493,000 |
|
|
4,251,000 |
|
|
4,054,000 |
|
|
4,804,000 |
|
|
9,799,000 |
|
Selling,
marketing, general and administrative expenses |
|
|
5,405,000 |
|
|
6,297,000 |
|
|
3,749,000 |
|
|
4,197,000 |
|
|
5,829,000 |
|
|
Amortization
of intangible assets |
|
|
13,668,000 |
|
|
21,129,000 |
|
|
2,633,000 |
|
|
997,000 |
|
|
208,000 |
|
|
Total
operating expenses |
|
|
23,566,000 |
|
|
31,677,000 |
|
|
10,436,000 |
|
|
9,998,000 |
|
|
15,836,000 |
|
Loss
from operations |
|
|
(23,566,000 |
) |
|
(31,677,000 |
) |
|
(10,374,000 |
) |
|
(9,913,000 |
) |
|
(15,836,000 |
) |
Other
income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income |
|
|
214,000 |
|
|
178,000 |
|
|
151,000 |
|
|
131,000 |
|
|
246,000 |
|
|
Interest
expense |
|
|
(13,000 |
) |
|
(63,000 |
) |
|
(82,000 |
) |
|
(55,000 |
) |
|
(72,000 |
) |
Loss
before minority interest |
|
|
(23,365,000 |
) |
|
(31,562,000 |
) |
|
(10,305,000 |
) |
|
(9,837,000 |
) |
|
(15,662,000 |
) |
|
Minority
interest in loss of subsidiaries |
|
|
873,000 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Net
loss |
|
|
(22,492,000 |
) |
|
(31,562,000 |
) |
|
(10,305,000 |
) |
|
(9,837,000 |
) |
|
(15,662,000 |
) |
|
Value
of warrants issued or extended |
|
|
(2,971,000 |
) |
|
(3,204,000 |
) |
|
(2,241,000 |
) |
|
(1,226,000 |
) |
|
(2,066,000 |
) |
|
Net
loss attributable to common
stockholders |
|
$ |
(25,463,000 |
) |
$ |
(34,766,000 |
) |
$ |
(12,546,000 |
) |
$ |
(11,063,000 |
) |
$ |
(17,728,000 |
) |
|
Basic
and diluted net loss per share |
|
$ |
(1.49)(1 |
) |
$ |
(1.68)(1 |
) |
$ |
(0.57)(2 |
) |
$ |
(0.47 |
) |
$ |
(0.68 |
) |
|
Weighted average number of common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used in computing net basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
loss per share |
|
|
17,114,998(1 |
) |
|
20,720,362(1 |
) |
|
21,897,871(2 |
) |
|
23,429,829 |
|
|
26,142,150 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
| |
|
As
of December 31, |
|
|
|
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
| Working
capital(3) |
|
$ |
2,522,000 |
|
$ |
5,489,000 |
|
$ |
5,037,000 |
|
$ |
5,870,000 |
|
$ |
12,534,000 |
|
| Total
assets |
|
|
87,202,000 |
|
|
69,894,000 |
|
|
67,391,000 |
|
|
68,451,000 |
|
|
79,773,000 |
|
| Accumulated
deficit |
|
|
(49,078,000 |
) |
|
(83,844,000 |
) |
|
(96,390,000 |
) |
|
(107,453,000 |
) |
|
(125,181,000 |
) |
| Total
stockholders’ equity |
|
|
86,142,000 |
|
|
68,634,000 |
|
|
65,405,000 |
|
|
65,977,000 |
|
|
73,863,000 |
|
|
(1) |
In
accordance with Statement of Financial Accounting Standards No. 128,
“Earnings Per Share,” the weighted average shares used in computing basic
and diluted net loss per share, and the basic and diluted net loss per
share for the years ended December 31, 2000 and 2001 have been adjusted to
give retroactive effect to shares issued in our March 18, 2002 and March
11, 2003 rights offerings. |
|
(2) |
In
accordance with Statement of Financial Accounting Standards No. 128,
“Earnings Per Share,” the weighted average shares used in computing basic
and diluted net loss per share, and the basic and diluted net loss per
share for the year ended December 31, 2002, have been adjusted to give
retroactive effect to shares issued in our March 11, 2003 rights
offering. |
|
(3) |
Working
capital is total current assets less total current
liabilities. |
Certain comparative statement of operations data has
been reclassified to conform with current year’s presentation.
|
Item
7. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
Our
primary business focus is on the development, manufacturing, marketing and
distribution of direct liquid fuel cell products for portable electronic
devices, for the consumer (personal and professional) and military markets. We
are also working to develop and commercialize other technologies we own or own
the rights to, including the CellScan. We have recently curtailed or stopped the
development program for some of our technologies, including our inherently
conductive polymers and stirling cycle system, based upon our decision to devote
more resources to developing our fuel cell technologies and commercializing fuel
cell-based products. In recent years we have increased funding of our fuel cell
related efforts, which increases we expect will continue until such time as we
successfully commercialize our first fuel cell products, of which we can give no
assurance, and perhaps thereafter.
This
presentation includes the operations of our wholly owned subsidiaries, unless we
tell you otherwise.
Results
of Operations
From our
inception in April 1992 through December 31, 2004 we have generated an
accumulated deficit of approximately $125,181,000, including approximately
$43,543,000 from amortization expense. We expect to incur additional operating
losses during 2005 and possibly thereafter, principally as a result of our
continuing anticipated research and development costs, increases in selling,
marketing, general and administrative expenses related to the introduction of
our products and the uncertainty of bringing our fuel cell technology or any of
our other technologies to commercial success. Since our inception, we have
relied principally on outside sources of funding to finance our operations, as
our revenues have been minimal. We expect this to continue until we are able to
successfully commercialize our fuel cell or any of our other products or
technologies, of which we can give no assurance.
Our
research and development costs, net have increased from approximately $2,749,000
for the year ended December 31, 1999 to approximately $9,799,000 for the year
ended December 31, 2004; however, if we are unable to successfully commercially
develop our fuel cell technology or any of our other technologies, we will be
forced to curtail our spending levels until such time, if ever, as we generate
revenues or otherwise receive funds from third party sources.
Year
ended December 31, 2004 compared to year ended December 31,
2003
We
sustained a net loss of $15,662,000 during the year ended December 31, 2004,
compared to $9,837,000 during the year ended December 31, 2003. The
increase in the net loss can primarily be attributed to an increase in research
and development costs as we increase funding of our fuel cell related efforts,
and an increase in selling, general and administrative expenses (including
non-cash charges related to stock options and warrants), somewhat offset by a
decrease in amortization of intangible assets during the year ended December 31,
2004, as certain intangible assets have become fully amortized.
We did
not recognize any revenues during the year ended December 31, 2004, compared to
revenues of approximately $131,000 and gross profit of approximately $85,000
during the year ended December 31, 2003. The revenues recognized during the year
ended December 31, 2003 were attributable to a January 2002 agreement to develop
for a third party an application for the use of our inherently conductive
polymers in its fuel cell products.
Research
and development costs amounted to $9,799,000 during the year ended December 31,
2004, compared to $4,804,000 during the year ended December 31, 2003. The
increases in research and development costs incurred during 2004 compared to
2003, can be primarily attributed to an increase of approximately $5,028,000 in
costs related to our fuel cell technologies and an increase of approximately
$42,000 in costs related to our CellScan, somewhat offset by a net decrease of
approximately $75,000
in
costs
related to our toroidal technologies, stirling cycle system, linear compressor
and other research and development costs. The research and development
activities for the periods presented include:
| · |
Fuel
Cell Technologies.
We incurred costs relating to our fuel cell technologies of approximately
$8,495,000 during the year ended December 31, 2004 compared
to costs of approximately $3,467,000 during the year ended December 31,
2003. The
increase in our research and development expenses related to our fuel cell
technologies of approximately $5,028,000 reflect our decision to continue
to devote substantial and increasing amounts of resources to the further
development of our fuel cell technologies and
products. |
| · |
CellScan.
We incurred costs relating to the refinement and assembly of the desktop
CellScan system and on various CellScan research activities of
approximately $1,003,000 during the year ended December 31, 2004, compared
to costs of approximately $961,000 during the year ended December 31,
2003. During the year ended December 31, 2004, in order to move towards
commercialization of the CellScan, we devoted a greater proportion of our
CellScan resources to the assembly of additional desktop CellScan systems,
as compared to the same periods in 2003 when we devoted a greater
proportion to the establishment of CellScan research programs at third
party medical institutions. |
| · |
Toroidal
Technologies, Stirling Cycle System, Linear Compressor and Other
Costs.
We incurred costs relating to our toroidal engine and compressor, stirling
cycle system, linear compressor and other research and development costs
aggregating approximately $300,000 during the year ended December 31,
2004, compared to costs of approximately $376,000 during the year ended
December 31, 2003. The decrease reflects management's decision to allocate
less of our resources to the development of these technologies and more of
our resources to the development of our fuel cell technologies and
products. |
Selling,
marketing, general and administrative (“SG&A”) expenses during the year
ended December 31, 2004 amounted to approximately $5,829,000, compared
to approximately $4,197,000 during the year ended December 31, 2003. The
increase of $1,632,000 for the year ended December 31, 2004 is primarily
attributable to an increase in non-cash charges relating to stock options and
warrants of approximately $931,000 (comprised of approximately $964,000 related
to the extension of the expiration date of certain stock options and warrants,
partially offset by a net decrease of approximately $33,000 in other costs
related to stock options and warrants); an increase in selling and marketing
expenses of approximately $285,000; an increase
in professional fees of approximately $171,000; an increase in labor and
executive consulting costs of approximately $101,000; an increase in insurance
costs of approximately $79,000; and a net
increase in various other SG&A cost categories of approximately
$65,000.
Amortization
of intangible assets amounted to $208,000 during the year ended December 31,
2004, compared to $997,000 during the year ended December 31, 2003. The decrease
for the year ended December 31, 2004 is primarily attributable to intangible
assets acquired in our September 2000 exchange offer for shares of Medis El that
we did not already own becoming fully amortized during the year ended December
31, 2003, partially offset by amortization of intangible assets acquired in our
March 2003 acquisition of the remaining 7% of More Energy that we did not
already own.
Year
ended December 31, 2003 compared to year ended December 31,
2002
We
sustained net losses of $9,837,000 during the year ended December 31, 2003,
compared to $10,305,000 during the year ended December 31, 2002. The decrease in
the net losses can primarily be attributed to decreases in amortization of
certain intangible assets as such intangible assets become fully amortized,
somewhat offset by an increases in research and development costs as we increase
funding of our fuel cell related efforts, and
selling, general and administrative expenses.
We
recognized revenues of approximately $131,000 and gross profit of approximately
$85,000 during the year ended December 31, 2003, compared to revenues of
approximately $192,000 and gross profit of approximately $62,000 during the year
ended December 31, 2002. The revenue in 2003 is attributable to a January 2002
agreement to develop for a third party an application for the use of our
inherently conductive polymers in its fuel cell products. In October 2003, such
agreement was terminated by the other party to the agreement prior to its
scheduled termination date, for reasons unrelated to our technology or
performance. Since the inception of such agreement in January 2002, we received
approximately $268,000 and expect to receive an additional amount of
approximately $6,000 on billings for the period prior to the termination. We do
not expect to receive the $26,000 balance that would have been due under such
agreement had it run through its entire term. The revenues recognized in 2002
were attributed both to $138,000 under the January 2002 agreement and to $54,000
under a one-time purchase order in which we designed a direct liquid fuel cell
for use in a new energy pack for infantry soldiers. All of such revenues are
non-recurring.
Research
and development costs amounted to $4,804,000 during the year ended December 31,
2003, compared to $4,054,000 during the year ended December 31, 2002. The
increases in research and development costs incurred during 2003 compared to
2002 can be primarily attributed to an increase of approximately $1,222,000
related to our fuel cell technologies, somewhat offset by a decrease of
approximately $221,000 in costs related to our CellScan and a net
decrease of approximately $251,000 in costs related to our toroidal
technologies, stirling cycle system, linear compressor and other costs. The
research and development activities for the periods presented
include:
| · |
Fuel
Cell Technologies.
We incurred costs relating to our fuel cell technologies of approximately
$3,467,000 during the year ended December 31, 2003 (net of credits
aggregating approximately $299,000 recognized pursuant to our contracts
with General Dynamics), compared to costs of approximately $2,245,000
during the year ended December 31, 2002. The net increase in our research
and development expenses relating to our fuel cell technologies of
approximately $1,222,000 in 2003 compared to 2002 reflects our decision to
continue to devote substantial and increasing amounts of resources to the
further development of our fuel cell technologies and
products. |
| · |
CellScan.
We incurred costs relating to the refinement of the desktop CellScan
system and on various CellScan research activities of approximately
$961,000 during the year ended December 31, 2003, compared to costs of
approximately $1,182,000 during the year ended December 31, 2002. The
decrease in 2003 compared to 2002 can be primarily attributed to decreases
in costs incurred related to the retention of third party researchers in
the development and testing of new CellScan applications, labor costs and
material costs, partially offset by an increase in other
costs. |
| · |
Toroidal
Technologies, Stirling Cycle System, Linear Compressor and
Other.
We incurred aggregate costs relating to our toroidal engine and
compressor, stirling cycle system, linear compressor and other costs of
approximately $378,000 during the year ended December 31, 2003, compared
to costs of approximately $627,000 during the year ended December 31,
2002. The decrease in 2003 compared to 2002 can be primarily attributed to
decreases |
| |
costs
incurred from the use of consultants and subcontractors, labor costs, and
other costs reflecting management's decision to allocate more of our
research and development resources to fuel cell
development. |
Selling,
marketing, general and administrative (“SG&A”) expenses during the year
ended December 31, 2003 amounted to approximately $4,197,000, compared to
approximately $3,749,000 during the year ended December 31, 2002. The increase
of $448,000 during 2003 compared to 2002 is primarily attributable to an
increase in non-cash charges relating to stock options and warrants of
approximately $430,000, an increase in insurance costs of approximately $144,000
and an increase in selling and marketing expenses of approximately $142,000,
somewhat offset by a decrease in executive and other consulting expenses of
approximately $224,000 and a net decrease in various other SG&A cost
categories aggregating to approximately
$44,000.
Amortization
of intangible assets amounted to $997,000 during the year ended December 31,
2003, compared to $2,633,000 during the year ended December 31, 2002. The
decrease is primarily attributable to intangible assets acquired in our June
2000 exchange offer for shares of Medis El that we did not already own becoming
fully amortized during the year ended December 31, 2003, partially offset by
amortization of intangible assets acquired in our March 2003 acquisition of the
remaining 7% of More Energy that we did not already own.
Liquidity
And Capital Resources
We
finance our operations primarily through the proceeds of investor equity
financing, which we will continue to depend on, at the earliest, until such time
as we successfully commercialize our fuel cell products or products derived from
any of our other technologies.
Our
working capital and capital requirements at any given time depend upon numerous
factors, including, but not limited to:
| · |
the
progress of research and development
programs; |
| · |
the
status of our technologies; and |
| · |
the
level of resources that we devote to the development of our technologies,
patents, marketing and sales capabilities. |
Another
possible source of revenue or other means to effect our cash expenditures are
collaborative arrangements with businesses and institutes for research and
development and companies participating in the development of our technologies.
Since January 2002, we have realized revenues of $323,000 on costs of sales of
$176,000, as well as credits against our research and development costs of
approximately $452,000, with respect to collaborative arrangements with third
parties relating to our fuel cell technologies. There can be no assurance that
we will realize additional revenue or credits to our research and development
expense from such collaborative arrangements still in existence or that we will
enter into additional collaborative arrangements in the future. Furthermore,
there can be no assurance that we will raise additional funds through any
financing approach implemented by us.
In
January 2004, we issued 1,425,000 shares of our common stock in a private
placement to institutional investors. We received gross proceeds of
approximately $14,588,000, less related costs of approximately
$309,000.
In
December 2004, we issued 220,000 shares of our common stock in a private
placement to an accredited investor, for proceeds of approximately $3,080,000.
During
the year ended December 31, 2004,
optionholders, including officers and a director, exercised outstanding options
issued under our 1999 Stock Option Plan to acquire 285,450 shares of our common
stock, for aggregate proceeds of approximately $1,656,000.
During
the year ended December 31, 2004, warrant holders, including officers and
directors, exercised outstanding warrants to acquire 548,101 shares of our
common stock, at exercise prices ranging from $4.92 to $9.60 per share, for
aggregate proceeds of approximately $2,846,000.
In
January 2005, we issued 50,000 shares of our common stock in a private sale to
an accredited investor, for proceeds of approximately $700,000.
Proceeds
from all of the above financing and option and warrant exercises have been and
will continue to be used for working capital, including for the continued
development and production of our direct liquid fuel cell technologies and
related products, as well as for selling, marketing, general and administrative
expenses.
For the
year ended December 31, 2004, net cash used in operating activities was
$10,178,000, as compared to $7,974,000 for year ended December 31, 2003. The
increase was primarily attributable to management's decision to continue to
increase levels of spending on research and development related to our fuel cell
technologies during the year ended December 31, 2004 compared to the year ended
December 31, 2003, and increases in SG&A expenditures, as described more
fully above.
For the
year ended December 31, 2004, net cash used in investing activities was
$2,549,000, which represented the following: (i) investments in short-term
deposits of $12,198,000, fully offset by maturities of
$12,198,000; (ii) purchases of property and equipment of approximately
$2,408,000, of which approximately $1,635,000 represents leasehold improvements
and other property and equipment costs for our new facility in Lod, Israel
(including $935,000 of leasehold incentive obligation); and (iii) a loan of
approximately $141,000 to Gennadi Finkelshtain, the General Manager of More
Energy, under an existing three year promissory note dated April 11, 2003, as
amended, made principally to enable him to pay the final installment of certain
taxes arising in connection with our March 2003 purchase from him of the
remaining 7% of More Energy we did not already own. This is
compared to net cash used in investing activities of $734,000 for the year ended
December 31, 2003, which was comprised of capital expenditures aggregating
approximately $576,000 and a loan of approximately $158,000 to Mr. Finkelshtain
pursuant to the promissory note described above.
For the
year ended December 31, 2004, cash aggregating $21,865,000 was provided by
financing activities, compared to $9,292,000 for the year ended December 31,
2003. During the year ended December 31, 2004, cash was provided by the
financing activities described above.
The cash
provided by financing activities for the year ended December 31, 2003
aggregating $9,292,000 was generated from: (i) our March 11, 2003 rights
offering from which we generated gross proceeds of approximately $5,000,000,
less costs of such offering of approximately $122,000; (ii) proceeds
of approximately
$3,721,000, less related costs of approximately $112,000, pursuant to our offer
to exchange and exercise which commenced September 3, 2003 and expired
on
November 13, 2003; (iii)
warrant holders exercising warrants to purchase an aggregate of 38,051 shares of
our common stock, for proceeds of approximately $184,000; and (iv) holders of
options issued under our stock option plan exercised options to acquire an
aggregate of 112,350 shares or our common stock, for proceeds of approximately
$621,000.
As of
December 31, 2004, we had approximately $15,758,000 in cash and cash equivalents
and an unused $5,000,000 revolving credit line which terminates in accordance
with its terms on July 1, 2006. As of December 31, 2004, giving effect to the
$700,000 we raised in our January 2005 private placement and to the
approximately $199,000 we raised in 2005 through March 10, 2005
from the exercise of outstanding stock
options
and warrants, we believe that our cash resources, including monies available to
us from our unused credit facility, will be sufficient to support
our projected expenditures for operating and developmental activities
for our Power Pack products and purchases of capital equipment, for at least the
next 14 months. However, our plans for volume manufacturing and marketing would
require us very sharply to increase our spending levels prior to the end of such
period, as our initial estimate is that preparing for volume production,
including construction of a manufacturing line, will cost approximately $22
million. To accomplish those plans we will need to raise additional funds
through public or private debt or equity financing. We also may require such
financing in order to be competitive, to establish a stronger financial position
and to continue our operations. We can offer no assurance that we will be able
to secure additional funding, or funding on terms acceptable to us, to meet our
financial obligations, if necessary, or that a third party will be willing to
make such funds available. Our failure to raise additional funds could require
us to delay or curtail the marketing and production programs relating to our
planned roll-out of the disposable Power Pack, and research and product
development efforts or cause us to default under the repayment terms of our
revolving credit facility, if we were to borrow funds under that facility and we
are unable to repay such borrowings. Furthermore, our failure to successfully
develop or market our fuel cell products or products derived from any of our
other technologies may materially adversely affect our ability to raise
additional funds. In any event, it is not possible to make any reliable estimate
of the funds required to complete the development of our fuel cell technologies
or any of our other technologies or market and produce our fuel cell products.
Commitments
and Contingencies
The
following table sets forth our contractual obligations at December 31,
2004.
| |
|
Payment
Due By Period |
|
|
Contractual
Obligations |
|
Total |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009
and thereafter |
|
Operating
Lease Obligation |
|
$ |
341,000 |
|
$ |
157,000 |
|
$ |
116,000 |
|
$ |
68,000 |
|
$ |
— |
|
$ |
— |
|
Purchase
Obligations |
|
|
6,736,000 |
|
|
4,736,000 |
|
|
699,000 |
|
|
454,000 |
|
|
454,000 |
|
|
393,000 |
|
Other
Long-Term Liabilities (Note 1) |
|
|
1,451,000 |
|
|
145,000 |
|
|
145,000 |
|
|
145,000 |
|
|
145,000 |
|
|
871,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,528,000 |
|
$ |
5,038,000 |
|
$ |
960,000 |
|
$ |
667,000 |
|
$ |
599,000 |
|
$ |
1,264,000 |
|
|
Note
1: |
Other
Long-Term Liabilities represents our accrued severance pay as of December
31, 2004. Since we do not expect a high level of employee turnover giving
rise to the payment of significant amounts of severance obligations, we
have included approximately 10% of the total liability in each of the
years 2005 through 2008 and the remainder in 2009 and
thereafter. |
Tax
Matters
As of
December 31, 2004, for U.S. federal income tax purposes, we have net operating
loss carry-forwards of approximately $10,702,000. For Israeli income tax
purposes, we have net operating loss carry-forwards of approximately
$51,130,000. Since our inception, we have not had any taxable income. Also,
neither we nor any of our subsidiaries have ever been audited by the United
States or Israeli tax authorities since incorporation.
The
availability of our U.S. net operating loss carry-forwards may be reduced to the
extent one or more direct or indirect holders of 5% or greater amount of our
common stock increases their equity interest in us by more than 50% in the
aggregate.
Grants
Obtained From The State Of Israel
Medis El,
our indirect wholly-owned subsidiary, received approximately $1,800,000 in
research and development grants from the Office of the Chief Scientist of the
Ministry of Commerce and Industry of the State of Israel from its inception to
1997. This is based upon a policy of the government of Israel to
provide
grants of between 50% and 66% of qualifying approved research and development
expenditures to promote research and development by Israeli companies. Medis El
received 50% of qualifying approved research and development expenditures, with
$1,629,000 of such funds being allotted for the CellScan and $167,000 allotted
for the neuritor. Pursuant to the grant arrangement, Medis El is required to pay
3% of its sales of CellScan and neuritor products developed with the grant funds
until the grant amounts are paid in full. There is no requirement to repay the
grants if the products developed with the grant funds are not sold. If Medis El
sells the underlying technology prior to repaying the grant funds, it must first
seek permission from the Israeli government for such sale. Prior to Medis El
receiving grant funds in 1992, Medis El assumed from Israel Aircraft Industries
Inc., our largest stockholder, its obligation relating to the repayment of
grants out of future royalties, if any, of approximately $805,000. As of
December 31, 2004, Medis El’s total contingent obligation for the repayment of
grants, which includes the $805,000, is $2,601,000. Neither we nor Medis El
presently receive any grants from the State of Israel.
Approved
Enterprise
Under the
Israeli Law for the Encouragement of Capital Investments, 1959, Medis El was
issued a certificate of approval as an “Approved Enterprise.” Under the law,
Medis El elected the “combined path,” pursuant to which Medis El had the right
to receive a government guaranteed bank loan of 66% of the amount of the
approved investment. In addition, Medis El had the right to receive a grant of
24% of the approved investment, in which case the loan would be reduced by the
amount of the grant. Medis El received investment grants of approximately
$97,000 and loans of approximately $893,000. The investment grants were used to
invest in equipment, furniture and fixtures and commercial vehicles. The loan
proceeds were used for the above as well as to acquire know-how, leasehold
improvements, marketing and working capital. The loans were paid-off in full
during the year ended December 31, 2000. Additionally, the tax liability in
respect of Medis El’s income deriving from its Approved Enterprise activities is
calculated at a rate of 20% of income for a ten-year period, with tax on
dividends distributed of 15%, instead of 25%. These tax benefits expire in
2006.
In
September 2001, More Energy, our fuel cell subsidiary, was granted Approved
Enterprise status. The plan provides a two-year tax exemption, as well as
reduced tax (25%-10%) for a period of 5-8 years. The benefits from the Approved
Enterprise programs depend upon More Energy fulfilling the conditions under the
grant and the laws governing the grant. The commencement of the benefits period
is determined beginning with the year in which taxable income is initially
generated by the Approved Enterprise, provided that the earlier of 14 years have
not elapsed from the year in which the approval was granted, or 12 years from
the year in which the enterprise was initially operated. More Energy’s initial
approved enterprise plan was completed during 2004 and it is in the process of
submitting a new plan.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent liabilities. On an on-going
basis, we evaluate past judgments and our estimates, including those related to
goodwill and intangible assets, stock options and warrants and deferred income
taxes. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
Goodwill
and Intangible Assets
We
consider accounting policies related to our goodwill and other intangible assets
to be critical due to the estimation processes involved and their materiality to
our financial statements. As of December 31, 2004, the net book values of our
goodwill and intangible assets were $58,205,000 and $672,000, respectively. Our
goodwill and other intangible assets arose primarily as a result of three
purchase accounting transactions: our acquisition of the minority interest in
Medis Inc. in 1997, our exchange of our shares for the minority interest in
Medis El in 2000 and our acquisition of the remaining 7% of More Energy that we
did not already own in 2003. In amortizing our goodwill through December 31,
2001 and our intangible assets through December 31, 2004, we made estimates and
assumptions regarding the useful lives of such assets. If our estimates and
assumptions change, the useful lives and resulting charges to operations for
amortization of such assets would also change.
Additionally,
with respect to our goodwill and intangible assets, as of January 1, 2002, we
adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which was issued
by the Financial Accounting Standards Board in June 2001. SFAS No. 142 requires
enterprises, effective January 1, 2002, to discontinue amortizing goodwill, and
instead requires that goodwill be subject to at least an annual assessment for
impairment. As part of our initial evaluation of our goodwill and intangible
assets for any possible impairment, as of January 1, 2002, we were required to
use estimates and assumptions with respect to markets for our products, future
cash flows, discount rates and timing of commercialization of our technologies
in determining the fair value of our reporting units. We have also performed
annual tests for impairment of our goodwill in 2002, 2003 and 2004. The
estimates we used assume that our products will be accepted and that we will
gain market share in the future and will experience growth in such market share.
If we fail to deliver products or to achieve our assumed revenue growth rates or
assumed gross margins, if the products fail to gain expected market acceptance,
or if our estimates and/or other assumptions change or other circumstances
change with respect to future cash flows, discount rates and timing of
commercialization of our technologies, we may, in the future, be required to
record charges to operations for impairment of our goodwill and/or our
intangible assets.
Stock
Options and Warrants
We also
consider accounting policies related to stock options and warrants to be
critical due to the estimation process involved. We utilize stock options and
warrants as an important means of compensation for employees, directors and
consultants and also warrants as an instrument in our fundraising process.
Accounting for such options and warrants, in some circumstances, results in
significant non-cash charges to our operations or accumulated loss. There are
assumptions and estimates involved in determining the value of such stock
options and warrants and the timing of related charges to our operations or
accumulated loss. These estimates and assumptions include the expected term of
the option, volatility of our stock price and interest rates. The market price
of our stock also has a significant impact on charges we incur related to stock
options and warrants. If these estimates and assumptions change or if our stock
price changes, the charges to operations and/or accumulated loss could also
change significantly.
As
provided for in SFAS No. 148, we have elected to continue to follow Accounting
Principles Board Opinion No. 25 (“APB 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. In December 2004, the Financial
Accounting Standards Board (“FASB”) issued the revised Statement of Financial
Accounting Standards (“SFAS”) No. 123, “Share-Based Payment” (“SFAS 123R”),
which addresses the accounting for share-based payment transactions in which we
obtain employee services in exchange for (a) equity instruments of the Company
or (b) liabilities that are based on the fair value of the our equity
instruments or that may be settled by the issuance of such equity instruments.
This statement eliminates the ability to account for employee share-based
payment transactions using APB No. 25 and requires instead that such
transactions be accounted for using the grant-date fair value based method. This
statement will be effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005 (for our quarterly period
beginning July 1, 2005). We expect to incur significant non-cash charges to
operations on any grants of stock options to employees and directors subsequent
to our adoption of SFAS123R as well as on unvested grants at the date of our
adoption of SFAS 123R.
Deferred
Income Taxes
We record
a valuation allowance to reduce our deferred tax assets to zero. In the event
that we were to determine that we are likely to be able to realize all or part
of our deferred tax assets in the future, an adjustment to the deferred tax
assets would be credited to operations in the period such determination was
made.
Recent
Accounting Pronouncements
In
December, 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which
is a revision of FASB Statement No. 123, “Accounting for Stock-Based
Compensation.” Statement 123(R) supersedes APB Opinion No. 25, “Accounting for
Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash
Flows.” Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.
Statement
123(R) must be adopted no later than July 1, 2005. Early adoption will be
permitted in periods in which financial statements have not yet been issued. We
expect to adopt Statement 123(R) on July 1, 2005.
Statement
123(R) permits public companies to adopt its requirements using one of two
methods:
| 1. |
A
“modified prospective” method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of
Statement 123(R) for all share-based payments granted after the effective
date and (b) based on the requirements of Statement 123 for all awards
granted to employees prior to the effective date of Statement 123(R) that
remain unvested on the effective date. |
| 2. |
A
“modified retrospective” method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under Statement 123 for
purposes of pro forma disclosures either (a) all prior periods presented
or (b) prior interim periods of the year of
adoption. |
We plan
to adopt Statement 123(R) using the modified-prospective method and expects that
the adoption will have a significant effect on our consolidated financial
statements.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29” (“SFAS 153”). The guidance in APB Opinion
No. 29, “Accounting for Nonmonetary Transactions” (“APB 29”), is based on the
principle that exchanges of nonmonetary assets should be measure based on fair
value of the assets exchanged. APB 29 included certain exceptions to that
principle. SFAS 153 amends APB 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
153 is effective for nonmonetary assets exchanges occurring in fiscal periods
beginning after June 15, 2005. We do not expect that the adoption of SFAS 153
will have a significant effect on its consolidated financial statements.
FASB
Staff Position ("FSP") No. 109-2, "Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American Jobs Creation
Act of 2004" ("FSP 109-2"), provides guidance under FASB Statement
No. 109, "Accounting for Income Taxes," with respect to recording the
potential impact of the repatriation provisions of the American Jobs Creation
Act of 2004 (the "Jobs Act") on enterprises' income tax expense and deferred tax
liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states
that an enterprise is allowed time beyond the financial reporting period of
enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or
repatriation of foreign earnings for purposes of applying FASB Statement
No. 109. We expect that the adoption of FSP109-2 will not have a
significant effect on our consolidated financial statements.
Risk
Factors
We
have had limited revenues since inception and none in 1999, 2000, 2001 and 2004,
and we cannot predict when we will achieve profitability.
We have
not been profitable and cannot predict when we will achieve profitability. We
have experienced net losses since our inception in April 1992. We, on a
consolidated basis with our subsidiaries, have had limited revenues since
inception and none in 1999, 2000, 2001 and 2004. We do not anticipate generating
significant revenues until we successfully develop, commercialize and sell
products derived from our fuel cell technologies or any of our other
technologies, of which we can give no assurance. We are unable to determine when
we will generate significant revenues from the sale of any of such
products.
We cannot
predict when we will achieve profitability, if ever. Our inability to become
profitable may force us to curtail or temporarily discontinue our research and
development programs and our day-to-day operations. Furthermore, there can be no
assurance that profitability, if achieved, can be sustained on an ongoing basis.
As of December 31, 2004, we had an accumulated deficit of approximately
$125,181,000.
We
may never complete the development of commercially acceptable fuel cell products
or develop any of our other technologies into commercially acceptable
products.
We do not
know when or whether we will successfully complete the development of
commercially acceptable fuel cell products for our target markets, or develop
any of our other technologies into commercially acceptable products. We continue
to seek to improve our fuel cell
technologies,
particularly in the areas of energy capacity, power density, stability of power
output, operating time, reduction of size and weight as well as the temperature
conditions under which the fuel cells can operate. We also seek to improve the
engineering design of our fuel cells and refill cartridges before we are able to
produce a commercially acceptable product. Additionally, we must complete the
production model of the converter used in our power pack to step up voltage
together with the power management system that allows the fuel cell Power Pack
to respond to differing voltage requirements of different devices. Failure of
any of the above could delay or prevent the successful development of
commercially acceptable fuel cell products for any of our target
markets.
Developing
any technology into a marketable product that the consumer will desire to
purchase is a risky, time consuming and expensive process. You should anticipate
that we will encounter setbacks, discrepancies requiring time consuming and
costly redesigns and changes and that there is the possibility of outright
failure.
We
may not meet our product development and commercialization milestones and time
tables.
We
establish milestones and time tables, based upon our expectations regarding our
technologies, plans and programs at that time, which we use to assess our
progress toward developing and delivering into the market place commercially
acceptable fuel cell product. These milestones relate to technology and design
improvements as well as to dates for achieving large scale production and
marketing goals. If our products exhibit technical defects or are unable to meet
cost or performance goals, including levels and stability of power output,
useful life and reliability, or if our production cannot be achieved in time our
commercialization schedule could be delayed and third parties who are
collaborating with us to manufacture or market our fuel cell products may
decline to continue that collaboration. Furthermore, potential purchasers of our
initial commercial products may lose interest or may opt to purchase alternative
technologies.
Generally,
we have made technological advances and established production and distribution
relationships that met our time table and milestone schedules. We can give no
assurance that our commercialization schedule will continue to be met as we
further develop our fuel cell products, or any of our other technologies or
products.
Customers
will be unlikely to buy our fuel cell products unless we can demonstrate that
they can be produced for sale to consumers at attractive
prices.
To date,
we have focused primarily on research and development of our fuel cell
technologies and are only at the early stages of production engineering for
large scale production of our fuel cell products. Consequently, we have no
experience in the final stages of manufacturing our fuel cell products on a
commercial basis. We plan to manufacture our fuel cell products through
third-party contract manufacturers. We can offer no assurance that either we,
our contract manufacturers or any other party we partner with to volume-produce
our products will develop efficient, automated, low-cost manufacturing
capabilities and processes to meet the quality, price, engineering, design and
production standards or production volumes required to successfully mass market
our fuel cell products. Even if we or our contract manufacturers are successful
in developing such manufacturing capability and processes, we do not know
whether we or they will be timely in meeting our product commercialization
schedule or the production and delivery requirements of potential customers. A
failure to develop such manufacturing processes and capabilities could have a
material adverse effect on our business and financial results.
The price
of our fuel cell products is dependent largely on material and other
manufacturing costs. We are unable to offer any assurance that either we or a
contract manufacturer will be able to
reduce
costs to a level which will allow production of a competitive product that the
consumer finds attractive or that any product produced using lower cost
materials and manufacturing processes will not suffer from a reduction in
performance, reliability and longevity. Furthermore, although we have estimated
a pricing structure for our fuel cell products, we can give no assurance that
these estimates will be correct in light of any manufacturing process we adopt
or distribution channels we use.
Furthermore,
our contemplated program for the volume production of our fuel cell products
would require us to manufacture the electrodes, catalysts and fuel internally
and deliver same to our proposed contract manufacturer. Although we have
established electrode production operations in our facility in Israel, we have
not ascertained whether we are capable of production of any of that or any other
components at a large enough scale to adequately supply those components in
sufficient volume, or if those components will meet or surpass the manufacturing
standards necessary for a successful final product.
A
commercially acceptable market for our fuel cell products may never develop or
may take longer to develop than we anticipate.
A
commercially acceptable market may never develop for our fuel cell products or
any of our other technologies, or may develop more slowly than we anticipate.
Our fuel cell products represent a new market product, and we do not know with
certainty to what extent, if any, end-users will want to purchase and use them.
The development of a commercially acceptable market for our fuel cell products
may be affected by many factors, some of which are out of our control,
including:
| · |
the
level to which the capabilities of our fuel cell product has advanced in
performance, time of use, size, weight, cost and other factors that
determine consumer acceptance; |
|
· |
the
emergence of newer, more competitive technologies and
products; |
|
· |
improvements
to existing technologies, including existing rechargeable battery
technology or the chips used in the electronic devices that allow the
batteries to operate more efficiently; |
|
· |
the
future cost of sodium borohydrides, alkalines, glycerol, ethanol, or any
other hydrogen-based fuels, the catalysts used in our fuel cell products
or other chemicals used for powering our fuel cell
products; |
|
· |
regulations
that affect or limit the use of the components in our fuel cells or our
fuel cells in general, including regulations determining the use of our
fuel cell products in an airplane cabin or other consumer
uses; |
|
· |
consumer
perceptions of the safety of our products; and |
|
· |
consumer
reluctance to try a new product. |
If a mass
market fails to develop or develops more slowly than we anticipate, we may be
unable to recover the losses we will have incurred in the development of our
products and may never achieve profitability.
We
will be unable to market or sell our fuel cell products or products derived from
any of our other technologies if we are unsuccessful in entering into
arrangements, alliances, joint ventures or licensing agreements with third
parties.
As we do
not have nor do we intend to develop our own marketing or wide scale
manufacturing infrastructure, our ability to market, manufacture and sell our
fuel cell technologies or any of our other technologies is wholly dependent on
our entry into manufacturing, sales or distributing arrangements, strategic
alliances, joint ventures or licensing agreements with third parties possessing
such capabilities. We can offer no assurance that we will be successful in
entering into such arrangements, alliances, joint ventures or agreements or that
the terms of which will be entirely beneficial to us.
Problems
or delays in our collaboration efforts with third parties to develop or market
our fuel cell products could hurt our reputation and the reputation of our
products.
We have
entered into agreements with third parties who have agreed to assist us in
developing or marketing our fuel cell products or producing and supplying
components of our fuel cell products. We are in discussions with other third
parties and may enter into similar agreements with such other parties or others
in the future, of which we can give no assurances of success. These
collaboration agreements contemplate that these third parties will work with our
scientists to test various aspects of, or assist in developing components of,
our fuel cells. Such tests or development efforts may encounter problems and
delays for a number of reasons, including, without limitation, the failure of
our technology, the failure of the technology of others, the failure to combine
these technologies properly and the failure to maintain and service any test
prototypes properly. Many of these potential problems and delays are beyond our
control. In addition, collaborative efforts, by their nature, often create
problems due to miscommunications and disparate expectations and priorities
among the parties involved and may result in unexpected modifications and delays
in developing or marketing our fuel cell technologies or impact the cost of
making and delivering our fuel cell products.. Any such problems or perceived
problems with these collaborative efforts could hurt our reputation and the
reputation of our products and technologies.
Our
efforts to protect our intellectual property may not offer sufficient
protection, which could hinder our growth and success.
We regard
our patents, trade secrets, copyrights and similar intellectual property rights
as essential to our growth and success. We rely upon a combination of patent,
copyright and trademark laws, trade secret protection, confidentiality and
non-disclosure agreements and contractual provisions with employees and with
third parties to establish and protect our proprietary rights. We own, directly
or indirectly through subsidiaries or companies in which we have an interest,
patents for certain technologies and are currently applying for additional
patents. We can offer no assurance that we will succeed in receiving patent and
other proprietary protection in all markets we enter, or, if successful, that
such protection will be sufficient. If we successfully develop and market any or
all of our technologies, we expect to face efforts by larger companies and other
organizations or authorities to undermine our patents by challenging or copying
our intellectual property. Moreover, intellectual property rights are not
protected in certain parts of the world. We intend to vigorously defend our
intellectual property against any challenges that may arise. However, any
infringement action initiated by us may be very costly and require the diversion
of substantial funds from our operations and may require management to expend
efforts that might otherwise be devoted to our operations.
Claims
by third parties that our technology infringes upon their patents may, if
successful, prevent us from further developing or selling our
technologies.
Although
we do not believe our business activities infringe upon the rights of others,
nor are we aware of any pending or contemplated actions to such effect, we can
give no assurance that our business activities will not infringe upon the
proprietary rights of others, or that other parties will not assert infringement
claims against us.
If
we do not obtain additional financing, we may be forced to curtail our planned
manufacturing and marketing programs. as well as research and development
efforts.
Our
ability to carry out our plans for manufacturing and marketing our fuel cell
products, as well as sustain our research and development program is dependent
upon our ability to secure additional funding. As of December 31, 2004, giving
effect to the $700,000 we raised in our January 2005 private placement and to
the approximately $199,000 we raised in 2005 through March 10, 2005
from the exercise of outstanding stock options and warrants, we believe that our
cash resources, including monies available to us from our unused credit
facility, will be sufficient to support our projected expenditures
for operating and developmental activities for our Power Pack products
and purchases of capital equipment, for at least the next 14 months.
However, our plans for volume manufacturing and marketing would require us very
sharply to increase our spending levels, prior to the end of such period. To
accomplish those plans we will need to raise additional funds through public or
private debt or equity financing. We also may require such financing in order to
be competitive, to establish a stronger financial position and to continue our
operations. We can offer no assurance that we will be able to secure additional
funding, or funding on terms acceptable to us, to meet our financial
obligations, if necessary, or that a third party will be willing to make such
funds available. Our failure to raise additional funds could require us to delay
or curtail our marketing and production programs and research and product
development efforts or cause us to default under the repayment terms of our
revolving credit facility, if we were to borrow funds under that facility and we
are unable to repay such borrowings. Furthermore, our failure to successfully
develop or market our fuel cell products or products derived from any of our
other technologies may materially adversely affect our ability to raise
additional funds. In any event, it is not possible to make any reliable estimate
of the funds required to complete the development of our fuel cell technologies
or any of our other technologies or market and produce our fuel cell products.
If
we were to lose our technical talent or members of senior management and could
not find appropriate replacements in a timely manner, our business could be
adversely affected.
Our
success depends to a significant extent upon Zvi Rehavi, Executive Vice
President, Gennadi Finkelshtain General Manager of More Energy, and the other
scientists, engineers and technicians that seek out, recognize and develop our
technologies, as well as our highly skilled and experienced management,
including Robert K. Lifton, our chief executive officer, and Howard Weingrow,
our president. The loss of the services of Messrs. Rehavi and Finkelshtain, of
any of our other technical talent or of Messrs. Lifton and Weingrow could have a
material adverse effect on our ability to develop our fuel cell products into
successful commercial products or any of our other technologies into commercial
products. We possess key-person life insurance of $245,000 on Mr. Rehavi and
$3,000,000 on Mr. Finkelshtain. Although to date we have been successful in
recruiting and retaining executive, managerial and technical personnel, we can
offer no assurance that we will continue to attract and retain the qualified
personnel needed for our business. The failure to attract or retain qualified
personnel could have a material adverse effect on our business.
There
may be adverse effects on our earnings and our stock price due to the large
amount of goodwill and intangible assets on our consolidated balance
sheet.
At
December 31, 2004, our consolidated balance sheet showed approximately
$58,205,000 of goodwill. Our goodwill balance of $58,205,000 is subject to a
test for impairment at least annually, which could result in a charge to
operations in the event impairment of the goodwill balance would be found. We
continue to amortize the remaining unamortized balance of our intangible assets
of $672,000, with a remaining useful life of approximately 39
months.
Risks
associated with conducting operations in Israel could materially adversely
affect our ability to complete the development of our fuel cell technology or
any of our other technologies.
Our
research and development facilities, our pilot manufacturing facility for
catalyst and electrodes, as well as some of our executive offices and
back-office functions, are located in the State of Israel and our key personnel
and their families reside in Israel. We are, therefore, directly affected by the
political, economic and military conditions in Israel. Any major hostilities
involving Israel or the interruption or curtailment of trade between Israel and
any other country, whether due to the Israeli-Palestinian conflict or America’s
war against terrorism, among others, could have a material adverse effect on our
ability to complete the development of any of our fuel cell products, our
technologies or our ability to supply our technology to contract manufacturers,
development partners, customers or vendors. Furthermore, any interruption or
curtailment of trade between Israel and any other country in which we have
strategic relationships could similarly adversely affect such relationships. In
addition, all male adult permanent residents of Israel under the age of 54,
unless exempt, are obligated to perform up to 36 days of military reserve duty
annually and are subject to being called to active duty at any time under
emergency circumstances. Some of our employees are currently obligated to
perform annual reserve duty. We are unable to assess what impact, if any, these
factors may have upon our future operations.
In
addition, historically, Israel has suffered from high inflation and the
devaluation of its currency, the New Israeli Shekel, or NIS, compared to the
U.S. dollar. Future inflation or further devaluations of the NIS may have a
negative impact on our NIS-based obligations over time upon substantial price
increases caused by inflation.
It
may be difficult to serve process on or enforce a judgment against our Israeli
officers and directors, making it difficult to bring a successful lawsuit
against us, or our officers and directors, individually or in the
aggregate.
Service
of process upon our directors and officers, many of whom reside outside the
United States, may be difficult to obtain within the United States. Furthermore,
any judgment obtained in the United States against us may not be collectible
within the United States to the extent our assets are located outside the United
States. This could limit the ability of our stockholders to sue us based upon an
alleged breach of duty or other cause of action. We have been informed by our
Israeli legal counsel that there is doubt as to the enforceability of civil
liabilities under the Securities Act of 1933 and the Securities Exchange Act of
1934 in original actions instituted in Israel. However, subject to limitation,
Israeli courts may enforce United States final executory judgments for
liquidated amounts in civil matters, obtained after a trial before a court of
competent jurisdiction, according to the rules of private international law
currently prevailing in Israel, which enforce similar Israeli judgments,
provided that:
| · |
due
service of process has been effected and the defendant was given a
reasonable opportunity to defend; |
| · |
the
obligation imposed by the judgment is executionable according to the laws
relating to the enforceability of judgments in Israel, such judgment is
not contrary to public policy, security or sovereignty of the State of
Israel and such judgment is executionable in the state in which it was
given; |
| · |
such
judgments were not obtained by fraud and do not conflict with any other
valid judgments in the same manner between the same parties;
and |
| · |
an
action between the same parties in the same matter is not pending in any
Israeli court at the time the lawsuit is instituted in the foreign
court. |
Foreign
judgments enforced by Israeli courts generally will be payable in Israeli
currency, which can then be converted into United States dollars and transferred
out of Israel. The judgment debtor may also pay in dollars. Judgment creditors
must bear the risk of unfavorable exchange rates.
We
intend to retain all of our future earnings, if any, for use in our business
operations and do not expect to pay dividends to our
stockholders.
We have
not paid any dividends on our common stock to date and do not anticipate
declaring any dividends in the foreseeable future. Our board presently intends
to retain all earnings, if any, for use in our business operations.
We
currently face and will continue to face significant
competition.
Our fuel
cell product face and will continue to face significant competition. A large
number of corporations, national laboratories and universities in the United
States, Canada, Europe, Japan and elsewhere are actively engaged in the
development and manufacture of power sources, including batteries and fuel
cells, both for portable electronic devices and other uses. Each of these
competitors has the potential to capture market share in various markets, which
would have a material adverse effect on our position in the industry and our
financial results.
We expect
competition to intensify greatly as the need for new energy alternatives becomes
more apparent and continues to increase. Some of our competitors are well
established and have substantially greater managerial, technical, financial,
marketing and product development resources. Additionally, companies, government
sponsored laboratories and universities, both large and small, are entering the
markets in which we compete. There can also be no assurance that current and
future competitors will not be more successful in the markets in which we
compete than we have been, or will be in the future. There can be no assurance
that we will be successful in such a competitive environment.
We
expect to be dependent on third party suppliers for the supply of key materials
and components for our products.
If and
when either we or our contract manufacturers or manufacturing, strategic
alliance or joint venture partners commence production of our fuel cells or fuel
cell products, of which there can be no assurance, we expect to rely upon third
party suppliers to provide requisite materials and components. A supplier’s
failure to supply materials or components in a timely manner, or to supply
materials and components that meet our quality, quantity or cost requirements,
or our inability to obtain substitute sources for these materials and components
in a timely manner or on terms acceptable to us, could harm our ability to
manufacture our fuel cell products or meet our cost target. We or our contract
manufacturers, manufacturing, strategic alliance or joint venture partners may
be unable to obtain
comparable
materials or components from alternative suppliers, and that could adversely
affect our ability to produce viable fuel cells or significantly raise the cost
of producing fuel cells or fuel cell products.
In
addition, platinum is presently a component of the anode electrode in our fuel
cell products. Platinum is a scarce natural resource and we are dependent upon a
sufficient supply of this commodity at a cost that allows us to meet our cost
targets for our fuel cell products. While we do not anticipate significant near
or long-term shortages in the supply of platinum, such shortages could adversely
affect our ability to produce commercially acceptable fuel cell product or raise
our cost of producing our fuel cell products beyond our targeted
cost.
Forward-Looking
Statements
Because
we want to provide you with meaningful and useful information, this Annual
Report contains certain forward-looking statements that reflect our current
expectations regarding our future results of operations, performance and
achievements. We have tried, wherever possible, to identify these
forward-looking statements by using words such as “anticipate,” “believe,”
“estimate,” “expect,” “plan,” “intend” and similar expressions. These statements
reflect our current beliefs and are based on information currently available to
us. Accordingly, these statements are subject to certain risks, uncertainties
and contingencies, including the factors set forth under “Risk Factors,” which
could cause our actual results, performance or achievements to differ materially
from those expressed in, or implied by, any of these statements. You should not
place undue reliance on any forward-looking statements. Except as otherwise
required by federal securities laws, we undertake no obligation to release
publicly the results of any revisions to any such forward-looking statements
that may be made to reflect events or circumstances after the date of this
Annual Report or to reflect the occurrence of unanticipated events.
| Item
7A. |
Quantitative
and Qualitative Disclosures About Market
Risk |
Impact
Of Inflation And Devaluation On Results Of Operations, Liabilities And
Assets
In
connection with our currency use, we operate in a mixed environment. Payroll is
paid in our local currency and the local currency of each of our subsidiaries,
such as the New Israeli Shekel (NIS) with respect to our Israeli-based
operations, as are most of our other operating expenses. Consideration for
virtually all sales is either in dollars or dollar-linked currency. As a result,
not all monetary assets and all monetary liabilities are linked to the same base
in the same amount at all points in time, which may cause currency fluctuation
related losses. In order to help minimize such losses, we currently invest our
liquid funds in both dollar-based and NIS-based assets.
For many
years prior to 1986, the Israeli economy was characterized by high rates of
inflation and devaluation of the Israeli currency against the United States
dollar and other currencies. Since the institution of the Israeli Economic
Program in 1985, inflation, while continuing, has been significantly reduced and
the rate of devaluation has been substantially diminished. However, Israel
effected devaluations (appreciations) of the NIS against the dollar as
follows:
|
2000 |
(2.7) |
|
2001 |
9.2 |
|
2002 |
7.3 |
|
2003 |
(7.6) |
|
2004 |
(1.6) |
In 1999
and 2000, the rate of inflation in Israel exceeded the rate of devaluation of
the NIS against the dollar, but in 1998, 2001 and 2002 the rate of devaluation
of the NIS against the dollar
exceeded
the rate of inflation in Israel. In 2004, Israel experienced both price
deflation and an appreciation of the NIS against the dollar. In 2004, the rate
of inflation (deflation) in Israel was 1.2% and the rate of devaluation
(appreciation) of the NIS was (1.6)%, against the dollar. Additionally, in 2005,
through January 31, the rate of inflation (deflation) in Israel was (0.6)% and
the rate of devaluation of the NIS was 1.7% against the dollar.
Impact
Of Political And Economic Conditions
The state
of hostility which has existed in varying degrees in Israel since 1948, its
unfavorable balance of payments and its history of inflation and currency
devaluation, all represent uncertainties which may adversely affect our
business.
|
Item
8. |
Financial
Statements and Supplementary Data |
Our
consolidated financial statements and corresponding notes thereto called for by
this item appear at the end of this document commencing on page
F-1.
| Item
9A. |
Controls
and Procedures |
Our
management carried out an evaluation, with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of December 31, 2004. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that (i) our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded,
processed, summarized and reported, within the time periods specified in the
rules and forms of the Securities and Exchange Commission and (ii) our
disclosure controls and procedures were designed to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
Management's
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2004 based on the framework in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on that evaluation, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2004.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management's
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2004 has been audited by Kost Forer Gabay & Kasierer, a
Member of Ernst & Young Global, an independent registered public accounting
firm, as stated in their report which is included elsewhere herein.
Changes
in Internal Control Over Financial Reporting
There has
not been any change in our internal control over financial reporting in
connection with the evaluation required by Rule 13a-15(d) under the Exchange Act
that occurred during the quarter ended December 31, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Report
Of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Medis
Technologies Ltd.
We have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that Medis Technologies
Ltd. maintained effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Medis Technologies Ltd.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, management’s assessment that Medis Technologies Ltd. maintained
effective internal control over financial reporting as of December 31,
2004, is fairly stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Medis Technologies Ltd. maintained, in all material
respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Medis
Technologies Ltd. as of December 31, 2004 and 2003, and the related
consolidated statements of operations, shareholders’ equity and cash flows for
each of the two years in the period ended December 31, 2004 of Medis
Technologies Ltd. and our report dated March 14, 2005 expressed an unqualified
opinion thereon.
|
|
|
Kost
Forer Gabay & Kasierer |
|
|
|
A
MEMBER OF ERNST & YOUNG GLOBAL |
|
Tel
Aviv, Israel |
|
|
|
March
14, 2005 |
|
|
| Item
9B. |
Other
Information. |
Not
applicable.
PART
III
|
Item
10. |
Directors
and Executive Officers of the
Registrant |
The
information required by this Item 10 is set forth under the heading "Election of
Directors" and subheading "Section 16(a) Beneficial Ownership of Reporting
Compliance" in our Proxy Statement for the 2005 Annual Meeting of Stockholders
(the "2005 Proxy Statement"), which is incorporated herein by this
reference.
|
Item
11. |
Executive
Compensation |
The
information required by this Item 11 set forth under the heading "Executive
Compensation" in the 2005 Proxy Statement, which is incorporated herein by this
reference. Notwithstanding the foregoing, the information provided under the
subheadings "Report on Executive Compensation" and "Performance Graph" is not
incorporated by reference.
|
Item
12. |
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
The
information required by this Item 12 is set forth under the heading "Security
Ownership of Certain Beneficial Owners and Management" and under the subheading
"Equity Compensation Plan Information" in the 2005 Proxy Statement, which is
incorporated herein by this reference.
|
Item
13. |
Certain
Relationships and Related
Transactions |
The
information required by this Item 13 is set forth under the heading "Certain
Relationships" in the 2005 Proxy Statement, which is incorporated herein by this
reference.
|
Item
14. |
Principal
Accounting Fees and Services |
The
information required by this Item 14 is set forth under the heading "Independent
Auditors" in the 2005 Proxy Statement, which is incorporated herein by this
reference.
PART
IV
|
Item
15. |
Exhibits
and Financial Statement Schedules |
(a) Financial
Statements.
Our
financial statements as set forth in the Index to Consolidated Financial
Statements attached hereto commencing on page F-1 are hereby incorporated by
reference.
(b) Exhibits.
The
following exhibits, which are numbered in accordance with Item 601 of Regulation
S-K, are filed herewith or, as noted, incorporated by reference
herein:
|
3.(i) |
Restated
Certificate of Incorporation of Medis Technologies Ltd.
(1) |
|
3.(ii) |
Restated
By-Laws of Medis Technologies Ltd., as amended (1) |
|
4.1 |
Form
of certificate evidencing shares of common stock (1) |
|
10.1* |
Medis
Technologies Ltd.’s 1999 Stock Option Plan, as amended
(2) |
|
10.2* |
Employment
Agreement dated November 2, 2000 between Zvi Rehavi and Medis El Ltd.
(3) |
|
10.3* |
Employment
Agreement dated March 23, 1999 between Israel Fisher and Medis El Ltd.
(3) |
|
10.4 |
Loan
Agreement dated as of December 29, 2000 between Fleet National Bank, as
the lender and Medis Technologies Ltd., as the borrower
(3) |
|
10.5 |
Amendment
to Loan Agreement dated October 24, 2002 but effective as of September 30,
2002 between Medis Technologies Ltd. and Fleet National Bank
(4) |
|
10.6 |
Amendment
No. 2 to Loan Agreement dated as of December 29, 2000 between Fleet
National Bank, as the lender and Medis Technologies Ltd., as the borrower,
dated February 20, 2003 (5) |
|
10.7 |
Amendment
No. 3 to Loan Agreement dated December 29, 2000 between Fleet National
Bank, as the lender, and Medis Technologies Ltd., as the borrower, dated
September 30, 2003 (8) |
|
10.8 |
Amendment
No. 4 to Loan Agreement dated as of December 29, 2000 between Fleet
National Bank, as the lender and Medis Technologies Ltd., as the borrower,
dated February 20, 2003 (2) |
|
10.9 |
Strategic
Agreement dated April 5, 2001 by and between General Dynamics Government
Systems Corporation and Medis Technologies Ltd. (3) |
|
10.10 |
Option
Agreement dated November 9, 2000, by and between Medis Technologies Ltd.
and Gennadi Finkelstein, and amendment thereto (3) |
|
10.11 |
Letter
Agreement dated March 14, 2003 by and between Medis Technologies Ltd. and
Gennadi Finkelshtain, amending the exercise terms of the Option Agreement
dated November 9, 2000 and exercising the option in full
(5) |
|
10.12 |
Letter
Agreement dated June 1, 1993 between Medis El Ltd. and The Industrial
Research and Development Institute of the Chief Scientist’s Office of the
State of Israel (6) |
|
10.13 |
Agreement
dated October 17, 1991 between Bar-Ilan University and Israel Aircraft
Industries Ltd. (6) |
|
10.14 |
Amendment
of License dated August 8, 1992 between Bar-Ilan University and Israel
Aircraft Industries Ltd. and Medis El (6) |
|
10.15 |
Assignment
of License Agreement between Israel Aircraft Industries between Israel
Aircraft Industries Ltd. and Bar-Ilan University dated August 13, 1992
between Israel Aircraft Industries Ltd. and Medis Israel Ltd.
(6) |
|
10.16 |
Letter
Agreement dated July 18, 1996 between Medis El Ltd. and Bar-Ilan
University (6) |
|
10.17* |
Consultancy
Agreement dated as of January 2, 2000 between Medis Technologies Ltd. and
Robert K. Lifton (7) |
|
10.18* |
Consultancy
Agreement dated as of January 2, 2000 between Medis Technologies Ltd. and
Howard Weingrow (7) |
|
10.19** |
Distribution
Agreement dated as of March 9, 2004 by and between ACCO Brands, Inc.
through its Kensington Technology Group, and Medis Technologies Ltd.
(8) |
|
10.20 |
Summary
of Material Lease Terms to Lod, Israel Facility |
|
10.21** |
Product
and Manufacturing Development Agreement, dated as of May 3, 2004, between
Medis Technologies Ltd. and Flextronics International Ltd.
(9) |
|
10.22 |
Agreement
dated May 5, 2003 between Medis Technologies Ltd. and General Dynamics C4
Systems, Incorporated (10) |
|
10.23** |
Distribution
Agreement, dated as of August 10, 2004, between ASE International Inc. and
Medis Technologies Ltd. (11) |
|
10.24** |
Distribution
Agreement, dated as of August 3, 2004, between Superior Communications and
Medis Technologies Ltd. (12) |
|
10.25** |
Development
Agreement dated as of May 25, 2004 between Eastman Kodak Company and Medis
Technologies Ltd. (13) |
|
10.26* |
Consultancy
Agreement dated as of July 1, 2002 between More Energy Ltd. and JSW
Consulting Inc. (10) |
|
10.27* |
Special
Personal Employment Contract dated as of July 15, 2002 between Medis El
Ltd. and Yaacov Weiss (10) |
| 10.28** |
Purchase Order
dated August 27, 2004 with General Dynamics C4 Systems,
Inc. |
|
14.1 |
Code
of Ethics (8) |
|
21.1 |
Subsidiaries
of the Registrant (6) |
|
23.1 |
Consent
of Ernst & Young LLP |
|
23.2 |
Consent
of Kost Forer Gabay & Kasierer, a Member of Ernst & Young
Global |
|
31.1 |
Rule
13a-14(a)/15d-14(a) certification of Chief Executive
Officer |
|
31.2 |
Rule
13a-14(a)/15d-14(a) certification of Chief Financial
Officer |
|
32.1 |
Section
1350 certifications |
*Management
contract or compensatory plan
**Portions
of this document have been omitted and submitted separately with the Securities
and Exchange Commission pursuant to a request for “Confidential
Treatment.”
|
(1) |
Filed
as an exhibit to the Registration Statement on Form S-1, as amended (File
No.: 333-83945), of Medis Technologies Ltd. and incorporated herein by
reference. |
|
(2) |
Filed
as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004 of Medis Technologies Ltd. and incorporated herein by
reference. |
|
(3) |
Filed
as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 2000 of Medis Technologies Ltd. and incorporated herein by
reference. |
|
(4) |
Filed
as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 of Medis Technologies Ltd. and incorporated herein by
reference. |
|
(5) |
Filed
as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 2002 of Medis Technologies Ltd. and incorporated herein by
reference. |
|
(6) |
Filed
as an exhibit to the Registration Statement on Form S-1, as amended (File
No.: 333-73276), of Medis Technologies Ltd. and incorporated herein by
reference. |
|
(7) |
Filed
as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 2001 of Medis Technologies Ltd. and incorporated herein by
reference. |
|
(8) |
Filed
as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 2003 of Medis Technologies Ltd. and incorporated herein by
reference. |
|
(9) |
Filed
as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004 of Medis Technologies Ltd. and incorporated herein by
reference. |
|
(10) |
Filed
as an exhibit to the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003 of Medis Technologies Ltd. and incorporated herein by
reference. |
|
(11) |
Filed
as an exhibit to the Current Report on Form 8-K dated August 10, 2004 of
Medis Technologies Ltd. and incorporated herein by
reference. |
|
(12) |
Filed
as an exhibit to the Current Report on Form 8-K dated August 3, 2004 of
Medis Technologies Ltd. and incorporated herein by
reference. |
|
(13) |
Filed
as an exhibit to the Current Report on Form 8-K dated May 25, 2004 of
Medis Technologies Ltd. and incorporated herein by
reference. |
(c) Financial
Statement Schedules.
None
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
| |
|
|
| |
MEDIS
TECHNOLOGIES LTD. |
|
|
|
| Date: March 16,
2005 |
By: |
/s/ Robert K.
Lifton |
| |
Robert K. Lifton |
|
|
Chairman and Chief Executive
Officer |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/
ROBERT K. LIFTON
Robert
K. Lifton
|
Chairman
and Chief
Executive Officer, Secretary and Director
(Principal
Executive Officer)
|
March
16, 2005
|
|
/s/
HOWARD WEINGROW
Howard
Weingrow
|
President,
Treasurer and Director
|
March
16, 2005
|
|
/s/
ISRAEL
FISHER
Israel
Fisher
|
Senior
Vice President-Finance
(Principal
Financial Officer)
|
March
16, 2005
|
|
/s/
JACOB
WEISS
Jacob
Weiss
|
Senior
Vice President-Business Development and Director
|
March
16, 2005
|
|
/s/
MICHAEL
S. RESNICK
Michael
S. Resnick
|
Vice
President and Controller
(Principal
Accounting Officer)
|
March
16, 2005
|
|
/s/
AMOS
EIRAN
Amos
Eiran
|
Director
|
March
16, 2005
|
|
/s/
ZEEV
NAHMONI
Zeev
Nahmoni
|
Director
|
March
16, 2005
|
|
/s/
JACOB
E. GOLDMAN
Jacob
E. Goldman
|
Director
|
March
16, 2005
|
|
/s/
PHILIP WEISSER
Philip
Weisser
|
Director
|
March
16, 2005
|
|
/s/
MITCHELL H. FREEMAN
Mitchell
H. Freeman
|
Director
|
March
16, 2005
|
|
/s/
STEVE M. BARNETT
Steve
M. Barnett
|
Director
|
March
16, 2005
|
INDEX
Medis
Technologies Ltd. Consolidated Financial Statements
|
|
Page |
|
|
|
|
Reports
of Independent Registered Public Accounting
Firms |
F-2
- F-3 |
|
|
|
Consolidated
Financial Statements |
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2003 and
2004 |
F-4 |
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2002, 2003 and
2004 |
F-5 |
| |
|
Statements
of Stockholders’ Equity for the years ended December 31, 2002, 2003 and
2004 |
F-6 |
| |
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2002, 2003 and
2004 |
F-7 |
|
|
|
Notes
to Consolidated Financial Statements |
F-9 |
|
|
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders of
Medis
Technologies Ltd.
We have
audited the accompanying consolidated balance sheets of Medis Technologies Ltd.
(a Delaware corporation) and its subsidiaries (the "Company") as of
December 31, 2003 and 2004, and the related consolidated statements of
operations, stockholders’ equity and cash flows for each of the two years in the
period ended December 31, 2004. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Medis Technologies
Ltd. and its subsidiaries at December 31, 2003 and 2004, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Medis Technologies Ltd.’s
and its subsidiaries internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 14, 2005 expressed an unqualified
opinion thereon.
|
|
|
Kost
Forer Gabay & Kasierer |
|
|
|
A
MEMBER OF ERNST & YOUNG GLOBAL |
|
Tel
Aviv, Israel |
|
|
|
March
14, 2005 |
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders of
Medis
Technologies Ltd.
We have
audited the accompanying consolidated statement of operations, stockholders’
equity and cash flows for the year ended December 31, 2002 of Medis Technologies
Ltd. (a Delaware corporation) and subsidiaries (the “Company”). These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated results of operations, stockholders’ equity
and cash flows for the year ended December 31, 2002 of Medis Technologies Ltd.
and subsidiaries in conformity with U.S. generally accepted accounting
principles.
|
|
ERNST
& YOUNG LLP |
|
|
|
|
|
New
York, New York |
|
|
|
February
25, 2003 |
|
|
Medis
Technologies Ltd. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
(in
U.S. dollars)
| |
|
December
31, |
|
| |
|
2003 |
|
2004 |
|
|
ASSETS |
|
|
|
|
|
Current
assets |
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
6,620,000 |
|
$ |
15,758,000 |
|
Accounts
receivable—trade, net |
|
|
74,000 |
|
|
— |
|
Accounts
receivable—other |
|
|
347,000 |
|
|
325,000 |
|
|
Prepaid
expenses and other current assets |
|
|
110,000 |
|
|
162,000 |
|
Total
current assets |
|
|
7,151,000 |
|
|
16,245,000 |
|
Property
and equipment, net (Note D) |
|
|
1,360,000 |
|
|
3,493,000 |
|
Long-term
note (Note C) |
|
|
158,000 |
|
|
299,000 |
|
Severance
pay fund (Note B) |
|
|
697,000 |
|
|
859,000 |
|
Intangible
assets, net (Note E) |
|
|
880,000 |
|
|
672,000 |
|
|
Goodwill,
net (Note E) |
|
|
58,205,000 |
|
|
58,205,000 |
|
|
Total
assets |
|
$ |
68,451,000 |
|
$ |
79,773,000 |
|
|
LIABILITIES
AND
STOCKHOLDERS’
EQUITY |
|
|
|
|
|
|
|
Current
liabilities |
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
323,000 |
|
$ |
1,128,000 |
|
|
Accrued
expenses and other current liabilities (Note F) |
|
|
958,000 |
|
|
2,583,000 |
|
Total
current liabilities |
|
|
1,281,000 |
|
|
3,711,000 |
|
Leasehold
incentive obligations |
|
|
— |
|
|
748,000 |
|
Accrued
severance pay (Note B) |
|
|
1,193,000 |
|
|
1,451,000 |
|
Commitments
and contingent liabilities (Note H) |
|
|
|
|
|
|
|
Stockholders’
equity (Note G) |
|
|
|
|
|
|
|
Preferred
stock, $.01 par value; 10,000 shares authorized; none
issued |
|
|
— |
|
|
— |
|
Common
stock, $.01 par value; 35,000,000 and 38,000,000 shares authorized, at
December 31, 2003 and 2004, respectively; 24,538,268 and 27,016,819
shares issued and outstanding, at December 31, 2003 and 2004,
respectively |
|
|
245,000 |
|
|
270,000 |
|
Additional
paid-in capital |
|
|
173,185,000 |
|
|
198,774,000 |
|
|
Accumulated
deficit |
|
|
(107,453,000 |
) |
|
(125,181,000 |
) |
|
Total
stockholders’ equity |
|
|
65,977,000 |
|
|
73,863,000 |
|
|
Total
liabilities and stockholders’ equity |
|
$ |
68,451,000 |
|
$ |
79,773,000 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Medis
Technologies Ltd. and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
U.S. dollars)
| |
|
Year
ended December 31, |
|
| |
|
2002 |
|
2003 |
|
2004 |
|
| |
|
|
|
|
|
|
|
Sales |
|
$ |
192,000 |
|
$ |
131,000 |
|
$ |
—
|
|
|
Cost
of sales |
|
|
130,000 |
|
|
46,000
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Gross
profit |
|
|
62,000 |
|
|
85,000 |
|
|
— |
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
Research
and development costs, net (Note H-6) |
|
|
4,054,000 |
|
|
4,804,000 |
|
|
9,799,000 |
|
Selling,
marketing, general and administrative expenses |
|
|
3,749,000 |
|
|
4,197,000 |
|
|
5,829,000 |
|
|
Amortization
of intangible assets |
|
|
2,633,000 |
|
|
997,000 |
|
|
208,000 |
|
|
Total
operating expenses |
|
|
10,436,000 |
|
|
9,998,000 |
|
|
15,836,000 |
|
Loss
from operations |
|
|
(10,374,000 |
) |
|
(9,913,000 |
) |
|
(15,836,000 |
) |
Other
income (expenses) |
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
151,000 |
|
|
131,000 |
|
|
246,000 |
|
|
Interest
expense |
|
|
(82,000 |
) |
|
(55,000 |
) |
|
(72,000 |
) |
| |
|
|
69,000 |
|
|
76,000 |
|
|
174,000 |
|
NET
LOSS |
|
|
(10,305,000 |
) |
|
(9,837,000 |
) |
|
(15,662,000 |
) |
|
Value
of warrants issued or extended (Note G) |
|
|
(2,241,000 |
) |
|
(1,226,000 |
) |
|
(2,066,000 |
) |
|
Net
loss attributable to common stockholders |
|
$ |
(12,546,000 |
) |
$ |
(11,063,000 |
) |
$ |
(17,728,000 |
) |
|
Basic
and diluted net loss per share (Note B) |
|
$ |
(.57 |
) |
$ |
(.47 |
) |
$ |
(.68 |
) |
|
Weighted-average
number of common shares used in computing basic and diluted net loss per
share (Note B) |
|
|
21,897,871 |
|
|
23,429,829 |
|
|
26,142,150 |
|
| |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Medis
Technologies Ltd. and Subsidiaries
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in
U.S. dollars)
| |
|
|
Common
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Shares |
|
|
Amount |
|
|
Additional
Paid-in Capital |
|
|
Accumulated
Deficit |
|
|
Deferred
Stock Compensation
Costs |
|
|
Total
Stockholders’ Equity |
|
Balance
at December 31, 2001 |
|
|
17,532,779 |
|
$ |
175,000 |
|
$ |
152,425,000 |
|
$ |
(83,844,000 |
) |
$ |
(122,000 |
) |
$ |
68,634,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
— |
|
|
— |
|
|
— |
|
|
(10,305,000 |
) |
|
— |
|
|
(10,305,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock pursuant to rights offering, net |
|
|
3,500,000 |
|
|
35,000 |
|
|
6,504,000 |
|
|
— |
|
|
— |
|
|
6,539,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock |
|
|
69,522 |
|
|
1,000 |
|
|
323,000 |
|
|
— |
|
|
— |
|
|
324,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred stock compensation |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
122,000 |
|
|
122,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options granted to consultants |
|
|
— |
|
|
— |
|
|
91,000 |
|
|
— |
|
|
— |
|
|
91,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
of warrants issued pursuant Shareholder Loyalty Program |
|
|
— |
|
|
— |
|
|
2,241,000 |
|
|
(2,241,000 |
) |
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2002 |
|
|
21,102,301 |
|
|
211,000 |
|
|
161,584,000 |
|
|
(96,390,000 |
) |
|
—
|
|
|
65,405,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
— |
|
|
— |
|
|
— |
|
|
(9,837,000 |
) |
|
— |
|
|
(9,837,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock pursuant to rights offering, net |
|
|
2,325,600 |
|
|
23,000 |
|
|
4,855,000 |
|
|
— |
|
|
— |
|
|
4,878,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock pursuant to offer to exchange and exercise,
net |
|
|
839,966 |
|
|
8,000 |
|
|
3,601,000 |
|
|
— |
|
|
— |
|
|
3,609,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in acquisition of minority interest of
subsidiary |
|
|
120,000 |
|
|
1,000 |
|
|
524,000 |
|
|
— |
|
|
— |
|
|
525,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock |
|
|
150,401 |
|
|
2,000 |
|
|
803,000 |
|
|
— |
|
|
— |
|
|
805,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options granted to directors |
|
|
— |
|
|
— |
|
|
131,000 |
|
|
— |
|
|
— |
|
|
131,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and warrants granted to consultants |
|
|
— |
|
|
— |
|
|
461,000 |
|
|
— |
|
|
— |
|
|
461,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
of warrants issued pursuant to offer to exchange and
exercise |
|
|
— |
|
|
— |
|
|
1,226,000 |
|
|
(1,226,000 |
) |
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003 |
|
|
24,538,268 |
|
|
245,000 |
|
|
173,185,000 |
|
|
(107,453,000 |
) |
|
— |
|
|
65,977,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
— |
|
|
— |
|
|
— |
|
|
(15,662,000 |
) |
|
— |
|
|
(15,662,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock pursuant to private placements, net |
|
|
1,645,000 |
|
|
17,000 |
|
|
17,346,000 |
|
|
— |
|
|
— |
|
|
17,363,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock warrants |
|
|
548,101 |
|
|
5,000 |
|
|
2,841,000 |
|
|
— |
|
|
— |
|
|
2,846,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options |
|
|
285,450 |
|
|
3,000 |
|
|
1,653,000 |
|
|
— |
|
|
— |
|
|
1,656,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options granted to directors |
|
|
— |
|
|
— |
|
|
147,000 |
|
|
— |
|
|
— |
|
|
147,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and warrants granted to consultants |
|
|
— |
|
|
— |
|
|
572,000 |
|
|
— |
|
|
— |
|
|
572,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extension
of stock options granted to employees, directors and
consultants |
|
|
— |
|
|
— |
|
|
964,000 |
|
|
— |
|
|
— |
|
|
964,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extension
of warrants granted to stockholders |
|
|
— |
|
|
— |
|
|
2,066,000 |
|
|
(2,066,000 |
) |
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004 |
|
|
27,016,819 |
|
$ |
270,000 |
|
$ |
198,774,000 |
|
$ |
(125,181,000 |
) |
$ |
— |
|
$ |
73,863,000 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Medis
Technologies Ltd. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
U.S. dollars)
| |
|
Year
ended December 31, |
|
| |
|
2002 |
|
2003 |
|
2004 |
|
Cash
flows from operating activities |
|
|
|
|
|
|
|
Net
loss |
|
$ |
(10,305,000 |
) |
$ |
(9,837,000 |
) |
$ |
(15,662,000 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities |
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment |
|
|
256,000 |
|
|
305,000 |
|
|
502,000 |
|
Leasehold
incentive obligations |
|
|
— |
|
|
— |
|
|
935,000 |
|
Amortization
of intangible assets |
|
|
2,633,000 |
|
|
997,000 |
|
|
208,000 |
|
Non-cash
compensation expense |
|
|
213,000 |
|
|
592,000 |
|
|
1,683,000 |
|
Loss
from sale of property and equipment |
|
|
11,000 |
|
|
— |
|
|
— |
|
Changes
in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
Accounts
receivable—trade |
|
|
— |
|
|
(74,000 |
) |
|
74,000 |
|
Accounts
receivable—other |
|
|
24,000 |
|
|
(187,000 |
) |
|
22,000 |
|
Prepaid
expenses and other current assets |
|
|
157,000 |
|
|
(58,000 |
) |
|
(52,000 |
) |
Accounts
payable |
|
|
(37,000 |
) |
|
195,000 |
|
|
606,000 |
|
Accrued
expenses and other current liabilities |
|
|
151,000 |
|
|
(15,000 |
) |
|
1,410,000 |
|
|
Accrued
severance pay, net |
|
|
115,000 |
|
|
108,000 |
|
|
96,000 |
|
|
Net
cash used in operating activities |
|
|
(6,782,000 |
) |
|
(7,974,000 |
) |
|
(10,178,000 |
) |
Cash
flows from investing activities |
|
|
|
|
|
|
|
|
|
|
Capital
expenditures |
|
|
(263,000 |
) |
|
(576,000 |
) |
|
(2,408,000 |
) |
Investment
in short-term deposits |
|
|
— |
|
|
— |
|
|
(12,198,000 |
) |
Maturity
of short-term deposits |
|
|
— |
|
|
— |
|
|
12,198,000 |
|
Proceeds
from disposition of property and equipment |
|
|
25,000 |
|
|
— |
|
|
— |
|
|
Long-term
note. |
|
|
— |
|
|
(158,000 |
) |
|
(141,000 |
) |
|
Net
cash used in investing activities |
|
|
(238,000 |
) |
|
(734,000 |
) |
|
(2,549,000 |
) |
Cash
flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock and exercise of stock options and warrants,
net |
|
|
7,057,000
|
|
|
9,292,000 |
|
|
21,865,000 |
|
|
Net
cash provided by financing activities |
|
|
7,057,000 |
|
|
9,292,000 |
|
|
21,865,000 |
|
Net
increase in cash and cash equivalents |
|
|
37,000 |
|
|
584,000 |
|
|
9,138,000 |
|
|
Cash
and cash equivalents at beginning of year |
|
|
5,999,000 |
|
|
6,036,000 |
|
|
6,620,000 |
|
|
Cash
and cash equivalents at end of year |
|
$ |
6,036,000 |
|
$ |
6,620,000 |
|
$ |
15,758,000 |
|
Medis
Technologies Ltd. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
(in
U.S. dollars)
| |
|
Year
ended December 31, |
|
| |
|
2002 |
|
2003 |
|
2004 |
|
Supplemental
disclosures of cash flow information: |
|
|
|
|
|
|
|
Cash
paid during the year for: |
|
|
|
|
|
|
|
Interest |
|
$ |
24,000 |
|
$ |
32,000 |
|
$ |
29,000 |
|
Non-cash
investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
Non
cash capital expenditure |
|
$ |
— |
|
$ |
— |
|
$ |
227,000 |
|
Acquisition
of shares of majority-owned subsidiary - purchase price allocated to
intangible assets (see Note C): |
|
$ |
— |
|
$ |
1,045,000 |
|
$ |
— |
|
Financed
as follows: |
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock |
|
$ |
— |
|
$ |
525,000 |
|
$ |
— |
|
Cost
of option purchased in prior period |
|
$ |
— |
|
$ |
520,000 |
|
$ |
— |
|
Value
of warrants issued pursuant to shareholder loyalty program (see Note
G) |
|
$ |
2,241,000 |
|
$ |
— |
|
$ |
— |
|
Value
of warrants issued pursuant offer to exchange and exercise (see Note
G) |
|
$ |
— |
|
$ |
1,226,000 |
|
$ |
— |
|
Value
of extension of warrants granted to stockholders (see Note
G) |
|
$ |
— |
|
$ |
— |
|
$ |
2,066,000 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Medis
Technologies Ltd. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A—NATURE OF BUSINESS AND GENERAL MATTERS
Medis
Technologies Ltd. (“MTL”), a Delaware corporation, is a holding company,
which through its wholly-owned subsidiaries, Medis Inc., 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 development, manufacturing, marketing and distribution
of direct liquid fuel cell products to power and charge portable electronic
devices, such as most cell phones (including “3G” cell phones with a full range
of functionality), digital cameras, PDAs (both for personal and professional
use, including wireless versions with e-mail capability), MP3 players, hand-held
video games and other devices with similar power requirements, as well as 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.
Since
inception, the Company has incurred operating losses and has used cash in its
operations. Accordingly, the Company has relied on external financing,
principally through the sale of its stock, to fund its research and development
activities. The Company believes this dependence will continue unless it is able
to successfully develop and market its technologies. On October 18, 2004, the
Company entered into a fourth amendment to an agreement governing its existing
$5,000,000 revolving credit line. Pursuant to the amendment, the termination
date of the revolving credit line was extended from July 1, 2005 to July 1,
2006. No other terms of the agreement were amended by the amendment. Any
outstanding balances would be collateralized by all deposits with the bank and
an assignment of certain leases owned by a partnership in which the Company's
chief executive officer and its president are partners. Additionally, the
Company's chief executive officer and its president have personally guaranteed
any amounts due under such credit line. As of December 31, 2004, the Company had
not borrowed any funds under this credit line (see also Note H).
See Note
C for discussion of acquisitions of minority interests.
NOTE
B—SIGNIFICANT ACCOUNTING POLICIES
The
Company’s consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles. The significant accounting policies
followed in the preparation of the consolidated financial statements, applied on
a consistent basis, are as follows:
1.
Principles of Consolidation
The
consolidated financial statements include the accounts of MTL and its
wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
2.
Cash and Cash Equivalents
Cash and
cash equivalents consist of cash and highly liquid investments with a maturity
of three months or less when purchased.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
B—SIGNIFICANT ACCOUNTING POLICIES (Continued)
3.
Research and Development Costs
Research
and development costs are charged to operations as incurred. Amounts funded to
the Company under Federal Government contractor-related fixed price, best
efforts, research and development arrangements are recognized as offsets to
research and development costs.
4.
Use of Estimates
In
preparing the Company’s consolidated financial statements in conformity with
U.S. generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the 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. Actual results could differ from those estimates.
5.
Fair Value of Financial Instruments
The
carrying value of all financial instruments potentially subject to valuation
risk (principally consisting of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses and other current liabilities)
approximates their fair value due to the short term maturities of such
investments.
6.
Translation of Foreign Currencies
The
financial statements of foreign subsidiaries have been prepared in U.S. dollars,
as the dollar is their functional currency. A substantial portion of the foreign
subsidiaries costs are incurred in dollars. The Company’s management believes
that the dollar is the primary currency of the economic environment in which the
foreign subsidiaries operate.
Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured
into U.S. dollars in accordance with Statement of the Financial Accounting
Standards ("SFAS") No. 52 "Foreign Currency Translation" ("SFAS No. 52"). All
transaction gains and losses of the remeasured, monetary balance sheet items are
reflected in the statement of operations as financial income or expense, as
appropriate and were immaterial to date.
7.
Property and Equipment, net
Property
and equipment are stated at cost, net of accumulated depreciation and
amortization, and net of investment grants from the State of Israel.
Depreciation is provided on the straight-line basis over the estimated useful
lives of such assets.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
B—SIGNIFICANT ACCOUNTING POLICIES (Continued)
The
estimated useful lives of property and equipment are as follows:
| |
Useful
Lives In Years
|
|
Machinery
and equipment |
7 |
|
Computers |
3 |
|
Furniture
and office equipment |
15 |
|
Vehicles |
7 |
|
Leasehold
improvements |
Over
the shorter of the term of the lease or the life of the
asset |
8.
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 ("APB") No. 25 (“APB No. 25”),
“Accounting for Stock Issued to Employees,” and FASB Interpretation No. 44 ("FIN
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"
("EITF No. 96-18"), under which such arrangements are accounted for based on the
fair value of the option or award at the measurement date.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
B—SIGNIFICANT ACCOUNTING POLICIES (Continued)
The
following table illustrate the effect on net loss attributed to common
stockholders and net loss per share, assuming that the Company had applied the
fair value recognition provision of SFAS No. 123 on its stock-based employee
compensation:
| |
|
Year
ended December 31, |
|
| |
|
2002 |
|
2003 |
|
2004 |
|
Net
loss attributable to common stockholders for the year as
reported |
|
$ |
(12,546,000 |
) |
$ |
(11,063,000 |
) |
$ |
(17,728,000 |
) |
Add:
Stock-based employee compensation expense included in the reported
loss |
|
|
122,000 |
|
|
131,000 |
|
|
930,000 |
|
|
Deduct:
Stock-based employee compensation expense determined under fair value
based method |
|
|
(4,976,000 |
) |
|
(1,150,000 |
) |
|
(5,192,000 |
) |
|
Pro
forma net loss attributable to common shareholders |
|
$ |
(17,400,000 |
) |
$ |
(12,082,000 |
) |
$ |
(21,990,000 |
) |
Basic
and diluted net loss per share as reported (Note
B) |
|
$ |
(.57 |
) |
$ |
(.47 |
) |
$ |
(.68 |
) |
Pro
forma basic and diluted net loss per share |
|
$ |
(.80 |
) |
$ |
(.52 |
) |
$ |
(.84 |
) |
The fair
value of each option granted is estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
| |
|
Year
ended December 31, |
|
| |
|
2002 |
|
2003 |
|
2004 |
|
Dividend
yield |
|
|
0 |
% |
|
0 |
% |
|
0 |
% |
Risk-free
interest rate |
|
|
2.50 |
% |
|
2.50 |
% |
|
2.25 |
% |
Expected
life in years |
|
|
2.0 |
|
|
1.6 |
|
|
1.4 |
|
Volatility |
|
|
94 |
% |
|
87 |
% |
|
65 |
% |
The
average fair value of each option granted in 2002, 2003 and 2004 was $3.06,
$1.82 and $4.00, respectively. The weighted average fair value of each option
granted at or below market price (none were granted above market price) in 2002,
2003 and 2004 was as follows:
| |
|
Year
ended December 31, |
|
| |
|
2002 |
|
2003 |
|
2004 |
|
Options
granted at an exercise price equal to market price |
|
$ |
3.24 |
|
$ |
1.18 |
|
$ |
4.37 |
|
Options
granted at an exercise price below market price |
|
$ |
— |
|
$ |
4.48 |
|
$ |
8.05 |
|
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
B—SIGNIFICANT ACCOUNTING POLICIES (Continued)
9.
Goodwill and Other
Intangible Assets
Goodwill
and other purchased intangible assets have been recorded as a result of the
Company's acquisitions. Goodwill is not amortized, but rather is subject to an
annual impairment test. Other intangible assets are amortized on a straight-line
basis over the weighted average remaining useful lives of approximately 39
months.
The
Company is required to perform an annual impairment test of goodwill. The
impairment test shall consist of a comparison of the fair value of an intangible
asset with its carrying amount. If the carrying amount of an intangible asset
exceeds its fair value, an impairment loss shall be recognized in an amount
equal to that excess. SFAS No. 142 requires goodwill to be tested for impairment
at least annually or between annual tests if certain events or indicators of
impairment occur. Goodwill is tested for impairment at the reporting unit level
by a comparison of the fair value of a reporting unit with its carrying amount.
During 2002, 2003 and 2004, no impairment losses were identified.
10.
Long-Lived Assets
The
Company's long-lived assets are reviewed for impairment in accordance with
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future undiscounted cash
flows expected to be generated by the asset. During 2002, 2003 and 2004, no
impairment losses have been identified.
11.
Revenue Recognition
Revenues
relating to development services agreements are recognized as services are
rendered over the term of the agreement. Amounts billed and/or received where
revenue recognition criteria have not been fully met, and thus the revenue is
not yet earned, are reflected as liabilities and are offset against the related
receivable.
12.
Net Loss Per Share
The
Company computes net loss per share in accordance with SFAS No. 128,
“Earnings Per Share” ("SFAS No. 128"). Under the provisions of SFAS
No. 128, basic net loss per share is computed by dividing the net loss for
the period by the weighted-average number of common shares outstanding during
the period. Diluted net loss per share is computed by dividing the net loss for
the period by the weighted-average number of common shares plus dilutive
potential common stock considered outstanding during the period. However, as the
Company generated net losses in all periods presented, potentially diluted
securities, composed of incremental common shares issuable upon the exercise of
warrants and stock options, are not reflected in diluted net loss per share
because such shares are antidilutive. The total number of shares related to the
outstanding options and warrants excluded from the calculation of diluted net
loss per share was 5,122,239, 5,049,363 4,943,053 as of December 31, 2002, 2003
and 2004, respectively.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
B—SIGNIFICANT ACCOUNTING POLICIES (Continued)
In
accordance with SFAS No. 128, the Company has adjusted its net loss per
share for the year ended December 31, 2002 to give retroactive effect to shares
issued in its March 11, 2003 rights offering. Accordingly, as a result of such
retroactive adjustments, the net loss per share decreased from $(.60) to $(.57),
or by $(.03) per share, for the year ended December 31, 2002 (see Note
G-1).
13.
Severance Pay
The
liability of the Company's subsidiaries in Israel for severance pay, which
comprises the Company's entire severance pay obligation, is calculated pursuant
to Israeli severance pay law based on the most recent salary of the employees
multiplied by the number of years of employment, as of the balance sheet date.
Employees are entitled to one month’s salary for each year of employment or a
portion thereof. The liability for all of its employees in Israel is fully
provided by monthly deposits with insurance companies and other financial
institutions and by an accrual. The deposited funds include profits accumulated
up to the balance sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israeli severance pay law or labor
agreements. The value of these deposited funds is recorded as an asset in the
Company's consolidated balance sheets.
Severance
expenses for the years ended December 31, 2002, 2003 and 2004 amounted to
approximately $261,000, $290,000 and $321,000, respectively.
14.
Income Taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
This Statement prescribes the use of the liability method whereby deferred tax
asset and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company provides a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated realizable value.
15.
Concentration of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents. The Company’s cash and
cash equivalents are invested in a bank and other short-term investments,
on-demand insurance contracts and money market funds with major international
financial institutions. Such cash and cash equivalents in the United States may
be in excess of insured limits and are not insured in other jurisdictions.
Management believes that the financial institutions that hold the Company’s cash
and cash equivalents are financially sound and, accordingly, minimal credit risk
exists with respect to these investments.
Sales to
two customers during 2002 were in excess of 10% (approximately 72% and 28%) of
the Company’s revenue and in the aggregate amounted to 100% of total revenue in
2002. In 2003, sales to one customer amounted to 100% of total revenues. The
Company had no sales in 2004.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
B—SIGNIFICANT ACCOUNTING POLICIES (Continued)
16.
Recent Pronouncements
In
December, 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 123 (revised 2004), "Share-Based Payment," ("SFAS 123(R)") which
is a revision of FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123(R) supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and amends FASB Statement No. 95,
"Statement of Cash Flows." Generally, the approach in SFAS 123(R) is similar to
the approach described in SFAS 123. However, SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.
SFAS
123(R) must be adopted no later than July 1, 2005. Early adoption will be
permitted in periods in which financial statements have not yet been
issued. The Company expects to adopt SFAS 123(R) on July 1,
2005.
SFAS
123(R) permits public companies to adopt its requirements using one of two
methods:
| 1. |
A
“modified prospective” method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS
123(R) for all share-based payments granted after the effective date and
(b) based on the requirements of SFAS 123 for all awards granted to
employees prior to the effective date of SFAS 123(R) that remain unvested
on the effective date. |
| 2. |
A
“modified retrospective” method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS 123 for
purposes of pro forma disclosures either (a) all prior periods presented
or (b) prior interim periods of the year of
adoption. |
The
Company plans to adopt SFAS 123(R) using the modified-prospective method and
expects that the adoption will have a significant effect on its consolidated
financial statements.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29” (“SFAS 153”). The guidance in APB Opinion
No. 29, “Accounting for Nonmonetary Transactions” (“APB 29”), is based on the
principle that exchanges of nonmonetary assets should be measure based on fair
value of the assets exchanged. APB 29 included certain exceptions to that
principle. SFAS 153 amends APB 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
153 is effective for nonmonetary assets exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company does not expect that the adoption of
SFAS 153 will have a significant effect on its consolidated financial
statements.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
B—SIGNIFICANT ACCOUNTING POLICIES (Continued)
FASB
Staff Position ("FSP") No. 109-2, "Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American Jobs Creation
Act of 2004" ("FSP 109-2"), provides guidance under FASB Statement
No. 109, "Accounting for Income Taxes," with respect to recording the
potential impact of the repatriation provisions of the American Jobs Creation
Act of 2004 (the "Jobs Act") on enterprises' income tax expense and deferred tax
liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states
that an enterprise is allowed time beyond the financial reporting period of
enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or
repatriation of foreign earnings for purposes of applying FASB Statement
No. 109. The Company expects that the adoption of FSP109-2 will not have a
significant effect on its consolidated financial statements.
17.
Reclassification
Certain
comparative data in these financial statements has been reclassified to conform
with current year's presentation.
NOTE
C—EXCHANGE OFFER AND ACQUISITION OF MINORITY INTERESTS
On
April 24, 2000, MTL commenced an offer for the approximately 36% of Medis
El it did not already beneficially own, offering 1.37 of its shares of common
stock for each ordinary share tendered (the “Exchange Offer”). In accordance
with APB No. 16 and Emerging Issues Task Force Issue No. 99-12, the Company
accounted for the exchange using the purchase method. Accordingly, the Company
calculated the purchase price of the 3,825,910 shares and 184,000 options of
Medis El not owned by it based on the market price of Medis El ordinary shares.
Such purchase price was $89,393,000. The Company allocated the excess of
purchase price over net assets acquired to goodwill ($81,867,000), CellScan
technology assets ($6,071,000) and in-process research and development for the
fuel
cells, stirling cycle and toroidal engine projects, which was charged to
research and development expense on the acquisition date ($561,000). Such
allocation was based on a valuation using the cost method, which represents the
fair value of the assets underlying each project.
The
Company amortizes the acquired technology assets over their remaining useful
lives of three years, and, through December 31, 2001, the Company had amortized
its goodwill over five years. In accordance with SFAS 142 "Goodwill and Other
Intangible Assets," the Company discontinued amortization of its goodwill
beginning on January 1, 2002. Furthermore, in accordance with SFAS 142, the
Company performs an annual assessment for impairment of its goodwill (see Note
E). During the years ended December 31, 2002, 2003 and 2004, the Company
recorded amortization expense aggregating approximately $2,024,000, $812,000 and
none, respectively, related to this transaction.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
C—EXCHANGE OFFER AND ACQUISITION OF MINORITY INTERESTS
(Continued)
From
January to June 2000, Medis El purchased an additional 11.5% of the
outstanding shares of More Energy, giving Medis El a 93% interest in such
company, for an aggregate purchase price of $320,000. Medis El accounted for
these acquisitions of minority interests using purchase accounting. The excess
of purchase price over the book value of the net assets acquired aggregated
$320,000. This excess purchase price was allocated to in-process research and
development and, therefore, was charged to research and development costs as of
the dates of the acquisitions.
On March
14, 2003, MTL acquired the remaining 7%, or 70 shares, of More Energy that it
did not already own through Medis El. Such acquisition was pursuant to an
agreement dated March 14, 2003 with the General Manager of More Energy and owner
of the remaining 7% interest of More Energy (the “Seller”), which amended the
terms of the MTL's existing option agreement to acquire such interest. Pursuant
to the amendment, the vesting schedule of the option was accelerated such that
the MTL could immediately exercise its option in full to acquire the remaining
7% interest. Such acquisition was undertaken in order to make More Energy a
wholly-owned subsidiary of the Company.
The
acquisition was accounted for under the purchase method of accounting. The total
purchase price of $1,045,000 was comprised of $520,000 paid in full in June 2001
for the purchase of the original option to acquire such interest in More Energy
and the issuance as of March 14, 2003 of 120,000 shares of MTL's common stock.
The common stock was valued at $4.374 per share, representing the average
closing price of MTL's common stock for three days before and after March 14,
2003 - the date of the acquisition agreement, or an aggregate of approximately
$525,000.
Based on
a purchase price allocation analysis performed by the Company, the entire
purchase price of $1,045,000 was allocated to intangible fuel cell technology
assets of More Energy. No goodwill was generated in the transaction. Such
intangible assets acquired are being amortized over five year useful lives.
During the year ended December 31, 2003 and 2004, the Company recorded
amortization expense of approximately $165,000 and $208,000, respectively,
related to such intangible assets acquired.
As of the
date of the acquisition, More Energy's total stockholder's equity reflected a
deficit. Since the Company, from More Energy's inception, has consolidated in
its financial statements 100% of the losses of More Energy, such deficit is
already included in the Company's accumulated deficit as of date of the
acquisition and was not reflected in the purchase price allocation.
In April
2003 and May 2004, the Company loaned an aggregate of approximately $299,000,
including accrued interest through December 31, 2004, to the Seller, principally
to enable him to pay certain tax obligations arising from the sale of his
interest in More Energy to MTL. The seller has executed a non-recourse, interest
bearing, secured promissory note (the “Note”) in favor of MTL evidencing such
loans. The interest rate under the Note is equal to the applicable federal rate
for mid-term loans in effect in April 2003, which equals a rate of 2.94% per
annum. Principal of, and accrued interest on, the Note must be paid in full by
December 31, 2006, the maturity date of the Note. The seller has also entered
into a pledge agreement with the Company under which he has pledged as
collateral for the payment in full of his obligations under the Note 120,000
shares of the Company's common stock owned by the Seller.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
C—EXCHANGE OFFER AND ACQUISITION OF MINORITY INTERESTS
(Continued)
As of
December 15, 1997, MTL acquired Israel Aircraft Industries Ltd.’s (“IAI”)
40% interest in Medis Inc., for aggregate consideration of 3,600,457 shares
of MTL stock. As this was an acquisition of a minority interest, the Company
accounted for this transaction using purchase accounting. The purchase price was
valued based on the value of Medis Inc.’s investment in Medis El, using the
quoted market price of Medis El shares as of December 15, 1997. The
aggregate purchase price was valued at $13,125,000. Acquired intangible
technology assets, consisting primarily of patents, know-how and other
technology-related assets, aggregated $2,975,000, of which $2,814,000 related to
the CellScan technology. Goodwill, which represented the excess of the purchase
price over the value of the acquired tangible and intangible technology assets,
aggregated $9,252,000. Intangible technology assets have been amortized over a
five-year period and goodwill had been amortized through December 31, 2001 based
on a five year useful live (see Note E).
NOTE
D—PROPERTY AND EQUIPMENT, NET
Property
and equipment consists of the following:
| |
|
December
31, |
|
| |
|
2003 |
|
2004 |
|
Machinery
and equipment |
|
$ |
2,115,000 |
|
$ |
2,764,000 |
|
Computers |
|
|
443,000 |
|
|
702,000 |
|
Furniture
and office equipment |
|
|
173,000 |
|
|
331,000 |
|
Vehicles |
|
|
47,000 |
|
|
47,000 |
|
|
Leasehold
improvements |
|
|
442,000 |
|
|
1,606,000 |
|
| |
|
|
3,220,000 |
|
|
5,450,000 |
|
|
Less
accumulated depreciation and amortization |
|
|
1,860,000 |
|
|
1,957,000 |
|
|
Property
and equipment, net |
|
$ |
1,360,000 |
|
$ |
3,493,000 |
|
Depreciation
and amortization expense on property and equipment for the years ended December
31, 2002, 2003 and 2004 amounted to $256,000, $305,000 and $502,000,
respectively. During
the year ended December 31, 2004, the Company reduced its leasehold improvements
and corresponding accumulated amortization balances for certain fully amortized
leasehold improvements that are no longer in service in the amount of
approximately $ 405,000.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
E—GOODWILL AND INTANGIBLE ASSETS, NET
As of
December 31, 2003 and 2004, the Company’s intangible assets consisted of
Goodwill and fuel cell technology assets.
Intangible
Assets
The
following table summarizes the cost and related accumulated amortization for
intangible assets that are subject to amortization.
| |
|
December
31, |
|
| |
|
2003 |
|
2004 |
|
| |
|
|
|
|
|
Cost: |
|
|
|
|
|
| |
|
|
|
|
|
CellScan
technology assets |
|
$ |
9,113,000 |
|
$ |
9,113,000 |
|
|
Fuel
Cell technology assets |
|
|
1,045,000 |
|
|
1,045,000 |
|
Total
intangible assets |
|
|
10,158,000 |
|
|
10,158,000 |
|
| |
|
|
|
|
|
|
|
Accumulated
amortization: |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
CellScan
technology assets |
|
|
9,113,000 |
|
|
9,113,000 |
|
|
Fuel
Cell technology assets |
|
|
165,000 |
|
|
373,000 |
|
| |
|
$ |
880,000 |
|
$ |
672,000 |
|
The
Company recorded amortization expense of $2,633,000, $997,000 and $208,000 for
the years ended December 31, 2002, 2003 and 2004, respectively. Based on the
current amount of intangible assets subject to amortization, the estimated
amortization expense for each of the years ending December 31, 2005 through 2007
is $209,000 and $45,000 for the year ending December 31, 2008.
The
Company has also reassessed the useful lives of its other intangible assets
previously recorded in connection with earlier purchase
acquisitions.
Goodwill
The
following table summarizes the activity in goodwill for the periods
indicated:
| |
|
December
31, |
|
| |
|
2003 |
|
2004 |
|
| |
|
|
|
|
|
|
|
Beginning
balance |
|
$ |
58,205,000 |
|
$ |
58,205,000 |
|
|
Amortization
expense |
|
|
- |
|
|
- |
|
| |
|
$ |
58,205,000 |
|
$ |
58,205,000 |
|
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
F— ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of the following:
| |
|
December
31, |
|
| |
|
2003 |
|
2004 |
|
Employees
and related liabilities |
|
$ |
599,000 |
|
$ |
725,000 |
|
Professional
services |
|
|
90,000 |
|
|
200,000 |
|
Related
parties |
|
|
82,000 |
|
|
45,000 |
|
Subcontractors
and consultants |
|
|
89,000 |
|
|
1,206,000 |
|
Leasehold
improvement obligations - current portion |
|
|
—
|
|
|
187,000 |
|
|
Others |
|
|
98,000 |
|
|
220,000 |
|
|
Total
accrued expenses and other current liabilities |
|
$ |
958,000 |
|
$ |
2,583,000 |
|
NOTE
G—STOCKHOLDERS’ EQUITY
1.
Medis Technologies Ltd. Common Stock
Each
stockholder is entitled to one vote for each share of common stock owned by that
stockholder on all matters properly submitted to the stockholders for their
vote. Stockholders owning or controlling more than 50% of the shares can elect
all of the directors. Subject to the dividend rights of holders of preferred
stock, if any, holders of common stock are entitled to receive dividends when,
as and if declared by the board of directors out of funds legally available for
this purpose. In the event of liquidation, dissolution or winding up, the
holders of common stock are entitled to receive on a pro rata basis any assets
remaining available for distribution after payment of liabilities and after
provision has been made for payment of liquidation preferences to all holders of
preferred stock. Holders of common stock have no conversion or redemption
provisions or preemptive or other subscription rights.
In
February and March 2002, certain officers and employees of the Company exercised
options to acquire an aggregate of 66,180 shares of the Company's common stock,
for an aggregate exercise price of approximately $309,000.
On March
18, 2002, the Company completed a rights offering and initiated a shareholder
loyalty program. Pursuant to the rights offering, it offered to its existing
stockholders subscription rights to purchase an aggregate of 3,500,000 shares of
its common stock at a purchase price of $2.00 per share. The Company received
gross proceeds of $7,000,000 from the rights offering, which proceeds, after
deducting related expenses of approximately $461,000, have been used for working
capital, including for the continued development of its direct liquid fuel cell
technology, as well as for selling, general and administrative
expenses.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
G—STOCKHOLDERS’ EQUITY (continued)
Additionally,
pursuant to the Company’s shareholder loyalty program, all stockholders who
purchased shares in the rights offering and who have met other specified
requirements, have received at no cost one-tenth of a warrant for each share of
common stock owned in such stockholder's name on February 13, 2002.
Accordingly, as of December 31, 2003, the Company issued an aggregate of
approximately 865,000 warrants to stockholders in the shareholder loyalty
program. Each full warrant entitles the holder to purchase one share of the
Company’s common stock at a price of $4.43, increasing to $4.92 on September 18,
2003 and to $5.41 on September 18, 2004. Such warrants expire on September 18,
2005. The Company has estimated the fair value of such warrants to be
approximately $2,241,000, using the Black-Scholes option pricing model, and has
accounted for such amount as a preferred dividend during the year ended December
31, 2002. During the years ended December 31, 2002 and 2003 through the
commencement of the offer to exchange and exercise on September 3, 2003 (see
below), stockholders exercised loyalty program warrants at an exercise price of
$4.43 per share to acquire an aggregate of 3,342 shares of the Company's common
stock for aggregate proceeds of approximately $15,000 and 12,542 shares of the
Company's common stock for aggregate proceeds of approximately $56,000,
respectively. See the discussion below regarding the Company's offer to exchange
and exercise such loyalty program warrants.
On March
11, 2003, the Company completed a rights offering in which it offered to its
existing stockholders subscription rights to purchase an aggregate of 2,325,600
shares of its common stock at a purchase price of $2.15 per share. The Company
received gross proceeds of approximately $5,000,000 from the rights offering,
which proceeds, after deducting related expenses of approximately $122,000, are
being used for working capital, including for the continued development of its
direct liquid fuel cell technology, as well as for selling, general and
administrative expenses.
In
accordance with SFAS No. 128, the Company has adjusted its net loss per
share for the year ended December 31, 2002 to give retroactive effect to shares
issued in its March 11, 2003 rights offering (see Note G-1). Accordingly, as a
result of such retroactive adjustments, the net loss per share decreased from
$(.60) to $(.57), or $(.03) per share, for the year ended December 31,
2002.
On
November 13, 2003, the Company completed an offer to exchange and exercise to
holders of its approximately 848,000 outstanding warrants issued pursuant to its
2002 shareholder loyalty program (the "Offer"). In order to participate in the
Offer, holders of loyalty program warrants who exchanged such warrants for new
warrants exercisable at $4.43 per share were also required to exercise the new
warrants at the time of the exchange. Each holder of a new warrant, upon its
exercise, received one share of common stock and a one-year warrant to purchase
an additional share of common stock at $9.60 for every two new warrants
exercised. Pursuant to the Offer, the Company issued 839,966 shares of its
common stock for gross proceeds of approximately $3,721,000, less related costs
of approximately $112,000, upon the exchange and exercise of 839,966 warrants at
a price of $4.43 per share. The Company has estimated the fair value of the
approximately 420,000 one-year warrants issued pursuant to the Offer using the
Black-Scholes option pricing model - assuming a 2.5% risk free interest rate, 0%
dividend yield, expected life of one year and 76% volatility - to be
approximately $1,226,000 and has accounted for such amount as a preferred
dividend for the year ended December 31, 2003.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
G—STOCKHOLDERS’ EQUITY (Continued)
During
the year ended December 31, 2003, warrant holders exercised outstanding warrants
to acquire 25,509 shares of the Company's common stock, at an exercise price of
$5.00 per share, for aggregate gross proceeds of approximately
$128,000.
During
the year ended December 31, 2003, an
officer, a director, employees and consultants of the Company exercised options
to acquire an aggregate of 112,350 shares of its common stock, for an aggregate
exercise price of approximately $621,000.
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.
In
December 2004, MTL issued 220,000 shares of its common stock in a private
placement to an accredited investor, for proceeds of approximately $3,080,000.
During
the year ended December 31, 2004, warrant holders, including officers and
directors of the Company, exercised outstanding warrants to acquire 548,101
shares of the Company's common stock, at exercise prices ranging from $4.92 to
$9.60 per share, for aggregate gross proceeds of approximately
$2,846,000.
During
the year ended December 31, 2004,
officers, a director, employees and consultants of the Company exercised options
to acquire an aggregate of 285,450 shares of its common stock, for an aggregate
exercise price of approximately $1,656,000.
See Note
C for a discussion of shares of the Company's common stock issued in connection
with the acquisition of the remaining interest in a subsidiary.
2.
Medis Technologies Ltd. Warrants
MTL
warrants outstanding are summarized below:
| |
|
Warrants |
|
Weighted
Average Exercise Price |
|
Balance
at January 1, 2002 |
|
|
1,892,618 |
|
$ |
14.26 |
|
Granted |
|
|
868,163 |
|
|
4.43 |
|
Exercised |
|
|
(3,342 |
) |
|
4.43 |
|
|
Cancelled
or Forfeited |
|
|
(18,000 |
) |
|
20.00 |
|
Balance
at December 31, 2002 |
|
|
2,739,439 |
|
|
11.12 |
|
Granted |
|
|
1,318,457 |
|
|
6.11 |
|
Exercised |
|
|
(878,017 |
) |
|
4.45 |
|
|
Exchanged
(see Note G-1) |
|
|
(839,966 |
) |
|
4.43 |
|
Balance
at December 31, 2003 |
|
|
2,339,913 |
|
|
13.20 |
|
Granted |
|
|
8,241 |
|
|
9.45 |
|
Exercised |
|
|
(548,101 |
) |
|
5.19 |
|
|
Cancelled
or Forfeited |
|
|
— |
|
|
—
|
|
|
Balance
at December 31, 2004 |
|
|
1,800,053 |
|
|
15.83 |
|
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
G—STOCKHOLDERS’ EQUITY (Continued)
On April
1, 2003, the Company granted to a consultant warrants to purchase an aggregate
of 50,000 shares of the Company's common stock, in connection with a consulting
agreement of the same date. Such warrants provide for an exercise price of $5.35
per share, the market price on the date of the grant, and expire three years
from the date of the grant. Warrants to purchase 25,000 shares vest one year
from the date of the grant and warrants to purchase the remaining 25,000 shares
vest two years from the date of the grant; provided that if the Company does not
extend the term of the consulting agreement for a second twelve month period,
all of the warrants shall vest one year from the date of the grant. The
Company accounted for such warrant in accordance with SFAS No. 123 and EITF
No. 96-18. For the year ended December 31, 2003, using the
Black-Scholes option pricing model assuming a 2.5% risk free interest rate, 0%
dividend yield, expected life of 2.5 years and 87% volatility, the Company
recorded selling, marketing, general and administrative expense of approximately
$268,000 with connection with this grant. For the
year ended December 31, 2004,
using the Black-Scholes option pricing model assuming a 2.5% risk free interest
rate, 0% dividend yield, expected life of 2 years and 83% volatility, the
Company recorded selling, marketing, general and administrative expense of
approximately $190,000 with connection with this grant.
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
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. The Company
accounted for such warrant in accordance with SFAS No. 123. 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.
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 above). Such warrants had original
expirations dates of November 14, 2004. The Company accounted for such warrants
in accordance with SFAS No. 123. Using the Black-Scholes option pricing
model, the Company calculated the incremental fair value resulting from the
extensions by calculating the fair value of the warrants immediately before the
extension assuming a 1.4% risk free interest rate, 0% dividend yield, expected
life of 0.22 years and 62% volatility, and by calculating the fair value of the
warrants immediately after the extension assuming a 2.0% risk free interest
rate, 0% dividend yield, expected life of 1.35 years and 63% volatility. The
incremental fair value resulting from the extension of such warrants in the
amount of $671,000 was accounted for as a preferred dividend during the year
ended December 31, 2004.
In
October, 2004, MTL extended through December 31, 2005 the expiration dates of
certain outstanding warrants that were issued to shareholders of the Company and
to members of its corporate advisory board. Such warrants were all scheduled to
expire on December 31, 2004. The Company accounted for such warrants held by
shareholders of the Company in accordance with SFAS No. 123 and for such
warrants held by members of its corporate advisory board in accordance with SFAS
No. 123 and EITF No. 96-18. Using the Black-Scholes option pricing model,
the Company calculated the incremental
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
G—STOCKHOLDERS’ EQUITY (Continued)
fair
value of the extensions by calculating the fair value of the warrants
immediately before the extension assuming a 1.6% risk free interest rate, 0%
dividend yield, expected life of 0.21 years and 74% volatility, and by
calculating the fair value of the warrants immediately after the extension
assuming a 2.0% risk free interest rate, 0% dividend yield, expected life of
1.21 years and 64% volatility. The Company has estimated the incremental fair
value resulting from the extension of all such warrants to be approximately
$1,534,000 and has accounted for approximately $1,395,000 related to such
warrants held by shareholders as a preferred stock dividend and has accounted
for approximately $139,000 related to such warrants held by advisory board
members as expense, during the year ended December 31, 2004.
See Note
G-1 for a discussion of warrants issued in connection with the issuance of the
Company’s common stock, the Company's loyalty program and the Company's offer to
exchange and exercise.
3.
Medis Technologies Ltd. Stock Options
On
July 13, 1999, the Company’s Board of Directors approved the 1999 Stock
Option Plan, and reserved 1,000,000 shares of common stock for issuance as stock
options or stock appreciation rights pursuant to the plan. The plan provides for
the issuance of both incentive and nonqualified stock options. On
October 11, 2000, the Company’s Board of Directors increased the number of
shares of its common stock reserved under the 1999 Stock Option Plan to
2,000,000, subject to stockholder approval. At the Annual Meeting of
Stockholders held on June 21, 2001, the Company’s stockholders approved the
increase in the number of shares of common stock reserved under the 1999 Stock
Option Plan. On April 25, 2002, the Company’s Board of directors increased the
number of shares of its common stock reserved under the 1999 Stock Option Plan
to 3,000,000, subject to stockholder approval. At the Annual Meeting of
Stockholders held on June 12, 2002, the Company’s stockholders approved the
increase in the number of shares of common stock reserved under the 1999 Stock
Option Plan. On April 28, 2003, the Company’s Board of directors increased the
number of shares of its common stock reserved under the 1999 Stock Option Plan
to 3,300,000, subject to stockholder approval. At the Annual Meeting of
Stockholders held on June 24, 2003, the Company’s stockholders approved the
increase in the number of shares of common stock reserved under the 1999 Stock
Option Plan. On May 13, 2004, the Company’s Board of directors increased the
number of shares of its common stock reserved under the 1999 Stock Option Plan
to 3,800,000, subject to stockholder approval. At the Annual Meeting of
Stockholders held on June 30, 2004, the Company’s stockholders approved the
increase in the number of shares of common stock reserved under the 1999 Stock
Option Plan.
On
January 31, 2002, the Board of Directors of the Company granted options to
purchase an aggregate of 647,000 shares of common stock under its 1999 Stock
Option Plan to employees, officers, directors and consultants of the Company.
Such options are exercisable at $8.75 (the market price on the grant date), vest
after one year and expire after three years. The Company accounted for those
options issued to employees, officers and directors in accordance with APB
No. 25 and FASB interpretation ("FIN") No. 44 and those issued to
consultants in accordance with SFAS No. 123 and EITF No. 96-18 using the
Black-Scholes option pricing model to estimate their fair value. In August 2004,
the Company extended the expiration date of such options through December 31,
2006 (see below).
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
G—STOCKHOLDERS’ EQUITY (Continued)
During
the year ended December 31, 2003, the Company issued options to purchase an
aggregate of 441,000 shares of common stock under its 1999 Stock Option Plan, as
follows:
| · |
February
12, 2003 - options to purchase an aggregate of 391,000 shares of common
stock to employees, officers, directors and consultants of the Company.
Such options are exercisable at $4.00 (the market price on the grant
date), vest after one year and expire after three years. The Company
accounted for those options issued to employees, officers and directors in
accordance with APB No. 25 and FIN 44 and those issued to consultants
in accordance with SFAS No. 123 and EITF No. 96-18 using the
Black-Scholes option pricing model to estimate their fair value.
|
| · |
March
31, 2003 - options to purchase 5,000 shares of common stock to a director
of the Company. Such options are exercisable at $5.12 (the market price on
the grant date), vest after one year and expire after three years. The
Company accounted for such options issued in accordance with APB
No. 25 and FIN 44. |
| · |
August
11, 2003 - options to purchase an aggregate of 20,000 shares of common
stock to a consultant of the Company. Of such options, 10,000 are
exercisable at $5.00, vest upon issuance with an expiration date of
December 31, 2004. The other 10,000 of such options are exercisable at
$8.75, vest upon issuance and expire on January 31, 2005. The Company
accounted for all such options in accordance with SFAS No. 123 and
EITF No. 96-18 using the Black-Scholes option pricing model to estimate
their fair value. In August 2004, the Company extended the expiration date
of such options through December 31, 2006 (see below).
|
| · |
November
6, 2003 - options to purchase an aggregate of 25,000 shares of common
stock to a director of the Company. Of such options, (i) 10,000 are
exercisable at $5.00, vest upon issuance and expire on December 31, 2004.
In August 2004, the Company extended the expiration date of such options
through December 31, 2006 (see below); (ii) 10,000 are exercisable at
$8.75, vest upon issuance and expire on January 31, 2005. In August 2004,
the Company extended the expiration date of such options through December
31, 2006 (see below) and (iii) 5,000 are exercisable $4.00, vest on
February 12, 2004 and expire on February 12, 2006. The Company accounted
for all such options in accordance with APB No. 25 and FIN 44.
|
During
the year ended December 31, 2004, the Company issued options to purchase an
aggregate of 734,000 shares of common stock under its 1999 Stock Option Plan, as
follows:
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
G—STOCKHOLDERS’ EQUITY (Continued)
| · |
January
2, 2004 - options to purchase an aggregate of 289,000 shares of common
stock to employees, officers, directors and consultants of the Company.
Such options are exercisable at $10.95 (the market price on the grant
date), vest after one year and expire after three years. The Company
accounted for those options issued to employees, officers and directors in
accordance with APB No. 25 and FIN 44 and those issued to consultants
in accordance with SFAS No. 123 and EITF No. 96-18 using the
Black-Scholes option pricing model to estimate their fair
value. |
| · |
July
2, 2004 - options to purchase 10,000 shares of common stock to a director
of the Company. Such options are exercisable at $12.55, vest on April 30,
2005 and expire on April 30, 2007. The Company accounted for such options
issued in accordance with APB No. 25 and FIN 44.
|
| · |
July
9, 2004 - options to purchase an aggregate of 15,000 shares of common
stock to a consultant of the Company. Such options are exercisable at
$14.69 (the market price on the grant date), vest after one year and
expire after three years. The Company accounted for such options in
accordance with SFAS No. 123 and EITF No. 96-18 using the
Black-Scholes option pricing model to estimate their fair
value. |
| · |
August
30, 2004 - options to purchase 10,000 shares of common stock to a director
of the Company. Such options are exercisable at $10.88 (the market price
on the grant date), vest after one year and expire after three years. The
Company accounted for such options issued in accordance with APB
No. 25 and FIN 44. |
| · |
November
3, 2004 - options to purchase an aggregate of 410,000 shares of common
stock to employees, officers, directors and consultants of the Company. Of
such options, 390,000 are exercisable at $13.08 (the market price on the
grant date), vest after one year and expire after four years. The
remaining 20,000, of which 10,000 vest on October 18, 2005 and 10,000 vest
on October 18, 2006, are exercisable at $12.30 and expire on October 18,
2008. The Company accounted for those options issued to employees,
officers and directors in accordance with APB No. 25 and FIN 44 and
those issued to consultants in accordance with SFAS No. 123 and EITF
No. 96-18 using the Black-Scholes option pricing model to estimate their
fair value. |
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 accounted for those options issued to employees,
officers and directors in accordance with APB No. 25 and FIN 44 and those
issued to consultants in accordance with SFAS No. 123 and EITF No. 96-18
using the Black-Scholes option pricing model to estimate their fair value. The
Company calculated the incremental intrinsic value of approximately $784,000
related to the extension of options issued to employees, officers and directors.
Using the Black-Scholes option pricing model the Company calculated the
incremental fair value of approximately $41,000 related to the extensions of
options issued to
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
G—STOCKHOLDERS’ EQUITY (Continued)
consultants
by calculating the fair value of the warrants immediately before and immediately
after the extension and recorded such amount as expense during the year ended
December 31, 2004.
During
the years ended December 31, 2002, 2003 and 2004, the chief executive
officer of the Company received options to purchase 100,000, 50,000 and 35,000
shares of the Company’s common stock, respectively, in his capacity as a
director.
The
Company’s option activity and options outstanding are summarized as follows:
| |
|
Options |
|
| |
|
Options |
|
Weighted
average exercise price |
|
Options
outstanding at January 1, 2002 |
|
|
1,822,000 |
|
$ |
8.72 |
|
Granted |
|
|
647,000 |
|
|
8.75 |
|
Exercised |
|
|
(66,200 |
) |
|
4.67 |
|
|
Cancelled
or forfeited |
|
|
(20,000 |
) |
|
20.50 |
|
Options
outstanding at December 31, 2002 |
|
|
2,382,800 |
|
|
8.74 |
|
Granted |
|
|
441,000 |
|
|
4.27 |
|
Exercised |
|
|
(112,350 |
) |
|
5.52 |
|
|
Cancelled
or forfeited |
|
|
(2,000 |
) |
|
6.75 |
|
Options
outstanding at December 31, 2003 |
|
|
2,709,450 |
|
|
8.15 |
|
Granted |
|
|
734,000 |
|
|
12.22 |
|
Exercised |
|
|
(285,450 |
) |
|
5.80 |
|
|
Cancelled
or forfeited |
|
|
(15,000 |
) |
|
7.79 |
|
|
Options
outstanding at December 31, 2004 |
|
|
3,143,000 |
|
|
9.31 |
|
Exercisable
December 31, 2004 |
|
|
2,411,000 |
|
|
8.43 |
|
Exercisable
December 31, 2003 |
|
|
2,308,450 |
|
|
8.86 |
|
|
Exercisable
December 31, 2002 |
|
|
1,454,800 |
|
|
8.84 |
|
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
G—STOCKHOLDERS’ EQUITY (Continued)
|
Options
Outstanding |
|
Options
Exercisable |
|
| |
Exercise
Price |
|
|
Number
outstanding at December
31, 2004 |
|
|
Weighted
average remaining contractual
life
years |
|
|
Weighted
average
exercise
prices |
|
|
Number
Exercisable at December
31, 2004 |
|
|
Weighted
average
exercise
prices |
|
$ |
2.93 |
|
|
450,000 |
|
|
2.00 |
|
$ |
2.93 |
|
|
450,000 |
|
$ |
2.93 |
|
| |
4.00 |
|
|
305,000 |
|
|
1.10 |
|
|
4.00 |
|
|
305,000 |
|
|
4.00 |
|
| |
5-5.26 |
|
|
242,500 |
|
|
1.40 |
|
|
5.15 |
|
|
242,500 |
|
|
5.15 |
|
| |
6.75 |
|
|
5,000 |
|
|
0.60 |
|
|
6.75 |
|
|
5,000 |
|
|
6.75 |
|
| |
8.75 |
|
|
558,500 |
|
|
2.00 |
|
|
8.75 |
|
|
558,500 |
|
|
8.75 |
|
| |
10.50 |
|
|
150,000 |
|
|
0.60 |
|
|
10.50 |
|
|
150,000 |
|
|
10.50 |
|
| |
10.88-10.95 |
|
|
297,000 |
|
|
2.00 |
|
|
10.95 |
|
|
— |
|
|
— |
|
| |
12.30-12.55 |
|
|
30,000 |
|
|
3.40 |
|
|
12.40 |
|
|
— |
|
|
— |
|
| |
13.08 |
|
|
390,000 |
|
|
3.80 |
|
|
13.08 |
|
|
— |
|
|
— |
|
| |
13.50 |
|
|
500,000 |
|
|
2.00 |
|
|
13.50 |
|
|
500,000 |
|
|
13.50 |
|
| |
14.69 |
|
|
15,000 |
|
|
2.50 |
|
|
14.69 |
|
|
— |
|
|
— |
|
| |
16.42 |
|
|
200,000 |
|
|
2.00 |
|
|
16.42 |
|
|
200,000 |
|
|
16.42 |
|
| |
|
|
|
3,143,000 |
|
|
|
|
|
|
|
|
2,411,000 |
|
|
|
|
As of
December 31, 2004, approximately 152,000 options were available for grant
pursuant to the 1999 stock option plan, as amended.
Compensation
costs charged to operations which the Company recorded for options granted to
employees and directors at exercise prices below the fair market value at the
date of grant and for options and warrants granted to consultants, including the
value of the extensions of the expiration dates in 2004 of employee, director
and consultant options and warrants, aggregated $213,000, $592,000 and
$1,683,000 in 2002, 2003 and 2004, respectively.
See Note
B-8 for discussion of pro forma effects of applying SFAS No. 123 to
employee stock options.
NOTE
H—COMMITMENTS AND CONTINGENT LIABILITIES
1.
CellScan License — Medis
El acquired the rights to the CellScan in August 1992 by assignment from
IAI of a license from Bar Ilan University (the “University”) to IAI. Medis El
paid IAI $1,000,000 in consideration of the assignment of the license and for
certain tooling and equipment. The license is a perpetual worldwide license to
develop, manufacture and sell the CellScan, and to sublicense the right to
manufacture and sell the device. The license includes all rights to the
University’s CellScan patents, know-how and inventions including any
subsequently acquired, and all improvements thereto. Medis El is obligated to
pay the University a royalty for a twenty-year period beginning in 1995. For the
first ten years, the royalty is at the rate of 6.5% of proceeds of sales (after
deducting sales commissions and other customary charges) and 4.5% on any fees
received from granting territorial rights. The royalty for the second ten-year
period is 3.5% on all revenues whether from sales or fees. In addition to such
royalty payments, the Company is required to grant $100,000 to the University
during the first year that the Company’s after-tax profits exceed $300,000. No
royalties were required to be paid during the three years ended
December 31, 2004.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
H—COMMITMENTS AND CONTINGENT LIABILITIES (continued)
2.
Neuritor License—In
consideration of grants by the State of Israel, Medis El is obligated to pay
royalties for a license from Imexco General Ltd. (“Imexco”), for which
assignment Medis El paid $500,000. An additional sum of $125,000 was paid in
December 1995. In 1996, Medis El relinquished its exclusive right to market
the Neuritor in consideration of relief of its obligation to pay minimum
royalties. Medis El has to pay Imexco royalties at rates ranging from 2% to 7%
of the revenue generated by the sale of the Neuritor. No royalties were required
to be paid during the three years ended December 31, 2004.
3.
Other Royalties—In
consideration of grants by the State of Israel, Medis El is obligated to pay
royalties of 3% of sales of products developed with funds provided by the State
of Israel until the dollar-linked amount equal to the grant payments received by
Medis El is repaid in full. All grants received from the State of Israel related
to the CellScan and Neuritor technologies. Total grants received, net of
royalties paid as of December 31, 2002, aggregate $2,601,000, which
includes those received by IAI relating to such technologies of $805,000. No
royalties were required to be paid during the three years ended
December 31, 2004.
4.
Lease Commitments—MTL’s
office space is provided to MTL for an annual rental fee of approximately
$117,000, by a company which is controlled by the chairman and chief executive
officer and by the president of MTL. The sublease is on a month to month
basis.
In
December 2004, Medis El and More Energy moved their offices and technology
center operations to an industrial compound in Lod, Israel, where More Energy
had existing production facilities. Medis El and More Energy are committed under
two leases for its facilities, which provide aggregate space of approximately
38,000 square feet. The lease covering approximately 35,400 square feet of such
facilities has an initial term of five years until November 30, 2009 with two
options of duration of 30 months each extending to November 30, 2014. The lease
covering approximately 2,600 square feet has a initial term of years until
October 31, 2008. Medis El has collateralized its obligations under such leases
up to an aggregate of approximately $275,000 by obtaining a bank guarantee in
favor of the lessor. Such guarantee is secured by Medis El’s deposits with the
bank from time to time. During the years ended December 31, 2002, 2003 and 2004,
the Company incurred expenses under its facility lease commitments aggregating
approximately $293,000, 341,000 and $387,000 respectively.
In
addition, the Company is committed under vehicle lease with various termination
dates in 2005 through 2007.
Future
minimum operating lease (facility and vehicle) payments for the next five years
and thereafter are as follows:
| |
|
Operating
Leases |
|
2005 |
|
$ |
592,000 |
|
2006 |
|
|
570,000 |
|
2007 |
|
|
522,000 |
|
2008 |
|
|
454,000 |
|
|
2009
and thereafter |
|
|
392,000 |
|
|
Total
future minimum lease payments |
|
$ |
2,530,000 |
|
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
H—COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
5.
Revolving
Credit Line—On
October 18, 2004, the Company entered into a fourth amendment to the agreement
governing its existing $5,000,000 revolving credit line. The loan agreement
bears interest on any outstanding balances based on either the LIBOR or Prime
Rate. Pursuant to the amendment, the termination date of the revolving credit
line was extended from July 1, 2005 to July 1, 2006. No other terms of the
agreement were changed. Any outstanding balances would be collateralized by all
deposits with the bank and an assignment of certain leases owned by a
partnership in which the Company's chairman and chief executive officer and its
president are partners. Additionally, the Company's chairman and chief executive
officer and its president have personally guaranteed any amounts due under such
credit line. As of December 31, 2004, the Company had not borrowed any funds
under this credit line.
6.
Fuel
Cell Technology Cooperation Agreements— In
April 2001, the Company entered into a mutually exclusive agreement with
General Dynamics Government Systems Corporation, a unit of General Dynamics
Corporation (“GD”), to develop and market fuel cells and fuel cell-powered
portable electronic devices for the United States Department of Defense (the
“DOD”). As part of such agreement, among other things, GD agreed to market the
Company’s fuel cell products to the DOD. In May 2002, the Company received a
$75,000 purchase order from GD to develop an initial prototype of such a fuel
cell charger. In March 2003, the Company developed, on schedule, the prototype
designated under the May 2002 purchase order and recorded the $75,000 as a
credit to research and development expense.
In
May 2003, the Company entered into a second agreement with GD to design and
develop on a best efforts basis a pre-production prototype of its fuel cell
Power Pack for the ruggedized personal digital assistant system that GD is
developing for the U.S. military (the "Agreement"). The total price for the
Company's services provided for in the Agreement is $500,000, with an initial
payment of $100,000 and the balance in accordance with the payment and
performance milestones established in the Agreement through January 2005. The
Company expects that it will benefit from the development effort beyond the
scope of the Agreement and development costs will exceed the $500,000 price. The
Company is accounting for the Agreement as a fixed priced, best efforts research
and development arrangement. The Company received payments aggregating $350,000
from the inception of the Agreement through December 31, 2004. During the year
ended December 31, 2004, the Company recorded approximately $147,000, as a
credit to research and development expense, and from the inception of the
agreement through December 31, 2004, the Company recorded approximately $370,000
as credits to research and development expense related to the Agreement.
In August
2004, the Company received an additional order from GD to deliver five prototype
fuel cell Power Packs and associated cartridges as power sources for 10
prototype tablet computers in support of the United States Air Force (USAF)
Wearable Computer Power Program. The order provides for 10 milestone payments of
$42,500 each through June 2005, or a total of $425,000. The order was issued
pursuant to a contract awarded to GD by the USAF and announced on August 20,
2004. Through December 31, 2004, the Company has billed GD for five payments
aggregating $212,500, has incurred costs under the contract of approximately
$54,000 and has received payments aggregating $170,000, pursuant to the
agreement.
7. Distribution
Agreements — On March
9, 2004, the Company entered into a distribution agreement with Kensington
Technology Group, a leading maker of computer accessories and a division of ACCO
Brands, Inc. Pursuant to the distribution agreement, among other things, the
Company has granted Kensington the limited, exclusive right to market and
distribute its Power Pack and other products using its fuel cell technology
under the Kensington and Medis brand names.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
H—COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
On August
3, 2004, the Company entered into a distribution agreement with Superior
Communications, which provides wireless accessories to major mobile operators,
retailers and distributors across the United States, for the distribution of the
Company’s fuel cell Power Pack products through outlets not otherwise covered by
the Company’s other distribution agreements.
On August
10, 2004, the Company entered into a distribution agreement with ASE
International Inc., which distributes a variety of consumer products to mass
distribution outlets such as department stores, drug stores and duty free shops,
for the distribution of the Company’s fuel cell Power Pack products through
outlets not otherwise covered by the Company’s other distribution
agreements.
8. Product
and Manufacturing Development Agreement - On May
3, 2004, the Company entered into a Product and Manufacturing Development
Agreement with Flextronics International Ltd. for commencing an
industrialization program leading to high volume production of the Company's
Power Pack products.
9. Development
Agreement — On May
25, 2004, the Company entered into a Development Agreement with Eastman Kodak
Company's Global Manufacturing Services operation for advancing the development
of refueling cartridges and chemicals to be used in the Company's fuel cell
products.
NOTE
I—RELATED PARTY TRANSACTIONS
1.
Insurance—During
2004,
Medis El
was included as an additional insured party on IAI’s product, casualty, and
third party liability coverage. This arrangement ended during the second half of
2004. During the years ended December 31, 2002, 2003 and 2004, IAI charged
Medis El approximately $5,000, $5,000 and $3,000 for insurance premiums.
2.
Consulting
Agreements—The
Company has entered into consulting agreements with its chairman and chief
executive officer and with its president. Such agreements have initial terms
through December 31, 2001 and provide for automatic extension on a year to year
basis. During the years ended December 31, 2002, 2003 and 2004, the Company
incurred fees relating to its agreement with its chairman and chief executive
officer of approximately $296,000, $240,000 and $255,000, respectively, as
compensation for his services as an officer of the Company. During the years
ended December 31, 2002, 2003 and 2004, the Company incurred fees relating to
its agreement with its president of approximately $244,000, $145,000 and
$160,000, respectively, as compensation for his services as an officer of the
Company.
During
the year ended December 31, 2002, the Company entered into a consulting
agreement with a corporation wholly owned by its senior vice president of
business development for selling, marketing and other promotional services. Such
agreement has an initial term through December 31, 2003 and provides for
automatic extension on a year to year basis. During the years ended December 31,
2002,
2003 and
2004, the Company incurred fees of approximately $72,000, $144,000 and $144,000,
respectively, as compensation for consulting services under such
agreement.
3.
Administrative
Services —
Secretarial and bookkeeping services are provided to MTL through a costs sharing
arrangement with a company that is controlled by the chairman and chief
executive officer and by the president of MTL. During the years ended December
31, 2002, 2003, and 2004, fees for such services amounted to approximately
$56,000, $60,000 and $68,000, respectively.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
J—INCOME TAXES
The
following represents the components of the Company’s pre-tax losses for each of
the three years in the period ended December 31, 2004.
| |
|
Year
ended December 31, |
|
| |
|
2002 |
|
2003 |
|
2004 |
|
Foreign |
|
$ |
(4,104,000 |
) |
$ |
(7,017,000 |
) |
$ |
(12,960,000 |
) |
|
Domestic |
|
|
(6,201,000 |
) |
|
(2,820,000 |
) |
|
(2,702,000 |
) |
| |
|
$ |
(10,305,000 |
) |
$ |
(9,837,000 |
) |
$ |
(15,662,000 |
) |
The
Company files a consolidated Federal income tax return, which includes MTL and
Medis Inc. At December 31, 2004, the Company has a net operating loss
(“NOL”) carryforward for United States Federal income tax purposes of
approximately $10,702,000, expiring through 2024.
Pursuant
to United States Federal income tax regulations, the Company’s ability to
utilize this NOL may be limited due to changes in ownership, as defined in the
Internal Revenue Code.
The
Company, through Medis El, has net operating losses, for Israeli tax purposes,
aggregating approximately $51,130,000 as of December 31, 2004, which, pursuant
to Israeli tax law, do not expire.
Deferred
income tax assets arising mainly from NOL carryforwards have been reduced to
zero through a valuation allowance. The Company continually reviews the adequacy
of the valuation allowance and will recognize deferred tax assets only if a
reassessment indicates that it is more likely than not that the benefits will be
realized.
Medis El
is an Israeli corporation and is subject to income taxes under the relevant
Israeli tax law. Medis El has been issued a certificate of approval as an
“Approved Enterprise,” which allows Medis El to have lower tax rates under
Israeli tax law. Such rates include a corporate tax on income derived from
Approved Enterprise activities at a rate of 10% to 20% and a tax rate on
distributed dividends of 15%. These benefits expire in 2006.
If Medis
El distributes a cash dividend from retained earning which were tax exempt due
to its approved enterprise status, Medis El would be required to pay a 25%
corporate tax on the amount distributed and a further 15% withholding tax would
be deducted from the amount disturbed to the recipients. Should Medis El derive
income form sources other than the approved enterprise programs during the
relevant period of benefits, this income would be taxable at the regular
corporate tax rate of 35% in 2004, 34% in 2005, 32% in 2006 and 30% in 2007 and
thereafter.
The
benefits from Medis El's approved enterprise programs are dependent upon it
fulfilling the conditions stipulated by the Laws for Encouragement of Capital
Investments, 1959 and the regulations published under this law, as well as the
criteria in the approval for the specific investment in Medis El's approved
enterprise programs. If Medis El does not comply with these conditions, the tax
benefits may be canceled, and it may be required to refund the amount of the
canceled benefit, with the addition of linkage difference and interest. As of
December 31, 2004, the Company believes that Medis El has complied with these
conditions.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
J—INCOME TAXES (Continued)
In
September 2001, More Energy, the Company's fuel cell subsidiary, was granted
Approved Enterprise status. The plan provides a two-year tax exemption, as well
as reduced tax (25%-10%) for a period of 5-8 years. The benefits from the
Approved Enterprise programs depend upon More Energy fulfilling the conditions
under the grant and the laws governing the grant. The commencement of the
benefits period is determined beginning with the year in which taxable income is
initially generated by the Approved Enterprise, provided that the earlier of 14
years have not elapsed from the year in which the approval was granted, or 12
years from the year in which the enterprise was initially operated. The
Company's initial approved enterprise plan was completed during 2004 and the
Company is in the process of submitting a new plan.
No tax
expense on income has been recorded in the financial statements of the Company,
as the Company has a loss in the current year, in each tax-paying jurisdiction.
Temporary
differences that give rise to deferred tax assets are as follows:
| |
|
December
31, |
|
| |
|
2003 |
|
2004 |
|
Net
operating loss carryforward—United States |
|
$ |
3,862,000 |
|
$ |
4,486,000 |
|
Net
operating loss carryforward—Israel |
|
|
15,350,000 |
|
|
15,339,000 |
|
|
Other
differences |
|
|
279,000 |
|
|
1,183,000 |
|
| |
|
|
19,491,000 |
|
|
21,008,000 |
|
|
Valuation
allowance |
|
|
(19,491,000 |
) |
|
(21,008,000 |
) |
|
Deferred
tax assets, net of valuation allowance |
|
$ |
— |
|
$ |
— |
|
A
reconciliation of the income tax benefit computed at the United States Federal
statutory rate to the amounts provided in the financial statements is as
follows:
|
|
Year
ended December 31, |
| |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
Income
tax benefit computed at |
|
|
|
|
|
|
|
|
|
|
Federal
statutory rate (34%) |
|
$ |
(3,504,000 |
) |
$ |
(3,344,000 |
) |
$ |
(5,325,000 |
) |
Other |
|
|
(143,000 |
) |
|
46,000 |
|
|
345,000 |
|
Effect
of change in foreign tax rate |
|
|
— |
|
|
— |
|
|
2,550,000 |
|
Effect
of permanent differences |
|
|
968,000 |
|
|
645,000 |
|
|
913,000 |
|
|
Valuation
allowance |
|
|
2,679,000 |
|
|
2,653,000 |
|
|
1,517,000 |
|
|
|
|
$ |
|
|
$ |
— |
|
$ |
— |
|
NOTE
K—SUMMARY INFORMATION ABOUT GEOGRAPHIC AREAS
The
Company manages its business on a basis of one reportable segment. See Note A
for a brief description of the Company's business. The following data is
presented in accordance with Statement of Financial Accounting Standards No.
131, "Disclosure About Segments of an Enterprise and Related Information". Total
revenues are attributed to geographic areas based on the location of the entity
making the sale.
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
K—SUMMARY INFORMATION ABOUT GEOGRAPHIC AREAS (Continued)
The
following data presents total revenues for the years ended December 31, 2002,
2003 and 2004 and long-lived assets as of December 31, 2002, 2003 and
2004:
| |
|
2002 |
|
2003 |
|
2004 |
|
| |
|
Total
Revenues |
|
Long-lived
assets |
|
Total
Revenues |
|
Long-lived
assets |
|
Total
Revenues |
|
Long-lived
assets |
|
United
States |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
158,000 |
|
$ |
— |
|
$ |
299,000 |
|
|
Israel |
|
|
192,000 |
|
|
60,756,000
|
|
|
131,000 |
|
|
60,445,000 |
|
|
— |
|
|
62,370,000
|
|
| |
|
$ |
192,000 |
|
$ |
60,756,000 |
|
$ |
131,000 |
|
$ |
60,603,000 |
|
$ |
— |
|
$ |
62,669,000 |
|
NOTE
L—CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
|
Quarter
ended |
|
March
31 |
|
June
30 |
|
September
30 |
|
December
31 |
|
Fiscal
2004 |
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
Gross
profit |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
Loss
from operations |
|
$ |
(3,300,000 |
) |
$ |
(3,402,000 |
) |
$ |
(4,206,000 |
) |
$ |
(4,928,000 |
) |
Net
loss |
|
$ |
(3,241,000 |
) |
$ |
(3,363,000 |
) |
$ |
(4,157,000 |
) |
$ |
(4,901,000 |
) |
Net
loss attributable to common stockholders |
|
$ |
(3,241,000 |
) |
$ |
(3,363,000 |
) |
$ |
(4,828,000 |
) |
$ |
(6,296,000 |
) |
Basic
and diluted net loss per share |
|
$ |
(.13 |
) |
$ |
(.13 |
) |
$ |
(.18 |
) |
$ |
(.24 |
) |
|
Weighted-average
number of shares used in computing basic and diluted net loss per
share |
|
|
25,880,979 |
|
|
26,206,147 |
|
|
26,252,602 |
|
|
26,335,126 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
37,000 |
|
$ |
38,000 |
|
$ |
38,000 |
|
$ |
18,000 |
|
Gross
profit |
|
$ |
19,000 |
|
$ |
29,000 |
|
$ |
22,000 |
|
$ |
15,000 |
|
Loss
from operations |
|
$ |
(2,508,000 |
) |
$ |
(2,664,000 |
) |
$ |
(2,264,000 |
) |
$ |
(2,477,000 |
) |
Net
loss |
|
$ |
(2,485,000 |
) |
$ |
(2,658,000 |
) |
$ |
(2,231,000 |
) |
$ |
(2,463,000 |
) |
Net
loss attributable to common stockholders |
|
$ |
(2,485,000 |
) |
$ |
(2,658,000 |
) |
$ |
(3,457,000 |
) |
$ |
(2,463,000 |
) |
Basic
and diluted net loss per share |
|
$ |
(.11 |
) |
$ |
(.11 |
) |
$ |
(.15 |
) |
$ |
(.10 |
) |
|
Weighted-average
number of shares used in computing basic and diluted net loss per
share |
|
|
22,446,271 |
|
|
23,562,873 |
|
|
23,591,557 |
|
|
24,106,764 |
|
Medis
Technologies Ltd. and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE
M—SUBSEQUENT EVENTS
1.
Private Placements of Common Stock - In
January 2005, the Company issued 50,000 shares of its common stock in a private
sale for proceeds of approximately $700,000.
********************************