You should read the
following discussion and analysis together with the financial statements and
related notes included elsewhere in this prospectus. This discussion may contain
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in any forward-looking
statements as a result of many factors, including those set forth under
“Risk Factors” and elsewhere in this prospectus.
Net Revenue
Consolidated net revenue
for the third quarter of 2004 was $1,952,887 compared with $727,047 for the same
period of 2003, an increase of $1,225,840, or 168.6%. Net revenue for the first
nine months of 2004 was $5,459,529 compared with $2,348,535 for the same period
of 2003, an increase of $3,110,994, or 132.5%. Of the revenue increase,
$1,129,058 and $3,259,439 for the third quarter of 2004 and the first nine
months ended September 30, 2004, respectively, was attributable to consolidating
the revenues of Mobile Energy Products, Inc. (“MEP”), whose operations
were acquired on October 1, 2003 from EaglePicher Technologies, LLC
(“EaglePicher”) and revenue increases of $96,782 for the quarter ended
and revenue decreases of $148,445 for the first nine months ended September 30,
2004 for the base business. The primary reason for the decline in the base
business for the first nine months ended September 30, 2004 was related to
delays in timely receipt of new pending and continuations of existing U.S.
government research and development contracts. The Company believes that
revenues from U.S. government research and development contracts awarded or
extended in June and July 2004 will bring revenues consistent with 2003 in the
fourth quarter of 2004.
Consolidated net revenue
included net revenue pursuant to a supply agreement with EaglePicher amounting
to $778,942, or 40%, and $2,829,911, or 52%, for the third quarter ended and
first nine months ended September 30, 2004, respectively. The Company believes
that revenues generated under this supply agreement will be lower in the fourth
quarter of 2004.
Gross Profit
The gross profit for the
third quarter of 2004 was $274,786 (14.1% of net revenue) compared to $20,933
(2.9% of net revenue) for the same period of 2003. Gross profit for the first
nine months of 2004 was $1,012,920 (18.6% of net revenue) compared to $177,306
(7.5% of net revenue) for the same period of 2003. The gross profit increase was
mainly driven by consolidating the revenues and cost of revenues of MEP. MEP
delivers commercially viable products to market under contracts yielding higher
gross profit than the Company’s mix of cost plus and fixed fee type
contracts.
9
General and Administrative Expenses
General and administrative
(“G&A”) expenses for the third quarter of 2004 were $418,824
(21.4% of net revenue) compared with $110,469 (15.2% of net revenue) for the
same period of 2003, an increase of $308,355. G&A expenses were $1,196,782
(21.9% of net revenue) for the first nine months of 2004 versus $283,761 (12.1%
of net revenue) for the same period of 2003, an increase of $913,021. Of the
increase for the first nine months of 2004, 27.3% was mainly driven by
consolidating the general and administrative expenses of MEP. The remaining
increase in G&A for the first nine months of 2004 was primarily a result of
increased accounting and legal expenses of 36.8%, investor relations expenses of
12.4%, and salaries and benefits for new employees to support future operating
activities. Additionally, 26.8% and 42.6% was related to stock-based employee
compensation expense related to the issuance of stock options to employees for
the third quarter and for the first nine months of 2004, respectively. The
deferred compensation expense related to stock options issued to employees
during the first nine months of 2004 was $1,592,178. The remaining balance as of
September 30, 2004 was $1,309,478 and will be fully amortized through June 2008.
Interest Expense
Interest expense for the
third quarter of 2004 was $7,079, compared with $39,767 for the same period of
2003, a decrease of $32,688. Interest expense for the first nine months of 2004
was $287,259 compared with $106,743 for 2003, an increase of $180,516. The
increase was primarily related to the increase of accretion of deferred interest
related to the notes payable to related parties. Concurrent with the merger, the
Company converted its notes payable to related parties and related accrued
interest amounting to $1,100,000 and $86,000, respectively into shares of its
common stock. The notes carried interest at 10% annum and were due on demand
maturing in November 2004.
The Company has a $100,000
secured line of credit with a bank with no expiration date and subject to annual
renewals. Advances bear interest at 1.0% over the bank’s prime lending rate
(5.00% as of June 30, 2004) and are personally guaranteed by a stockholder of
the Company. The Company made repayments in the amount of $100,000 in the second
quarter. The unused line of credit is $100,000 as of September 30, 2004.
Interest expense related to the line of credit amounted to $2,542 and $3,949 for
the nine months ended September 30, 2004 and 2003, respectively.
Net Loss
Net loss for the third
quarter of 2004 was $303,267, compared to a net loss of $118,926 for the same
period of 2003. Net loss for the first nine months of 2004 was $723,271,
compared to a net loss of $213,198 for the same period of 2003.
Deferred compensation
expense related to stock options issued to employees during the first nine
months of September 2004 was $1,592,178. The remaining balance as of September
30, 2004 was $1,309,478 and will be fully amortized through June 2008 expensed
in G&A.
Net Loss Attributable to Common Stockholders
Net loss attributable to
common stockholders for the third quarter of 2004 was $779,763 or $.06 cents per
share (basic and diluted), compared to a net loss of $118,926 or $.01 cent per
share (basic and diluted) for the same period of 2003. Net loss attributable to
common stockholders for the first nine months of 2004 was $4,467,303 or $.45
cents per share (basic and diluted), compared to a net loss of $213,198 or $.03
cents per share (basic and diluted) for the same period of 2003.
The Company recorded a
one-time, non-cash item to recognize deemed dividends on preferred stock in the
amount of $3,744,032. Of this amount, $3,290,216 resulted from the beneficial
conversion of the underlying shares of common stock associated with issuance of
new series A convertible preferred stock and detachable warrants in June and
July 2004. An additional $453,816 resulted from the conversion of old EEI series
A convertible preferred stock into shares of common stock.
10
Liquidity and Capital Resources
The Company's working capital, current ratio and long-term debt to equity ratio are as follows:
|
|
September 30, 2004
|
|
December 31, 2003
|
|
Working capital
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$4,843,984
|
|
$(804,310)
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|
Current ratio
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6.55 to 1
|
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.62 to 1
|
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Long-term debt to equity ratio
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7.9%
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(47.5)%
|
The Company has a $100,000
unsecured line of credit with a bank with no expiration date and subject to
annual renewals. Advances bear interest at 1.0% over the bank’s prime
lending rate (5.00% as of September 30, 2004) and are personally guaranteed by a
stockholder of the Company. The Company made repayments in the amount of
$100,000 in the nine months ended September 30, 2004. The unused line of credit
is $100,000 as of September 30, 2004.
The Company’s
long-term debt was $614,998 as of September 30, 2004. Current maturities of
long-term debt are $235,376 as of the same period. During the first nine months
of 2004, debt decreased by $55,921 compared to total debt at December 31, 2003.
The Company made repayments
on a note payable requiring 24 monthly installments of $5,042 commencing July
2002 and on a note payable requiring 12 monthly installments of $2,744
commencing January 2004 bearing interest at 9% in the amount of $45,375 and
$25,894, respectively.
The Company has a
non-interest bearing note payable to EaglePicher requiring three annual
installments of $150,000 commencing in October 2004 and is secured by assets
acquired in connection with the purchase of its alternative energy business. As
of September 30, 2004, the note payable had a face value of $450,000 with a
remaining discount to fair value of $22,830. During the nine months ended
September 30, 2004, the Company accreted an additional $15,348 of interest at an
effective rate of 5%, increasing the fair value of the note payable to $427,170.
The Company has three notes
payable with Connecticut Innovations, Incorporated (“CII”). CII notes
payable provided working capital for specific contract research and development
projects. The terms of these notes provide for royalty payments due CII in the
event such projects yield a commercially viable product or patented process. The
royalty payment will equal 15% of licensing or royalty fees earned by the
Company related to the specified projects limited to 200% of the original
principal balance of the related note. The Company has not realized revenues
subject to royalties related to the CII notes payable for the nine months ended
September 30, 2004. The Company has not made the scheduled principal and
interest payments since October 2002. The Company has an agreement with CII
whereby CII has waived its rights to any collection actions, remedies, fees and
expenses resulting from events of default through February 12, 2005. Further,
until a new funding agreement is arranged, CII agreed to apply any payments made
to principal and interest as originally scheduled. The notes payable and related
interest payable to CII are $182,340 and $32,092, respectively, as of September
30, 2004.
Concurrent with the merger,
the Company converted its notes payable to a stockholder and individuals and
entities related to a stockholder and related accrued interest, amounting to
$1,100,000 and $86,000, respectively, into 1,019,367 shares of its common stock.
The notes carried interest at 10% per annum and were due on demand maturing in
November 2004. The notes were convertible into the Company’s common stock
at a rate of $1.16 per share. In connection with the above notes, the Company
issued warrants to purchase 412,560 shares of the Company’s common stock at
$1.16 per share. On June 9, 2004, a warrant to purchase 154,710 shares of EEI
common stock was relinquished by a holder of the warrant. The terms of the
warrants are five years from the issuance of the related notes with expirations
beginning in April 2007 through November 2008. The total estimated value of the
warrants amounted to $260,207 and represents deferred interest that was to be
accreted over the term of the related notes. Upon conversion of the notes, the
remaining deferred interest, amounting to $107,140, was accreted into interest
expense. The Company plans to pay $12,115 of remaining interest payable related
to the notes payable in cash.
11
In March 2004, the Company
issued warrants to purchase 156,250 shares of its Preferred Stock in connection
with a contract to receive a total of $500,000 in cash funding from In-Q-Tel, Inc., a private venture
capital firm, for intended use in the research and development of certain battery
technologies. The contract provides for scheduled payments to the Company if it
performs certain research and development activities over a nine-month period.
The warrants are exercisable at $0.00 (zero dollars) per share over a five-year
period expiring in March 2009. Concurrent with merger, the Company and the
holder of the warrant have agreed to modify the warrant to provide for the
issuance of 268,594 shares of the Company’s common stock upon exercise. The
warrants were recorded as additional paid-in capital and a warrant subscription
receivable. The Company has satisfied the contract terms to date and collected
$300,000 as of September 30, 2004. The outstanding warrant subscription
receivable was $200,000 as of September 30, 2004 and will be received in
increments of $50,000 in November and December of 2004.
Concurrent with the merger
and on June 30, 2004 and July 15, 2004, the Company completed a private
placement of 5,501 units at a purchase price of $1,000 per unit. Each unit
consists of one share of Series A Preferred stock, convertible into 400 shares
of common stock, and a detachable warrant to purchase 200 shares of common stock
at an exercise price of $2.50. Gross proceeds from the private placement
amounted to approximately $5,501,000 and net proceeds amounted to approximately
$4,590,000. Gross proceeds allocated to the issuance of the Series A Convertible
Preferred stock amounted to $3,290,216 and resulted in a beneficial conversion
feature in that amount and was deemed a preferred stock dividend to the holders.
Cash expected to be
generated from operating activities, together with funds available resulting
from the proceeds of the private placement of series A convertible preferred
stock, are expected, under current conditions, to be sufficient to finance the
Company’s planned operations over the next twelve months. Over that same
period, the Company expects to make significant investments in plant, property,
and equipment to expand its manufacturing capabilities to manufacture its
patented bipolar nickel-metal hydride batteries.
Net Revenue
Consolidated net revenue
for 2003 was $4,120,024 compared with $2,749,220 for 2002, an increase of
$1,370,804, or 49.9%. Of the revenue increase, $843,793 was attributable to
consolidating the revenues of Mobile Energy Products, Inc. (“MEP”),
whose operations were acquired on October 1, 2003 from EaglePicher Technologies,
LLC (“EaglePicher”) and revenue increases of $527,011 for the base
business. The primary reason for the increase in the base business for the year
was related to receipt of new pending and continuations of existing U.S.
government research and development contracts.
Consolidated net revenue
included net revenue pursuant to a supply agreement with EaglePicher amounting
to $619,360, or 15.0%.
Gross Profit
Gross profit for 2003 was
$939,606 (22.8% of net revenue) compared to $108,628 (4.0% of net revenue) for
2003. The gross profit increase was mainly driven by consolidating the revenues
and cost of revenues of MEP. MEP delivers commercially viable products to market
under contracts yielding higher gross profit than the Company’s mix of cost
plus and fixed fee type contracts.
General and Administrative Expenses
General and administrative
(“G&A”) expenses for 2003 were $826,441 (20.1% of net revenue)
compared with $298,524 (10.9% of net revenue) for 2002, an increase of $527,917.
Of the increase, 50.4% was mainly driven by consolidating the general and
administrative expenses of MEP. The remaining increase in G&A for 2003 was
primarily a result of increased accounting and legal expenses related to the MEP
acquisition.
Interest Expense
Interest expense for 2003
was $151,706, compared with $72,751 for 2002, an increase of $78,955. The
increase was primarily related to the increase of accretion of deferred interest
related to the notes payable to related parties. The notes carried interest at
10% annum and are due on demand maturing in November 2004. The remaining
increase relates to long-term debt and advances on a secured line of credit with
a bank.
12
Net Loss
Net loss for 2003 was $38,541, compared to a net loss of $748,210 for 2002.
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