****
 
 
 **UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **Washington,
DC 20549**
 
 
 
 **FORM
10-Q**
 
 **x**
    **QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**
 
 **For
the quarterly period ended March 31, 2005**
 
 **o**
    **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**
 
 **000-31083**
 **(Commission
File Number)**
 
 
 
 **MILLENNIUM
CELL INC.**
 **(Exact
Name of Registrant as Specified in Its Charter)**
 
 
 
 **Delaware**
    **22-3726792****(State
      or Other Jurisdiction of**
    **(I.R.S.
      Employer****Incorporation
      or Organization)**
    **Identification
      Number)**
 
 **One
Industrial Way West,**
 **Eatontown,
New Jersey 07724**
 **(Address
of Principal Executive Offices) (Zip Code)**
 
 **(Registrant's
telephone number, including area code) (732) 542-4000**
 
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). Yes o No x
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 42,467,580 shares of Common Stock, par
value $.001, were outstanding on May 4, 2005.
 
  
  **MILLENNIUM
CELL INC.**
 **(a
development stage enterprise)**
 **Index**
 
 
 **PART
I - FINANCIAL INFORMATION**
 
 **Page**Item
      1.
    Financial
      Statements (Unaudited)Consolidated
      Balance Sheet - March 31, 2005 and December 31, 2004
    1Consolidated
      Statements of Operations - Three months endedMarch
      31, 2005 and 2004
    2Consolidated
      Statements of Cash Flows - Three months ended March 31, 2005 and
      2004
    3Consolidated
      Statements of Stockholders’ Equity - Three months endedMarch
      31, 2005
    4Notes
      to Consolidated Financial Statements - March 31, 2005
    5Item
      2.
    Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
    9Item
      3.
    Quantitative
      and Qualitative Disclosures About Market Risk
    14Item
      4.
    Controls
      and Procedures
    15**PART
      II - OTHER INFORMATION**Item
      1.
    Legal
      Proceedings
    16Item
      2.
    Unregistered
      Sales of Equity Securities and Use of Proceeds
    16Item
      3.
    Defaults
      Upon Senior Securities
    16Item
      4.
    Submission
      of Matters to a Vote of Security Holders
    17Item
      5.
    Other
      Information
    17Item
      6.
    Exhibits
    17
 
 
 
 
 
 
 
   Unless
the context otherwise requires, all references to “we,” “us,” “our,” and the
“Company” include Millennium Cell Inc., and its wholly-owned subsidiary, MCE
Ventures LLC.
 
 **FORWARD-LOOKING
STATEMENTS**
 
 This
report contains forward-looking statements (within the meaning of the Private
Securities Litigation Reform Act of 1995). These forward-looking statements
reflect our current view about future events and financial performance and are
subject to risks and uncertainties. Statements contained herein that are not
statements of historical fact may be deemed to be forward-looking information.
When we use words such as “plan,” “believe,” “expect,” “anticipate,” “on target”
and “intend” or similar expressions, we are making forward-looking statements.
Investors should
not rely on forward-looking statements because they are subject to a variety of
risks, uncertainties and other factors that could cause actual results to differ
materially from our expectations, and we expressly do not undertake any duty to
update forward-looking statements or to publicly announce revisions to any of
the forward-looking statements, whether as a result of new information, future
events or otherwise. These
factors include, but are not limited to, the following: (i) the cost and timing
of development and market acceptance of, and the availability of components and
raw materials required by, a hydrogen battery technology and hydrogen delivery
system, (ii) the cost and commercial availability of the quantities of raw
materials required by the hydrogen fuel storage and delivery systems, (iii)
competition from current, improving and alternate power technologies, (iv) our
ability to raise capital at the times, in the amounts and at costs and terms
that are acceptable to fund the development and commercialization of our
hydrogen battery technology and hydrogen delivery system and our business plan,
(v) our ability to protect our intellectual property, (vi) our ability to
achieve budgeted revenue and expense amounts, (vii) our ability to generate
revenues from the sale or license of, or provision of services related to, our
technology, (viii) our ability to enter into agreements with collaborators and
strategic partners and the failure of our collaborators and strategic partners
to perform under their agreements with us, (ix) our ability to generate design,
engineering or management services revenue opportunities in the hydrogen
generation or fuel cell markets, (x) our ability to secure government funding of
our research and development and technology demonstration projects and (xi)
other factors discussed under the caption “Investment Considerations” in our
Annual Report on Form 10-K for the year ended December 31,
2004.
  
  **PART
I - FINANCIAL INFORMATION**
 
 **Item
1.**   ***Financial
Statements (Unaudited).***
 
 **MILLENNIUM
CELL INC.**
 **(A
DEVELOPMENT STAGE ENTERPRISE)**
 **CONSOLIDATED
BALANCE SHEET**
 **(unaudited)**
 
 **March
      31,**
    **December
      31,****2005**
    **2004****ASSETS**Current
      assets:Cash
      and cash equivalents
    $
      7,016,278
    $
      8,217,840Accounts
      receivable - trade
    62,401
    73,474Accounts
      receivable - other
    222,836
    372,776Prepaid
      expenses
    359,600
    261,467Deferred
      financing costs
    567,974
    97,366Total
      current assets
    8,229,089
    9,022,923Property
      and equipment, net
    603,802
    663,576Patents
      and licenses, net
    554,265
    538,802Restricted
      cash
    3,043,781
    3,035,021Security
      deposits
    45,676
    45,676$
      12,476,613
    $
      13,305,998**LIABILITIES
      AND STOCKHOLDERS' EQUITY**Current
      liabilities:Accounts
      payable
    $
      86,976
    $
      282,586Accrued
      expenses
    1,162,860
    593,698Accrued
      separation
    39,736
    318,368Short-term
      portion of capital lease obligation
    32,018
    37,036Short-term
      portion of refundable grant obligation
    31,163
    28,766Deferred
      compensation
    65,037
    65,037Convertible
      secured debentures, net of discount
    2,399,988
    2,399,988Convertible
      unsecured debentures, net of discount
    1,921,237
    5,137,335Deferred
      revenue
    85,000
    85,000Total
      current liabilities
    5,824,015
    8,947,814Refundable
      grant obligation
    174,777
    177,174Capital
      lease obligation and other long-term liabilities
    —
    2,669Commitments
      and contingenciesStockholders'
      equity:Preferred
      stock, $.001 par value; 5,000,000 authorized shares, none issued andOutstandingCommon
      stock, $.001 par value; authorized 70,000,000 shares,42,445,487
      and 39,113,963 shares issued and outstandingas
      of March 31, 2005 and December 31, 2004, respectively
    42,445
    39,114Additional
      paid-in capital
    91,622,827
    85,663,479Deferred
      compensation
    (734,804)
    (188,805)Deficit
      accumulated during development stage
    (84,452,647)
    (81,335,447)Total
      stockholders' equity
    6,477,821
    4,178,341$
      12,476,613
    $
      13,305,998
 
 See notes
to financial statements.
 
 1
 **MILLENNIUM
CELL INC.**
 **(A
DEVELOPMENT STAGE ENTERPRISE)**
 **CONSOLIDATED
STATEMENTS OF OPERATIONS**
 **(unaudited)**
 
 **Three
      Months**
    **Three
      Months****Ended**
    **Ended**
    **Cumulative****March
      31,**
    **March
      31,**
    **Amounts
      From****2005**
    **2004**
    **Inception**Revenue
    $
      79,901
    $
      25,000
    $
      1,464,626Cost
      of revenue
    79,901
    25,000
    1,377,883Gross
      margin
    —
    —
    86,743Product
      development and marketing
    1,081,235
    992,515
    21,073,610General
      and administrative(excluding
      non-cash charges)
    868,758
    1,611,161
    21,084,529Non-cash
      compensation charges
    505,207
    322,138
    25,741,220Restructuring
      expense
    —
    —
    104,982Depreciation
      and amortization
    77,583
    142,343
    2,772,946Research
      and development
    217,742
    —
    8,804,464Total
      operating expenses
    2,750,525
    3,068,157
    79,581,751Loss
      from operations
    (2,750,525)
    (3,068,157)
    (79,495,008)Other
      income, net
    15,989
    —
    15,989Interest
      expense
    382,664
    314,313
    2,833,838Equity
      in losses of affiliates
    —
    —
    856,078Loss
      before income taxes
    (3,117,200)
    (3,382,470)
    (83,168,935)Benefit
      from income taxes
    —
    —
    867,169Net
      loss
    (3,117,200)
    (3,382,470)
    (82,301,766)Preferred
      stock amortization
    —
    —
    2,150,881Net
      loss applicable to common stockholders
    $
      (3,117,200)
    $
      (3,382,470)
    $
      (84,452,647)Loss
      per share -- basic and diluted
    $
      (.08)
    $
      (.10)
    $
      (2.89)Weighted
      -- average number of shares outstanding
    40,173,960
    35,398,732
    29,201,615
 
  See notes
to financial statements.
 
 
  2
  **MILLENNIUM
CELL INC.**
 **(A
DEVELOPMENT STAGE ENTERPRISE)**
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 **(unaudited)**
 
 **Three
      months**
    **Three
      months**
    **Cumulative****Ended**
    **Ended**
    **Amounts
      from****March
      31, 2005**
    **March
      31, 2004**
    **Inception**OPERATING ACTIVITIESNet
      loss
    $
      (3,117,200)
    $
      (3,382,470)
    $
      (82,301,766)Adjustments
      to reconcile net loss tonet
      cash used in operating activities:Depreciation
      and amortization
    77,583
    142,343
    2,772,946Amortization of
      discount on debentures
    183,903
    76,257
    1,906,223Beneficial
      conversion feature on debentures
    98,000
    175,757
    1,952,582Amortization of
      deferred financing costs
    66,151
    38,229
    1,030,727Non-cash
      interest charges
    65,399
    —
    207,916Losses
      on investment in affiliate
    —
    —
    856,078Non-cash
      compensation charges
    505,207
    322,138
    25,741,220Changes
      in operating assets and liabilities:Accounts
      receivable
    161,013
    (230,900)
    (285,237)Prepaid
      expenses and other assets
    (35,636)
    2,696
    (342,778)Accounts
      payable and accrued expenses
    (329,019)
    685,086
    1,517,000Deferred
      revenue
    —
    140,000
    2,484,988Net
      cash used in operating activities
    (2,324,599)
    (2,030,864)
    (44,460,101)INVESTING
      ACTIVITIESPurchase of
      property and equipment
    —
    (86,398)
    (2,885,446)Patent
      registration costs
    (33,272)
    (10,186)
    (741,552)Restricted
      cash
    (8,759)
    (7,049)
    (3,043,781)Investment in
      affiliate
    —
    —
    (856,078)Net
      cash used in investing activities
    (42,031)
    (103,633)
    (7,526,857)FINANCING
      ACTIVITIESProceeds from
      issuance of common stock
    288,691
    8,289
    35,773,864Underwriting
      and other expenses of initialpublic
      offering
    —
    —
    (3,669,613)Proceeds from
      issuance of debentures
    —
    5,600,000
    21,428,806Proceeds from
      equity private placement
    —
    —
    2,736,279Deferred
      financing costs
    —
    (20,001)
    (698,384)Proceeds from
      exercise of warrants
    884,064
    —
    884,064Proceeds from
      capital contribution
    —
    —
    500,000Payment
      of note payable
    —
    —
    (250,000)Payment
      of capital lease obligation
    (7,687)
    (6,925)
    (54,166)Proceeds from
      grant, net
    —
    —
    205,940Proceeds from
      sale of preferred stock
    —
    —
    2,146,446Net
      cash provided by financing activities
    1,165,068
    5,581,363
    59,003,236Net
      change in cash and cash equivalents
    (1,201,562)
    3,446,866
    7,016,278Cash
      and cash equivalents, beginning ofPeriod
    8,217,840
    6,004,173
    —Cash
      and cash equivalents, end of period
    $
      7,016,278
    $
      9,451,039
    $
      7,016,278
 
 See notes
to financial statements.
 
 
 3
 
 
 **MILLENNIUM
CELL INC.**
 **(A
DEVELOPMENT STAGE ENTERPRISE)**
 **CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY**
 **(unaudited)**
 
 
  **Additional**
    
    
    
    
    
    **Total****Common
      Stock**
    
    **Paid-In**
    
    **Deferred**
    
    **Accumulated**
    
    **Stockholders'****Shares**
    **Amount**
    
    **Capital**
    
    **Compensation**
    
    **Deficit**
    
    **Equity**
 **Balance
      at December 31, 2004**
    **39,113,963**
    **$
      39,114**
    
    **$
      85,663,479**
    
    **$
      (188,805)**
    
    **$
      (81,335,447)**
    
    **$
      4,178,341**Issuance
      of common stock from conversion of debentures
    1,954,331
    1,954
    
    3,398,045
    
    -
    
    -
    
    3,399,999Beneficial
      conversion feature of debentures
    -
    -
    
    98,000
    
    -
    
    -
    
    98,000Issuance
      of common stock for debt financing costs
    52,477
    53
    
    62,448
    
    -
    
    -
    
    62,501Issuance
      of common stock from exercise of options
    120,288
    120
    
    288,571
    
    -
    
    -
    
    288,691Issuance
      of common stock for Board of Director compensation
    11,183
    11
    
    14,527
    
    -
    
    -
    
    14,538Amortization
      of restricted stock awards
    -
    -
    
    -
    
    498,561
    
    -
    
    498,561Issuance
      of common stock for restricted stock awards
    474,800
    475
    
    1,044,085
    
    (1,044,560)
    
    -
    
    -Issuance
      of common stock for exercise of warrants
    589,376
    589
    
    883,475
    
    -
    
    -
    
    884,064Issuance
      of common stock for interest payments
    82,671
    83
    
    107,284
    
    -
    
    -
    
    107,367Issuance
      of stock for 401(k) plan matching contributions
    46,398
    46
    
    62,913
    
    -
    
    -
    
    62,959Net
      loss
    
    
    
    
    
    
    
    (3,117,200)
    
    (3,117,200)**Balance
      at March 31, 2005**
    **42,445,487**
    **$
      42,445**
    
    **$
      91,622,827**
    
    **$
      (734,804)**
    
    **$
      (84,452,647)**
    
    **$
      6,477,821**
 
 
 See notes
to financial statements.
 
 4
   **MILLENNIUM
CELL INC.**
 **(A
DEVELOPMENT STAGE ENTERPRISE)**
 **NOTES
TO FINANCIAL STATEMENTS**
 **(unaudited)**
 
 
 **NOTE
1—BASIS OF PRESENTATION**
 
 The
consolidated financial statements include the accounts of Millennium Cell Inc.
and its wholly owned subsidiary, MCE Ventures LLC. MCE Ventures is a Delaware
limited liability company that was formed in 2002 to engage in limited strategic
investment activities. All significant inter-company transactions and accounts
have been eliminated.
 
 The
accompanying unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, all known adjustments (which
consist primarily of normal recurring adjustments) considered necessary for a
fair presentation have been included. The interim statements should be read in
conjunction with our Annual Report on Form 10-K for the year ended December 31,
2004.
 
 **NOTE
2—EARNINGS PER SHARE**
 
 Basic
earnings per share (“EPS”) is computed by dividing income available to common
stockholders by the weighted average number of common shares actually
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. All such securities were
anti-dilutive for all periods presented.
 
 **NOTE
3—STOCK BASED COMPENSATION**
 
 Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" and FAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has elected to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25").
 
 The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation:
 
 **Three
      Mos. Ended Mar., 31,****2005**
    **2004**Net
      loss attributable to common stockholders —As
      reported
    $(3,117,200)
    $(3,382,470)Add:
      Total stock-based compensation expense included in net
loss
    505,207
    322,138Deduct:
      Total stock-based compensation expense determined under fair value based
      method for all stock option awards
    (580,899)
    (518,254)Net
      loss attributable to common stockholders — Pro forma
    $(3,192,892)
    $(3,578,586)Net
      loss per share attributable to commonstockholders
      — As reported
    $(0.08)
    $(0.10)Net
      loss per share attributable to commonstockholders
      — Pro forma
    $(0.08)
    $(0.10)
 
 
 5
 
 The fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
 
 **Three
      Mos. Ended March 31,****2005**
    **2004**Expected
      dividend yield
    —
    —Expected
      stock price volatility
    .89
    .57Risk-free
      interest rate
    3.74%
    3.48%Expected
      option term
    5
      years
    5
      years
 
 The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. The
Company's options have characteristics significantly different from those of
traded options, and changes in the subjective input assumptions can materially
affect the fair value estimate. Based upon the above assumptions, the weighted
average fair value of stock options granted at market was $1.22 and $1.25 in
2005 and 2004, respectively.
  In
December 2004, the FASB issued SFAS No. 123 - Revised (SFAS No. 123R),
"Share-Based Payment." SFAS No. 123R revises SFAS No. 123, "Accounting for
Stock-Based Compensation", and supercedes APB No. 25, "Accounting for Stock
Issued to Employees." Under SFAS No. 123R, the Company will measure the cost of
employee services received in exchange for stock based on the grant-date fair
value of stock-based compensation (with limited exceptions). That cost will be
recognized over the period during which an employee is required to provide
service in exchange for the stock award (usually the vesting period). The fair
value of the stock award will be estimated using an option-pricing model, with
excess tax benefits, as defined in SFAS No. 123R, being recognized as an
addition to paid-in capital. The provisions of SFAS No. 123R are effective as of
the beginning of the first annual reporting period that begins after June 15,
2005. The Company is currently in the process of evaluating the impact of SFAS
No. 123R on its financial statements.
  **NOTE
4—OPTIONS, WARRANTS AND NON-CASH CHARGES**
 
 In August
2003, the Company exchanged 835,500 eligible stock options for 197,599 shares of
restricted stock related to an exchange offer, which will fully vest in August
2005. During the quarter ended March 31, 2005, the Company recorded $49,400 for
the non-cash charges for the August 2003 restricted stock awards issued to
employees. The Company will recognize additional non-cash charges of $98,800 in
the remainder of 2005.
 
 In March
2005, the Company issued 474,800 shares of restricted stock to employees with a
fair market value of $1,044,560. These shares will vest in five years, or
earlier, upon meeting certain accelerated vesting criteria, as defined. During
the quarter ended March 31, 2005, the Company recorded $449,161 in non-cash
charges for restricted stock issued to employees which includes the amortization
of restricted stock issued in March 2005 and the vesting of 189,920 shares of
restricted stock during March 2005 based on the Company’s performance of certain
acceleration of vesting features in the restricted stock plan. The Company will
recognize additional non-cash charges of $94,011 in the remainder of 2005 and an
additional $501,000 will be recorded through 2009, or earlier if other
accelerated vesting features are met.
 
 On
March 10, 2005, a warrant holder exercised 589,376 warrants with a strike price
of $1.50 in connection with an agreement reached between the Company and the
warrant holder wherein the Company agreed to reduce the strike price of the
warrants from $3.93 to $1.50 in exchange for immediate exercise by the holder.
As a result of this exercise, the Company received gross proceeds of $884,064
and such amounts were recorded as paid-in capital at March 31,
2005.
 
 **NOTE
5—PRIVATE PLACEMENTS**
 
 *2004
Debentures*
 
 In
January 2004, the Company entered into a private placement financing transaction
with an institutional and accredited investor pursuant to the terms of a
securities purchase agreement between the Company and the purchaser. The Company
claimed the exemption from registration under Section 4(2) of the Securities Act
of 1933. Pursuant to the terms of the agreement, the investor agreed to acquire
up to $10 million of unsecured debentures, convertible into common stock of the
Company, subject to certain terms and conditions. The SEC declared the
registration of shares underlying the debentures effective on February 17, 2004
and $6.0 million of unsecured debentures (the “First Debentures”) were issued to
the investor on that date at an initial conversion price of $3.30, subject to
certain terms and conditions. As of March 31, 2005, all of the First Debentures
have been converted into 3,523,012 shares of the Company’s common stock.
 
 
 6
  In
September 2004, the Company issued an additional $4.0 million of unsecured
convertible debentures (“Additional Debentures”) under the private placement
transaction that closed in February of 2004. Cash fees of $171,194 were deducted
from the proceeds and 60,069 shares of common stock valued at $73,284 were
issued to the holder of the debentures upon closing of the transaction. The
market value of these shares and the cash fees were recorded as a discount on
the debentures and are amortized over the term of the debentures or as they are
converted, whichever happens first. The carrying value of the debentures was
$3,755,522 at the time of issuance. The debentures mature 18 months after the
date of issuance and are subject to six, 30-day extensions and bear interest at
6% per annum with payments due quarterly. As of March 31, 2005, 2 million of the
Additional Debentures were converted into 1,290,323 shares of the Company’s
common stock.
 
 Among
other things, the terms and conditions of the debentures include covenants
related to the Company’s continued listing on a nationally recognized stock
market (which includes the NASDAQ National Market and/or The NASDAQ SmallCap
Market), in the event that our average closing stock price is below $1.00,
$0.75, or $0.50 for 30, 15 and 5 consecutive trading days, respectively, and
minimum cash maintenance requirements of 80% of outstanding unsecured
debentures. If there is an event of default under the debentures, the holder may
elect to require us to prepay all of a portion of the principal amount of the
debentures plus a 30% premium. The Company is in compliance with all applicable
covenants at March 31, 2005.
 
 In
accordance with APB No. 14, “Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants”, the Company amortizes discounts on its debentures
as interest expense, over the original maturity period of the debentures or
ratably as they are converted, whichever comes first. In the first quarter of
2005, the Company recognized a non-cash charge to interest expense of $65,399,
respectively for amortization of discount on debentures.
 
 In
accordance with Emerging Issues Task Force (“EITF”) No. 00-27, “Application of
Issue No. 98-5 to Certain Convertible Instruments”, and EITF No. 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios”, and after considering the terms of
the transaction, the Company determined that the debentures contained a
beneficial conversion feature (“BCF”). The BCF existed because of a discount of
7% that will be given to the investor in the event of a company-initiated
conversion of the debentures prior to maturity. Accordingly, at time of
conversion, the Company will record as interest expense any applicable BCF based
on the fair value of the conversion feature on that date in the event of an
early conversion of debentures into common stock.
 
 In the
first quarter of 2005, the Company converted $1.4 million of the First
Debentures and $2.0 million of Additional Debentures into 664,008 and 1,290,323
shares of common stock, respectively, and a BCF of $98,000 was recorded to
additional paid in capital.
 
 **NOTE
6—SUPPLEMENTAL CASH FLOW INFORMATION**
 
 The
Company issued 46,398 shares of common stock valued at $62,960 to employees as
401(k) Plan employer matching contributions during the three months ended March
31, 2005. In the first quarter of 2005, the Company issued 474,800 shares of
common stock valued at $1,044,560 to employees as restricted stock. The Company
also converted $3.4 million and $1.1 million of unsecured debentures into
1,954,331 and 443,210 shares of common stock during
the three months ended March 31, 2005 and 2004, respectively.
 
 **NOTE
7—RELATED PARTY TRANSACTIONS**
 
 In
October 2004, the Company’s Board of Directors approved a financial advisory
services agreement with Andersen & Company LLC (“Andersen”), pursuant to
which Andersen is to act as the Company’s Senior Financial Advisor. As Senior
Financial Advisor, Andersen is required to support the Company’s efforts to
raise capital through transactions that contemplate issuances of debt, equity
and/or convertible securities by Millennium to strategic entities and financial
investors. In consideration therefore, the Company paid Andersen a
non-refundable retainer in the amount of $62,500 in cash. Further, upon the
execution and delivery of definitive agreements with respect to a strategic
transaction, Andersen is entitled to a fee equal to $62,500 payable in shares of
restricted Common Stock which was paid in March 2005 by the issuance of 52,477
shares as of a result of the Company’s agreement with Dow (see Note
8).
 
 
 7
 
 **NOTE
8—SUBSEQUENT EVENTS**
****
*Stock
Purchase Agreement*

On
February 27, 2005, the Company entered into a stock purchase agreement (the
“Stock Purchase Agreement”) with The Dow Chemical Company (“Dow”). The Stock
Purchase Agreement represents the first step of a proposed joint development
arrangement (the “Agreements”) with Dow. It is required in the Stock Purchase
Agreement, that the Company’s stockholders approve the issuance of securities to
the extent that such issuance, on an as converted, as exercised basis, exceeds
19.9% of the outstanding common stock or voting power of the Company. The
Company received shareholder approval during the Company’s 2005 Annual Meeting
of Stockholders, which was held on April 21, 2005. On April 25, 2005, the
Company issued 155,724 shares of its Series A-0 Preferred Stock, par value $.001
per share, to Dow, convertible into 3% of the Company’s outstanding common
stock. The Company claimed the exemptionfrom registration under Section 4(2) of the Securities Act in connection
with the issuance of the Series A Preferred Stock.

The
purpose of the Agreements is for the two companies to jointly develop portable
power solutions based on the Company’s Hydrogen on Demand® energy systems
coupled with a fuel cell. The Joint Development Agreement has a three year term
and Dow may terminate the Joint Development Agreement if milestones are not met
and under certain other conditions. The Agreements contemplate a series of four
milestones designed to culminate in a commercially available product. The
milestones are focused on portable and/or consumer electronics applications.
Achievement of milestones in either portable or consumer electronics
applications will be sufficient to trigger equity transactions at Dow’s option
to purchase $1.25 million of the Company’s Series B Convertible Preferred Stock,
par value $.001 per share, and a grant of additional shares of Series A
Preferred Stock. For more information regarding this transaction, see the
Company’s Current Reports on Form 8-K filed on February 28, 2005, and April 26,
2005.

*Series
C Preferred Stock*

In April
2005, the Company entered into a private placement financing transaction with
seven institutional and accredited investors pursuant to the terms of a
securities purchase agreement.  Pursuant to the terms of the agreement, the
investors paid $10 million in cash for 10,000 shares of the Company’s Series C
Convertible Preferred Stock, par value $.001 per share, which shares are
convertible into common stock of the Company at an initial conversion price
equal to $2 per share, subject to adjustment based on customary antidilution
terms. The Series C Preferred Stock bears a 7% cumulative dividend payable
quarterly in shares of common stock or cash, at the Company’s option. Three
years after issuance, the Series C Preferred Stock is subject to mandatory
redemption. Additionally, the Company issued to the investors three-year
warrants to purchase 1.25 million shares of the Company’s common stock at an
exercise price equal to $2 per share, subject to adjustment based on customary
antidilution terms.

The
Company claimed the exemption from registration under Section 4(2) of the
Securities Act in connection with the issuance. Under the securities purchase
agreement, the Company is obligated to file a resale registration statement with
the SEC no later than May 25, 2005. For more information regarding this
transaction, see the Company’s Current Report on Form 8-K that the Company filed
with the SEC on April 27, 2005.
 8
  
 **Item
2.**  ***Management's
Discussion and Analysis of Financial Condition and Results of
Operations.***
 
 The
following discussion should be read in conjunction with the accompanying
consolidated financial statements and notes thereto included within this report.
In addition to historical information, this Form 10-Q and the following
discussion contain forward-looking statements that reflect our plans, estimates,
intentions, expectations and beliefs. See the discussion contained herein under
the caption “Forward-Looking Statements” for more information. Our actual
results could differ materially from those discussed in the forward-looking
statements. The discussion below should be read in conjunction with our
Annual Report on Form 10-K for the fiscal year ended December 31, 2004 .
 
 **General**
 
 We were
formed as a Delaware limited liability company on December 17, 1998, and
organized and began operations on January 1, 1999 (inception date). We were
converted into a Delaware corporation on April 25, 2000 when all of the
outstanding equity interests of the limited liability company were converted
into shares of common stock of the corporation. Unless otherwise indicated, all
information that we present in this Form 10-Q for any date or period gives
effect to the conversion as if it had occurred on that date or as of the
beginning of that period and all references to common stock for periods before
the conversion mean our issued and outstanding membership interests.
 
 **Overview**
 
 We are
engaged in the development of hydrogen battery technology for use primarily in
portable electronic devices for the consumer, medical, military and industrial
markets. We are developing this technology in partnership with corporate and
government entities. Hydrogen on Demand® is the trademarked name for our
proprietary hydrogen energy storage and delivery technology. Our technology is
based on the culmination of work reflected in more than 30 patents (either
granted or in application) that collectively provide us with a leading position
in the system and fuel blend technology used to convert sodium borohydride to
hydrogen energy for use in portable electronic device applications.
 
 Our losses
have resulted primarily from costs associated with product development and
research and development activities as well as non-cash amortization of
preferred stock and non-cash charges related to the issuance of stock options
and warrants to employees and third parties. As a result of planned expenditures
in the areas of research, product development and marketing and additional
non-cash charges relating to employee stock options and restricted stock, we
expect to incur additional operating losses for the foreseeable future.
  
 **Results
of Operations**
 
 ***Three
Months Ended March 31, 2005 versus Three Months Ended March 31,
2004***
 
 *Revenues* .
Revenues for the three months ended March 31, 2005 were $79,901 compared to
$25,000 for the same period of 2004. The increase was mainly attributable to our
contract with Concurrent Technologies Corp. that began in the fourth quarter of
2004. While in the development stage, our revenue is expected to fluctuate from
quarter to quarter with the timing of prototype development and design
services.
  In the
near-term, revenues are expected to be derived substantially from up-front
license fees, research contracts with various federal, state and local agencies,
collaborations with other companies, management services, and royalty payments
or joint venture revenue from licensees or strategic partnerships. Revenues will
be recognized in the period in which technology is delivered, licensing revenues
are earned, or as services are performed.
  *Cost
of Revenues.* Cost of
revenues for the three months ended March 31, 2005 were $79,901 compared to
$25,000 for the same period of 2004. The increase was mainly attributable to our
contract with Concurrent Technologies Corp. that began in the fourth quarter of
2004. Cost of revenues during the development stage are allocated from the
Product Development and Marketing expense and Research and Development expense
line items on the income statement depending on the nature of the
project.
 
 *Product
Development and Marketing Expense* . Product
development and marketing expenses for the three months ended March 31, 2005
were $1,081,235 compared to $992,515 for the same period of 2004, an increase of
$88,720. This increase is mostly attributable to our creating a new Sales,
Marketing and Product Development department in the first quarter of 2005.
 
 9
 
 
 *General
and Administrative Expense* . General
and administrative expenses for the three months ended March 31, 2005 were
$868,758 compared to $1,611,161 for the same period of 2004, a decrease of
$742,403. The decrease was mainly the result of an accrual of separation costs
in the first quarter of 2004 in connection with our previous President and Chief
Executive Officer. The remainder of the decrease is attributable to increased
efficiency of our administrative and finance organizations and cost reduction
activities.
 
 *Non-cash
Compensation* .
Non-cash charges were $505,207 for the three months ended March 31, 2005
compared to $322,138 for the same period of 2004, an increase of $183,069. The
non-cash charges increased because of the issuance of 474,000 shares of
restricted stock issued to employees in 2005.
 
 *Depreciation
and Amortization* .
Depreciation and amortization was $77,583 for the three months ended March 31,
2005 compared to $142,343 for the same period of 2004, a decrease of $64,760.
The decrease reflects the impact of assets that have recently been fully
depreciated.
 
 *Research
and Development Expense* .
Research and development expenses were $217,742 for the three months ended March
31, 2005 compared to zero for the same period of 2004. We are reimbursed for
expenses under the Department of Energy program for the joint research of
electrochemical pathways to manufacture sodium borohydride. During the quarter
ended March 31, 2004, we did not incur any other type of research and
development expenses which resulted in the increase of $217,742 for the three
months ended March 31, 2005.
 *Interest
Expense, net* . Net
interest expense was $382,664 for the three months ended March 31, 2005 compared
to $314,313 for the same period of 2004, an increase of $68,351. The increase in
net interest expense was caused mainly by a higher amount of debenture
conversions during the first quarter of 2005 than in the same period of 2004. In the
first quarter of 2005, approximately $3.4 million of debentures were converted
as compared to $1.0 million in the same period of 2004. Interest
expense is comprised of interest on debenture principal, beneficial conversion
features, amortization of original issue discounts and issue costs on our
debentures.
 
 ***Three
Months Ended March 31, 2004 versus Three Months Ended March 31, 2003***
 
 *Revenues* .
Revenues for the three months ended March 31, 2004 were $25,000 compared to
$55,261 for the same period of 2003. In the near-term, revenues are expected to
be derived substantially from license fees, research contracts with various
federal, state and local agencies, collaborations with other companies,
management and contract services, and royalty payments or joint venture revenue
from licensees or strategic partnerships. Revenues will be recognized in the
period in which technology is delivered, licensing revenues are earned, or as
services are performed.
 
 *Cost
of Revenues.* Cost of
revenues for the three months ended March 31, 2004 was $25,000 compared to
$55,261 for the same period of 2003.
 
 *Product
Development and Marketing Expense* . Product
development and marketing expenses for the three months ended March 31, 2004
were $992,515 compared to $1,231,499 for the same period of 2003, a decrease of
$238,984. This decrease was mostly attributable to decreased headcount in the
marketing function and other active cost management initiatives.
 
 *General
and Administrative Expense* . General
and administrative expenses for the three months ended March 31, 2004 were
$1,611,161 compared to $1,070,493 for the same period of 2003, an increase of
$540,668. The increase was driven by the accrual of separation costs of
approximately $591,000 as a result of the resignation of the our previous
President and Chief Executive Officer in March 2004. The separation costs were
comprised of salary, benefits and other costs in satisfaction of his employment
contract.
 
 *Non-cash
Compensation Charges* .
Non-cash charges were $322,138 for the three months ended March 31, 2004
compared to $1,095,406 for the same period of 2003, a decrease of $773,268. The
non-cash charges in 2003 were primarily related to options issued below market
to employees in 2000 and warrants issued to affiliates and other third parties
for services rendered.
  *Depreciation
and Amortization* .
Depreciation and amortization was $142,343 for the three months ended March 31,
2004 compared to $175,297 for the same period of 2003, a decrease of $32,954.
The decrease reflects the impact of assets that have recently been fully
depreciated.
 
 *Research
and Development Expense* .
Research and development expenses were zero for the three months ended March 31,
2004 compared to $305,411 for the same period of 2003, a decrease of $305,411.
The decrease is mainly attributable to the reimbursement of expenses under the
Department of Energy program for the joint research of electrochemical pathways
to manufacture sodium borohydride. This program reimburses us for 80% of our
qualifying costs under the program. Although the project began during the first
quarter of 2004, the Department of Energy authorized us to bill for work that
occurred up to 90 days prior to the contract effective date.
 
 10
 *Interest
Expense* .
Interest expense was $314,313 for the three months ended March 31, 2004 compared
to $516,000 for the same period of 2003, a decrease of $201,687. The decrease in
interest expense was mainly the result of fewer conversions of debentures in the
first quarter of 2004 than in the same period of 2003. During the quarter ended
March 31, 2004, $0.7 million of debentures were converted compared with $1.2
million in the first quarter of 2003. When debentures are converted,
amortization of original issue discounts, issue costs and charges for beneficial
conversion features are recorded as interest expense.
 
 **Liquidity
and Capital Resources**
 
 *General*
 
 Since our
inception, we have financed our operations primarily through our initial public
offering in August 2000 and private placements of equity and debt securities. In
1999, we issued $1.25 million of membership interests in Millennium Cell LLC for
cash, which subsequently were converted into shares of our common stock as of
April 25, 2000. We also received a capital contribution of $0.5 million in the
first quarter of 2000, and in May 2000, we sold 759,368 shares of our former
Series A preferred stock, which automatically converted into 759,368 shares of
common stock upon the completion of our initial public offering. The net
proceeds from our initial public offering totaled approximately $29.9 million
and we generated net proceeds from private placement transactions in 2002 and
2003 totaling $14.1 million. In 2004, we received net proceeds of approximately
$9.4 million from a new private placement transaction. In April 2005, we
received net proceeds of approximately $7,788,000 for the issuance of Series C
Preferred Stock.
 
 *Ballard
Power Systems*
  In
October 2000, we received $2.4 million in cash from Ballard Power Systems Inc.
as an advance for prospective royalties pursuant to a product development
agreement between Ballard and us. In addition, we granted to Ballard a warrant
to purchase up to 400,000 shares of our common stock, which was terminated as
part of the strategic investment discussed below. Upon completion of certain
stages of product development, the parties agreed to negotiate in good faith for
the grant of a license of our technology to Ballard in certain fields of use, at
which time prepaid royalties may be earned and the warrants will be issued and
recorded at fair value.
 
 On November
8, 2002, we agreed with Ballard that the product development milestones had been
achieved and agreed to convert the $2.4 million refundable royalty payment into
an investment in our company in the form of secured convertible debentures with
a maturity date of November 8, 2005. The Ballard debentures are secured by a
standby letter of credit issued by Wachovia Bank, National Association, with an
aggregate face amount equal to the outstanding principal. We will not have the
ability to use this cash until the bank pledges are released upon conversion of
the Ballard debentures to common stock. The debentures are convertible at a
conversion price of $4.25, subject to anti-dilution adjustments and certain
price protection in the event we initiate the conversion. As part of the
purchase agreement we entered into with Ballard, Ballard retains the option to
license the non-exclusive right to manufacture and sell products with our
Hydrogen on Demand â technology for specific portable fuel cell products and stationary internal
combustion engine generators.
  *Private
Placement Transactions*

During
2002, 2003 and 2004, we entered into a series of private placement financing
transactions with three different institutional and accredited investors
pursuant to the terms of separate securities purchase agreements among the
Company and the purchasers. The private placements were exempt from registration
under the Securities Act of 1933, as amended, pursuant to Section 4(2) of such
Act. The placements collectively raised $26.0 million dollars through the sale
of $4.0 million in common stock and the issuance of $22.0 million in convertible
debentures. As of March 31, 2005, approximately $20.0 million of debentures had
been converted into 10,584,366 shares of common stock and $2.0 million of
unsecured debentures remain outstanding. See Note 5 of the notes to financial
statements for more information about certain private placement
transactions.

*Stock
Purchase Agreement*

**On
February 27, 2005, we entered into a Stock Purchase Agreement with The Dow
Chemical Company. The Stock Purchase Agreement represents the first step of a
proposed joint development arrangement with Dow. It is required in the Stock
Purchase Agreement that our stockholders approve the issuance of securities to
the extent that such issuance, on an as converted, as exercised basis, exceeds
19.9% of our outstanding common stock or voting power. We received shareholder
approval during our 2005 Annual Meeting of Stockholders, which was held on April
21, 2005. On April 25, 2005, we issued 155,724 shares of our Series A-0
Preferred Stock to Dow, convertible into 3% of our common stock.We
claimed the exemptionfrom registration under Section 4(2) of the Securities Act in connection
with the issuance of the Series A Preferred Stock.
  11
 The
purpose of the joint development arrangement is for the two companies to jointly
develop portable power solutions based on our Hydrogen on Demand® energy systems
coupled with a fuel cell. The Joint Development Agreement has a three year term
and Dow may terminate the Joint Development Agreement if milestones are not met
and under certain other conditions. The Agreements contemplate a series of four
milestones designed to culminate in a commercially available product. The
milestones are focused on portable and/or consumer electronics applications.
Achievement of milestones in either portable or consumer electronics
applications will be sufficient to trigger equity transactions at Dow’s option
to purchase $1.25 million of our Series B Preferred Stock and to receive a grant
of additional shares of Series A Preferred Stock. For more information regarding
this transaction, see our Current Reports on Form 8-K filed on February 28,
2005, and April 26, 2005.

*Series
C Preferred Stock*

In April
2005, we entered into a private placement financing transaction with seven
institutional and accredited investors pursuant to the terms of a securities
purchase agreement.  Pursuant to the terms of the agreement, the investors
paid $10 million in cash for 10,000 shares of our Series C Convertible Preferred
Stock, par value $.001 per share, which shares are convertible into common stock
of the Company at an initial conversion price equal to $2 per share, subject to
adjustment based on customary antidilution terms. The Series C Preferred Stock
bear a 7% cumulative dividend payable quarterly in shares of common stock or
cash, at our option. Three years after issuance, the Series C Preferred Stock is
subject to mandatory redemption. Additionally, we issued to the investors
three-year warrants to purchase 1.25 million shares of our common stock at an
exercise price equal to $2 per share, subject to adjustment based on customary
antidilution terms.

We
claimed the exemption from registration under Section 4(2) of the Securities Act
in connection with the issuance. Under the securities purchase agreement, we are
obligated to file a resale registration statement with the SEC no later than May
25, 2005. For more information regarding this transaction, see our Current
Report on Form 8-K that we filed with the SEC on April 27, 2005.

*Sources
and Uses of Cash*

As of
March 31, 2005, we had $7,016,278 in cash and cash equivalents and restricted
cash of $3,043,781. Cash used in operations totaled $2,324,599 and $2,030,864 in
the first three months of 2005 and 2004, respectively, and related to funding
our net operating losses. The restricted cash comprised $2.4 million of cash
used for collateral in connection with Ballard's strategic investment in us and
$0.6 million of cash used for collateral as security deposit held by our
landlord in connection with the amended lease agreement. These funds used will
not be available for use in operations until the letters of credit have been
reduced or terminated.

Investing
activities used cash of $42,031 and $103,633 in the first three months of 2005
and 2004, respectively. Investing activities in 2005 consisted mainly of patent
registration costs, while in 2004 we purchased laboratory equipment to support
our research.

*Commitments
and Contingencies*

In April
2001, we amended our main operating lease to provide for additional space for
our principal operating offices and laboratories. The amended lease will expire
in 2008 and contains options to renew for an additional eight years and requires
us to pay our allocated share of taxes and operating costs in addition to the
annual base rent payment.

In
connection with the amended lease agreement, we issued a letter of credit to the
landlord for $588,972 in lieu of a cash security deposit. The letter of credit
was collateralized with a portion of our cash and is classified as Restricted
Cash. The funds used for collateral will not be available for use in operations.

Between
January 1999 and April 2000, we received an aggregate of $227,522 from a
recoverable grant award from the State of New Jersey Commission on Science and
Technology. The funds were used to partially fund costs directly related to
development of our technology. The recoverable grant is required to be repaid
when we generate net sales in a fiscal year. The repayment obligation, which
began in March 2001, ranges from 1% to 5% of net sales over a ten-year period.
We are obligated to repay the unpaid amount of the original grant at the end of
the ten-year period. We repaid approximately $21,000 of the award during the
second quarter of 2003, which represents 3% of our 2002 net sales. Based upon 4%
of our 2003 net sales, $18,675 is due to be repaid in 2005. In addition, based
upon 5% of our 2004 net sales, $10,091 is due to be repaid in 2005.
  12
 
   The
Contractual Obligations discussed above are outlined in the following
table:
 **Contractual
      Obligations**
    **Payment
      due in fiscal years****Total**
    **2005
      (remaining 9 months)**
    **2006**
    **2007**
    **2008**
    **2009**Operating
      lease - Facility
    $
      1,775,803
    $
      363,233
    $
      484,310
    $
      484,310
    $
      443,950
    $3⁄4Refundable
      grant obligation
    205,940
    31,163
    3⁄4
    3⁄4
    3⁄4
    174,777Capital
      lease obligations
    32,018
    32,018
    —
    3⁄4
    3⁄4
    3⁄4Convertible
      secured debentures
    2,399,988
    2,399,988
    3⁄4
    3⁄4
    3⁄4
    3⁄4Convertible
      unsecured debentures
    1,921,237
    1,921,237
    3⁄4
    3⁄4
    3⁄4
    3⁄4Total
    $6,334,986
    $4,747,639
    $
      484,310
    $
      484,310
    $
      443,950
    $174,777
 
 We believe
that our current cash and cash equivalents, together with the cash that will be
available from the recent financing transactions will be sufficient to satisfy
anticipated cash needs of our operations through 2007. We may raise additional
funds through public or private financing, collaborative relationships or other
arrangements. Additional funding, if sought, may not be available or, if
available, may be offered at terms not favorable to us. Further, any additional
equity financing may be dilutive to stockholders, and debt financing, if
available, may involve restrictive covenants. Our failure to raise capital when
needed may harm our business and operating results.
 
 **Critical
Accounting Policies**
 
 *Application
of Critical Accounting Policies*
 
 The
discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and judgments that
affect our reported assets and liabilities, revenues and expenses, and other
financial information. Actual results may differ significantly from these
estimates under different assumptions and conditions. In addition, our reported
financial condition and results of operations could vary due to a change in the
application of a particular accounting standard.
  We regard an
accounting estimate underlying our financial statements as a "critical
accounting estimate" if the accounting estimate requires us to make assumptions
about matters that are highly uncertain at the time of estimation and if
different estimates that reasonably could have been used in the current period,
or changes in the estimate that are reasonably likely to occur from period to
period, would have had a material effect on the presentation of financial
condition, changes in financial condition, or results of operations.
 
 Not all of
these significant accounting policies, however, require management to make
difficult, complex or subjective judgments or estimates. Our management has
discussed our accounting policies with the audit committee of our Board of
Directors, and we believe that our estimates relating to revenue recognition,
convertible debt and stock options described below fit the definition of
"critical accounting estimates."
 **
 *Revenue
Recognition*
 
 Our near term
revenues will be derived substantially from contracts that require us to
deliver hydrogen generation technology, management services, system design and
prototype systems and licensing of technology for test and evaluation. We
anticipate that revenues will be recognized in the period in which the
technology is delivered or licensed revenue is earned.
  *Convertible
Debt*
 
 We account
for the issuance and conversion of convertible debt in accordance with APB No.
14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants". As a result, we have and will record original issue discounts to the
extent the fair value of the debt is below the face value of the instrument and
amortize the discount over the life of the instrument. To the extent conversions
of debt into common stock are made prior to the maturity date of the instrument,
we will record as interest expense a ratable proportion of the discount
associated with the face value of the debt converted.
   13
  We
account for issuances of convertible debt in accordance with Emerging Issues
Task Force ("EITF") No. 00-27, "Application of Issue No. 98-5 to Certain
Convertible Instruments" ("EITF No. 00-27"), and EITF No. 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" ("EITF No. 98-5"). As a result of certain
conversion price discounts included within our outstanding debt instruments, we
will record interest expense resulting from BCFs as described under the caption
"Liquidity and Capital Resources" above.
  *Stock
Options*
  We
disclose pro forma information regarding net income and earnings per share that
is required by SFAS No. 148. This information is required to be determined as if
we had accounted for its employee stock options under the fair value method of
that statement. We have estimated the fair value of options granted at the date
of grant using a Black-Scholes option-pricing model.
  The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Our
options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially affect
the fair value estimate. Due to these highly subjective assumptions, the pro
forma disclosures of net loss and loss per share for those periods are not
likely to be representative the pro forma effects on net loss and loss per share
in future years.
  **Item
3.**   ***Quantitative
and Qualitative Disclosures about Market Risk.***
 
 Market risk
represents the risk of loss that may impact our financial position, operating
results or cash flows due to changes in U.S. interest rates. This exposure is
directly related to our normal operating activities. Our cash and cash
equivalents are invested with high quality issuers and are generally of a
short-term nature. As a result, we do not believe that near-term changes in
interest rates will have a material effect on our future results of
operations.
 
 Our systems'
ability to produce energy depends on the availability of sodium borohydride,
which has a limited commercial use and is not manufactured in vast quantities.
There are currently only two major manufacturers of sodium borohydride and there
can be no assurance that the high cost of this specialty chemical will be
reduced. Once we commence full operations in the future, we may need to enter
into long-term supply contracts to protect against price increases of sodium
borohydride. There can be no assurance that we will be able to enter into these
agreements to protect against price increases.
  **Item
4.**   ***Controls
and Procedures***
 
 (a)
Evaluation of Disclosure Controls and Procedures.
 
 Our
Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this quarterly report. Based on
such evaluation, our Chief Executive Officer and our Chief Financial Officer
have concluded that, as of the end of the period covered by this quarterly
report, our disclosure controls and procedures were effective to provide
reasonable assurance that material information relating to us and our business
is made known to management, including our Chief Executive Officer and our Chief
Financial Officer, particularly during the period when our periodic reports are
being prepared.
 
 (b)
Changes in Internal Controls.
 
 Since
the evaluation date, there have not been any significant changes in our internal
controls or in other factors that could significantly affect such
controls.
  
 14
 **PART
II**
 
 **Item
1. Legal
Proceedings.**
 
 (a)  None.
 
 **Item
2.** **Unregistered
Sales of Equity Securities and Use of Proceeds.**
  (a)  None.
  (b)  None.
  (c)  We have
issued the following shares of our common stock to an institutional and
accredited investor (“Investor”) upon conversion of an aggregate amount of
$3,399,998.76 principal amount of our unsecured convertible debentures owned by
the Investor:
  **Date**
    **Amount
      of Unsecured****Convertible Debentures**
    **Number
      of Shares of Common Stock****Issued**February
      28, 2005
      
      
      March
      4, 2005
      
      
      March
      11, 2005
    $2,000,000.65
      
      
      $1,000,000.22
      
      
      $399,997.89
    1,290,323
      
      
      485,437
      
      
      178,571
 
  We issued
the shares of common stock set forth above in reliance upon the exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended. The
resale of the shares by the Investor is registered pursuant to a registration
statement declared effective by the Securities and Exchange
Commission.
  **Item
3.** **Defaults
Upon Senior Securities.**
 
 None.
   15
  **Item
4.** **Submission
of Matters to a Vote of Security Holders.**
 
 Our 2005
Annual Meeting of Shareholders was held on April 21, 2005. The meeting was
called for the following purposes: (1) to elect nine directors to serve on our
Board of Directors, each for a one year term and until their respective
successors are elected, (2) to ratify the Board of Directors’ appointment of
Ernst & Young LLP as our independent public accountants for the 2005 fiscal
year, and (3) to approve the issuance of our securities to The Dow Chemical
Company to the extent that such issuance, on an as converted, as exercised
basis, exceeds 19.9% of our outstanding common stock or voting power.
 There were no shareholder proposals. The results of the voting was as
follows:
 Proposal
      (1):
    **VOTES
      FOR**
    **WITHHELD**G.
      Chris Andersen
    29,146,878
    2,484,418Kenneth
      R. Baker
    31,402,543
    228,753Alexander
      MacLachlan
    31,360,427
    270,869Peter
      A. McGuigan
    31,393,880
    237,416Zoltan
      Merszei
    29,226,335
    2,404,961H.
      David Ramm
    31,271,218
    360,078James
      L. Rawlings
    29,123,227
    2,508,069Richard
      L. Sandor
    31,358,457
    272,839John
      R. Wallace
    31,362,895
    268,401
  Proposal  (2):       FOR  AGAINST  WITHHELD
 Ratification
of Ernst & Young LLP as our
 independent
public accountants     31,505,641  77,765  47,890
 
 Proposal
(3):       FOR  AGAINST  WITHHELD
 Approve
issuance of securities of the Company to
 The Dow
Chemical Company    11,378,432  333,282  62,369
 
 **Item
5.** **Other
Information.**
 
 None.
  **Item
6.** **Exhibits
and Reports on Form 8-K.**
 
 (a) Exhibits
 
 10.1† —Stock
Purchase Agreement, dated February 27, 2005, by and between the Company and The
Dow Chemical Company (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed with the SEC on February 28,
2005).
  31.1*  —  Certification
of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of
2002.
 
 31.2*  —  Certification
of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of
2002.
 
 32.1* —
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
  
 †
Previously filed
 * Filed
herewith
    16
  **Signatures,
and Certifications of the Chief Executive Officer and the Chief Financial
Officer of the Company.**
 
 Exhibits
31.1, 31.2 and 32.1 to this Quarterly Report on Form 10-Q include Certifications
of our Interim Chief Executive Officer and our Acting Chief Financial
Officer.
 
 The first
two forms of Certification are required by Rule 13a-14 under the Exchange Act in
accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302
Certifications”). The Section 302 Certifications include references to an
evaluation of the effectiveness of the design and operation of our “disclosure
controls and procedures” and our “internal controls and procedures for financial
reporting”. Item 4 of Part I of this Quarterly Report presents the conclusions
of our Interim Chief Executive Officer and our Acting Chief Financial Officer
about the effectiveness of such controls based on and as of the date of such
evaluation (relating to Item 4 of the Section 302 Certifications), and contain
additional information concerning disclosures to our Audit Committee and
independent auditors with regard to deficiencies in internal controls and fraud
and related matters.
 
 The
second form of Certification is being
furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(subsection (a) and (b) of section 1350, chapter 63 of title 18, United States
Code) and is not being filed as part of this Form 10-Q or as a separate
disclosure document. A signed original of such written statement required by
Section 906, or other document authenticating, acknowledging or otherwise
adopting the signature that appears in typed form within the electronic version
of this written statement required by Section 906, has been provided to us and
will be retained by us and furnished to the Securities and Exchange Commission
or its staff upon request.
 ****
 **SIGNATURES**
 
 
 Pursuant
to 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.
 
 MILLENNIUM CELL
INC.
 (Registrant)
 
 By: /s/ H. David
Ramm
 H. David
Ramm
 Chief Executive
Officer
 
 
 May 13,
2005
 
  
 17