<PAGE> 1
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 SEPTEMBER 30, 1998
[ ] 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 October 31, 1998:
21,239,694 shares of Common Stock
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE> 2
LITHIUM TECHNOLOGY CORPORATION AND SUBSIDIARY
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997
Consolidated Statements of Operations - Nine Months Ended
September 30, 1998 and 1997, and Period From July 21,
1989 (Date of Inception) to September 30, 1998
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1998 and 1997, and Period from July 21,
1989 (Date of Inception) to September 30, 1998
Notes to Consolidated Financial Statements - September 30,
1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
LITHIUM TECHNOLOGY CORPORATION AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEETS
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,662,000 $ 506,000
Cash held in escrow -- 3,330,000
Other current assets 53,000 15,000
---------- ----------
Total Current Assets 1,715,000 3,851,000
---------- ----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION OF $716,000 AND $567,000 549,000 422,000
OTHER ASSETS:
Debt issue costs, less accumulated amortization of $146,000 and $39,000 582,000 638,000
Security and equipment deposits 95,000 49,000
----------- -----------
677,000 687,000
----------- -----------
$2,941,000 $4,960,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 147,000 $ 390,000
Accrued salaries 165,000 181,000
Other accrued expenses 553,000 308,000
Customer deposits 100,000
----------- -----------
Total Current liabilities 965,000 879,000
----------- -----------
LONG-TERM LIABILITIES:
Senior Secured Convertible Notes, due July 1, 2002 5,500,000 5,500,000
----------- -----------
Total liabilities 6,465,000 6,379,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Common stock, par value $.01 per share:
Authorized - 50,000,000 shares
Issued and outstanding - 21,239,694 and 21,016,361 shares 212,000 210,000
Additional paid-in capital 38,454,000 38,277,000
Accumulated deficit (6,865,000) (6,865,000)
Deficit accumulated during development stage (35,325,000) (33,041,000)
------------ ------------
Total Stockholders' Deficiency (3,524,000) (1,419,000)
------------ ------------
$2,941,000 $4,960,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 21, 1989
(DATE OF INCEPTION)
THREE MONTHS ENDED NINE MONTHS ENDED TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------------ -----------------
1998 1997 1998 1997 1998
---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Development contracts $ 32,000 -- $ 54,000 -- $ 54,000
----------- ------------ ----------- ------------ ------------
COSTS AND EXPENSES:
Engineering, research
and development 537,000 287,000 1,397,000 914,000 6,509,000
General and administrative 414,000 294,000 1,351,000 1,135,000 9,964,000
----------- ------------ ----------- ------------ ------------
951,000 581,000 2,748,000 2,049,000 16,473,000
----------- ------------ ----------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net of
interest income (89,000) (46,000) (240,000) (530,000) (1,715,000)
Interest expense related
to beneficial conversion
feature -- (9,821,000) -- (9,821,000) (17,841,000)
Other non-operating
income - Note 5 -- 650,000 650,000
----------- ------------ ----------- ------------ ------------
(89,000) (9,867,000) 410,000 (10,351,000) (18,906,000)
----------- ------------ ----------- ------------ ------------
NET LOSS: $(1,008,000) $(10,448,000) $(2,284,000) $(12,400,000) $(35,325,000)
=========== ============ =========== ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING: 21,240,000 17,612,000 21,116,000 17,530,000
=========== ============ =========== ============
BASIC AND DILUTED NET LOSS
PER SHARE: $(.05) $(.59) $(.11) $(.71)
=========== ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY) - (UNAUDITED)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During
---------------- Paid-In Accumulated Development
Shares Amount Capital Deficit Stage
------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES AT
DECEMBER 31, 1997 21,016,361 $210,000 $38,277,000 $(6,865,000) $(33,041,000)
Nine months ended September 30, 1998:
Issuance of Common Stock:
In connection with
settlement of litigation 125,000 1,000 124,000
Upon exercise of stock options 98,333 1,000 53,000
Net loss (2,284,000)
---------- -------- ----------- ----------- ------------
BALANCES AT
SEPTEMBER 30, 1998 21,239,694 $212,000 $38,454,000 $(6,865,000) $(35,325,000)
========== ======== =========== =========== ============
</TABLE>
5
<PAGE> 6
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
Nine Months Ended July 21, 1989
September 30, (Date of
------------- Inception) to
1998 1997 September 30, 1998
---------- ----------- ------------------
(unaudited) (unaudited) (As Restated,
see Note 7)
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,284,000) $(12,400,000) $(35,325,000)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Interest expense relating to the beneficial
conversion feature of the Senior
Secured Convertible Note -- 9,821,000 17,841,000
Depreciation 149,000 126,000 716,000
Amortization of debt issue costs 107,000 146,000 1,027,000
Reduction of accrued expenses (270,000) -- (270,000)
Common stock issued in lieu of interest -- 455,000 1,288,000
Fair value of warrants and option granted
for services rendered -- -- 209,000
Common stock issued for services
provided -- -- 206,000
Common stock issued upon settlement of
litigation 125,000 -- 125,000
Expenses paid by shareholder on behalf
of Company -- -- 79,000
Changes in operating assets and liabilities:
Other current assets (38,000) 10,000 (48,000)
Security and equipment deposits (46,000) -- (95,000)
Accounts payable, accrued expenses and
customer deposits 356,000 109,000 2,344,000
Due to related parties -- -- (118,000)
------------ ----------- ------------
Net cash used in
operating activities (1,901,000) (1,733,000) (12,021,000)
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (276,000) (2,000) (1,015,000)
Restricted cash -- 65,000 --
Other -- (1,000) 94,000
------------ ----------- ------------
Net cash provided by (used in)
investing activities (276,000) 62,000 (921,000)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advance repayable only out of
proceeds of public offering -- -- 471,000
Proceeds received upon issuance of
common stock -- -- 3,239,000
Proceeds received from issuance of
preferred stock, net of related costs -- -- 100,000
Proceeds received upon exercise of options
and warrants, net of costs 54,000 -- 637,000
Net advances by former principal
stockholder -- -- 321,000
Proceeds from sale of convertible debt 3,330,000 1,370,000 10,874,000
Debt issue costs (51,000) (278,000) (938,000)
Repayment of convertible debt -- (100,000) (100,000)
------------ ----------- ------------
Net cash provided by
financing activities 3,333,000 992,000 14,604,000
------------ ----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,156,000 (679,000) 1,662,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 506,000 1,388,000 --
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,662,000 $ 709,000 $ 1,662,000
============ =========== ============
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 $ -- $ -- $ 352,000
Exchange of equipment and accrued rent for
common stock $ -- $ -- $ 271,000
Subordinated notes and related accrued interest
exchanged for Series A preferred stock $ -- $ -- $ 3,300,000
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 $ -- $ 145,000 $ 4,776,000
Deferred offering costs on warrants exercised $ -- $ -- $ 88,000
Issuance of warrants in settlement of litigation for
debt issue costs and for services rendered $ -- $ 190,000 $ 364,000
Common stock issued for costs related to 10%
promissory notes $ -- $ -- $ 525,000
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
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, 1997. Operating results for the three and nine month
periods ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998 or
any interim period.
Effective January 1, 1998, the Company adopted Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income"
("SFAS 130"). During the periods presented, the Company had no changes
in equity from transactions or other events and circumstances from
non-owner sources. Accordingly, a statement of comprehensive income has
not been provided as comprehensive loss equals net loss for all periods
presented.
2. DESCRIPTION OF BUSINESS
Lithium Technology Corporation ("LTC") together with its wholly-owned
subsidiary, Lithion Corporation ("Lithion"), collectively referred to
as the "Company", are development stage companies in the process of
commercializing a unique, solid-state, lithium polymer rechargeable
battery. The Company is engaged in research and development activities
to further develop and exploit this battery technology and also holds
various patents relating to such batteries. The Company's
commercialization focus is on the rapidly growing portable electronics
market segment (notebook computers and wireless communications handset
devices).
7
<PAGE> 8
3. OPERATING AND LIQUIDITY DIFFICULTIES AND MANAGEMENT'S PLANS TO
OVERCOME
The accompanying consolidated financial statements of the Company 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,
the Company has incurred substantial operating losses and expects to
incur additional operating losses over the next several years. The
Company does not expect to generate any revenues from commercial
operations prior to December 31, 1999. 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 the Company's operations is dependent upon its
ability to raise additional financing. These conditions raise
substantial doubt about the Company'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.
8
<PAGE> 9
MANAGEMENT'S PLANS
During the last four years, the Company has recruited a new management
team and a core technical staff with commercialization and battery
technology expertise. The staff has expertise in technology,
commercialization, process development, battery engineering and
strategic alliance development. A modern research facility was leased
and product development commenced. Through September 30, 1998, the
Company had not generated any revenues from commercial operations and
the losses have resulted principally from (i) interest expense related
to the beneficial conversion feature of certain convertible notes, (ii)
general and administrative costs and (iii) research and development
costs.
Although, management's operating plan seeks to minimize the Company's
capital requirements, commercialization of the Company's battery
technology will require substantial amounts of additional capital. The
Company expects that research and development expenses will increase
significantly as it continues to advance its battery technology and
develop products for commercial applications. The Company's working
capital and capital requirements will depend upon numerous factors,
including, without limitation, the progress of the Company's research
and development program, the levels and resources that the Company
devotes to the development of manufacturing and marketing capabilities,
technological advances, the status of competitors, the ability of the
Company to obtain equity and/or debt financing in the public or private
markets, and the ability of the Company to establish collaborative
arrangements with other companies to provide research and development
funding to the Company and to manufacture and market the Company's
products.
The Company has raised approximately $14,800,000 since inception
through various sales of convertible debt and common and preferred
stock. During 1996, the Company sold a then 4% equity position to a
Japanese Consortium for approximately $2,400,000 and also sold 10%
convertible promissory notes for $1,750,000. During 1997, the Company
issued 8.5% Senior Secured Convertible Notes for $5,500,000.
Management's plans include expansion of its strategic alliances, which
would provide capital from joint development programs, license fees or
an additional equity investment. The Company also plans to raise
additional capital by means of private and/or public equity or debt
financings.
In May 1998, the Company entered into a technology development
agreement with a global notebook computer manufacturer for the Company
to provide its proprietary rechargeable lithium-ion polymer batteries
for an advanced notebook application. Under the terms of the agreement,
the manufacturer will invest $1,000,000 in the Company for 1,428,571
shares of Common Stock. Of this amount, $100,000 was advanced to the
Company and $900,000 is scheduled for funding in two payments based
upon technology-related milestones.
The Company reported in its June 30, 1998 report on Form 10-QSB that it
was then seeking to raise gross proceeds of $22,000,000 through the
private placement of redeemable convertible preferred stock. As
reported by the Company at that time, no commitments had been received
by the Company for the purchase of such securities, nor have any
commitments since been received. The Company, with the advice of its
investment banking firm, has determined not to proceed with the
$22,000,000 offering and the Company is currently evaluating and
reformulating its financial objectives and strategies in conjunction
with its technology development and manufacturing strategies. The
decision not to proceed with the $22,000,000 offering was based on
several factors including the recent global economic down cycle as well
as unfavorable conditions in the domestic and international securities
markets during the third fiscal quarter for 1998 (particularly in the
Far East where significant investment interest in the Company is
potentially located), and a significant decrease in the market price
for the Company's common stock with the potential adverse consequence
on the pricing of the $22,000,000 offering and resulting dilutive
effect to the Company's existing shareholders. In connection with this
re-evaluation the Company is currently developing, and implementing in
part, a two-part financing strategy, the first component of which
seeks to raise gross proceeds of approximately $6,000,000 through the
private placement of debt and equity securities, and the second
component of which is currently under development and subject to the
first financing round's outcome, R&D results, the finalization of
alternative manufacturing strategies, and other factors. The
definitive terms of these financings are subject to negotiation with
the potential investors. No commitments for the purchase of these
securities have been received by the Company as of the date of this
report.
There can be no assurance that the incremental capital needed to attain
commercial viability of the Company's battery technology will be
obtained, which the Company currently estimates at approximately
$14,300,000 (without regard to repayment of the $5,500,000 Senior
Secured Convertible Notes and to the capital requirements for the
development of any overseas manufacturing capacity). If the Company is
unable to raise sufficient capital, it will be forced to curtail
research and development expenditures which, in turn, will delay, and
could prevent, the completion of the commercialization process.
9
<PAGE> 10
4. PROPERTY AND EQUIPMENT ARE SUMMARIZED AS FOLLOWS:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Laboratory equipment $1,123,000 $ 855,000
Furniture and office equipment 97,000 93,000
Leasehold improvements 45,000 41,000
---------- ---------
1,265,000 989,000
Less: Accumulated depreciation
and amortization 716,000 567,000
---------- ---------
$ 549,000 $ 422,000
========== =========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS - In August 1996, civil actions were commenced
against the Company by a former director of the Company, and by the
Company's former legal counsel. The former director's complaint sought
monetary damages amounting to approximately $4,500,000 and specific
performance of registration rights of certain warrants of the Company
that had not been registered and to which he claimed entitlement. The
Company had declared such warrants and related documents void. The
complaint of the Company's former counsel alleged non-payment of legal
fees for services rendered. The Company included the unpaid legal fees
in accounts payable, however, it believed these actions to be without
merit. Accordingly, the Company filed its own lawsuit against the
former counsel as well as the former director.
In May 1998, the Company reached agreements to settle the law suits
pursuant to which the Company issued 125,000 shares of its Common
Stock, received a cash settlement payment and eliminated an accrued
liability, the net effect of which was cash proceeds to the Company of
approximately $505,000.
ACCRUED INTEREST - Included in other accrued expenses at September 30,
1998 is accrued interest payable on the $5,500,000 Senior Secured
Convertible Notes of $478,000. The Company has recently given notice of
its election to pay the interest due for the first year of $467,500
through the issuance of common stock. This interest payment will result
in the issuance of approximately 1,670,000 shares of the Company's
common stock.
10
<PAGE> 11
6. STOCK OPTIONS
Options under the 1994 Stock Plan and Directors Plan as of September
30, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise Price
<S> <C> <C>
Outstanding, beginning of period 2,909,000 $ 0.73
Granted 65,000 1.01
Exercised (98,000) .55
Cancelled (113,000) .87
---------- ------
Outstanding, end of period 2,763,000 $ 0.73
---------- ------
Options exercisable, end of period 1,918,000 $ 0.63
---------- ------
</TABLE>
11
<PAGE> 12
7. RESTATEMENT
Subsequent to the issuance of the September 30, 1997 financial
statements on Form 10-Q, management determined that the accounting
treatment of the convertible notes issued in 1994 and 1995 did not
reflect the intrinsic value of the beneficial conversion feature of
those notes. As a result, the financial statements for the period from
July 21, 1989 (date of inception) to September 30, 1997, and for the
years ended December 31, 1994 and December 31, 1995 have been restated
from amounts previously reported to reflect the appropriate accounting
treatment for the beneficial conversion features. The effect of the
restatement is to record the discount as interest expense for each
period with an offsetting credit to additional paid-in capital. The
restatement had no impact on total stockholders' equity or total
assets.
The impact of the restatement on the Company's financial statements is
summarized below:
<TABLE>
<CAPTION>
As Previously
Reported As Restated
<S> <C> <C>
Net loss:
For the period July 21, 1989 (date of inception)
through September 30, 1997 $23,257,000 $31,277,000
=========== ===========
</TABLE>
12
<PAGE> 13
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.
Subsequent to the issuance of the September 30, 1997 financial statements on
Form 10-QSB, management determined that the accounting treatment of the
convertible notes issued in 1994 and 1995 did not reflect the intrinsic value of
the beneficial conversion feature of those notes. As a result, the financial
statements for the period from July 21, 1989 (date of inception) to September
30, 1997, and for the years ended December 31, 1994 and 1995 have been restated
from amounts previously reported to reflect the appropriate accounting treatment
for the beneficial conversion features. The effect of the restatement is to
record the discount as interest expense for each period with an offsetting
credit to additional paid-in capital. The restatement had no impact on total
stockholders' equity or total assets.
OVERVIEW
The Company is in the late stages of developing and seeking to commercialize
innovative rechargeable solid-state lithium-ion polymer batteries. As of
September 30, 1998, the Company had not generated any product revenues and had
no commercial operations. To date, the Company has delivered limited quantities
of its battery cells to selected Original Equipment Manufacturers ("OEMs") for
evaluation. Based upon the performance of the Company's battery cells and its
unique manufacturing technology, a top ten personal computer manufacturer (the
"PC OEM") has entered into a technology development agreement with the Company
to incorporate the Company's lithium-ion polymer batteries in the PC OEM's
advanced notebook computer. Subject to successful qualification of the Company's
battery, the Company anticipates entering into a definitive supply agreement
with the PC OEM.
In anticipation of sales to OEMs, the Company has recently focused its resources
on the augmentation of its manufacturing operations. The Company has purchased
larger scale laminating and packaging equipment to upgrade its pilot line and
begin manufacturing at the Company's Plymouth Meeting plant which the Company
anticipates will become operational in the third quarter/fourth quarter 1999
time frame with respect to limited production of beta test prototypes and in
early 2000 with respect to commercial production. LTC also has executed a letter
of intent to enter into a joint venture partnership with Elite Material Co.,
Ltd. ("EMC"), a manufacturer of high quality laminates of printed circuit
boards. The Company and EMC have mutually agreed to reassess the manufacturing
facility in Taiwan as originally contemplated by the letter of intent and the
level of potential financial involvement by the Company in the joint venture in
light of the Company's decision, as discussed above, not to proceed with its
$22,000,000 offering, and the factors underlying that decision as discussed
above. The reassessment of the Taiwan joint venture and manufacturing facility
is on-going at the time of this report. The Company has entered into an
agreement with Centurion International, Inc. ("Centurion"), a leading
manufacturer and supplier of high performance battery packs to a number of major
portable electronics manufacturers, to integrate LTC's lithium-ion polymer
battery cells into battery packs for the PC OEM as LTC'S subcontractor.
The Company has been unprofitable since inception, expects to incur substantial
additional operating losses in the future, and needs significant additional
financing to repay existing indebtedness and to continue the development and
commercialization of its technology. The Company does not expect to generate
any significant revenues from operations during the fiscal year ending December
31, 1998 or during the year ended December 31, 1999.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
The Company has financed its operations since inception with convertible debt
and private placements of common and preferred stock and has raised
approximately $14.8 million, including, most recently, $5.5 million in senior
secured convertible notes (the "1997 Notes"). The Company has recently given
notice of its election to pay the interest due for the first year on the 1997
Notes through the issuance of common stock. This interest payment will result in
the issuance of approximately 1,670,000 shares of the Company's common stock
which is in process but not completed as of the date of this report.
13
<PAGE> 14
At September 30, 1998, the Company had cash and cash equivalents of $1,662,000,
fixed assets of $549,000 and other assets of $677,000. The Company's total
liabilities were $6,465,000 consisting of accounts payable, accrued salaries,
and accrued expenses in the amount of $965,000 and the 1997 Notes in the amount
of $5,500,000. The Company had net working capital of $750,000 on September 30,
1998.
The Company's net working capital decreased by approximately $2,222,000 from
December 31, 1997 to September 30, 1998. The Company's cash, cash equivalents
and cash held in escrow decreased by approximately $2,174,000 from December 31,
1997 to September 30, 1998. The decrease in net working capital and in cash and
cash equivalents is attributable primarily to operating expenses and capital
expenditures offset by $505,000 in proceeds from the settlement of litigation.
The Company's stockholders deficiency was $3,524,000 at September 30, 1998,
after giving effect to an accumulated deficit of $42,190,000 which consisted of
$35,325,000 accumulated deficit during the development stage from July 21, 1989
through September 30, 1998 and $6,865,000 accumulated deficit from prior
periods. The Company expects to incur substantial operating losses as it
continues its commercialization efforts.
In May 1998, the Company entered into the aforementioned technology development
agreement with the PC OEM for the Company to provide its proprietary
rechargeable lithium-ion polymer batteries for an advanced notebook application.
Under the terms of the agreement, the manufacturer will invest $1,000,000 in the
Company for 1,428,571 shares of Common Stock. Of this amount, $100,000 was
advanced to the Company and $900,000 is scheduled for funding in two payments
based upon technology-related milestones. Upon issuance of the shares, the value
of the discount, if any, on the shares may result in a charge to earnings.
In May 1998, the Company reached agreements to settle lawsuits pursuant to which
the Company issued 125,000 shares of its Common Stock, received a cash
settlement payment and eliminated an accrued liability, the net effect of which
was the receipt of cash proceeds by the Company of approximately $505,000.
Although the Company's operating plan seeks to minimize the Company's capital
requirements, commercialization of the Company's battery technology will require
substantial amounts of additional capital. The Company expects that research and
development and production expenses will increase significantly as it continues
to advance its battery technology and develop products for commercial
applications. The Company's working capital and capital requirements will depend
upon numerous factors, including, without limitation, the progress of the
Company's research and development program, the levels and resources that the
Company devotes to the development of manufacturing capability, technological
advances, the status of competitors, the ability of the Company to obtain equity
and/or debt financing in the public or private markets, and the ability of the
Company to establish collaborative arrangements with other companies to provide
research and development funding to the Company and to manufacture and market
the Company's products.
14
<PAGE> 15
The Company believes that as of September 30, 1998, it has sufficient capital
resources to meet the Company's needs and satisfy the Company's obligations
through approximately April/May 1999 other than financing for the development of
manufacturing capacity, including the obtaining of additional financing for
approximately $4.0 million in equipment expenditures that are currently
estimated to be required in 1998-99 to achieve sustained production levels,
based on the Company's current strategies and subject to the uncertainties
discussed in this report. The Company does not currently have sufficient cash to
achieve all its development and production objectives, including the completion
of the Plymouth Meeting Manufacturing Plant and repayment of long-term
liabilities. Accordingly, the Company has implemented measures to reduce the
burn rate of cash including the voluntary deferral of the payment of the
Chairman/CEO's salary and the monthly fees due the Company's financial relations
consultant. These deferred payments will be accrued on the Company's balance
sheet. Continuation of the Company's operations beyond April/May 1999 is
dependent upon its ability to raise additional financing. In order to raise
sufficient capital for its future growth and repayment of the 1997 Notes, the
Company will be required to sell additional debt or equity securities.
As discussed above, the Company, with the advice of its investment banking firm,
has determined not to proceed with the $22,000,000 offering and the Company is
currently evaluating and reformulating its financial objectives and strategies
in conjunction with its technology development and manufacturing strategies. The
decision not to proceed with its $22,000,000 offering was based on several
factors including the recent global economic down cycle as well as unfavorable
conditions in the domestic and international securities markets during the third
quarter for 1998 (particularly in the Far East where significant investment
interest in the Company is potentially located), and a significant decrease in
the market price for the Company's common stock with the potential adverse
consequence on the pricing of the $22,000,000 offering and resulting dilutive
effect to the Company's existing shareholders. In connection with this
re-evaluation the Company is currently developing, and implementing in part, a
two-part financing strategy, the first component of which seeks to raise gross
proceeds of approximately $6,000,000 through the private placement of debt and
equity securities, and the second component of which is currently under
development and subject to the first financing round's outcome, R&D results,
the finalization of alternative manufacturing strategies, and other factors.
The definitive terms of these financings are subject to negotiation with the
potential investors. No commitments for the purchase of these securities have
been received by the Company as of the date of this report.
There can be no assurance that the incremental capital needed for attaining
commercial viability of the Company's battery technology will be obtained, which
the Company currently estimates at approximately $14,300,000 (without regard to
repayment of the $5,500,000 1997 Notes and to the capital requirements for the
development of any overseas manufacturing capacity).
The $14,300,000 is comprised as follows (i) $6,500,000 for working capital
through the third quarter; (ii) $3,800,000 for capital equipment (iii)
$2,500,000 for technology licensing; and (iv) $1,500,000 for fees and legal
expenses. If the Company is unable to raise sufficient capital, it will be
forced to curtail research and development expenditures which, in turn, will
delay, and could prevent, the completion of the commercialization process.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 and September 30, 1997
Revenues
The Company had $54,000 in Research and Development contract revenues as
a subcontractor to Yardney Technical Products for a NASA battery Research and
Development contract for the nine months ended September 30, 1998.
The Company had no revenues from commercial operations for the nine
months ended September 30, 1998 and 1997.
Engineering, Research and Development Expenses
Engineering, research and development expenses were $1,397,000 for the nine
months ended September 30, 1998 compared to $914,000 for the same period in
1997. The increase of $483,000 results from increased lab supplies, salaries and
certain contract research activities.
General and Administrative Expenses
General and administrative expenses were $1,351,000 for the nine months
ended September 30, 1998 compared to $1,135,000 for the same period in 1997. The
increase of $216,000 was due primarily to increased consulting and promotional
expenses.
15
<PAGE> 16
Interest Expense
Interest expense was $249,000 (net of interest income of $110,000) for the
nine months ended September 30, 1998 compared to $530,000 (net of interest
income of $28,000) for the same period in 1997. The decrease in interest expense
is primarily attributable to convertible notes issued in 1996 (the "1996
Notes"), which were paid during 1997 and the convertible notes issued in 1997.
Three Months Ended September 30, 1998 and September 30, 1997
Revenues
The Company had no revenues from commercial operations for the three months
ended September 30, 1998 and 1997.
Engineering, Research and Development Expenses
Engineering, research and development expenses were $527,000 for the three
months ended September 30, 1998 compared to $287,000 for the same period in
1997. The increase of $250,000 results from increased lab supplies, salaries and
certain contract research activities.
General and Administrative Expenses
General and administrative expenses were $414,000 for the three months
ended September 30, 1998 compared to $294,000 for the same period in 1997. The
increase of $120,000 was due primarily to increased consulting, legal, and
promotional expenses and amortization of debt issue costs.
Interest Expense
Interest expense was $89,000 (net of interest income of $29,000) for the
three months ended September 30, 1998 compared to $46,000 (net of interest
income of $10,000) for the same period in 1997. The increase in interest expense
is primarily attributable to the Company's 1997 Notes which were issued in
September 1997.
16
<PAGE> 17
PLAN OF OPERATIONS FOR THE COMPANY
The Company's strategy is to commercialize a new generation of solid state
lithium-ion polymer and lithium metal polymer batteries based on fifteen years
of research and development and a strong patent portfolio covering both the
battery construction and manufacturing process unique to the battery industry.
The proprietary technology uses high performance fibers in composite battery
structures and low-cost web coating/handling methods for manufacturing. This
technology encompasses lithium-ion polymer batteries (market entry in 1999 or
early 2000) and lithium alloy polymer batteries (market entry in three to five
years). The Company's target market is mobile communications and computing
applications which showcase the Company's thin, flat lightweight form factor and
long run-times. The Company's long term objectives include the development
and/or licensing of battery technology for a variety of other applications
including microelectronics, electric vehicles, aerospace and defense and solar
cells. There can be no assurance, however, that the Company will be able to
achieve the technological breakthroughs that will be necessary in order to
ultimately achieve commercialization and/or obtain financings or generate
revenues in order to sustain the Company's on-going research and development
phase or to complete the equipment augmentation at the Company's Plymouth
Meeting Manufacturing Plant (PMMP) or, the scale-up for commercial production at
the Company's proposed joint venture Taiwan Manufacturing Plant (TMP). The TMP,
as noted above, is currently being reassessed by the Company and EMC.
Beginning in 1994 the Company recruited a new management team and a core
technical staff with thin film commercialization, battery technology and global
marketing expertise. A modern research facility was leased in late 1994 and
product development has continued at an accelerated pace. At September 30, 1998,
the management team and technical staff consisted of eleven full-time employees.
The staff has the required expertise in technology, commercialization, process
development, battery engineering, electrochemistry and strategic alliance
development. During 1996 the Company entered into employment agreements with
Thomas R. Thomsen as the Company's Chief Executive Officer, David J. Cade as the
Company's President and Chief Operating Officer, and Dr. George R. Ferment as
the Company's Executive Vice President and Chief Technical Officer. In June
1998, the Company extended the Chief Executive Officer's employment agreement,
as of May 1, 1998, through December 31, 1998. Also in June 1998, the Company
extended the employment agreement with its President/Chief Operating Officer and
its Executive Vice President of Operations/Chief Technical Officer for two years
on the same terms and conditions except that no new options were granted, the
salary for the President/Chief Operating Officer was increased to $155,000 per
year, the salary for the Executive Vice President/Chief Technical Officer was
increased to $145,000 per year, both officers were granted bonuses of 20% of
their salaries in the event certain specified milestones are achieved, both
officers were granted certain severance payment benefits in the event of a
change in control (as defined in the employment extension agreements) combined
with the officer's employment termination resulting from the officer's
resignation or the Company's termination of the officer's employment without
cause, and the vesting provisions relating to certain of these officers' stock
options were modified in the event of specified employment termination events,
disability or death.
17
<PAGE> 18
The Company's development and commercialization plan currently has the
following milestones:
(i) hand-made cell samples tested by potential strategic
partners beginning in 1995 (accomplished);
(ii) installation of a Demonstration Manufacturing Facility
(DMF) continuous flow coating and laminating unit in first quarter of 1996
(accomplished);
(iii) upgrade of the DMF and distribution of DMF-made
lithium-ion polymer cell samples to selected Original Equipment Manufacturer
(OEM) customers in early 1997 (accomplished);
(iv) joint development/design iterations with selected OEMs
leading to distribution of prototype battery packs (on-going);
(v) installation of larger scale lamination and packaging
equipment at PMMP, the purpose of which includes the prove-in of the Company's
fiber-web substrate-based manufacturing process (ongoing);
(vi) limited production of beta test prototypes in the third
quarter/fourth quarter 1999 time frame and initial commercial production at PMMP
in early 2000.
(vii) initial production, subject to the reassessment noted
above, at the Taiwan Joint Venture plant; and
(viii) construction of additional manufacturing facilities in
the Pacific Rim, the United States, and Europe in the 2000-2001 time frame
based on, and subject to, market demand and availability of capital.
The Company estimates that completion of phases (v) and (vi) through the third
quarter of 1999 will cost the Company approximately $14.3 million in capital
expenditures and operating costs.
The $14,300,000 is comprised as follows (i) $6,500,000 for working capital
through the third quarter; (ii) $3,800,000 for capital and equipment (iii)
$2,500,000 for technology licensing; and (iv) $1,500,000 for fees and legal
expenses. There can be no assurances that the Company will meet these
development milestones on the time schedule outlined above. In connection with
achieving and implementing manufacturing capability and commercialization, the
Company expects to hire significant additional personnel.
During March 1996, a continuous flow coating/laminating line -- referred to
previously in this "Plan of Operation" as the Demonstration Manufacturing
Facility ("DMF") -- was installed by the Company. This line has been used to
further define the Company's manufacturing technology and to sharpen
manufacturing cost estimates. Through equipment augmentation and upgrade, the
DMF is in the process of transitioning to the Plymouth Meeting Manufacturing
Plant which will serve as the production facility for battery cells which will
be assembled by Centurion into battery packs for Original Equipment Manufacturer
("OEM") customers. Subject to the uncertainties discussed in this report and the
availability of capital, it is anticipated that the PMMP will cost approximately
$4.0 million to complete in the 1998-99 time frame including manufacturing
equipment meeting applicable environmental regulatory standards. The PMMP will
be located within the Company's existing environmental in Plymouth
Meeting, Pennsylvania. The Company intends to finance the overall estimated
$14,300,000 total capital equipment and operating expense required to bring the
Company to the initial commercial production stage at approximately the end of
1999 or early 2000 by means of private and/or public equity or debt financings.
These targets and the milestones discussed in phases (v) through (vii) are
subject to continuing update and revision as the Company completes the
applications-specific technology development activity and proves in
manufacturing processes from the prototype phase to the commercial production
phase.
18
<PAGE> 19
The Company does not currently have sufficient cash to achieve all its
development and production objectives, including the completion of the upgraded
manufacturing line and repayment of long term liabilities if not converted to
equity and $4.0 million for additional equipment purchases and associated
engineering services. As noted above (See "Liquidity, Capital Resources, and
Financial Condition") the Company believes that as of September 30, 1998 it has
sufficient capital resources to meet the Company's needs and satisfy the
Company's obligations through approximately April/May 1999 based on the
Company's current strategies and subject to the exceptions and uncertainties
discussed in this report. In order to raise sufficient capital for its future
growth, and repayment of long term liabilities if not converted to equity, the
Company will be required to sell additional debt or equity securities. Such new
capital is planned to be sought from several sources, including strategic
partners and the private equity market, although the Company has no commitments
for new capital as of the date of this report. The Company is also seeking to
raise additional capital for its activities beyond 1998, which may result in
further dilution to the Company's existing stockholders. The Company will seek
to expand its strategic alliances which would provide capital from joint
development programs, license fees or an additional equity investment.
Discussions are continuing with companies in Japan, Korea, Taiwan, Europe and
the United States. However, there can be no assurances that additional capital
will be available to the Company on a timely basis or on acceptable terms. In
addition, there can be no assurance that the Company will be able to meet the
technological objectives and/or satisfy the capital requirements that the
Company believes are necessary to convert battery technology into successful
commercial products. There can be no assurance that the Company's products will
generate any revenues, will not encounter technical problems when used, will be
successfully marketed, will be produced at a competitive cost, or will achieve
customer acceptance or, if commercial products are developed and revenues
produced, that the Company will be profitable. The likelihood of the success of
the Company must be weighed against the problems, expenses, difficulties,
complications and delays frequently encountered in developing and marketing a
new product.
YEAR 2000
The Company is a development stage company in the process of commercializing a
unique, solid-state lithium-ion polymer rechargeable battery. The Company is in
the process of conducting a review of its computer and business systems to
identify and address any problems that the systems may have with correctly
interpreting and processing date information as the year 2000 approaches. The
Company's computer system review is expected to be completed in late 1998 or
early 1999. Based on this review, the Company will develop and implement a plan
to achieve year 2000 compliance. As a development stage company, the Company
has not yet established any significant relationships, whereby year 2000
compliance or non-compliance might materially affect the Company's operations.
The Company believes that it will achieve year 2000 compliance in a manner which
will not disrupt the Company's operations. At this point in the review process,
the Company can not reasonably estimate the cost of achieving year 2000
compliance; however, the Company does not anticipate the cost of implementing
its year 2000 efforts to be material.
There can be no assurance that the failure of the Company or any third parties
to achieve year 2000 compliance would not have a material adverse effect on the
Company. A contingency plan has not yet been developed for dealing with the most
reasonably likely worst case scenario, and such scenario has not yet been
clearly identified.
SAFE HARBOR STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a new "safe
harbor" for certain forward-looking statements. Statements contained in this
report that are not historical facts are forward-looking statements that involve
risks and uncertainties that could cause actual results to differ materially
from those stated in the forward-looking statements. Factors that could cause
actual results to differ materially include, among others: general economic
conditions, changes in laws and government regulations, fluctuations in demand
for the Company's products, the Company's ability to consummate strategic
alliances, technology development problems, and the Company's ability to
successfully finance future plant and equipment plans, as well as its current
ongoing operations.
19
<PAGE> 20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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) Exhibits
None.
b) Form 8-K Reports during the Quarter Ended
September 30, 1998
None.
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.
LITHIUM TECHNOLOGY CORPORATION
By: /s/ Thomas R. Thomsen
-----------------------------------------
Thomas R. Thomsen
Chairman and Chief Executive Officer
/s/ William D. Walker
-----------------------------------------
William D. Walker
Treasurer and
Chief Financial Officer
(Principal Financial Officer)
November , 1998
20
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL EXTRACTED FROM THE COMPANY'S FINANCIAL
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