SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For The Quarterly Period Ended March 31, 2002
[ ] Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number 1-10446
LITHIUM TECHNOLOGY CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 13-3411148
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5115 CAMPUS DRIVE, PLYMOUTH MEETING, PA 19462
(Address of Principal Executive Offices)
(610) 940-6090
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No __
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes __ No __
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of May 1, 2002: 64,303,305 shares
of Common Stock
Transitional Small Business Disclosure Format (check one):
Yes __ No X
LITHIUM TECHNOLOGY CORPORATION AND SUBSIDIARY
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2002
INDEX
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Condensed Consolidated Balance Sheets - March 31, 2002 3
and December 31, 2001 (Unaudited)
Condensed Consolidated Statements of Operations - Three Months
Ended March 31, 2002 and 2001, and Period From
July 21, 1989 (Date of Inception) to March 31, 2002 (Unaudited) 4
Condensed Consolidated Statements of Changes in Stockholders'
Deficiency - Three Months Ended March 31, 2002 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2002 and 2001, and Period from
July 21, 1989 (Date of Inception) to March 31, 2002 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements - Three Months
Ended March 31, 2002 (Unaudited) 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 17
PART II - OTHER INFORMATION 21
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
2
PART I - FINANCIAL INFORMATION
LITHIUM TECHNOLOGY CORPORATION AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, 2002 December 31, 2001
------------ ------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 168,000 $ 60,000
Prepaid insurance 16,000 $ 10,000
------------ ------------
Total Current Assets 184,000 70,000
------------ ------------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION OF $1,336,000 AND $1,301,000 218,000 235,000
SECURITY DEPOSIT 21,000 21,000
------------ ------------
Total assets $ 423,000 $ 326,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 273,000 $ 293,000
Accrued salaries 201,000 201,000
Note Payable 73,000 82,000
Covertible promissory notes 1,042,000 80,000
------------ ------------
Total current liabilities 1,589,000 656,000
------------ ------------
LONG-TERM LIABILITIES:
Convertible promissory notes 3,949,000 5,249,000
------------ ------------
Total liabilities 5,538,000 5,905,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred Stock, par value $.01 per share
Authorized - 100,000 shares
Issued and outstanding - None
Common stock, par value $.01 per share:
Authorized - 125,000,000 shares
Issued and outstanding - 64,303,305 and 51,303,305 shares 643,000 513,000
Additional paid-in capital 69,594,000 47,719,000
Accumulated deficit (6,865,000) (6,865,000)
Deficit accumulated during development stage (68,487,000) (46,946,000)
------------ ------------
Total stockholders' equity (deficiency) (5,115,000) (5,579,000)
------------ ------------
$ 423,000 $ 326,000
============ ============
See accompanying notes to condensed consolidated financial statements.
3
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, Period From July 21, 1989
--------------------------------- (Date of Inception) to
2002 2001 March 31, 2002)
------------ ------------ ------------
REVENUES:
Development contracts $ 0 $ 0 $ 190,000
------------ ------------ ------------
COSTS AND EXPENSES:
Engineering, research and development 394,000 417,000 11,365,000
General and administrative 440,000 250,000 15,235,000
Stock based compensation expense 2,755,000 -- 5,018,000
------------ ------------ ------------
3,589,000 667,000 31,618,000
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net of interest income (2,000) (1,000) (1,838,000)
Interest expense related to beneficial conversion feature (17,950,000) -- (35,871,000)
Other non-operating income -- -- 650,000
------------ ------------ ------------
(17,952,000) (1,000) (37,059,000)
------------ ------------ ------------
NET LOSS $(21,541,000) $ (668,000) $(68,487,000)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: 63,147,735 51,294,305
============ ============
BASIC AND DILUTED NET LOSS PER SHARE: $ (.34) $ (.01)
============ ============
See accompanying notes to condensed consolidated financial statements.
4
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
Deficit
Accumulated
During
Common Stock Additional Accumulated Development
Shares Amount Paid-In Capital Deficit Stage
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 2001 51,303,305 $ 513,000 $ 47,719,000 $ (6,865,000) $(46,946,000)
Three months ended March 31, 2002:
Issuance of Warrants 2,755,000
Beneficial conversion feature related
to convertible notes 17,950,000
Upon conversion of convertible notes 13,000,000 130,000 1,170,000
Net loss (21,541,000)
------------ ------------ ------------ ------------ ------------
BALANCES AT MARCH 31, 2002 64,303,305 $ 643,000 $ 69,594,000 $ (6,865,000) $(68,487,000)
============ ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
5
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Period From
July 21, 1989
Three Months Ended (Date of Inception)
March 31, to
2002 2001 March 31, 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(21,541,000) $ (668,000) $(68,487,000)
Adjustments to reconcile net loss to net cash flows from operating
Activities:
Interest expense relating to the beneficial conversion feature of the
Convertible Notes 17,950,000 -- 35,871,000
Depreciation 35,000 36,000 1,338,000
Amortization of debt issue costs -- -- 1,070,000
Common stock and warrants issued at prices below fair market value 2,755,000 -- 3,922,000
Repricing of outstanding options -- -- 25,000
Repricing of outstanding warrants -- -- 1,071,000
Reduction of accrued expenses -- -- (270,000)
Common stock issued in lieu of interest -- -- 1,915,000
Fair value of warrants and option granted for services rendered -- -- 209,000
Common stock issued for services provided -- -- 273,000
Common stock issued upon settlement of litigation -- -- 125,000
Expenses paid by shareholder on behalf of Company -- -- 79,000
Changes in operating assets and liabilities: -- -- --
Accounts receivable -- -- --
Other current assets (6,000) -- (16,000)
Security and equipment deposits -- -- (21,000)
Accounts payable, accrued expenses and customer deposits (29,000) 104,000 2,080,000
Due to related parties -- -- (118,000)
------------ ------------ ------------
Net cash used in operating activities (836,000) (528,000) (20,934,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (18,000) (25,000) (1,306,000)
Other -- -- 94,000
------------ ------------ ------------
Net cash provided by (used in) investing activities $ (18,000) $ (25,000) $ (1,212,000)
------------ ------------ ------------
See accompanying notes to condensed consolidated financial statements.
6
Period From
July 21, 1989
Three Months Ended (Date of Inception)
March 31, to
2002 2001 March 31, 2002
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds received from Convertible Promissory Notes 962,000 548,000 6,291,000
Net advance repayable only out of proceeds of public offering -- -- 471,000
Proceeds received upon issuance of common stock -- -- 3,789,000
Proceeds received from issuance of preferred stock, net of related costs -- -- 100,000
Proceeds received upon exercise of options and warrants, net of costs -- -- 1,455,000
Net advances by former principal stockholder -- -- 321,000
Proceeds from sale of convertible debt -- -- 10,874,000
Debt issue costs -- -- (887,000)
Repayment of convertible debt -- -- (100,000)
------------ ------------ ------------
Net cash provided by financing activities 962,000 548,000 22,314,000
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 108,000 (5,000) 168,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 60,000 52,000 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 168,000 $ 47,000 $ 168,000
============ ============ ============
See accompanying notes to condensed consolidated financial statements.
7
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) -- CONTINUED
Period From
July 21, 1989
Three Months Ended (Date of
March 31, Inception) to
2002 2001 March 31, 2002
---------- ---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Contribution to capital by former principal stockholder -- -- $ 3,659,000
Related party debt exchanged for convertible debt -- -- $ 321,000
Exchange of indebtedness to former principal stockholder for common stock -- -- $ 445,000
Issuance of common stock for services and accrued salaries -- -- $ 501,000
Exchange of equipment and accrued rent for common stock -- -- $ 271,000
Subordinated notes and related accrued interest exchanged for Series A -- -- $ 3,300,000
preferred stock
Exchange of convertible debt for convertible preferred stock -- -- $ 356,000
Conversion of convertible debt and accrued interest into common stock, net of
unamortized debt discount $1,300,000 -- $11,247,000
Exchange of advances repayable only out of proceeds of public offering for
common stock -- -- $ 471,000
Deferred offering costs on warrants exercised -- -- $ 88,000
Issuance of warrants in settlement of litigation for debt issue costs and for
services rendered -- -- $ 364,000
Common stock issued for costs related to 10% promissory notes -- -- $ 525,000
Issuance of warrants $2,755,000 $ 2,755,000
See accompanying notes to condensed consolidated financial statements.
8
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America applicable to interim periods. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. These financial statements should be
read in conjunction with the Company's audited financial statements included in
the Company's Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission for the year ended December 31, 2001. Operating results for
the three months ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002 or any
interim period.
2. CRITICAL ACCOUNTING POLICIES AND RECENT PRONOUNCEMENTS
CONSOLIDATION -- The consolidated financial statements include the accounts of
Lithium Technology Corporation and Lithion Corporation. All significant
intercompany accounts and transactions have been eliminated.
ESTIMATES AND UNCERTAINTIES -- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America ("generally accepted accounting principles") requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results, as determined at a later date,
could differ from those estimates.
STOCK OPTIONS -- In accordance with Statement of Financial Accounting Standard
("SFAS") No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), LTC
has elected to account for stock option grants to employees using the intrinsic
value based method prescribed by APB Opinion No. 25.
CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES -- LTC accounts for
convertible securities with beneficial conversion features in accordance with
Emerging Issues Task Force 98-5, "Accounting for convertible securities with
beneficial conversion features or contingently adjustable conversion ratios."
STOCK-BASED COMPENSATION -- In March 2000, the FASB issued Financial Accounting
Series Interpretation No. 44 ("FIN 44") entitled "Accounting for Certain
Transactions involving Stock Compensation," which provides clarification to
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The adoption of this Interpretation had no effect on the Company's
financial position or results of operations for the current year, but does
require that the Company's option plans be accounted for under variable plan
accounting (See Note 9).
RECENT ACCOUNTING PRONOUNCEMENTS -- The FASB issued SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" in June
2001. These statements address how intangible assets that are acquired
individually, with a group of other assets or in connection with a business
combination should be accounted for in financial statements upon and subsequent
to their acquisition. The new statements require that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method and
establish specific criteria for the recognition of intangible assets separately
from goodwill. LTC adopted SFAS No. 141 on July 1, 2001, as required by the new
statement. The adoption of SFAS No. 141 did not have any impact on LTC's
financial position or its results of operations. LTC adopted SFAS No. 142 on
January 1, 2002 and the adoption did not have any impact on LTC's financial
position or its results of operations.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," in
June 2001. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. While LTC is currently evaluating the
impact the adoption of SFAS No. 143 will have on its financial position and
results of operations, it does not expect such impact to be material.
The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," in August 2001. SFAS No. 144, which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of, supercedes SFAS No. 121 and is effective
for fiscal years beginning after December 15, 2001. While LTC is currently
evaluating the impact the adoption of SFAS No. 144 will have on its financial
position and results of operations, it does not expect such impact to be
material.
3. HISTORY OF THE BUSINESS
Lithium Technology Corporation and its wholly-owned subsidiary, Lithion
Corporation, collectively referred to as "LTC", are pre-production stage
companies in the process of commercializing unique, solid-state, lithium-ion and
lithium polymer rechargeable batteries. LTC is engaged in technology development
activities and pilot line manufacturing operations to further advance this
battery technology and holds various patents relating to such batteries. LTC has
developed innovative flat lithium ion batteries for large, high rate
applications including Hybrid Electric Vehicles (HEVs), other automotive
applications and energy storage devices for the distributed power/renewable
energy market.
The date of inception of LTC's development stage is July 21, 1989. At that time,
LTC exchanged its capital stock for all of the capital stock of Lithion and an
operating company in a reverse acquisition. The operating company was divested
in November 1993. The accumulated deficit associated with the operating company
of $6,865,000 has been segregated from LTC's deficit accumulated during the
development stage in the accompanying consolidated financial statements.
PENDING TRANSACTION WITH GAIA - In December 2001, LTC entered into a non-binding
letter of intent (the "LOI") with the German lithium polymer battery company
GAIA Akkumulatorenwerke GmbH, headquartered in Nordhausen/Thuringia, Germany
("GAIA") and Arch Hill Capital N.V. of the Netherlands ("Arch Hill"), the
beneficial owner of all of the outstanding shares of GAIA. The LOI contemplates
a potential share exchange (the "GAIA Share Exchange") whereby LTC would acquire
an equity interest in GAIA in exchange for the issuance to Arch Hill of an
equity interest in LTC. If LTC consummates the GAIA
9
Share Exchange, management anticipates that LTC would enter into a strategic
alliance agreement with GAIA and operate the two companies as a single entity
with two operating locations - at Plymouth Meeting, Pennsylvania and at
Nordhausen, Germany.
LTC has agreed in the LOI to use its best efforts to consummate the GAIA Share
Exchange by May 31, 2002. LTC has not yet entered into any definitive agreements
relating to the GAIA Share Exchange and no assurance can be given that the GAIA
Share Exchange will be consummated as described herein or at all. The
applicable accounting for the contemplated transactions between LTC, GAIA,
Arch Hill and any other parties will be determined when and if any definitive
agreements are executed.
In order to have sufficient capital resources for its development, production,
operating and administrative needs and in order to implement the new strategy of
combining its operations with GAIA, LTC will need to raise at least $6,000,000
in a new equity financing (the "New Financing"). LTC expects that the New
Financing will be a condition precedent to the GAIA Share Exchange. If LTC
raises $6,000,000 in the New Financing, management believes that LTC would have
sufficient funds to meet its needs until approximately June 2003. Management
believes that a second financing will be necessary during the twelve months
after the completion of the GAIA Share Exchange, if such transaction is
consummated, in order to fully implement the Company's new business plan.
LTC has not entered into any definitive agreements relating to the New Financing
and no assurance can be given that the New Financing will be consummated.
BRIDGE FINANCING BY ARCH HILL - Pursuant to the terms of a bridge loan entered
into as of January 8, 2002, as amended on March 22, 2002 Arch Hill has agreed to
advance working capital to LTC until the earlier of the closing of the New
Financing and May 31, 2002. Notes issued to Arch Hill under the bridge financing
agreement are convertible, at any time prior to repayment of the Notes, into LTC
common stock at $.08 per share. Arch Hill has advanced a total of $1,042,025
through March 31, 2002 convertible into 13,025,312 shares of LTC common stock.
LTC believes that provided Arch Hill advances the needed working capital to it
under the bridge loan, LTC will have sufficient capital resources to meet its
needs and satisfy its obligations through May 31, 2002.
TERMINATION OF MERGER WITH ILION - On December 31, 2001, LTC entered into a
Termination Agreement with Ilion Technology corporation ("Ilion") which was
closed on January 8, 2002 when all closing conditions were met (the "Termination
Agreement"). Pursuant to the Termination Agreement, the then existing Merger
Agreement between LTC and Ilion, dated January 19, 2000, as amended from time to
time, and all other agreements between LTC and Ilion, were terminated. Pursuant
to the Merger Agreement between LTC and Ilion, which had a termination date of
February 28, 2002, LTC had proposed to merge its lithium battery business with
Ilion's. That merger was contingent on an initial public offering by Ilion,
which did not occur.
Under the provisions of the Termination Agreement, all rights and obligations of
Ilion and LTC under the Merger Agreement, the related bridge financing agreement
in effect since October 1999, and all other agreements between LTC and Ilion,
were terminated. In connection with the Termination Agreement, Ilion sold to
Arch Hill $3,949,000 of LTC notes originally held by Ilion and the remaining
$1,300,000 of LTC notes held by Ilion were
10
converted into 13,000,000 restricted shares of LTC common stock (the "Ilion
Conversion Shares"). LTC recognized $16,483,000 of
interest expense related to the beneficial conversion feature during the three
months ended March 31, 2002. (See Note 7).
The Termination Agreement provides that after the termination closing and from
time to time as requested by Ilion, LTC will take all appropriate actions to
nominate or remove or replace one person designated by Ilion to LTC's Board of
Directors provided that Ilion (i) is the beneficial owner of at least 1% of LTC
common stock then outstanding during the two year period after the termination
closing or (ii) is the beneficial owner of at least 5% of LTC common stock then
outstanding at any time after the termination closing.
As a condition to the Termination Agreement, the existing Warrant Agreement
between LTC and Ilion, dated as of January 19, 2000 (the "Warrant Agreement"),
relating to 7,500,000 shares of our common stock was amended (the "Warrant
Amendment") to increase the number of shares of LTC common stock subject to the
Warrant Agreement to 12,500,000 (the "Warrant Shares") and to extend the
termination date of the Warrants to January 10, 2004. The Warrants are currently
exercisable at $.15 per share. In connection therewith, LTC recognized
$2,755,000 of stock based compensation expense during the three months ended
March 31, 2002.
The Termination Agreement also provides that if after the closing of the New
Financing and the GAIA Share Exchange the Ilion Conversion Shares and the
Warrant Shares do not equal at least 9% of LTC capital stock on a fully diluted
basis, then LTC will issue to Ilion warrants to purchase LTC common stock (the
"New Warrant Shares") having the same terms as the warrant and warrant amendment
so that the Ilion Conversion Shares, the Warrant Shares and the New Warrant
Shares equal 9% of LTC's capital stock on a fully diluted basis immediately
after the GAIA Share Exchange.
In connection with the Bridge Loan from Ilion, LTC granted Ilion a non-exclusive
worldwide license to use LTC's thin film technology and manufacturing methods
solely as it relates to lithium-ion polymer batteries (the "Original Ilion
License"). The Original Ilion License provided that all improvements that were
developed by LTC or Ilion during the course of the licensing arrangement are
owned by Ilion (the "Improvements"). Under the Termination Agreement, the
Original Ilion License was terminated and LTC and Ilion entered into cross
licensing agreements whereby worldwide, non-exclusive, royalty free, perpetual
license were granted by each to the other with respect to certain specified
technology. The cross licensing agreement gives LTC, among other things, the
right to use the Improvements owned by Ilion and gives Ilion, among other
things, the right to use certain LTC technology that did not constitute
Improvements. The license from LTC to Ilion covers all product designs,
processing techniques and knowledge known to "those skilled in the art" whether
or not patented or patentable which LTC owned or possessed on December 31, 2001
and have communicated to Ilion or was developed by us pursuant to the LTC-Ilion
Merger Agreement, solely as the foregoing relates to the materials, design and
architecture of lithium-ion/lithium-ion polymer batteries and excluding any of
the foregoing as it relates to lithium metal polymer batteries and excluding any
improvements to the technology after December 31, 2001. The license from Ilion
to LTC covers all product designs, processing techniques and knowledge known to
"those skilled in the art" whether or not patented or
11
patentable which Ilion owned or possessed on December 31, 2001 and has
communicated to LTC or was developed by LTC pursuant to the LTC-Ilion Merger
Agreement, solely as the foregoing relates to the materials, design and
architecture of lithium-ion /lithium-ion polymer batteries and excluding any
improvements to the technology after December 31, 2001.
As part of the licensing arrangement LTC agreed not to duplicate Ilion's High
Power Device product or design or any other aspect of the high power device
system that could be protected by patent, provided however, LTC may duplicate
aspects of the system that may be determined by third party analysis. LTC also
agreed to not enter the power conditioning reliability market for a period of
two years after Proteus Power LLC (or its successor) ("Proteus") enters
commercial production or three years after December 31, 2001, whichever is
earlier. Subject to the foregoing, LTC has the right to use known conventional
construction designs which exist in the commercial marketplace outside of
Ilion-Proteus.
With respect to the Ilion Conversion Shares, the Warrant Shares and the shares
issuable upon conversion of the Ilion Notes and the Arch Bridge Notes, LTC
granted certain demand and piggy back registration rights commencing May 1,
2002.
As a further condition to the Termination Agreement on December 31, 2001, LTC
entered into a Note Purchase and Sale Agreement with Ilion and Arch Hill (the
"Note Purchase and Sale Agreement") which was closed on January 8, 2002 when all
closing conditions were met. Under the terms of the Note Purchase and Sale
Agreement, Arch Hill acquired from Ilion $3,949,000 principal amount of LTC
promissory notes held by Ilion (the "Ilion Notes"), convertible into 39,490,000
shares of our Common Stock. The Ilion Notes were previously issued by LTC to
Ilion in connection with the LTC-Ilion Merger Agreement and related bridge
financing agreement.
4. OPERATING AND LIQUIDITY DIFFICULTIES AND MANAGEMENT'S PLANS TO
OVERCOME:
The accompanying consolidated financial statements of LTC have been prepared on
a going concern basis, which contemplates the continuation of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. Since its inception, LTC has incurred substantial operating losses and
expects to incur additional operating losses over the next several years. Since
December 1993, operations have been financed primarily through the use of
proceeds from the sale of convertible debt and private placements of common and
preferred stock. Continuation of LTC's operations in 2002 is dependent upon the
bridge financing from Arch Hill and completion of the New Financing described in
Note 3. These conditions raise substantial doubt about LTC's ability to continue
as a going concern. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
MANAGEMENT'S PLANS - LTC has worked closely with selected portable electronics
Original Equipment Manufacturers ("OEMs") in the past, exploring various
notebook computer, PDA and wireless handset applications. Over the past few
years LTC has refocused its unique large footprint cell technology and market
activities to concentrate on
12
large, high rate battery applications including advanced automotive batteries
for 42-volt systems, Hybrid Electric Vehicles (HEVs) and energy storage devices
for the distributed power/renewable energy market. In September 2000, LTC
completed its first working prototype lithium-ion HEV battery, complete with
battery management and control electronics. A second generation prototype HEV
battery, designed to meet the specifications of an existing HEV, was completed
in January 2001. LTC is currently working on a prototype 42-volt automotive
battery which LTC expects to deliver to a European auto manufacturer in the
second quarter of 2002. LTC has not yet delivered a prototype HEV, 42-volt or
stationary power battery for testing by a third party.
As described in Note 3, LTC and GAIA have entered into a LOI relating to a share
exchange and a New Financing.
Management's operating plan seeks to minimize LTC's capital requirements, but
commercialization of LTC's battery technology will require substantial amounts
of additional capital. LTC expects that technology development and operating and
production expenses will increase significantly as it continues to advance its
battery technology and develop products for commercial applications. LTC's
working capital and capital requirements will depend upon numerous factors,
including, without limitation, the progress of LTC's technology development
program, technological advances, the status of competitors and the ability of
LTC and GAIA to collaborate subsequent to the GAIA Share Exchange.
LTC does not currently have sufficient cash to achieve all its development and
production objectives. LTC needs to raise approximately $6,000,000 in the New
Financing in order to have sufficient capital resources for its development,
production, operating and administrative needs until approximately June 2003.
LTC contemplates that a second financing transaction will be necessary during
the twelve months after the completion of the GAIA Share Exchange in order to
fully implement the new business plan.
LTC has not yet entered into any definitive agreements relating to the GAIA
Share Exchange or the New Financing.
Pursuant to the terms of a bridge loan entered into as of January 8, 2002, Arch
Hill has agreed to advance working capital to LTC until the earlier of the
closing of the New Financing or May 31, 2002. Arch Hill has advanced a total of
$1,294,567 through April 24, 2002 convertible at $.08 per share into 16,182,087
shares of LTC common stock. LTC believes that provided Arch Hill advances the
needed working capital to it under the bridge loan, LTC will have sufficient
capital resources to meet its needs and satisfy its obligations through May 31,
2002.
There can be no assurance that funding will continue to be provided by Arch Hill
in the amounts necessary to meet all of LTC's obligations until the closing of
the New Financing or that LTC will be able to consummate the New Financing. If
the New Financing is not consummated, LTC will assess all available alternatives
including a sale of its assets or merger, the suspension of operations and
possibly liquidation, auction, bankruptcy, or other measures.
13
The Arch Hill Bridge Loan Agreement does not contain a maximum of the amount of
funding that may be advanced under such agreement. Accordingly, there is no
maximum amount of notes that may be issued to Arch Hill. The amount of the notes
will be related to the working capital advances made by Arch Hill to LTC and the
length of time until the New Financing is completed.
5. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2002 are summarized as follows:
Laboratory equipment .......................... $ 1,396,000
Furniture and office equipment ................ 110,000
Leasehold improvements ........................ 48,000
-----------
$ 1,554,000
Less: Accumulated depreciation and amortization (1,336,000)
-----------
$ 218,000
===========
6. NOTE PAYABLE
As of December 31, 2001, LTC was in default on a note for a research and
development funding agreement. Under the agreement, starting in 1999 LTC was
obligated to pay a total of $100,000 for principal and $50,000 for interest
through January 2004. LTC did not make payments on the note until 2000. On
February 28, 2002, LTC remedied the condition of default. As of March 31, 2002,
the principal balance remaining under the note is $73,000. The note is secured
by the intellectual property rights and equipment developed from the funds
provided by this agreement.
7. CONVERTIBLE PROMISSORY NOTES
As of December 31, 2001, in connection with the Bridge Loan Financing Agreement,
Ilion has advanced to LTC working capital of $5,249,000 in the form of
Convertible Promissory Notes which have no stated interest rate and are
convertible at $.10 per share into LTC common stock if the LTC Ilion merger was
not consummated for any reason (See Note 3). Since the Convertible Promissory
Notes became convertible on January 8, 2002, the entire $16,483,000 of interest
expense related to the beneficial conversion venture was recognized as expense
during January 2002. During January 2002, in connection with the Termination
Agreement, Ilion sold to Arch Hill $3,949,000 of LTC notes originally held by
Ilion and the remaining $1,300,000 of LTC notes held by Ilion were converted
into 13,000,000 restricted shares of LTC common stock (the "Ilion Conversion
Shares").
As of March 31, 2002, Arch Hill advanced to LTC working capital of $1,042,025
(including $962,025 advanced during the three months ended March 31, 2002) in
the form of Convertible Promissory Notes which have no stated interest rate (See
Note 3). The notes are convertible at any time commencing on the date of
issuance into 13,025,312 shares of LTC common stock at $0.08 per share. Since
the Convertible Promissory Notes totaling $962,025 payable to Arch Hill are
convertible at inception, the entire $1,467,000 of interest expense related to
the beneficial conversion feature of these Notes was recognized as expense
during the three months ended March 31, 2002. (See Note 10).
14
8. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS - LTC has entered into an Employment Agreement with David
Cade, for a period of three years commencing as of January 1, 2002 (the "Term"),
pursuant to which Mr. Cade serves as LTC's Chairman and Chief Executive Officer
at a salary of $207,500 per year until the closing of the LTC-GAIA Transaction
and thereafter at $250,000 per year, subject to increase at the discretion of
the Board of Directors. The Agreement provides that during each fiscal year, Mr.
Cade will be eligible to receive a target bonus of up to 40% of his annual
salary for such fiscal year with the exact amount of such bonus to be determined
at the discretion of the Board of Directors or the applicable committee of the
Board of Directors in accordance with performance thresholds for such fiscal
year to be agreed upon prior to March 1 of the fiscal year to which the bonus
and the performance thresholds relate. Mr. Cade's employment agreement provides
for certain severance payment benefits in the event his employment is terminated
by LTC other than for cause and includes certain confidentiality,
non-solicitation and non-competition provisions.
LTC has entered into an Employment Agreement with Andrew J. Manning, for a
period of three years commencing as of January 1, 2002 (the "Term"), pursuant to
which Dr. Manning serves as LTC's Executive Vice President, Chief Operating
Officer and Chief Technical Officer at a salary of $150,000 per year until the
closing of the LTC-GAIA Transaction and thereafter at $175,000 per year, subject
to increase at the discretion of the Board of Directors. The Agreement provides
that during each fiscal year, Dr. Manning will be eligible to receive a target
bonus of up to 20% of his annual salary for such fiscal year with the exact
amount of such bonus to be determined at the discretion of the Board of
Directors or the applicable committee of the Board of Directors in accordance
performance thresholds for such fiscal year to be agreed upon prior to March 1
of the fiscal year to which the bonus and the performance thresholds relate. Dr.
Manning's employment agreement provides for certain severance payment benefits
in the event his employment is terminated by LTC other than for cause and
includes certain confidentiality, non-solicitation and non-competition
provisions.
9. STOCKHOLDERS' EQUITY
2002 STOCK INCENTIVE PLAN - LTC's Board of Directors adopted the 2002 Stock
Incentive Plan (the "2002 Plan") in January 2002. The 2002 Plan terminates in
January 2012. A total of 7,000,000 shares of common stock are reserved and
available for grant. The exercise price of an option granted under the 2002 Plan
will not be less than the fair market value of LTC's Common Stock on the date of
grant; however, for any non-qualified Stock Option the option price per share of
Common Stock, may alternatively be fixed at any price deemed to be fair and
reasonable, as of the date of grant. Options granted that are not vested will be
cancelled immediately upon termination of the grantee's employment or
association with LTC, except in certain situations such as retirement, death or
disability. Vested options are exercisable for up to sixty months upon
termination of the Grantee's employment or association with LTC.
In January 2002, 750,000 options were issued under the 2002 Plan to employees
and directors of LTC, having an exercise price of $.20, a term of ten years,
with one-half of such options
15
vesting July 1, 2002 and one-half vesting January 22, 2003.
Options under the 1994 Stock Plan, The Directors Plan, the 1998 Plan and the
2002 Plan as of March 31, 2002 are summarized as follows:
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
Outstanding, beginning of period 2,350,000 $ 0.27
Granted 750,000 $ 0.20
Exercised 0 0
Cancelled 0 0
--------- ---------
Outstanding, end of period 3,100,000 $ 0.25
--------- ---------
Options exercisable, end of period 2,350,000 $ 0.27
--------- ---------
Warrants as of March 31, 2002 are summarized as follows:
WEIGHTED
AVERAGE
WARRANTS EXERCISE PRICE
-------- --------------
Outstanding, beginning of period 4,186,000 $ 0.15
Granted 12,500,000(1) $ 0.15
Cancelled 0 0
---------- ----------
Outstanding, end of period 16,686,000 $ 0.15
---------- ----------
Exercisable 16,686,000 $ 0.15
---------- ----------
(1) In connection therewith, LTC recognized $2,755,000 of stock based
compensation expenses using the Black-Scholes option pricing model
as prescribed by FASB Statement 123 using the following
assumptions: no dividend yield, expected volatility of 198%, risk
free interest rate of 4.34% and expected life of 2 years. (See
Note 3).
10. SUBSEQUENT EVENT
On April 24, 2002, Arch Hill advanced an additional $252,542 to LTC under terms
of the bridge loan agreement that is convertible at any time commencing on the
date of issuance into 3,156,775 shares of LTC common stock at $.08 per share.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this report.
GENERAL AND PLAN OF OPERATION
We are a pre-production stage company in the process of commercializing unique,
solid-state, lithium-ion and lithium polymer rechargeable batteries. We are
engaged in technology development activities and pilot line manufacturing
operations to further advance this battery technology and we hold various
patents relating to such batteries.
We have worked closely with selected portable electronics original equipment
manufacturers (OEMs) in the past, exploring various notebook computer, PDA and
wireless handset applications. Over the past few years we have refocused our
large footprint cell technology and market activities to concentrate on large,
high rate battery applications including advanced automotive batteries for
42-volt systems, HEVs and energy storage devices for the distributed
power/renewable energy market. In September 2000, we completed our first working
prototype lithium-ion HEV battery, complete with battery management and control
electronics. A second generation prototype HEV battery, designed to meet the
specifications of an existing HEV, was completed in January 2001. We are
currently working on a prototype 42-volt automotive battery which we expect to
deliver to a European auto manufacturer in the second quarter of 2002. We have
not yet delivered a prototype HEV, 42-volt or stationary power battery for
testing by a third party.
In December 2001 we entered into a non-binding LOI with GAIA and Arch Hill, the
beneficial owner of all of the outstanding shares of GAIA. The LOI contemplates
a potential share exchange whereby we would acquire an equity interest in GAIA
in exchange for the issuance to Arch Hill of an equity interest in us. If we
consummate the GAIA Share Exchange we anticipate that we would enter into a
strategic alliance agreement with GAIA and operate the two companies as a single
entity with two operating locations - at Plymouth Meeting, Pennsylvania and at
Nordhausen, Germany.
We have agreed in the LOI to use our best efforts to consummate the GAIA Share
Exchange by May 31, 2002. We have not entered into any definitive agreements
relating to the GAIA Share Exchange as of the date of this Report and no
assurance can be given that the GAIA Share Exchange will be consummated as
described herein or at all.
In January 2002 as amended on March 22, 2002, we entered into a bridge loan with
Arch Hill pursuant to which Arch Hill has agreed to advance working capital to
us until the earlier of the closing of the New Financing and May 31, 2002.
For a further description of the GAIA Share Exchange, the bridge financing with
Arch Hill and the termination of the Merger Agreement with Ilion see our Form
10-KSB for the year ended December 31, 2001.
We have been unprofitable since inception, expect to incur substantial
additional operating losses over the next few years and need significant
additional financing to continue the development and
17
commercialization of our technology. We do not expect to generate revenues from
commercial operations during the year ended December 31, 2002.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
We have financed our operations since inception with convertible debt and
private placements of common stock and have raised approximately $20.7 million,
including $5,249,000 from Ilion and $1,042,025 from Arch Hill as of March 31,
2002.
At March 31, 2002, we had cash and cash equivalents of $168,000, fixed assets of
$218,000 and other assets of $37,000. Our total liabilities were $5,538,000
consisting of accounts payable, accrued salaries, accrued expenses and a
convertible promissory note to Arch Hill in the amount of $1,589,000 and
convertible promissory notes held by Arch Hill (formerly held by Ilion - see
Note 2) in the amount of $3,949,000. We had a working capital deficit of
$1,405,000 on March 31, 2002 as compared to a working capital deficit of
$586,000 on December 31, 2001. The increase in the working capital deficit is
primarily attributable to the convertible note payable to Arch Hill.
Our cash and cash equivalents increased by approximately $108,000 from December
31, 2001 to March 31, 2002. The cash increase is attributable primarily to
funding from Arch Hill in advance of payments to trade creditors.
Our stockholders' deficiency was $5,115,000 at March 31, 2002, after giving
effect to an accumulated deficit of $75,352,000 which consisted of $68,487,000
accumulated deficit during the development stage from July 21, 1989 through
March 31, 2002 and $6,865,000 accumulated deficit from prior periods. We expect
to incur substantial operating losses as we continue our commercialization
efforts.
We do not currently have sufficient cash to achieve all of our development and
production objectives. In order to have sufficient capital resources for our
development, production, operating and administrative needs and in order to
implement the new strategy of combining our operations with GAIA we will need to
raise at least $6,000,000 in a new equity financing. We expect that the New
Financing will be a condition precedent to the GAIA Share Exchange. If we raise
$6,000,000 in the New Financing we believe that we would have sufficient funds
to meet our needs until approximately June 2003. We believe that a second
financing transaction will be necessary during the twelve months after the
completion of the GAIA Share Exchange, if such transaction is consummated, in
order to fully implement our new business plan.
We have not entered into any definitive agreements relating to the New Financing
as of the date of this Report.
Pursuant to the terms of a bridge loan entered into as of January 8, 2002 as
amended on March 20, 2002, Arch Hill has agreed to advance working capital to us
until the earlier of the closing of the New Financing and May 31, 2002. Arch
Hill has advanced a total of $1,294,567 through April 24, 2002 convertible at
$.08 per share into 16,182,087 shares of our common stock. We believe that
provided Arch Hill advances the needed working capital to us under the bridge
loan, we will have sufficient capital resources to meet our needs and satisfy
our obligations through May 31, 2002.
18
There can be no assurance that funding will continue to be provided by Arch Hill
in the amounts necessary to meet all of our obligations until the closing of the
New Financing or that we will be able to consummate the New Financing. If the
New Financing is not consummated, we will assess all available alternatives
including a sale of our assets or merger, the suspension of operations and
possibly liquidation, auction, bankruptcy, or other measures.
RESULTS OF OPERATIONS
We had no revenues from commercial operations for the three months ended March
31, 2002 and 2001.
Engineering, research and development expenses were $394,000 for the three
months ended March 31, 2002 compared to $417,000 for the three months ended
March 31, 2001. The decrease of $23,000 was due primarily to decreased salaries
and temporary technical assistance offset by increased lab supplies.
General and administrative expenses were $440,000 for the three months ended
March 31, 2002 compared to $250,000 for the three months ended March 31, 2001.
The increase of $190,000 was due to increased legal, accounting and other
expenses.
Stock based compensation expenses were $2,755,000 for the three months ended
March 31, 2002 compared to $0 for the three months ended March 31, 2001. The
$2,755,000 of expense was caused by the issuance of 12,500,000 warrants to Ilion
pursuant to terms of the Termination Agreement (See Note 2).
Interest expense increased to $2,000 (net of interest income of $1,000) for the
three months ended March 31, 2002 compared to $1,000 (net of interest income of
$2,000) for the three months ended March 31, 2001.
In connection with the additional $962,025 of convertible promissory notes
payable to Arch Hill, $1,457,000 of interest expense related to the beneficial
conversion feature was recognized as expense for the three months ended March
31, 2002. Since the Convertible Promissory Note payable to Arch Hill is
convertible at inception, the entire $1,467,000 of interest expense related to
the beneficial conversion feature was recognized as expense during the three
months ended March 31, 2002.
In connection with the Bridge Loan Financing Agreement, Ilion had advanced to
LTC working capital of $5,249,000 in the form of Convertible Promissory Notes
which have no stated interest rate and are convertible at $.10 per share into
LTC common stock if the LTC Ilion merger was not consummated for any reason (See
Notes 3 and 7). Since the Convertible Promissory Notes became convertible on
January 8, 2002, the entire $16,483,000 of interest expense related to the
beneficial conversion feature was recognized as expense during January 2002.
19
SAFE HARBOR STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This report contains certain forward-looking
statements and information that are based on the beliefs of management as well
as assumptions made by and information currently available to management. The
statements contained in this report relating to matters that are not historical
facts are forward-looking statements that involve risks and uncertainties,
including, but not limited to, the successful commercialization of our
batteries, future demand for our products, general economic conditions,
government and environmental regulation, competition and customer strategies,
technological innovations in the battery industries, changes in our business
strategy or development plans, capital deployment, business disruptions, our
ability to consummate the share exchange and financing described herein and
other risks and uncertainties, certain of which are beyond our control. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may differ materially form those
described herein as anticipated, believed, estimated or expected.
20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following Exhibits are filed as part of this
Report or incorporated herein by reference:
10.4 2002 Stock Incentive Plan. (1)
10.9 Form of Incentive Stock Option Agreement relating to
LTC's 2002 Stock Incentive Plan. (1)
10.10 Form of Non-Qualified Incentive Stock Option
Agreement relating to LTC's 2002 Stock Incentive Plan
[For Employees]. (1)
10.11 Form of Non-Qualified Incentive Stock Option
Agreement relating to LTC's 2002 Stock Incentive Plan
[For Consultants and Non-Employee Directors]. (1)
10.24 Form of Third Warrant Amendment Agreement. (1)
10.27 Employment Agreement dated as of January 1, 2002
between David J. Cade and LTC. (1)
21
10.30 Employment Agreement dated as of January 1, 2002
between Andrew J. Manning and LTC. (1)
10.31 Termination Agreement, dated as of December 31, 2001,
between LTC and Ilion [Schedules and Exhibits
omitted]. (1)
10.32 Warrant Amendment Agreement, dated as of December
31,2001, between LTC and Ilion. (2)
10.33 License Agreement, dated as of December 31, 2001,
from LTC to Ilion [Schedules omitted]. (2)
10.34 License agreement, dated as of December 31,2001 from
Ilion to LTC [Schedules omitted]. (2)
10.35 Note Purchase and Sale Agreement, dated as of
December 31, 2001, among Ilion, Arch Hill and LTC.
[Schedules omitted]. (2)
10.36 Interim Financing Letter Agreement, dated as of
December 31, 2001 between LTC and Arch Hill
[Schedules and Exhibits omitted]. (2)
10.37 Form of Convertible Promissory Note to be issued
under the Interim Financing Letter Agreement between
LTC and Arch. (2)
10.38 Bridge Financing Amendment Agreement, dated as of
March 20, 2002, between LTC and Arch Hill. (1)
b) Form 8-K Reports during the Quarter Ended March 31,
2002:
Form 8-K dated January 8, 2002 reporting on the
termination of the LTC-Ilion merger agreement, the
closing of the Note Purchase and Sale Agreement among
Ilion, Arch Hill and LTC and the execution and
delivery of the Interim Financing Letter Agreement
between LTC and Arch Hill.
(1) Incorporated herein by reference to LTC's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2001.
(2) Incorporated herein by reference to LTC's Report on Form 8-K dated January
23, 2002.
22
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
May 14, 2002 LITHIUM TECHNOLOGY CORPORATION
By: /s/ David J. Cade
-------------------------------------------
David J. Cade, Chairman and Chief Executive
Officer (Principal Executive Officer)
By: /s/ William D. Walker
--------------------------------------------
William D. Walker, Chief Financial Officer
(Principal Financial and Accounting Officer)
23