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 June 30, 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 August 9, 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 JUNE 30, 2002
INDEX
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Condensed Consolidated Balance Sheets - June 30, 2002
and December 31, 2001 (Unaudited) 3
Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended June 30, 2002
and 2001, and Period From July 21, 1989 (Date of
Inception) to June 30, 2002 (Unaudited) 4
Condensed Consolidated Statements of Changes in Stockholders'
Deficiency - Six Months Ended June 30, 2002 (Unaudited) 6
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2002 and 2001, and
Period from July 21, 1989 (Date of Inception) to
June 30, 2002 (Unaudited) 7
Notes to Condensed Consolidated Financial Statements - Six Months
Ended June 30, 2002 (Unaudited) 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 19
PART II - OTHER INFORMATION 25
ITEM 1. LEGAL PROCEEDINGS 25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
2
PART I - FINANCIAL INFORMATION
LITHIUM TECHNOLOGY CORPORATION AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, 2002 DECEMBER 31, 2001
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 118,000 $ 60,000
Other -- 10,000
------------ ------------
Total Current Assets 118,000 70,000
------------ ------------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION OF $1,368,000 AND $1,301,000 266,000 235,000
SECURITY DEPOSIT 21,000 21,000
------------ ------------
Total assets $ 405,000 $ 326,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 159,000 $ 293,000
Accrued salaries 201,000 201,000
Note Payable 70,000 82,000
Convertible promissory notes 1,915,000 80,000
------------ ------------
Total current liabilities 2,345,000 656,000
------------ ------------
LONG-TERM LIABILITIES:
Convertible promissory notes 3,949,000 5,249,000
------------ ------------
Total liabilities 6,294,000 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 70,358,000 47,719,000
Accumulated deficit (6,865,000) (6,865,000)
Deficit accumulated during development stage (70,025,000) (46,946,000)
------------ ------------
Total stockholders' equity (deficiency) (5,889,000) (5,579,000)
------------ ------------
$ 405,000 $ 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 JUNE 30,
2002 2001
------------ ------------
REVENUES:
Development contracts $ 1,000 $ 7,000
------------ ------------
COSTS AND EXPENSES:
Engineering, research and development 432,000 210,000
General and administrative 341,000 232,000
------------ ------------
773,000 442,000
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net of interest income (2,000) (1,000)
Interest expense related to beneficial conversion feature (764,000) --
------------ ------------
(766,000) (1,000)
------------ ------------
NET LOSS $ (1,538,000) $ (436,000)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: 64,303,305 51,294,305
============ ============
BASIC AND DILUTED NET LOSS PER SHARE: $ (.02) $ (.01)
============ ============
See accompanying notes to condensed consolidated financial statements.
4
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, PERIOD FROM JULY 21, 1989
------------------------------- (DATE OF INCEPTION) TO
2002 2001 JUNE 30, 2002)
------------ ------------ ------------
REVENUES:
Development contracts $ 1,000 $ 7,000 $ 191,000
------------ ------------ ------------
COSTS AND EXPENSES:
Engineering, research and development 826,000 627,000 11,797,000
General and administrative 781,000 482,000 15,576,000
Stock based compensation expense 2,755,000 -- 5,018,000
------------ ------------ ------------
4,362,000 1,109,000 32,391,000
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net of interest income (4,000) (2,000) (1,840,000)
Interest expense related to beneficial conversion feature (18,714,000) -- (36,635,000)
Other non-operating income -- -- 650,000
------------ ------------ ------------
(18,718,000) (2,000) (37,825,000)
------------ ------------ ------------
NET LOSS $(23,079,000) $ (1,104,000) $(70,025,000)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: 63,726,000 51,294,000
============ ============
BASIC AND DILUTED NET LOSS PER SHARE: $ (.36) $ (.02)
============ ============
See accompanying notes to condensed consolidated financial statements.
5
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)
Six months ended June 30, 2002:
Issuance of Warrants 2,755,000
Beneficial conversion feature related
to convertible notes 18,714,000
Upon conversion of convertible notes 13,000,000 130,000 1,170,000
Net loss (23,079,000)
---------- ------------ ------------ ------------ ------------
BALANCES AT JUNE 30, 2002 64,303,305 $ 643,000 $ 70,358,000 $ (6,865,000) $(70,025,000)
========== ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
6
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PERIOD FROM
JULY 21, 1989
SIX MONTHS ENDED (DATE OF INCEPTION)
JUNE 30 TO
2002 2001 JUNE 30, 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(23,079,000) $ (1,104,000) $(70,025,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Interest expense relating to the beneficial conversion feature of the
Convertible Notes 18,714,000 -- 36,635,000
Depreciation 67,000 71,000 1,370,000
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:
Other current assets 10,000 -- --
Security and equipment deposits -- -- (21,000)
Accounts payable, accrued expenses and customer deposits (146,000) 31,000 1,963,000
Due to related parties -- -- (118,000)
------------ ------------ ------------
Net cash used in operating activities (1,679,000) (1,002,000) (21,777,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (98,000) (29,000) (1,386,000)
Other -- -- 94,000
------------ ------------ ------------
Net cash provided by (used in) investing activities $ (98,000) $ (29,000) $ (1,292,000)
------------ ------------ ------------
See accompanying notes to condensed consolidated financial statements.
7
PERIOD FROM
JULY 21, 1989
SIX MONTHS ENDED (DATE OF INCEPTION)
JUNE 30 TO
2002 2001 JUNE 30, 2002
---- ---- -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds received from Convertible Promissory Notes 1,835,000 1,011,000 7,164,000
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 1,835,000 1,011,000 23,187,000
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 58,000 (20,000) 118,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 60,000 52,000 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 118,000 $ 32,000 $ 118,000
============ ============ ============
See accompanying notes to condensed consolidated financial statements.
8
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) -- CONTINUED
PERIOD FROM
JULY 21, 1989
SIX MONTHS ENDED (DATE OF
JUNE 30, INCEPTION) TO
2002 2001 JUNE 30, 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.
9
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited condensed 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 audited financial statements
of Lithium Technology Corporation and its wholly-owned subsidiary Lithion
Corporation, collectively referred to as LTC or the "Company", included in LTC'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 and six
months ended June 30, 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 condensed 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 Consensus 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 LTC financial
position or results of operations
10
for the current year, but does require that certain of LTC's options 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
LTC is a pre-production stage company 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.
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.
LTC has worked closely with selected portable electronics Original Equipment
Manufacturers ("OEMs") in the past, exploring various notebook, computer,
personal data assistant ("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 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 August 2002. LTC has not yet
delivered a prototype HEV, 42-volt or stationary polymer battery for testing by
a third party.
11
On January 8, 2002, LTC completed the first step in a strategic repositioning of
the Company. In the first phase, LTC and Ilion Technology Corporation terminated
their previously existing Merger Agreement dated January 19, 2000, as amended
from time to time, to pave the way for LTC's proposed strategic alliance with
the German lithium polymer battery company GAIA Akkumulatorenwerke GmbH ("GAIA")
of Nordhausen, Thuringia, Germany. This strategic alliance is planned as part of
the proposed share exchange and new equity financing transactions described
below.
PENDING TRANSACTION WITH GAIA - On June 7, 2002 LTC signed a Share Exchange
Agreement which, upon closing, would give LTC a 60% beneficial ownership
interest in GAIA. According to the terms of the Share Exchange Agreement, LTC
shares are to be issued in exchange (the "Share Exchange") for shares of GAIA
Holding B.V. ("GAIA Holding") that are owned by Hill Gate Capital N.V. ("Hill
Gate"). Hill Gate, a wholly owned subsidiary of Arch Hill Capital N.V. ("Arch
Hill"), controls GAIA Holding which in turn beneficially owns all of the
outstanding shares of GAIA. In exchange for its equity ownership in GAIA
Holding, the Share Exchange Agreement provides for LTC to issue to Hill Gate
60,000 shares of LTC preferred stock convertible into 66,804,314 shares of LTC
common stock.
The Share Exchange Agreement contains conditions to parties' respective
obligations to close the transactions contemplated thereby, unless waived by the
applicable party, including conditions that:
- There be no material adverse change in either LTC or GAIA;
- Each party shall have performed all covenants required by the Share
Exchange Agreement;
- There shall be no material litigation pending against either LTC or
GAIA;
- LTC and GAIA must have entered into a Strategic Alliance Agreement
providing for operation of the two companies as a single entity and
covering technology sharing and licensing, product development,
production, outsourcing, manufacturing, sales, and distribution;
- LTC and the stockholders of GAIA Holding must have entered into an
option agreement whereby LTC will have the right to acquire the shares
of GAIA Holding owned by such stockholders in order to maintain an
ownership position in GAIA Holding of not less than 60%;
- Not less than $5,000,000 in the aggregate principal amount of LTC
convertible notes shall have been sold prior to or contemporaneously
with the Share Exchange;
- Each party shall have obtained all of the third party consents required
to be obtained by it in connection with the Share Exchange; and
12
- LTC must have received from its financial advisor, an opinion that the
proposed Share Exchange is fair from a financial point of view to LTC's
stockholders, and such opinion shall not have been withdrawn prior to
the closing date.
It is currently contemplated that the Share Exchange will be consummated on or
around August 30, 2002.
The Share Exchange Agreement may be terminated by the mutual agreement of Hill
Gate and LTC or by either of such parties if there has been a material breach of
a covenant or if the Share Exchange is not completed by August 31, 2002.
It is currently contemplated that in order to have sufficient capital resources
for LTC's development, production, operating and administrative needs and in
order to implement the new strategy of combining LTC's operations with the
operations of GAIA, LTC needs to raise at least $5,000,000 in an offering of its
convertible notes (the "New Financing").
If LTC raises $5,000,000 in the New Financing by August 30, 2002, management
believes that LTC would have sufficient funds to meet its needs until
approximately January 2003. Management believes that a second financing will be
necessary during the first quarter of 2003, if the Share Exchange is
consummated, in order to fully implement the Company's new combined business
plan with GAIA.
LTC has not entered into any definitive agreements relating to the New Financing
as of the date of this Report and no assurance can be given that the New
Financing or the second 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 as of March 22, 2002, May 30, 2002, and
July 29, 2002 (the "Bridge Loan Agreement") Arch Hill agreed to advance working
capital to LTC until the closing of the New Financing and Share Exchange which
has a termination date of August 31, 2002, if not consummated by that date,
unless extended by the parties. Arch Hill has advanced a total of $1,914,567
through June 30, 2002 convertible into 23,932,087 shares of LTC common stock.
Notes issued to Arch Hill under the bridge financing agreement ("Bridge Notes")
are convertible, at any time prior to repayment of the Bridge Notes, into LTC
common stock at $.08 per share. The Bridge Notes issued to Arch Hill under the
bridge financing arrangement are repayable upon the issuance of the following
amounts of new convertible Notes by LTC in the New Financing or any subsequent
financing ("New Notes"): upon the issuance of $6,000,000 principal amount of New
Notes - one-third of the outstanding Bridge Notes are repayable; upon the
issuance of $7,000,000 principal amount of New Notes - two-thirds of the
outstanding Bridge Notes are repayable; upon the issuance of $8,000,000
principal amount of New Notes - all of the Bridge Notes are repayable.
Notwithstanding the foregoing, in the event there is no closing of a financing
by October 31, 2002, all outstanding Bridge Notes shall be due and owing on
October 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
13
by Ilion were 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 six months ended June
30, 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 LTC 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 six months ended June
30, 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
licenses 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 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 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 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
14
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 LTC 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 condensed 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 - As described in Note 3, LTC has worked closely with
selected portable electronics 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 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.
LTC does not currently have sufficient cash to achieve all its development and
production objectives.
As described in Note 3, LTC entered into a Share Exchange Agreement which upon
closure would give LTC a 60% beneficial ownership interest in GAIA. LTC needs to
raise at least $5,000,000 in a New Financing in order to implement its new
strategy of combining its operations with the operations of GAIA. Unless waived
by the parties to the Share Exchange Agreement, the New Financing is a condition
precedent to the GAIA Share Exchange. If LTC raises $5,000,000 in the New
Financing, management believes that LTC would have sufficient funds to meet its
needs until approximately January 2003. Management believes that a second
financing will be
15
necessary during the first quarter of 2003, if the Share Exchange is
consummated, in order to fully implement the Company's new combined business
plan with GAIA.
LTC has not entered into any definitive agreements relating to the New Financing
as of the date of this Report, and no assurance can be given that the New
Financing or that a second round financing will be consummated.
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 Share Exchange.
Pursuant to the terms of a bridge loan entered into as of January 8, 2002 as
amended, Arch Hill has agreed to advance working capital to LTC until the
closing of the New Financing and Share Exchange. Arch Hill has advanced a total
of $1,914,567 through June 30, 2002 convertible at $.08 per share into
23,932,087 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 August 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 and Share Exchange or that LTC will be able to consummate the
New Financing, Share Exchange or second financing described above. If the New
Financing and Share Exchange 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.
The 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 June 30, 2002 are summarized as follows:
Laboratory equipment $ 1,469,000
Furniture and office equipment 117,000
Leasehold improvements 48,000
-----------
$ 1,634,000
Less: Accumulated depreciation and amortization (1,368,000)
-----------
$ 266,000
===========
16
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 June 30, 2002,
the principal balance remaining under the note is $70,000. 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 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 feature 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.
As of June 30, 2002, Arch Hill advanced to LTC working capital of $1,914,567
(including $1,834,567 advanced during the six months ended June 30, 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 23,932,087 shares of LTC common stock at $0.08 per share. Since
the Convertible Promissory Notes totaling $1,834,567 payable to Arch Hill are
convertible at inception, the entire $2,231,000 of interest expense related to
the beneficial conversion feature of these Notes was recognized as expense
during the six months ended June 30, 2002. (See Note 10).
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
17
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 vesting July 1, 2002 and one-half vesting January
22, 2003. In June 2002, 20,000 options were issued under the 2002 Plan to an
employee, having an exercise price of $.14, a term of ten years, with 25% of
such options vesting at the time of issuance and the remainder vesting 25% upon
each anniversary of the grant date.
Options under the 1994 Stock Plan, The Directors Plan, the 1998 Plan and the
2002 Plan as of June 30, 2002 are summarized as follows:
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
Outstanding, January 1, 2002 2,350,000 $ 0.25
Granted 770,000 $ 0.20
Exercised 0 0
Cancelled 0 0
--------- ---------
Outstanding, June 30, 2002 3,120,000 $ 0.25
--------- ---------
Options exercisable, June 30, 2002 2,350,000 $ 0.27
--------- ---------
Warrants as of June 30, 2002 are summarized as follows:
WEIGHTED
AVERAGE
WARRANTS EXERCISE PRICE
-------- --------------
Outstanding, January 1, 2002 4,186,000 $ 0.15
Granted 12,500,000(1) $ 0.15
Cancelled 0 0
---------- ----------
Outstanding, June 30, 2002 16,686,000 $ 0.15
---------- ----------
Exercisable, June 30, 2002 16,686,000 $ 0.15
---------- ----------
18
(1) In connection therewith in January 2002, 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 July 29, 2002, Arch Hill and LTC entered into Amendment No. 3 to the Bridge
Loan Agreement. Amendment No. 3 provides that Arch Hill will advance to LTC
$150,000 on July 29, 2002 and $150,000 on or before August 12, 2002 and such
additional amounts agreed to by Arch Hill and LTC from time to time pending the
closing of the Financing and the Share Exchange and LTC will deliver to Arch
Hill a non-convertible Promissory Note (the "Promissory Note") against receipt
by LTC of such funds. Amendment No. 3 also provides that the principal balance
and all other sums due and payable under any Promissory Note issued under the
Agreement on or after July 29, 2002 shall be payable upon the earlier of (i) the
closing date of an equity financing in which LTC receives aggregate gross
proceeds of $2 million from subscribed funds and from the application of the
Promissory Note Amount (as hereinafter defined) and (ii) October 31, 2002. Arch
Hill may, in lieu of repayment of the Promissory Note, apply any amount
outstanding under the Promissory Note (the "Promissory Note Amount") against the
purchase price of equity securities being sold by LTC in a Financing.
On July 30, 2002, Arch Hill advanced $150,000 to LTC under the Bridge Loan
Agreement and LTC issued a non-convertible Promissory Note to Arch Hill in the
amount of $150,000. On August 13, 2002, Arch Hill advanced $150,000 to LTC under
the Bridge Loan Agreement and LTC issued a non-convertible Promissory Note to
Arch Hill in the amount of $150,000.
In July and August 2002, 55,000 options were issued under the 2002 Plan to
certain employees with exercise prices ranging from $.11 to $.115. The options
have a term of ten years, with 25% of such options vesting at the time of
issuance and the remainder vesting 25% upon each anniversary of the grant date.
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
GENERAL
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 August 2002. We have not yet delivered a prototype HEV,
42-volt or stationary power battery for testing by a third party.
Our operating plan seeks to minimize our capital requirements, but
commercialization of our battery technology will require substantial amounts of
additional capital. We expect that technology development and operating and
production expenses will increase significantly as we continue to advance our
battery technology and develop products for commercial applications. Our working
capital and capital requirements will depend upon numerous factors, including,
without limitation, the progress of our technology development program,
technological advances, the status of competitors and the ability of us to
collaborate with GAIA subsequent to the Share Exchange described below.
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 commercialization of our
technology. We do not expect to generate revenues from commercial operations
during the year ended December 31, 2002.
GAIA SHARE EXCHANGE AGREEMENT
GENERAL
On June 7, 2002 we signed a Share Exchange Agreement which, upon closing, would
give us a 60% beneficial ownership interest in the German lithium polymer
battery company, GAIA Akkumulatorenwerke GmbH, headquartered in
Nordhausen/Thuringia, Germany ("GAIA"). According to the terms of the Share
Exchange Agreement, our shares are to be issued in exchange (the "Share
Exchange") for shares of GAIA Holding B.V. ("GAIA Holding") that are owned by
Hill Gate Capital N.V. ("Hill Gate"). Hill Gate, a wholly owned subsidiary of
Arch Hill Capital N.V. ("Arch Hill"), controls GAIA Holding which in turn
beneficially owns all
19
of the outstanding shares of GAIA. In exchange for its equity ownership in GAIA
Holding, the Share Exchange Agreement provides that we will issue to Hill Gate
60,000 shares of LTC preferred stock convertible into 66,804,314 shares of our
common stock.
GAIA is a German private limited company. GAIA Holding, a Dutch corporation, is
the 100% owner of GAIA. Hill Gate, a Dutch corporation, owns a 71% equity
interest in GAIA Holding, and Stichting Administratiekantoor GAIA, a Dutch
corporation, owns the remaining 29% equity interest GAIA Holding.
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 the operations of GAIA, we need to raise at least
$5,000,000 in an offering of our convertible notes (the "New Financing"). Unless
waived by the parties to the Share Exchange Agreement, the New Financing is a
condition precedent to the GAIA Share Exchange (the "New Financing Condition").
CONDITIONS TO THE CLOSING UPON GAIA SHARE EXCHANGE
In addition to the New Financing Condition, the Share Exchange Agreement
contains conditions to the parties' respective obligations to close upon the
transactions contemplated thereby, unless waived by the applicable party,
including conditions that:
- There be no material adverse change in either us or GAIA;
- Each party shall have performed all covenants required by the Share
Exchange Agreement;
- There shall be no material litigation pending against either us or GAIA
and other customary conditions;
- LTC and GAIA must have entered into a Strategic Alliance Agreement
providing for operation of the two companies as a single entity and
covering technology sharing and licensing, product development,
production, outsourcing, manufacturing, sales, and distribution;
- LTC and the stockholders of GAIA Holding must have entered into an
option agreement whereby LTC will have the right to acquire the shares
of GAIA Holding owned by such stockholders in order to maintain an
ownership position in GAIA Holding of not less than 60%;
- Each party shall have obtained all of the third party consents required
to be obtained by it in connection with the Share Exchange; and
- We must have received from our financial advisor, an opinion that the
proposed Share Exchange is fair from a financial point of view to our
stockholders, and such opinion shall not have been withdrawn prior to
the closing date;
Management currently contemplates that the Share Exchange will be consummated on
or around August 30, 2002.
PROXY OR INFORMATION STATEMENT
20
After the closing of the New Financing, we plan to prepare and file with the
Securities and Exchange Commission a proxy or information statement to be mailed
to our stockholders in order to obtain consent to increase the authorized number
of shares of our common stock or effect a reverse stock split thereof sufficient
to make available that number of shares of our common stock as will be required
for the conversion of the convertible notes to be issued as part of the New
Financing and the preferred stock to be issued in the Share Exchange.
LTC BOARD OF DIRECTORS
The Share Exchange Agreement provides that as soon as practicable after
consummation the Share Exchange and filing by us of a Form 14-F for such
purpose, our Board of Directors will be increased to twelve members and Hill
Gate will be entitled to designate six nominees to our Board of Directors. Ilion
Technology Corporation ("Ilion") is also entitled to designate one nominee to
our Board of Directors. We will be required to use our reasonable best efforts
to cause Hill Gate's and Ilion's nominees to be elected to our Board of
Directors thereafter.
GAIA BOARD OF DIRECTORS
The Share Exchange Agreement provides that as soon as practicable after
consummation of the GAIA Share Exchange, GAIA's Supervisory Board of Directors
will be increased to five members and we will be entitled to designate one
nominee to GAIA's Supervisory Board of Directors. GAIA will be required to use
its reasonable best efforts to cause our nominee to be elected to GAIA's
Supervisory Board of Directors thereafter.
GAIA HOLDING BOARD OF DIRECTORS
The Share Exchange Agreement provides that as soon as practicable after
consummation of the GAIA Share Exchange, GAIA Holding's Supervisory Board of
Directors shall be increased to five members and we will be entitled to
designate one nominee to GAIA's Supervisory Board of Directors. GAIA will be
required to use its reasonable best efforts to cause our nominee to be elected
to GAIA's Supervisory Board of Directors thereafter.
REGISTRATION RIGHTS
Hill Gate will have the following registration rights, at our expense, with
respect to our common stock issuable upon conversion of our preferred stock
issued in the Share Exchange: (1) upon the request of the holders of at least
50% of the convertible notes or preferred stock, one demand registration, (2)
unlimited piggyback rights, and (3) rights to register shares in up to three
shelf offerings pursuant to Form S-3. All registration rights will terminate
when the underlying common stock may be sold under Rule 144(k).
TERMINATION
The Share Exchange Agreement may be terminated by the mutual agreement of Hill
Gate and us or by either party if there has been a material breach of a covenant
by the other party or if the Share Exchange is not completed by August 31, 2002.
STRATEGIC ALLIANCE AGREEMENT WITH GAIA
21
The execution by us and GAIA of a Strategic Alliance Agreement covering
technology sharing and licensing, joint production, marketing, sales and
distribution activities and similar matters, is a condition to closing the Share
Exchange.
OPTION AGREEMENT WITH GAIA HOLDING STOCKHOLDERS
The execution and delivery of an option agreement by the stockholders of GAIA
Holding pursuant to which we will have the right to acquire the shares of GAIA
Holding owned by such stockholders in order to maintain an ownership position in
GAIA Holding of not less than 60%, is a condition to closing the Share Exchange.
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, May 30, 2002 and July 29, 2002 (the "Bridge Loan
Agreement"), Arch Hill agreed to advance working capital to us until the closing
of the New Financing and Share Exchange. The Share Exchange Agreement has a
termination date of August 31, 2002, if the transaction is not consummated by
that date, unless extended by the parties. Arch Hill has advanced a total of
$1,914,567 through June 30, 2002 convertible into 23,932,087 shares of our
common stock.
Notes issued to Arch Hill under the bridge financing agreement prior to July 29,
2002 ("Bridge Notes") are convertible, at any time prior to repayment of the
Bridge Notes, into our common stock at $.08 per share. The Bridge Notes issued
to Arch Hill under the bridge financing arrangement are repayable upon the
issuance of the following amounts of new convertible Notes by LTC in the New
Financing or any subsequent financing ("New Notes"): upon the issuance of
$6,000,000 principal amount of New Notes - one-third of the outstanding Bridge
Notes are repayable; upon the issuance of $7,000,000 principal amount of New
Notes - two-thirds of the outstanding Bridge Notes are repayable; upon the
issuance of $8,000,000 principal amount of New Notes - all of the Bridge Notes
are repayable. Notwithstanding the foregoing, in the event there is no closing
of a financing by October 31, 2002, all outstanding amounts shall be due and
owing on October 31, 2002.
On July 29, 2002, Arch Hill and LTC entered into Amendment No. 3 to the Bridge
Loan Agreement. Amendment No. 3 provides that Arch Hill will advance to LTC
$150,000 on July 29, 2002 and $150,000 on or before August 12, 2002 and such
additional amounts agreed to by Arch Hill and LTC from time to time pending the
closing of the Financing and the Share Exchange and LTC will deliver to Arch
Hill a non-convertible promissory note (the "Promissory Note") against receipt
by LTC of such funds. Amendment No. 3 also provides that the principal balance
and all other sums due and payable under any Promissory Note issued under the
Agreement on or after July 29, 2002 shall be payable upon the earlier of (i) the
closing date of an equity financing in which LTC receives aggregate gross
proceeds of $2 million from subscribed funds and from the application of the
Promissory Note Amount (as hereinafter defined) and (ii) October 31, 2002. Arch
Hill may, in lieu of repayment of the Promissory Note, apply any amount
outstanding under the Promissory Note (the "Promissory Note Amount") against the
purchase price of equity securities being sold by LTC in a Financing. On July
30, 2002, Arch Hill advanced $150,000 to LTC under the Bridge Loan Agreement and
LTC issued a non-convertible Promissory Note to Arch Hill in the amount of
$150,000. On August 13, 2002, Arch Hill advanced $150,000 to LTC under the
Bridge Loan Agreement and LTC issued a non-convertible Promissory Note to Arch
Hill in the amount of $150,000.
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 $21.6 million,
including $5,249,000 from Ilion and $1,914,567 from Arch Hill as of June 30,
2002.
At June 30, 2002, we had cash and cash equivalents of $118,000, fixed assets of
$266,000 and other assets of $21,000. Our total liabilities were $6,294,000
consisting of current liabilities (accounts payable, accrued salaries, accrued
expenses and a convertible promissory note to Arch Hill) in the aggregate amount
of $2,345,000 and long-term liabilities (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 $2,227,000 on June 30, 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 issuance of convertible
notes to Arch Hill during the first six months of 2002.
22
Our cash and cash equivalents increased by approximately $58,000 from December
31, 2001 to June 30, 2002. The cash increase is attributable primarily to
funding under the Bridge Loan Agreement prior to payment of trade creditors and
others.
Our stockholders' deficiency was $5,889,000 at June 30, 2002, after giving
effect to an accumulated deficit of $76,890,000 which consisted of $70,025,000
deficit accumulated during the development stage from July 21, 1989 through June
30, 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 $5,000,000 in a New Financing. The New Financing is a condition
precedent to the GAIA Share Exchange. If we raise $5,000,000 in the New
Financing we believe that we would have sufficient funds to meet our needs until
approximately January 2003. We believe that a second financing transaction will
be necessary during the first quarter of 2003, if the Share Exchange is
consummated, in order to fully implement our new business plan with GAIA.
We have not entered into any definitive agreements relating to the New Financing
as of the date of this Report and no assurance can be given that the New
Financing or the second financing will be consummated.
Pursuant to the terms of a bridge loan entered into as of January 8, 2002 as
amended on March 20, 2002, May 30, 2002 and July 29, 2002, Arch Hill has agreed
to advance working capital to us until the closing of the New Financing and
Share Exchange. The Share Exchange Agreement has a termination date of August
31, 2002, if the transaction is not consummated by that date, unless extended.
Arch Hill has advanced a total of $1,914,567 through June 30, 2002 convertible
at $.08 per share into 23,932,087 shares of our common stock. Arch Hill has
advanced an additional $150,000 on July 29, 2002 and $150,000 on August 13, 2002
under the non-convertible Promissory Notes. 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 August 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 our obligations until the closing of the
New Financing and Share Exchange or that we will be able to consummate the New
Financing and Share Exchange. 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
SIX MONTHS ENDED JUNE 30, 2002
We had revenues from development contracts in the amount of $1,000 for the six
months ended June 30, 2002 as compared to $7,000 for the six months ended June
30, 2001.
Engineering, research and development expenses were $826,000 for the six months
ended June 30, 2002 compared to $627,000 for the six months ended June 30, 2001.
The increase of $199,000 was due primarily to increased materials purchased to
produce prototype batteries and increased technical consulting services. We
expect our engineering, research and development expenses to continue to
increase during fiscal year 2002.
General and administrative expenses were $781,000 for the six months ended June
30, 2002 compared to $482,000 for the six months ended June 30, 2001. The
increase of $299,000 was due to increased legal, accounting, consulting and
other expenses.
23
Stock based compensation expenses were $2,755,000 for the six months ended June
30, 2002 compared to $0 for the six months ended June 30, 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 3).
Interest expense increased to $4,000 (net of interest income of $1,000) for the
six months ended June 30, 2002 compared to $2,000 (net of interest income of
$2,000) for the three months ended June 30, 2001.
In connection with the Bridge Loan Financing Agreement, Ilion had advanced to us
working capital of $5,249,000 in the form of Convertible Promissory Notes which
had no stated interest rate and were convertible at $.10 per share into our
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.
As of June 30, 2002, Arch Hill advanced to us working capital of $1,914,567
(including $1,834,567 advanced during the six months ended June 30, 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 23,932,087 shares of our common stock at $0.08 per share. Since
the Convertible Promissory Notes totaling $1,834,567 payable to Arch Hill are
convertible at inception, the entire $2,231,000 of interest expense related to
the beneficial conversion feature of these Notes was recognized as expense
during the six months ended June 30, 2002. (See Note 10).
THREE MONTHS ENDED JUNE 30, 2002
We had revenues from development contracts in the amount of $1,000 for the three
months ended June 30, 2002 as compared to $7,000 for the three months ended
June 30, 2001.
Engineering, research and development expenses were $432,000 for the three
months ended June 30, 2002 compared to $210,000 for the three months ended June
30, 2001. The increase of $222,000 was due primarily to increased materials
purchased to produce prototype batteries, increased technical consulting
services and salaries.
General and administrative expenses were $341,000 for the three months ended
June 30, 2002 compared to $232,000 for the three months ended June 30, 2001. The
increase of $109,000 was due to increased legal, accounting, consulting and
other expenses.
Interest expense increased to $2,000 (net of interest income of $1,000) for the
three months ended June 30, 2002 compared to $1,000 (net of interest income of
$2,000) for the three months ended June 30, 2001.
In connection with the additional $873,000 of convertible promissory notes
payable to Arch Hill, $764,000 of interest expense related to the beneficial
conversion feature was recognized as expense for the three months ended June 30,
2002. Since the Convertible Promissory Note payable to Arch Hill is convertible
at inception, the entire $764,000 of interest expense related to the beneficial
conversion feature was recognized as expense during the three months ended June
30, 2002.
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
24
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.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
Pursuant to the Bridge Loan Agreement Arch Hill advanced $252,542, $340,000
and $280,000 to LTC and on May 15, 2002, May 31, 2002 and June 21, 2002,
respectively, and we issued to Arch Hill convertible notes in such principal
amounts, which notes are immediately convertible into shares of our common stock
at $.08 per share. The convertible notes issued during the quarter ended June
30, 2002 were issued in reliance on the exemption from registration pursuant to
Section 4(2) of the Securities Act of 1933 as transactions not involving a
public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
25
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:
10.39 Bridge Financing Amendment Agreement No. 2 dated as of May 30,
2002 between Lithium Technology Corporation and Arch
Hill Capital N.V. (1)
10.40 Share Exchange Agreement, dated as of June 7, 2002, by and
between Lithium Technology Corporation and Hill Gate
Capital N.V. and Exhibits [Schedules omitted] (1)
10.41 Bridge Financing Amendment Agreement No. 3 dated as of July
29, 2002 between Lithium Technology Corporation and
Arch Hill Capital N.V.
b) Form 8-K Reports during the Quarter Ended June 30, 2002:
Form 8-K dated June 7, 2002 reporting on the execution of a
Share Exchange Agreement which will give LTC a 60% beneficial
ownership interest in GAIA Akkumulatorenwerke GmbH.
(1) Incorporated herein by reference to LTC's Report on Form 8-K dated June 7,
2002.
26
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.
Dated: August 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)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies in his capacity as an officer of
Lithium Technology Corporation (the "Company") that the Quarterly Report of the
Company on Form 10-QSB for the period ended June 15, 2002 fully complies with
the requirements of Section 13(a) of the Securities Exchange Act of 1934 and
that the information contained in such report fairly presents, in all material
respects, the financial condition of the Company at the end of such period and
the results of operations of the Company for such period.
Dated: August 14, 2002
/s/ David J. Cade
---------------------------------------
David J. Cade
Chairman and Chief Executive Officer
/s/ William D. Walker
---------------------------------------
William D. Walker
Chief Financial Officer
27