**U.S.SECURITIES AND EXCHANGE COMMISSION**

 

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For The Quarterly Period Ended**

**March 31, 2003**

 

**Commission file number: 0-30391**

 

**MEDIS TECHNOLOGIESLTD.**

(Exact Name ofRegistrant as Specified in its Charter)

 

| **Delaware**                                                     |   | **13-3669062**                           |
|------------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
|                                                             |   |                                     |
| **805 Third AvenueNew York, New York 10022**                     |
| (Address of Principal  Executive Offices and Zip Code)           |
|                                                             |   |                                     |
| **(212) 935-8484**                                               |
| (Registrant’s  Telephone Number, Including Area Code)       |

 

**Indicate by checkmark whether theregistrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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****ý** |   | **No****o** |   |
|--------|-------------------|--------|-------------|--------|

 

**Indicate by checkmark whether the registrant is anaccelerated filer as defined in Rule 12b-2 of the Exchange Act.**

|   | **Yes****ý** |   | **No****o** |   |
|--------|-------------------|--------|-------------|--------|

 

**Thenumber of shares of Common Stock, par value $.01 per share, outstanding as ofMay 13, 2003 was 23,552,721.**

 

 

----

** **

**MEDIS TECHNOLOGIES LTD.**

 

# **INDEXTO FORM 10-Q**

 

**FOR THE QUARTER ENDED MARCH 31, 2003**

 
| **PART I. FINANCIAL INFORMATION** |
|-----------------------------------|
|                              |
| Item 1.                           | Financial Statements |
|                              |   |
|                              | Condensed  Consolidated Balance Sheets December 31, 2002 and March 31, 2003 (Unaudited) |
|                              |   |
|                              | Condensed  Consolidated Statements of Operations (Unaudited) Three months ended March  31, 2002 and 2003 |
|                              |   |
|                              | Condensed  Consolidated Statements of Cash Flows (Unaudited) Three months ended March  31, 2002 and 2003 |
|                              |   |
|                              | Notes to Condensed Consolidated Financial Statements  (Unaudited) |
|                              |   |
| Item 2.                           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|                              |   |
| Item 3.                           | Quantitative and Qualitative Disclosures About  Market Risk |
|                              |   |
| Item 4.                           | Controls and Procedures |
|                              |   |
| **PART II.**                      | **OTHER INFORMATION** |
|                              |   |
| Item 5.                           | Other Information |
|                              |   |
| Item 6.                           | Exhibits and Reports on Form 8-K |

 

----

 

**PART I****- FINANCIAL INFORMATION**

**Item 1****.     Financial Statements**

 

**MedisTechnologies Ltd. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

 
|                                                                                                                                                                              |   | **December  31, 2002** |       | **March 31,  2003** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|---------------------|------------|
|                                                                                                                                                                              |   |                   |       | **(unaudited)**     |       |
| **ASSETS**                                                                                                                                                                        |   |                   | ** ** |                | ** ** |
| Current  assets                                                                                                                                                                   |   |                   | ** ** |                | ** ** |
| Cash  and cash equivalents                                                                                                                                                        |   | $                      | 6,036,000  |                | $          | 9,123,000 |   |
| Accounts  receivable—trade                                                                                                                                                   |   | *—*               |       | 28,000              |       |
| Accounts  receivable—other                                                                                                                                                   |   | 50,000                 |       | 84,000              |       |
| Prepaid  expenses and other current assets                                                                                                                                        |   | 52,000                 |       | 45,000              |       |
| Total  current assets                                                                                                                                                             |   | 6,138,000              |       | 9,280,000           |       |
| Property  and equipment, net                                                                                                                                                      |   | 1,199,000              |       | 1,190,000           |       |
| Goodwill,  net                                                                                                                                                                    |   | 58,205,000             |       | 58,205,000          |       |
| Intangible  assets, net                                                                                                                                                           |   | 832,000                |       | 1,359,000           |       |
| Other  assets                                                                                                                                                                     |   | 520,000                | * *   | *—*            | * *   |
| Total  assets                                                                                                                                                                     |   | $                      | 66,894,000 |                | $          | 70,034,000 |   |
|                                                                                                                                                                              |   |                   |       |                |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                    |   |                   |       |                |       |
| Current  liabilities                                                                                                                                                              |   |                   |       |                |       |
| Accounts  payable                                                                                                                                                                 |   | $                      | 128,000    |                | $          | 228,000 |   |
| Accrued  expenses and other current liabilities                                                                                                                                   |   | 973,000                |       | 1,005,000           |       |
| Total  current liabilities                                                                                                                                                        |   | 1,101,000              |       | 1,233,000           |       |
| Accrued  severance pay                                                                                                                                                            |   | 388,000                |       | 456,000             |       |
| Commitments  and contingencies                                                                                                                                                    |   |                   |       |                |       |
| Stockholders’  equity                                                                                                                                                        |   |                   |       |                |       |
| Preferred  stock, $.01 par value; 10,000 shares authorized; none issued                                                                                                           |   | —                 | * *   | *—*            | * *   |
| Common  stock, $.01 par value; 35,000,000 shares authorized; 21,102,301 and 23,552,721  shares issued and outstanding, at December 31, 2002 and March 31 2003,  respectively |   | 211,000                |       | 236,000             |       |
| Additional  paid-in capital                                                                                                                                                       |   | 161,584,000            |       | 166,984,000         |       |
| Accumulated  deficit                                                                                                                                                              |   | (96,390,000            | )          | (98,875,000         | )          |
| Total  stockholders’ equity                                                                                                                                                  |   | 65,405,000             |       | 68,345,000          |       |
| Total  liabilities and stockholders’ equity                                                                                                                                  |   | $                      | 66,894,000 |                | $          | 70,034,000 |   |

 

The accompanying notesare an integral part of these statements.

 

1

----

 

**Medis Technologies Ltd. andSubsidiaries**

**Condensed Consolidated Statements ofOperations**

**(Unaudited)**

 
|                                                                                     |   | **Three  Months Ended March 31,** |       |
|------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                     |   | **2002**                          |       | **2003** |   |
|                                                                                     |   |                              |       |   |   |
| Sales                                                                                    |   | $                                 | 80,000     |   | $ | 37,000 |   |
| Cost  of sales                                                                           |   | 51,000                            |       | 18,000 |   |
|                                                                                     |   |                              |       |   |   |
| Gross  profit                                                                            |   | 29,000                            |       | 19,000 |   |
|                                                                                     |   |                              |       |   |   |
| Operating  expenses                                                                      |   |                              |       |   |   |
| Research  and development costs, net                                                     |   | $                                 | 951,000    |   | $ | 1,192,000 |   |
| Selling,  general and administrative expenses                                            |   | 1,059,000                         |       | 817,000 |   |
| Amortization  of intangible assets                                                       |   | 667,000                           |       | 518,000 |   |
| Total  operating expenses                                                                |   | 2,677,000                         |       | 2,527,000 |   |
| Loss  from operations                                                                    |   | (2,648,000                        | )          | (2,508,000 | ) |
| Other  income (expenses)                                                                 |   |                              |       |   |   |
| Interest  income                                                                         |   | 24,000                            |       | 33,000 |   |
| Interest  and other expense                                                              |   | (24,000                           | )          | (10,000 | ) |
|                                                                                     |   | —                            |       | 23,000 |   |
|                                                                                     |   |                              |       |   |   |
| NET  LOSS                                                                                |   | $                                 | (2,648,000 | ) | $ | (2,485,000 | ) |
|                                                                                     |   |                              |       |   |   |   |   |
| Basic  and diluted net loss per share (Note B)                                           |   | $                                 | (.12       | ) | $ | (.11 | ) |
|                                                                                     |   |                              |       |   |   |
| Weighted-average  shares used in computing basic and diluted net loss per share (Note B) |   | 21,248,566                        |       | 22,446,271 |   |

 

The accompanying notesare an integral part of these statements.

 

2

----

 

**Medis Technologies Ltd. andSubsidiaries**

**Condensed Consolidated Statements ofCash Flows**

**(Unaudited)**

 
|                                                                                                                            |   | **Three  Months Ended March 31,** |       |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                                                            |   | **2002**                          |       | **2003** |   |
|                                                                                                                            |   |                              |       |   |   |
| Cash  flows from operating activities                                                                                           |   |                              | ** ** |   | ** ** |
| Net  loss                                                                                                                       |   | $                                 | (2,648,000 | ) | $ | (2,485,000 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities                                                     |   |                              |       |   |   |
| Depreciation  and amortization of property and equipment                                                                        |   | 53,000                            |       | 67,000 |   |
| Amortization  of intangible assets                                                                                              |   | 667,000                           |       | 518,000 |   |
| Non-cash  stock based compensation expense                                                                                      |   | 223,000                           |       | — |   |
| Loss  from sale of property and equipment                                                                                       |   | 11,000                            |       | — |   |
| Changes  in operating assets and liabilities                                                                                    |   |                              |       |   |   |
| Accounts  receivable—trade                                                                                                 |   | (94,000                           | )          | (28,000 | ) |
| Accounts  receivable—other                                                                                                 |   | 6,000                             |       | (34,000 | ) |
| Prepaid  expenses and other current assets                                                                                      |   | 34,000                            |       | 7,000 |   |
| Accounts  payable                                                                                                               |   | 8,000                             |       | 100,000 |   |
| Accrued  expenses and other current liabilities                                                                                 |   | 228,000                           |       | 32,000 |   |
| Accrued  severance payable                                                                                                      |   | 83,000                            |       | 68,000 |   |
| Net  cash used in operating activities                                                                                          |   | (1,429,000                        | )          | (1,755,000 | ) |
| Cash  flows from investing activities                                                                                           |   |                              |       |   |   |
| Capital  expenditures                                                                                                           |   | (72,000                           | )          | (58,000 | ) |
| Proceeds  from disposition of property and equipment                                                                            |   | 25,000                            |       | — |   |
| Net  cash used in investing activities                                                                                          |   | (47,000                           | )          | (58,000 | ) |
| Cash  flows from financing activities                                                                                           |   |                              |       |   |   |
| Proceeds  from issuance of common stock                                                                                         |   | 6,848,000                         |       | 4,900,000 |   |
| Changes  in accrued/deferred common stock issuance costs                                                                        |   | 364,000                           |       | — |   |
| Net  cash provided by financing activities                                                                                      |   | 7,212,000                         |       | 4,900,000 |   |
| Net  increase in cash and cash equivalents                                                                                      |   | 5,736,000                         |       | 3,087,000 |   |
|                                                                                                                            |   |                              |       |   |   |
| Cash  and cash equivalents at beginning of period                                                                               |   | 5,999,000                         |       | 6,036,000 |   |
| Cash  and cash equivalents at end of period                                                                                     |   | $                                 | 11,735,000 |   | $ | 9,123,000 |   |
|                                                                                                                            |   |                              |       |   |   |
| Supplemental  disclosures of cash flow information:                                                                             |   |                              |       |   |   |
| Cash  paid during the period for:                                                                                               |   |                              | ** ** |   | ** ** |
| Interest                                                                                                                        |   | $                                 | 2,000      |   | $ | 10,000 |   |
| Non-cash  investing and financing activities:                                                                                   |   |                              |       |   |   |
| Acquisition  of shares of majority-owned subsidiary – purchase price allocated to  intangible assets, financed as follows: |   | $                                 | —     |   | $ | 1,045,000 |   |
| Issuance  of common stock                                                                                                       |   | $                                 | —     |   | $ | 525,000 |   |
| Cost  of option purchased in prior period                                                                                       |   | $                                 | —     |   | $ | 520,000 |   |

 

The accompanying notesare an integral part of these statements.

 

3

----

 

**Medis Technologies Ltd. andSubsidiaries**

**Notesto Condensed Consolidated Financial Statements**

**(Unaudited)**

 

**Note A -Nature Of Operations And Basis Of Presentation**

** **

Medis Technologies Ltd. (the “Company”), aDelaware corporation, is a holding company, which through its wholly-ownedsubsidiaries, Medis El Ltd. (“Medis El”) and More Energy Ltd. (“MoreEnergy”), engages in research and development of technology products tolicense, sell, or enter into joint ventures with large corporations. TheCompany’s primary business focus is on the development and commercialization ofdirect liquid fuel cells and attendant refueling cartridges for use as primaryand auxiliary power sources for portable electronic devices which currently userechargeable or disposable batteries as their power source. These devicesinclude cell phones, personal digital assistants (PDAs), laptop computers andcertain military devices.  The Company’sother technologies, which are in various stages of development, include highlyconductive polymers, the CellScan, the toroidal engine, stirling cycle system,and the Rankin cycle linear compressor.

 

The accompanying condensed consolidated financialstatements should be read in conjunction with the following notes and with theconsolidated financial statements for the year ended December 31, 2002 andrelated notes included in the Company’s Annual Report on Form 10-K. Thecondensed consolidated financial statements as of March 31, 2003 and for thethree months ended March 31, 2002 and 2003 are unaudited and have been preparedin accordance with accounting principles generally accepted in the UnitedStates applicable to interim financial information and the rules andregulations promulgated by the Securities and Exchange Commission. Accordingly,such condensed consolidated financial statements do not include all of theinformation and footnote disclosures required in annual financial statements.In the opinion of the Company’s management, the March 31, 2002 and 2003unaudited condensed consolidated interim financial statements include all adjustments,consisting of normal recurring adjustments necessary for a fair presentation ofsuch condensed consolidated financial statements. The results of operations forthe three months ended March 31, 2003 are not necessarily indicative of theresults to be expected for the entire year.

 

The condensed consolidated balance sheet as ofDecember 31, 2002 has been derived from the audited financial statements atthat date but does not include all of the information and notes required byaccounting principles generally accepted in the United States for completefinancial statements.

 

**Note B -Certain Transactions**

 

*1.   RightsOffering* - On March 11, 2003, the Company completed a rightsoffering in which it offered to its existing stockholders subscription rights topurchase an aggregate of 2,325,600 shares of its common stock at a purchaseprice of $2.15 per share. The Company received gross proceeds of $5,000,040from the rights offering, which proceeds, after deducting related expenses ofapproximately $121,000, are being used for working capital, including for thecontinued development of its direct liquid fuel cell technology, as well as forselling, general and administrative expenses.

 

In accordance with SFAS No. 128, the Company hasadjusted its net loss per share for three months ended March 31, 2002 to giveretroactive effect to shares issued in its March 11, 2003 rights offering.Accordingly, as a result of such retroactive adjustment, for the three monthsended March 31, 2002, the net loss per share decreased from $(.13) to $(.12),or $(.01) per share.

 

4

----

 

*2.   ShareholderLoyalty Program* - During the three months ended March 31,2003, stockholders have exercised warrants to acquire an aggregate of 4,820shares of the Company’s common stock, pursuant to the Company’s shareholderloyalty program, for aggregate proceeds of approximately $21,400.

 

*3.   Exerciseof Option to Acquire Remaining Interest in Subsidiary* - On March 14, 2003, the Company acquired theremaining 7%, or 70 shares, of More Energy that it did not already own.  Such acquisition was pursuant to anagreement dated March 14, 2003 with the General Manager of More Energy andowner of the remaining 7% interest of More Energy, which amended the terms of theCompany’s existing option agreement to acquire such interest. Pursuant to theamendment, the vesting schedule of the option was accelerated such that theCompany could immediately exercise its option in full to acquire the remaining7% interest. Such acquisition was undertaken in order to make More Energy awholly-owned subsidiary of the Company.

 

The acquisition was accounted forunder the purchase method of accounting. The total purchase price of $1,045,000 was comprised of $520,000 paid infull in June 2001 for the purchase of the original option to acquire suchinterest in More Energy and the issuance as of March 14, 2003 of 120,000 sharesof the Company’s common stock.  Thecommon stock was valued at $4.374 per share, representing the average closing price of the Company’s commonstock for three days before and after March 14, 2003 - the date of theacquisition, or an aggregate of approximately $525,000.

 

The Company has performed apreliminary analysis to determine the allocation of the purchase price of MoreEnergy. Such analysis has resulted in the entire purchase price being allocatedto intangible assets.   As of the dateof the acquisition, More Energy’s total stockholder’s equity reflected adeficit.  Since the Company, from MoreEnergy’s inception, has consolidated in its financial statements 100% of thelosses of More Energy, such deficit is already included in the Company’saccumulated deficit as of March 31, 2003 and is not reflected in the purchaseprice allocation.  Furthermore, thepreliminary analysis provided that More Energy had intangible assets to whichthe purchase price could be allocated and that goodwill would not be generated in the transaction because the total fair value of net tangible andintangible net assets acquired exceeded the total purchase price. The Companyhas not recorded any amortization on such intangible assets for the threemonths ended March 31, 2003, pending a more detailed analysis of the allocationof the purchase price.

 

The Company’s condensed consolidated statements of operations for thethree month periods ended March 31, 2002 and 2003 include 100% of theoperations of More Energy.

 

*4.   Stock-basedCompensation* - In December2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148,“Accounting for Stock-Based Compensation –Transition and Disclosure.” SFAS No.148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to providealternative methods of transition for a voluntary change to the fair valuebased methods of accounting for stock-based employee compensation. In addition,SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require moreprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results.

 

5

----

 

As provided for in SFAS No. 148,the Company has elected to continue to follow Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations in accounting for its employee stock options, under whichcompensation expense, if any, is generally based on the difference between theexercise price of an option or the amount paid for the award and the marketprice or fair value of the underlying common stock at the date of the grant. Tothe extent that compensation expense is recognized with respect to stockoptions issued to employees or directors, such expense is amortized over thevesting period of such options. Stock-based compensation arrangements involvingnon-employees or non-directors are accounted for under SFAS No. 123, underwhich such arrangements are accounted for based on the fair value of the optionor award.

 

Had compensation cost for the Company’s stock optionplans been determined based on the fair value at the grant dates for allawards, the Company’s net loss and basic and diluted net loss per share wouldhave been the pro forma amounts indicated below:

 
|                                                                                               |   | **Three  Months Ended  March 31,** |       |
|----------------------------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                                               |   | **2002**                           |       | **2003** |   |
| Net  loss, as reported                                                                             |   | $                                  | (2,648,000 | ) | $ | (2,485,000 | ) |
| Add:  Total stock-based employee compensation expense included in the reported loss                |   | 135,000                            |       | — |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method |   | (1,068,000                         | )          | (398,000 | ) |
|                                                                                               |   |                               |       |   |   |
| Pro  forma net loss                                                                                |   | $                                  | (3,581,000 | ) | $ | (2,883,000 | ) |
| Basic  and diluted net loss per share as reported (Note B)                                         |   | $                                  | (.12       | ) | $ | (.11 | ) |
| Pro  forma net loss per share                                                                      |   | $                                  | (.17       | ) | $ | (.13 | ) |

 

The fair value of each option granted is estimated onthe date of the grant using the Black-Scholes option pricing model with thefollowing weighted average assumptions:

 
|                     |   | **Three  Months Ended   March 31,** |   |
|--------------------------|--------|-------------------------------------|--------|
|                     |   | **2002**                            |   | **2003** |   |
|                     |   |                                |   |   |   |
| Dividend yield           |   | 0                                   | %      | 0 | % |
| Risk-free  interest rate |   | 2.50                                | %      | 2.50 | % |
| Expected  life in years  |   | 1-2                                 |   | 1-2 |   |
| Volatility               |   | 94                                  | %      | 95 | % |

 

*5.   Polymer Agreement*– In January 2002, the Company entered into an agreement with a U.S. company todevelop a new application for the use of its highly conductive polymers in a proton exchange membrane fuel cellcomponent which could advance the development of such fuel cells forautomobile, home and stationary power uses. The agreement provides for theCompany to receive payments aggregating $300,000 over time. The Company recognizedrevenues of 

 

6

----

approximately $37,000 during the three months endedMarch 31, 2003, with respect to such agreement.

 

*6.   Fuel CellTechnology Cooperation Agreements* – In April 2001, theCompany entered into a mutually exclusive agreement with General DynamicsGovernment Systems Corporation, a unit of General Dynamics Corporation (“GD”),to develop and market fuel cells and fuel cell-powered portable electronicdevices for the United States Department of Defense (the “DOD”). As part ofsuch agreement, among other things, GD agreed to market the Company’s fuel cellproducts to the DOD. In May 2002, the Company received a $75,000 purchase orderfrom GD to develop an initial prototype of such a fuel cell charger. In March2003, the Company delivered, on schedule, the prototype designated under theMay 2002 purchase order and recorded the $75,000 as a credit to research anddevelopment expense (see subsequent event, below).

 

**Note C - Liquidity**

 

Since inception, the Company has incurred operatinglosses and has used cash in its operations. Accordingly, the Company has reliedon financing activities, principally the sale of its stock, to fund itsresearch and development activities and operations. The Company believes thisdependence will continue unless it is able to successfully develop and marketits technologies. However, there can be no assurance that the Company will beable to continue to obtain financing or successfully develop and market itstechnologies.

 

On February 20, 2003, the Company entered into asecond amendment to the agreement governing its existing $5,000,000 revolvingcredit line.  Pursuant to the amendment,the termination date of the revolving credit line was extended from December26, 2003 to July 1, 2004.  No otherterms of the agreement were amended by the amendment. As of March 31, 2003, theCompany had not borrowed any funds under this credit line.

** **

**Note D – Subsequent Events**

 

On May 5, 2003, the Company announced that it hadsigned an agreement with General Dynamics C4 Systems, a business unit of GD, todesign and develop a pre-production prototype of its fuel cell power pack forthe ruggedized personal digital assistant system that GD is developing for themilitary.  The total price for theCompany’s services provided for in the agreement is $500,000, with an initialpayment to us of $100,000 and the balance in accordance with the payment andperformance milestones established in the agreement through January 2005.

 

**Item2.****    Management’sDiscussion And Analysis Of Financial Condition And Results Of Operations**

 

**Forward Looking Statements**

 

Some of the information in this quarterly reportcontains forward-looking statements that involve substantial risks anduncertainties. You can identify these statements by forward-looking words suchas “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “plans,” and“continue” or similar words. You should read statements that contain thesewords carefully because they:

 

•      discussour future expectations;

•      containprojections of our future results of operations or of our financial

 

7

----

 

condition; or

•      stateother “forward-looking” information.

 

We believe it is important to communicate ourexpectations to our investors. However, there may be events in the future thatwe are not able to accurately predict or over which we have no control. Therisk factors listed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2002, as well as any cautionary language in this quarterly report,provide examples of risks, uncertainties and events that may cause our actualresults to differ materially from the expectations we describe in ourforward-looking statements. You should be aware that the occurrence of theevents described in these risk factors and elsewhere in this quarterly reportcould have a material adverse effect on our business, operating results andfinancial condition.

 

**Introduction**

 

This presentation includes the operations of our whollyand majority owned subsidiaries, unless we tell you otherwise.

** **

**Results Of Operations**

 

From our inception in April 1992 through March31, 2003 we have generated an accumulated deficit of approximately $98,875,000,including approximately $42,908,000 from amortization expense. We expect toincur additional operating losses during the remainder of  2003 and possibly thereafter, principally asa result of our continuing anticipated research and development costs, selling,general and administrative expenses and the uncertainty of bringing our fuelcell technology or any of our other technologies to commercial success.

 

Our annual research and development costs haveincreased from approximately $2,749,000 in 1999 to approximately $4,161,000 in2002; however, we anticipate that our failure to successfully commerciallydevelop our fuel cell technology or any of our other technologies will force usto curtail our spending levels until such time, if ever, as we generaterevenues or otherwise receive funds from third party sources. If we begin tomarket and sell any of our technologies, we will increase such expenses to theextent necessary, which we expect to fund out of revenues.

 

***Three Months Ended March 31, 2003 Compared To Three MonthsEnded March 31, 2002***

 

We sustained net losses of $2,485,000 during the threemonths ended March 31, 2003, compared to $2,648,000 during the three monthsended March 31, 2002. The decrease in the net losses can primarily beattributed to decreases in selling, general and administrative expenses andamortization of intangible assets, somewhat offset by an increase in researchand development costs.

 

We recognized revenues of approximately $37,000 andgross profit of approximately $19,000 during the three months ended March 31,2003, compared to revenues of approximately $80,000 and gross profit ofapproximately $29,000 during the three months ended March 31, 2002. The revenuein 2003 is attributable to a January 2002 agreement to develop for a thirdparty an application for the use of our highly conductive polymers in its fuelcell products. During the three months ended March 31, 2002, an aggregate of$25,000 of revenues are attributable to that same January 2002 agreement. Theother $55,000 of revenues during the three months ended March 31, 2002 isattributable to work performed under a completed January 2002 purchase order inwhich we designed a direct liquid fuel cell for use in a new energy pack forinfantry soldiers. All of such revenues are non-recurring.

 

8

----

 

Research and development costs amounted to $1,192,000during the three months ended March 31, 2003, compared to $951,000 during thethree months ended March 31, 2002. The increase in  research and development costs incurred during the three monthsended March 31, 2003, compared to the same period in 2002,  can be attributed to a rise of approximately$377,000 in costs related to our fuel cell technologies, somewhat offset byreductions in costs related to our CellScan of approximately $94,000 andreductions in costs related to our toroidal technologies, stirling cycle systemand linear compressor of approximately $37,000. The research and developmentactivities for the periods presented include:

 

•      FuelCell Technologies. We incurred costs relating to our fuel cell technologies ofapproximately $819,000 during the three months ended March 31, 2003, comparedto costs of approximately $442,000 during the three months ended March 31,2002. This increase in our research and development expenses relating to ourfuel cell technologies of approximately $377,000 during the three months endedMarch 31, 2003 reflect management’s decision to continue to devote substantialresources to the development of our fuel cell technologies.

 

•      CellScan.We incurred costs relating to the refinement of the next generation CellScansystem and on various CellScan research activities of approximately $256,000during the three months ended March 31, 2003, compared to costs ofapproximately $349,000 during the three months ended March 31, 2002. Thedecrease can be primarily attributed to decreases in costs incurred related tothe retention of third party researchers and consultants in the development andtesting of new CellScan applications and completion of the desktop CellScan anddecreases in labor and material costs, partially offset by an increase in othercosts.

 

•      ToroidalTechnologies, Stirling Cycle System and Linear Compressor. We incurred costsrelating to our toroidal engine and compressor, stirling cycle system andlinear compressor of approximately $117,000 during the three months ended March31, 2003, compared to costs of approximately $155,000 during the three monthsended March 31, 2002. The decrease during the three months ended March31, 2003 can be primarily attributed to decreases in costs incurred from theuse of consultants and subcontractors, somewhat offset by increases in laborand other costs, with respect to such technologies.

 

Selling, general and administrative expenses duringthe three months ended March 31, 2003 amounted to approximately $817,000,compared to approximately $1,059,000 during the three months ended March 31,2002. The decrease of $242,000 for the three months ended March 31, 2003compared to the same period in 2002 is primarily attributed to a reduction ofapproximately $97,000 in non-cash charges relating to stock options anddecreases in salary and executive consulting costs of approximately $166,000,partially offset by increases in selling and marketing expenses of approximately$34,000.

 

Amortization of intangible assets amounted to $518,000during the three months ended March 31, 2003, compared to $667,000 during thethree months ended March 31, 2002. The decrease is attributable to certainintangible assets being fully amortized prior to March 31, 2003.

 

9

----

 

Management believes that, as an additional operationalmeasurement, earnings (loss) before interest, taxes, depreciation, andamortization, or EBITDA, is useful and meaningful to an understanding of ouroperating performance. EBITDA should not be considered in isolation or as asubstitution for net income (loss) or cash flow data or as a measure of ourprofitability or liquidity. Items excluded from EBITDA, such as depreciationand amortization, are significant components in understanding and assessing ourfinancial performance.

 

The computation of EBITDA for the three months endedMarch 31, 2002 and 2003 is set forth in the table below: 

 
|                  |   | **Three Months Ended March 31,** |       |
|-----------------------|--------|----------------------------------|------------|
|                  |   | **2002**                         |       | **2003** |   |
| Net loss              |   | $                                | (2,648,000 | ) | $ | (2,485,000 | ) |
| Add: interest expense |   | 13,000                           |       | 10,000 |   |
| Add: amortization     |   | 667,000                          |       | 518,000 |   |
| Add: depreciation     |   | 53,000                           |       | 67,000 |   |
| EBITDA                |   | $                                | (1,915,000 | ) | $ | (1,890,000 | ) |

 

The decrease in the loss before interest, taxes,depreciation, and amortization for the three months ended March 31, 2003 ascompared to the three months ended March 31, 2002 occurred primarily due toreasons discussed earlier in this section.

 

**LiquidityAnd Capital Resources**

 

We have historically financed our operations primarilythrough the proceeds of investor equity financing, long-term bank loans andgrants to Medis El from the Chief Scientist of the Ministry of Industry andCommerce of Israel with respect to the CellScan, initial sales of our productsand fees from the granting of exclusive distribution rights.

 

On March 11, 2003, we completed a rights offering inwhich we offered to our existing stockholders subscription rights to purchasean aggregate of 2,325,600 shares of our common stock at a purchase price of$2.15 per share. We received gross proceeds of approximately $5,000,000 fromthe rights offering, which proceeds, after deducting related expenses ofapproximately $121,000, are being used for working capital, including for thecontinued development of our direct liquid fuel cell technology, as well as forselling, general and administrative expenses.

 

On February 20, 2003, we entered into a secondamendment to the agreement governing our existing $5,000,000 revolving credit line.  Pursuant to the amendment, the terminationdate of the revolving credit line was extended from December 26, 2003to July 1, 2004.  No other terms of theagreement were amended by the amendment. We have not borrowed any funds underthis credit line to date.

 

For the three months ended March 31, 2003, net cashused in operating activities was $1,755,000, compared to $1,429,000 for thethree months ended March 31, 2002. The increase was primarily attributable toincreases in levels of spending on research and development activities, duringthe three months ended March 31, 2003 compared to the same period in 2002, forthe reasons discussed above.

 

For the three months ended March 31, 2003, net cashused in investing activities was $58,000, which represented capitalexpenditures. This is compared to $47,000 for the three months ended March

 

10

----

 

31, 2002, which represented capital expenditures of $72,000, somewhatoffset by the proceeds from the disposition of property and equipment of$25,000.

 

For the three months ended March 31, 2003, cashaggregating $4,900,000 was provided by financing activities, compared to$7,212,000 for the three months ended March 31, 2002. On March 11, 2003, wecompleted a rights offering, which generated gross proceeds of approximately$5,000,000, as discussed above, less costs of such offering of approximately$121,000. Additionally, during the three months ended March 31, 2003, warrantholders under our loyalty program exercised warrants for an aggregate of 4,820shares of our common stock, providing proceeds of approximately $21,000. Thecash provided by financing activities during the three months ended March 31,2002 was provided by the completion of our March 18, 2002 rights offering,which generated gross proceeds of $7,000,000 less costs of $461,000, proceedsof approximately $309,000 from the exercise of options to purchase our commonstock and changes in accrued/deferred common stock issuance costs of $364,000.

 

As of March 31, 2003, we had approximately $9,123,000in cash and cash equivalents, as well as an unused $5,000,000 revolving creditline which terminates in accordance with its terms on July 1, 2004. Our workingcapital and capital requirements at any given time depend upon numerousfactors, including, but not limited to:

 

•      theprogress of research and development programs;

•      thestatus of our technologies; and

•      thelevel of resources that we devote to the development of our technologies,patents, marketing and sales capabilities.

 

Another contributing factor is the status ofcollaborative arrangements with businesses and institutes for research anddevelopment and companies participating in the development of our technologies.Since January 2002, we have entered into four collaborative arrangements withthird parties, in which we realized revenues of $229,000 on costs of sales of$148,000. There can be no assurance that we will realize additional revenuefrom such collaborative arrangements or that we will enter into additionalcollaborative arrangements in the future. Recently, we have financed ouroperations principally through the sale of our securities. There can be noassurance that we will raise additional funds through any financing approachimplemented by us.

 

As of March 31, 2003, we believe that our cashresources and monies available to us from our credit facility, will besufficient to support our operating and developmental activities for at leastthe next 22 months. Beyond such time, we may require capital infusions ofcash to continue our operations, whether through debt financing, issuance ofshares or from companies or other organizations participating in thedevelopment of our technologies. However, to the extent we are unable to raiseor acquire additional other funds, we will curtail research and development ofone or more technologies until such time as we acquire additional funds.

 

**Item 3.****Quantitative And Qualitative Disclosures About MarketRisk**

 

**DisclosureAbout Market Risk**

 

***Impact Of Inflation And Devaluation On Results OfOperations, Liabilities And Assets***

 

In connection with our currency use, we operate in amixed environment. Payroll is paid in our local currency and the local currencyof each of our subsidiaries, such as the New Israeli Shekel (NIS) with respectto our Israeli-based operations, as are most of our other operating expenses.Consideration for virtually all sales is either in dollars or dollar-linkedcurrency. As a result, not all monetary assets and

 

11

----

 

all monetary liabilities are linked to the same base in the same amountat all points in time, which may cause currency fluctuation related losses. Inorder to help minimize such losses, we currently invest our liquid funds inboth dollar-based and NIS-based assets.

 

For many years prior to 1986, the Israeli economy wascharacterized by high rates of inflation and devaluation of the Israelicurrency against the United States dollar and other currencies. Since theinstitution of the Israeli Economic Program in 1985, inflation, whilecontinuing, has been significantly reduced and the rate of devaluation has beensubstantially diminished. However, Israel effected devaluations of the NISagainst the dollar as follows:

 

:

 

| 1998 |   | 17.6  | %      |
|------|--------|-------|--------|
| 1999 |   | (0.17 | )      |
| 2000 |   | (2.7  | )      |
| 2001 |   | 9.2   |   |
| 2002 |   | 7.3   |   |

 

In 1999 and 2000, the rate of inflation in Israelexceeded the rate of devaluation of the NIS against the dollar, but in 1998,2001 and 2002 the rate of devaluation of the NIS against the dollar exceededthe rate of inflation in Israel. In 2002, the rate of inflation in Israel was6.5% and the rate of devaluation of the NIS was 7.3% against the dollar.Additionally, in 2003, through March 31, the rate of inflation in Israel was0.8% and the rate of appreciation of the NIS was 1.1% against the dollar.

*** ***

***Impact Of Political And Economic Conditions***

 

The state of hostility which has existed in varyingdegrees in Israel since 1948, its unfavorable balance of payments and itshistory of inflation and currency devaluation, all represent uncertaintieswhich may adversely affect our business.

** **

**Item 4****.    Controls and Procedures**

 

Within the 90 days prior to the date of this report,under the supervision and with the participation of management, including ourChief Executive Officer and our Chief Financial Officer, we have evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,our Chief Executive Officer and our Chief Financial Officer have concluded thatour disclosure controls and procedures are effective in timely alerting them tomaterial information relating to us (including our consolidated subsidiaries)required to be included in our periodic SEC filings. There have been nosignificant changes in our internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of theirevaluation.

 

**PART II****- OTHER INFORMATION**

** **

**Item 5.****    Other Information**

** **

**Agreement With General Dynamics**

 

On May 5, 2003, we announced that we signed anagreement with General Dynamics C4 Systems, a business unit of GeneralDynamics, for us to design and develop a pre-production prototype of our fuelcell power pack for the ruggedized personal digital assistant system thatGeneral Dynamics is developing for the military.  The total price for our services provided for in the agreement is$500,000,

 

12

----

 

with an initial payment to us of $100,000 and the balance in accordancewith the payment and performance milestones established in the agreementthrough January 2005.

** **

**Loan to Key Employee**

 

In April 2003, we loaned Gennadi Finkelshtain, theGeneral Manager of More Energy, an aggregate of approximately $155,000 topermit Mr. Finkelshtain to pay certain taxes incurred upon our issuance tohim of 120,000 shares of our common stock as payment for the 7% of More Energywe did not already own. We expect to loan an additional aggregate principalamount not to exceed $103,000 upon Mr. Finkelshtain’s incurrence ofadditional, related tax obligations. The loans were and will be made under athree year promissory note pursuant to which Mr. Finkelshtain agrees topay interest on the loans then outstanding at a rate equal to the applicablefederal rate in effect for mid-term loans on the date of each loan. The loansare secured by the 120,000 shares of our common stock.

 

**Item 6****.    Exhibits and Reports on Form 8-K**

 

(a)           Exhibits.

 
| **Exhibit Number** |   | **Exhibit  Description**                                                                                                         |
|--------------------|--------|----------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                             |
| 10.1               |   | Consultancy Agreement  dated as of July 1, 2002 between More Energy Ltd. and JSW Consulting  Inc.                           |
|               |   |                                                                                                                             |
| 10.2               |   | Special Personal  Employment Contract dated as of July 15, 2002 between Medis El Ltd.  and Yaakov Weiss.          |
|               |   |                                                                                                                             |
| 10.3               |   | Promissory Note dated  April 11, 2003 between Gennadi Finkelshtain, as borrower, and Medis El  Technologies Ltd., as holder |
|               |   |                                                                                                                             |
| 10.4               |   | Security Agreement  dated April 11, 2003 between Gennadi Finkelshtain, as Pledgor, and Medis  Technologies Ltd., as Lender       |
|               |   |                                                                                                                             |
| 10.5               |   | Agreement dated May 5,  2003 between Medis Technologies Ltd. and General Dynamics C4 Systems,  Incorporated                      |

 

(b)           Reportson Form 8-K.  We filed the followingreport on Form 8-K during the first quarter of the year endingDecember 31, 2003.

 
| **Date of Report**  |   | **Date Report Filed with SEC** |   | **Items Reported**                     |   |
|---------------------|--------|--------------------------------|--------|----------------------------------------|--------|
|                |   |                           |   |                                   |   |
| March 27, 2003 |   | March 28, 2003            |   | Item 9.  Regulation FD Disclosure |   |

 

13

----

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this Report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|               | MEDIS TECHNOLOGIES LTD. |
|--------------------|-------------------------|
|               |                    |   |
|               | By:                     | /s/  Robert  K. Lifton |   |
|               |                    | Robert  K. Lifton |   |
|               |                    | Chairman  and Chief |   |
|               |                    | Executive  Officer |   |
|               |                    |
|               |                    |
|               | By:                     | /s/  Israel Fisher |   |
|               |                    | Israel  Fisher |   |
|               |                    | Vice  President-Finance |   |
|               |                    | (Principal  Financial and |   |
|               |                    | Accounting  Officer) |   |
| Date: May 13, 2003 |                    |
|                    |                         |  |  |  |

 

14

----

 

**CERTIFICATIONS**

** **

I, Robert K. Lifton,certify that:

 

1.             I have reviewed this quarterly report on Form 10-Q ofMedis Technologies Ltd.;

 

2.             Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3.             Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4.             The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

 

a)             Designed such disclosure controls and procedures toensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b)             Evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

 

c)             Presented in this quarterly report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.             The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)             All significant deficiencies in the design or operationof internal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

b)             Any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.             The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date: May 13, 2003 |
|--------------------|
|               |
|               | /s/ Robert K. Lifton |   |
|               | Robert K. Lifton |
|               | Chief Executive Officer |

 

15

----

 

I, Israel Fisher, certifythat:

 

1.             I have reviewed this quarterly report on Form 10-Q ofMedis Technologies Ltd.;

 

2.             Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3.             Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4.             The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

 

a)             Designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

b)             Evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

 

c)             Presented in this quarterly report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5.             The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)             All significant deficiencies in the design or operationof internal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

b)             Any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.             The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date: May 13, 2003 |
|--------------------|
|               |
|               | /s/ Israel Fisher |   |
|               | Israel Fisher |
|               | Chief Financial Officer |

 

16

----