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, 2003
Commission file number: 0-30391
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MEDIS TECHNOLOGIES LTD. |
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(Exact name of registrant as specified in its charter) |
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Delaware |
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13-3669062 |
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(State of incorporation) |
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(I.R.S. Employer Identification No.) |
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805 Third Avenue |
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(Address of principal executive offices, including zip code) |
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(212) 935-8484 |
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(Registrant’s telephone number, including area code) |
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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, 2003, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $91,500,000.
As of March 8, 2003, there were outstanding 26,187,578 shares of the registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the 2004 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III.
TABLE OF CONTENTS
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.
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.
On March 10, 2004, we announced that we had 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, we have granted Kensington the limited, exclusive right to market and distribute our Power Pack charger and other products using our fuel cell technology under the Kensington brand name.
In January 2004, we raised a total of approximately $14,580,000 through the private sale to institutional investors of 1,425,000 million shares of our common stock. We plan to use the net proceeds of approximately $14,331,000 towards the costs associated with producing and marketing our fuel cell Power Pack products and refueling cartridges, as well as for additional working capital.
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 as soon as reasonably practicable after we 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.
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 expected to be capable of providing power to operate and charge even 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 then be disposed of by the consumer. By contrast, the military product we are developing and what we anticipate may be a second generation consumer product is not disposable. This refuelable Power Pack incorporates a removable fuel cartridge that can easily be replaced in seconds when the fuel in such cartridge is depleted.
A fuel cell is an electro-chemical device that converts the chemical energy of a fuel, such as 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 being developed for small scale applications, and in particular for use in portable electronic devices. While we believe that certain technologies used in our fuel cells may be applied towards advancing the development of larger fuel cells
delivering up to 5 kilowatts of power, we have no current intention to divert resources or funds to develop or manufacture larger fuel cells.
Central to our fuel cell products is our patented liquid fuel, of which we achieved major advances in power density and energy capacity without the side effect of generating significant heat. Furthermore, our fuel contains no methanol or hydrogen gas, which avoids problems, such as toxicity and flammability, associated with the storage and use of these compounds. We expect that our fuel will be compatible with everyday use on all forms of transportation.
Fuel cells for small-scale applications have many of the characteristics of rechargeable batteries and would 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.
We expect that as portable electronic devices become more advanced and continue to offer greater capabilities and functionality, device manufacturers, service providers and consumers will seek significantly increased and longer lasting power. Since we believe that batteries presently used in these devices are approaching their technological limit, the power gap that already exists between those ever-increasing power demands of electronic applications and the amounts of power in the batteries will increase. We expect the Power Pack to help fill that gap.
Much of the other 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 a liquid 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 makes 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 is usually limited to 3% to 6%, reducing the performance of the fuel cell. As a result, some direct methanol fuel cells are constructed with an external delivery system to feed the methanol into the fuel cell and a regulator to control the flow of methanol. 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.
Some companies have announced plans to use highly concentrated methanol which is then diluted inside the fuel cell. We believe that high concentrations of methanol raise issues of consumer health and safety and issues of transportability. 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
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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 traditionally affected PEM-based fuel cells. Our fuel cell technology enables us to use a safer alcohol in our fuel instead of methanol, thus avoiding methanol’s levels of toxicity and flammability. Additionally, our fuel cell is self-regulating, meaning it provides sufficient power to meet the draw-down of power as needed and it does not require an external fuel delivery or regulating system. 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 very small 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. With initial cell voltage of 0.40 — 1.0 volt, we use a DC to DC converter in our system to increase the initial voltage to 5 volts. 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.
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.
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 even the most advanced portable electronic devices, 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. When used to power a cell phone, each disposable Power Pack is expected to deliver the equivalent of 15 hours of talk time, or about three 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.
The disposable Power Pack has an anticipated size of 80 x 55 x 30 mm (3.2 x 2.2 x 1.2 inches) and anticipated weight of 120 grams empty and 200 grams fully fueled. The disposable Power Pack is expected to have a suggested retail price of $14.95 to $19.99. By comparison with battery-operated portable cell phone chargers in the market today, we expect our disposable Power Pack to offer many advantages, including:
• considerably more hours of operation relative to cost;
• the ability to start a cell phone depleted of power in seconds rather than minutes;
• use of a built-in fuel gauge that tells the user how much fuel is still available; and
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• no reverse polarity which discharges the cell phone battery when the charger is left connected.
Additionally, the Power Pack may be an attractive product for people to place in a survival kit due to its anticipated long life prior to use.
We expect that as manufactures 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 supplying power to operate continuously and charge the device repeatedly, will bring about a convergence of power supply and demand. We anticipate that device manufactures will benefit by having available power for their new products, service providers will benefit by providing increased air time for the new products and functions and consumers will benefit from the convenience and freedom of being able to operate and charge advanced new portable devices on the go.
In May 2004, we plan to unveil the prototype of the disposable Power Pack. By the end of 2004, we plan to make delivery of initial units of the Power Pack to distributors and selected others for demonstration and to seek to accumulate orders for the Power Pack. The actual date of large scale distribution and sale to the ultimate consumer will depend in large part on the level of orders received and the ability of contract manufacturers, whose services we plan to engage, to scale up production to meet those orders. We expect to be able to make such deliveries by the middle to the end of 2005. However, we can give no assurances that we will engage such contract manufacturers in time to meet that timetable or that if engaged, they will be able to meet that timetable.
The refuelable Power Pack, which we anticipate may be a second generation consumer product, is expected to be able to repeat the charging process a number of times with each fueling, and refueling can be accomplished in seconds with a small, lightweight and inexpensive refueling cartridge. This refueling process transfers the fuel and electrolyte in the cartridge into the Power Pack and extracts any remaining fuel, electrolyte and water by-products back into the refueling cartridge. The cartridge can then be discarded.
We are designing and developing a refuelable Power Pack capable of providing auxiliary power to a ruggedized PDA being developed by General Dynamics to meet military specifications. At present, the PDA is charged by a battery sleeve with eight lithium mangenese 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 four or five refueling cartridges, making it lighter and less expensive than the present system. In May 2004, we plan to deliver a completed prototype of our refuelable Power Pack and fuel cartridges to the C4 Systems division of General Dynamics, who will then commence testing our product against military specifications. We expect this testing to conclude at the end of 2004, when we expect C4 Systems to submit the refuelable Power Pack to the U.S. military for their direct testing.
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 and of our fuel cell as a primary power source. These advances include:
• supplying increased energy while also reducing size and weight;
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• 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;
• reducing the internal and external temperature during operation; and
• integrating our individual fuel cells into a seamless power source.
Our fuel cell system integrates each fuel cell through the use of a DC to DC converter, which increases the voltage without having to connect a number of fuel cells in a series. We have designed a DC to DC converter that is now in the form of a bread board, or experimental model, which is 88% efficient. We have contracted with Flextronics International Ltd. to develop a DC to DC converter with an efficiency of over 90% and a size of approximately one-quarter of the present bread-board converter. We are also considering engaging other companies having expertise in this area for parallel development of a DC to DC converter. In conjunction with the DC to DC converter, we are developing the power management systems that allow our Power Pack products to respond to the power requirements of the particular product which they are charging as well as to show the level of the fuel still available to the user.
It has been publicly reported that there are currently over 1.5 billion users of portable electronic devices world wide and this number is expected to reach 2 billion by 2007, with reported annual sales of approximately 450 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. We believe that this trend is consistent with the strategies of mobile operators (service providers) worldwide who are requiring that products have greater functionality in order to increase their income from air time usage. Published comments made by mobile operators suggest that they believe that the battery life of the cell phones being delivered by cell phone OEM’s (original equipment manufacturers) fall short of satisfying the consumer.
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 users who travel frequently and who would use the Power Pack to keep their phones 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. 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 protect against loss of power by reason of blackouts or for emergency use in case of natural disasters.
At the same time, there is a fast growing market for digital cameras - already estimated at 53 million sold last year and 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
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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 cell phone Power Pack users would use them for charging their digital cameras and other portable devices.
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 C4 Systems towards development of this product. On May 5, 2003, we announced an agreement with C4 Systems to design and develop a pre-production prototype of our fuel cell military product for the ruggedized personal digital assistant (PDA) system that they are developing for the military. 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 January 2005. Under our two agreements with General Dynamics we have already received five payments totaling $350,000. We anticipate further payments totaling $225,000 during 2004 and 2005, as we achieve additional milestones.
Together with General Dynamics we are also evaluating other military products where micro fuel cells would be valuable, including products carried by foot soldiers in the Land Warrior program of the U.S. Department of Defense, with the aim of eventually, where appropriate, replacing batteries with fuel cells. 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.
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 are in the process of putting into 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.
We are engaged in negotiations with large-scale contract manufacturers with a view to having in place in the coming months one or more relationships capable of producing the components and final product, including the packaging, of the disposable Power Pack and of the refuelable Power Pack. We contemplate that this will take place in two stages. The first stage would involve a contract manufacturer converting the prototype Power Pack into a fully-engineered product ready for large-scale production, which may include applying for and receiving certain regulatory approvals. The second stage, which
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would commence after we choose one or more contract manufacturers based on price and other criteria, would provide for us to place orders and for the manufacturer to produce in high volumes the product for distribution and delivery.
In order to move the production process forward more quickly, we have installed a production line for the cathode, as well as the catalysts for the cathode and anode, in our facility in Israel and we expect to install a production line for the anode in 2004. These production lines are expected to provide the ability to supply electrodes and catalysts for thousands of units in the first year of their completion. These lines are also expected to be fully scalable upwards and we plan to transfer them to our contract manufacturers who will be able to scale them up as required. One of the immediate advantages of having this automated system in place is that it is expected significantly to enhance the performance levels of the products we make from that time forward. Until now, we have been making all the products by hand and cannot achieve the very fine degrees of tolerance that a machine can accomplish.
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. Pursuant to the distribution agreement, among other things, we have granted Kensington the 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 also continue to meet with large original equipment manufacturers (OEMs) both of cell phones and digital cameras to discuss both bundling or boxing our Power Pack with the products they are selling to the consumer as well as the potential of providing a fuel cell as an attached secondary power source and ultimately as a primary power source, replacing the battery, for their products.
Based on assumptions we have made concerning estimated component, manufacturing and distribution costs and sales prices, our preliminary estimates are that the disposable Power Pack, when ready for commercialization, could be manufactured in commercial quantities of millions of units at a cost of approximately $4.00 per unit, and could bear a suggested retail price to the ultimate consumer of $14.95 to $19.95 per unit.
Since we have not begun commercial production or distribution of these products, we can give no assurance that these assumptions and estimates will prove to be accurate if and when these products are commercially available.
Based upon our discussions with cell phone service providers about levels of customer usage, as well as company-sponsored surveys and focus groups dealing both with cell phone and digital camera owners, we believe that heavy users of cell phones or digital cameras would purchase at least six disposable Power Packs a year, with lighter users purchasing fewer Power Packs.
As a hypothetical illustration, if heavy users representing just one percent of the cell phone market worldwide or fifteen percent of the digital camera market worldwide (approximately 15,000,000 people in either case) purchased disposable Power Packs, and if our expectations are correct as to usage levels, we, after deducting what we believe would be appropriate additional costs for production costs, overhead, marketing and advertising, would earn approximately $6.00 per share after taxes for every 15,000,000 of such users.
There is no assurance that we can achieve that level of sales for the cell phone, digital camera or any other markets or that we will achieve an earnings per share based upon these estimates.
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We expect to compete against other fuel cell developers as well as against other advanced battery technologies. 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, is also developing a direct methanol fuel cell for mobile phones that it expects to run up to ten times longer than existing batteries. 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., for both of these companies it has been announced that Intel has invested, and Smart Fuel Cell GmbH.
We believe other large cell phone and portable electronic device companies may 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., 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 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 chargeable and 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.
W 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.
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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.
The CellScan is a static cytometer; an instrument for measuring reactions of 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, non-adherent cell, such as a tumor cell. The CellScan can repeatedly and continuously monitor the intensity and polarization of 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 with 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 hour. 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 we intend to build two CellScans during 2004, with a view towards commercialization.
Our first focus for commercialization of the product is to offer to Israeli-based health insurance companies and HMOs a commercial test for chemosensitivity. In that connection we are in the process of contacting such institutions and establishing the systems to carry out such testing in a commercial setting. After establishing a commercial test for chemosensitivity, we would expect that we would also seek to offer other commercial tests, such as for atherosclerosis and drug allergies. As part of the commercialization process, we are also seeking to enter into distribution agreements for the CellScan with entities that have strong marketing and distribution capabilities in various parts of the world. 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 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, the early detection of breast, ovarian and colon cancer, atherosclerosis, lupus, tuberculosis and drug allergy.
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Recent, on-going and planned studies for several CellScan applications include the following:
• Chemosensitivity. A major clinical problem in the area of oncology is that cancers that are classified as being identical according to their histopathological characteristics are in fact highly individual in their drug sensitivities. Current cancer chemotherapy is often based on the results of randomized trials performed on patients who have had similar types and stages of the disease which has limited success.
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. In the CellScan method, cancer cells obtained from human biopsies are exposed to anti-cancer agents and then labeled with different functional fluorescent dyes. Changes in fluorescence intensity and polarization of the stained cells are monitored by the CellScan and used to predict drug efficacy.
The first phase of a multi-patent study at the Oncological Institute was completed in January 2004, and we view the results as encouraging. We intend to continue the study with more advanced stage cancer patients.
• Breast Cancer. In two recent studies performed at Rebecca Sieff Medical Center in Israel and published in a scientific journal, 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. As the sensitivity and specificity levels achieved in such studies were promising, we have established a CellScan laboratory in Tashkent, Uzbekistan to perform a multi-patient breast cancer study in collaboration with the Uzbekistan Health Ministry, using a tetramer enhanced MUC-1 antigen, which is a new biological reagent, that we expect will further improve the CellScan results. The initial phase of the sturdy was completed in December 2003, and we have begun a new phase of the study in February 2004, utilizing an additional antigen.
• Ovarian Cancer. We have entered into an agreement with the Epidemiology Department of Carmel Medical Center in Israel to carry-out a multi-patient study to determine whether the CellScan can be used for early detection of ovarian cancer, as well as a further study of breast cancer. We have installed a CellScan at the facility and trained medical center personnel in its use. The study began in August 2003 and we expect it to continue through the first quarter of 2004.
• Tuberculosis. In a laboratory study to determine whether the CellScan could be used in the diagnosis of tuberculosis, it was found that the CellScan was more sensitive than the conventional Mantoux test for tuberculosis. We have begun a dialogue with the Moscow Institute of Tuberculosis to establish a CellScan laboratory for multi-patient tuberculosis testing. We also expect plan to explore the possibility of expanding such testing to other Russian and Eastern European medical facilities.
• Lupus. In collaboration with Sheba Medical Center in Israel, we have an on-going study in our laboratory to determine whether the CellScan can be used in the detection of Systemic Lupus Erythematosus (SLE), which is a systemic autoimmune disease characterized by the production of autoantibodies directed against cell surface, nuclear and cytoplasmic proteins. A strong correlation was found between the CellScan results and other tests that measure cell
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stimulation, suggesting that the CellScan, used in conjunction with nucleosomal antigen, may be an efficient tool in the diagnosis and monitoring of lupus patients.
• 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, as we believe that no satisfactory method is currently available for diagnosing drug allergy without the risk of triggering an adverse cutaneous (on the skin) reaction to the allergen. Results to date indicate that the CellScan is a promising apparatus for monitoring drug allergies.
• Atherosclerosis. In collaboration with Sheba Medical Center in Israel, there is an on-going study underway in our laboratory utilizing the CellScan to determine the possibility of identifying patients with severe coronary heart disease through monitoring the response of their lymphocytes to disease-associated antigens. 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. We believe that this approach could pave the way to early detection of coronary heart disease with a non-invasive procedure, utilizing the CellScan.
Our Inherently Conductive Polymers, or ICPs, have electrical properties that can be changed over the full range of conductivity from insulators to metallic conductors and have the non-corroding properties, superior flexibility and durability of plastics. Thus, they have a wide and diverse range of commercial uses, including uses for civilian and military products, particularly in electronic products such as sensors and capacitors. We have previously disclosed that our ICPs can increase the capacity of the electrodes of an electrochemical supercapacitor by up to five hundred percent.
In January 2002, we entered into an agreement with a U.S. company to develop a new application for the use of our ICPs in a PEM fuel cell component which could advance the development of such fuel cells for automobile, home and stationary power uses. The agreement provided for the payment to us over time of $300,000, of which we have recognized $268,000 from inception through December 31, 2003. In October 2003, such agreement was terminated by the other party to the agreement prior to its scheduled termination date, for reasons unrelated to the Company’s technology or performance.
In 2003, we closed our pilot manufacturing facility related to the ICPs in Or-Yehuda, Israel, and we are currently not producing any ICPs for third parties.
Our stirling cycle system is a refrigeration system using our stirling cycle technologies and a compressor powered by two of our linear reciprocating motors. The stirling cycle is based upon a century-old technique that harnesses energy from the expansion and contraction of a gas forced between separate chambers and our linear reciprocating motor is based on our reciprocating electrical technologies. We believe that our stirling cycle system can offer advantages for certain applications over conventional refrigeration systems, including greater energy efficiency and being more environmentally friendly 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.
We have developed a demonstration stirling cycle system that achieved in laboratory tests a 130 watt cooling capacity, similar in power to the cooling capacity of a 14 cubic foot beverage cooler, at a
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coefficient of performance of 1.7. A coefficient of performance is a measurement of energy efficiency. Based on the cooling capacity and coefficient of performance achieved, we plan to seek a business association to apply our stirling cycle technology to the development of a 5 watt cryocooler for use in cooling wireless communication relay stations, where we believe it may have certain advantages.
We have also contacted several large refrigeration system companies, regarding joint development of the cryocooler and other stirling cycle technology applications. We are continuing in dialogue with such companies and would seek to develop customized prototypes, with a view towards licensing or selling the technology. We can give no assurance that the stirling cycle system will operate as we plan or that it will attract interest from companies in this field.
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 a unique feature of such a toroidal engine would be the implementation of pneumatic compression, supplementing the mechanical compression. We believe that if we are able to successfully develop our toroidal engine, it could offers advantages over a conventional internal combustion engine, including a simple design with fewer moving parts, better mechanical and thermal efficiency and a favorable weight to power ratio and volume to power ratio.
We have developed and have recently completed initial testing of an approximately 61 cubic inch demonstration engine (“GR 1000”) based upon our toroidal technologies. Utilizing the information gained from our testing, during July and August 2003 we assembled a new demonstration engine. In order to increase power and reduce fuel consumption, we have designed and are manufacturing a new external and internal combustion system to take advantage of the engine’s high operating pressure. Additionally, we have designed and manufactured all of the components of a small demonstration engine (“GR 120”). Unlike the GR 1000, which requires