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

 

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For The Quarterly Period EndedSeptember 30, 2002**

 

**Commission file number: 0-30391**

 

| **MEDIS TECHNOLOGIES  LTD.**                                     |
|------------------------------------------------------------------|
| (Exact Name of  Registrant as Specified in its Charter)          |
|                                                             |   |   |
| **Delaware**                                                     |   | **13-3669062** |
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
|                                                             |   |   |
| **805 Third Avenue  New 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** |
|--------|-------------------------|-------------------|

 

The number of shares ofCommon Stock, par value $.01 per share, outstanding as of November 12, 2002 was21,099,193.

 

 

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**MEDIS TECHNOLOGIES LTD.**

 

# **INDEXTO FORM 10-Q**

 

**FOR THE QUARTER ENDED SEPTEMBER 30,2002**

 
| **PART I. FINANCIAL  INFORMATION** |
|------------------------------------|
|                               |
| Item 1.                            | Financial Statements |
|                               |   |
|                               | Condensed  Consolidated Balance Sheets  December 31, 2001 and September 30, 2002 (Unaudited) |
|                               |   |
|                               | Condensed  Consolidated Statements of Operations (Unaudited)  Three and nine months ended September 30, 2001 and 2002 |
|                               |   |
|                               | Condensed  Consolidated Statements of Cash Flows (Unaudited)  Nine months ended September 30, 2001 and 2002 |
|                               |   |
|                               | 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 |

 

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.     Financial Statements**

 

**Medis Technologies Ltd. andSubsidiaries**

**Condensed Consolidated Balance Sheets**

 
|                                                                                                                                                                                                                                                |   | **December  31, 2001** |       | **September  30, 2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|-------------------------|------------|
|                                                                                                                                                                                                                                                |   |                   |       | **(unaudited)**         |       |
| **ASSETS**                                                                                                                                                                                                                                          |   |                   |       |                    |       |
|                                                                                                                                                                                                                                                |   |                   |       |                    |       |
| Current  assets                                                                                                                                                                                                                                     |   |                   | ** ** |                    | ** ** |
| Cash  and cash equivalents                                                                                                                                                                                                                          |   | $                      | 5,999,000  |                    | $          | 7,934,000 |   |
| Accounts  receivable - trade                                                                                                                                                                                                                        |   | —                 |       | 29,000                  |       |
| Accounts  receivable - other                                                                                                                                                                                                                        |   | 74,000                 |       | 130,000                 |       |
| Prepaid  expenses and other current assets                                                                                                                                                                                                          |   | 403,000                |       | 134,000                 |       |
|                                                                                                                                                                                                                                                |   |                   |       |                    |       |
| Total  current assets                                                                                                                                                                                                                               |   | 6,476,000              |       | 8,227,000               |       |
|                                                                                                                                                                                                                                                |   |                   |       |                    |       |
| Property  and equipment, net                                                                                                                                                                                                                        |   | 1,228,000              |       | 1,244,000               |       |
| Intangible  assets, net                                                                                                                                                                                                                             |   | 61,670,000             |       | 59,675,000              |       |
| Other  assets                                                                                                                                                                                                                                       |   | 520,000                |       | 520,000                 |       |
|                                                                                                                                                                                                                                                |   |                   |       |                    |       |
| Total  assets                                                                                                                                                                                                                                       |   | $                      | 69,894,000 |                    | $          | 69,666,000 |   |
|                                                                                                                                                                                                                                                |   |                   |       |                    |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                      |   |                   |       |                    |       |
|                                                                                                                                                                                                                                                |   |                   |       |                    |       |
| Current  liabilities                                                                                                                                                                                                                                |   |                   |       |                    |       |
| Accounts  payable                                                                                                                                                                                                                                   |   | $                      | 165,000    |                    | $          | 181,000 |   |
| Accrued  expenses and other current liabilities                                                                                                                                                                                                     |   | 822,000                |       | 1,015,000               |       |
|                                                                                                                                                                                                                                                |   |                   |       |                    |       |
| Total  current liabilities                                                                                                                                                                                                                          |   | 987,000                |       | 1,196,000               |       |
|                                                                                                                                                                                                                                                |   |                   |       |                    |       |
| Accrued  severance pay                                                                                                                                                                                                                              |   | 273,000                |       | 380,000                 |       |
|                                                                                                                                                                                                                                                |   |                   |       |                    |       |
| Total  liabilities                                                                                                                                                                                                                                  |   | 1,260,000              |       | 1,576,000               |       |
|                                                                                                                                                                                                                                                |   |                   |       |                    |       |
| Commitments  and contingencies                                                                                                                                                                                                                      |   |                   |       |                    |       |
|                                                                                                                                                                                                                                                |   |                   |       |                    |       |
| Stockholders’  equity                                                                                                                                                                                                                          |   |                   |       |                    |       |
| Preferred  stock, $.01 par value; 10,000 shares authorized; none issued                                                                                                                                                                             |   | —                 |       | —                  |       |
| Common  stock, $.01 par value; 25,000,000 and 35,000,000 shares authorized at  December 31, 2001 and September 30, 2002, respectively; 17,532,779 and  21,098,959 issued and outstanding at December 31, 2001 and September 30,  2002, respectively |   | 175,000                |       | 211,000                 |       |
| Additional  paid-in capital                                                                                                                                                                                                                         |   | 152,425,000            |       | 161,569,000             |       |
| Accumulated  deficit                                                                                                                                                                                                                                |   | (83,844,000            | )          | (93,690,000             | )          |
| Deferred  compensation costs                                                                                                                                                                                                                        |   | (122,000               | )          | —                  |       |
|                                                                                                                                                                                                                                                |   |                   |       |                    |       |
| Total  stockholders’ equity                                                                                                                                                                                                                    |   | 68,634,000             |       | 68,090,000              |       |
|                                                                                                                                                                                                                                                |   |                   |       |                    |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                    |   | $                      | 69,894,000 |                    | $          | 69,666,000 |   |

 

The accompanying notesare an integral part of these statements.

 

1

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**Medis Technologies Ltd. andSubsidiaries**

**Condensed Consolidated Statements ofOperations**

**(Unaudited)**

 
|                                                                            |   | **Three Months Ended  September 30,** |       | **Nine Months Ended  September 30,** |   |
|---------------------------------------------------------------------------------|--------|---------------------------------------|------------|--------------------------------------|--------|
|                                                                            |   | **2001**                              |       | **2002**                             |   | **2001** |   | **2002** |   |
|                                                                            |   |                                  |       |                                 |   |   |   |   |   |
| Sales                                                                           |   | $                                     | —     |                                 | $      | 38,000 |   | $ | — |   | $ | 154,000 |   |
|                                                                            |   |                                  |       |                                 |   |   |   |   |   |
| Cost  of sales                                                                  |   | —                                |       | 32,000                               |   | — |   | 110,000 |   |
|                                                                            |   |                                  |       |                                 |   |   |   |   |   |
| Gross  profit                                                                   |   | —                                |       | 6,000                                |   | — |   | 44,000 |   |
|                                                                            |   |                                  |       |                                 |   |   |   |   |   |
| Operating  expenses                                                             |   |                                  |       |                                 |   |   |   |   |   |
| Research  and development costs                                                 |   | 919,000                               |       | 1,038,000                            |   | 2,877,000 |   | 2,978,000 |   |
| Selling,  general and administrative expenses                                   |   | 1,198,000                             |       | 723,000                              |   | 3,720,000 |   | 2,735,000 |   |
| Amortization  of intangible assets                                              |   | 5,279,000                             |       | 665,000                              |   | 15,849,000 |   | 1,995,000 |   |
|                                                                            |   |                                  |       |                                 |   |   |   |   |   |
| Total  operating expenses                                                       |   | 7,396,000                             |       | 2,426,000                            |   | 22,446,000 |   | 7,708,000 |   |
|                                                                            |   |                                  |       |                                 |   |   |   |   |   |
| Loss  from operations                                                           |   | (7,396,000                            | )          | (2,420,000                           | )      | (22,446,000 | ) | (7,664,000 | ) |
|                                                                            |   |                                  |       |                                 |   |   |   |   |   |
| Other  income (expenses)                                                        |   |                                  |       |                                 |   |   |   |   |   |
| Interest  income                                                                |   | 74,000                                |       | 43,000                               |   | 144,000 |   | 112,000 |   |
| Interest  and other expense                                                     |   | (12,000                               | )          | (15,000                              | )      | (40,000 | ) | (53,000 | ) |
|                                                                            |   |                                  |       |                                 |   |   |   |   |   |
|                                                                            |   | 62,000                                |       | 28,000                               |   | 104,000 |   | 59,000 |   |
|                                                                            |   |                                  |       |                                 |   |   |   |   |   |
| NET  LOSS                                                                       |   | (7,334,000                            | )          | (2,392,000                           | )      | (22,342,000 | ) | (7,605,000 | ) |
|                                                                            |   |                                  |       |                                 |   |   |   |   |   |
| Value  of warrants issued                                                       |   | —                                |       | (2,241,000                           | )      | — |   | (2,241,000 | ) |
|                                                                            |   |                                  |       |                                 |   |   |   |   |   |
| Net  loss attributable to common shareholders                                   |   | $                                     | (7,334,000 | )                                    | $      | (4,633,000 | ) | $ | (22,342,000 | ) | $ | (9,846,000 | ) |
|                                                                            |   |                                  |       |                                 |   |   |   |   |   |
| Basic  and diluted net loss per share                                           |   | $                                     | (.37       | )*                                   | $      | (.22 | ) | $ | (1.14 | )* | $ | (.47 | ) |
|                                                                            |   |                                  |       |                                 |   |   |   |   |   |
| Weighted-average  shares used in computing basic and diluted net loss per share |   | 20,070,248                            | *          | 21,098,959                           |   | 19,658,512 | * | 20,823,280 |   |

 

The accompanying notesare an integral part of these statements.

 

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*  See note B-1

 

2

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**Medis Technologies Ltd. andSubsidiaries**

**Condensed Consolidated Statements ofCash Flows**

**(Unaudited)**

 
|                                                                        |   | **Nine  Months Ended September 30,** |        |
|-----------------------------------------------------------------------------|--------|--------------------------------------|-------------|
|                                                                        |   | **2001**                             |        | **2002** |   |
|                                                                        |   |                                 |        |   |   |
| Cash  flows from operating activities                                       |   |                                 |        |   |   |
| Net loss                                                                    |   | $                                    | (22,342,000 | ) | $ | (7,605,000 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities |   |                                 |        |   |   |
| Depreciation                                                                |   | 330,000                              |        | 174,000 |   |
| Amortization  of intangible assets                                          |   | 15,849,000                           |        | 1,995,000 |   |
| Non-cash  compensation expense                                              |   | 1,663,000                            |        | 213,000 |   |
| Loss  from sale of property and equipment                                   |   | 4,000                                |        | 11,000 |   |
| Changes  in operating assets and liabilities                                |   |                                 |        |   |   |
| Accounts  receivable - trade                                                |   | —                               |        | (29,000 | ) |
| Accounts  receivable - other                                                |   | 72,000                               |        | (56,000 | ) |
| Prepaid  expenses and other current assets                                  |   | 10,000                               |        | 75,000 |   |
| Accounts  payable                                                           |   | 60,000                               |        | 16,000 |   |
| Changes  in accrued severance pay                                           |   | 37,000                               |        | 107,000 |   |
| Accrued  expenses and other current liabilities                             |   | (24,000                              | )           | 193,000 |   |
|                                                                        |   |                                 |        |   |   |
| Net  cash used in operating activities                                      |   | (4,341,000                           | )           | (4,906,000 | ) |
|                                                                        |   |                                 |        |   |   |
| Cash  flows from investing activities                                       |   |                                 |        |   |   |
| Purchase  of property and equipment                                         |   | (655,000                             | )           | (226,000 | ) |
| Proceeds  from sale of property and equipment                               |   | 25,000                               |        | 25,000 |   |
| Acquisition  of option to acquire shares of a majority-owned subsidiary     |   | (520,000                             | )           | — |   |
|                                                                        |   |                                 |        |   |   |
| Net  cash used in investing activities                                      |   | (1,150,000                           | )           | (201,000 | ) |
|                                                                        |   |                                 |        |   |   |
| Cash  flows from financing activities                                       |   |                                 |        |   |   |
| Proceeds  from issuance of common stock, net                                |   | 10,278,000                           |        | 7,042,000 |   |
|                                                                        |   |                                 |        |   |   |
| Net  cash provided by financing activities                                  |   | 10,278,000                           |        | 7,042,000 |   |
|                                                                        |   |                                 |        |   |   |
| Net  increase in cash and cash equivalents                                  |   | 4,787,000                            |        | 1,935,000 |   |
|                                                                        |   |                                 |        |   |   |
| Cash  and cash equivalents at beginning of period                           |   | 2,885,000                            |        | 5,999,000 |   |
| Cash  and cash equivalents at end of period                                 |   | $                                    | 7,672,000   |   | $ | 7,934,000 |   |
|                                                                        |   |                                 |        |   |   |
| Supplemental  disclosures of cash flow information:                         |   |                                 |        |   |   |
| Cash  paid during the period for                                            |   |                                 |        |   |   |
| Interest                                                                    |   | $                                    | 10,000      |   | $ | 13,000 |   |
| Taxes                                                                       |   | $                                    | 46,000      |   | $ | 62,000 |   |

 

The accompanying notesare an integral part of these statements.

 

3

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**Medis Technologies Ltd. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements(Unaudited)**

 

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

 

Medis Technologies Ltd. (the “Company”), aDelaware corporation, is a holding company, which through its wholly-ownedsubsidiary Medis El Ltd. (“Medis El”) and its majority—owned subsidiaryMore Energy Ltd. (“More Energy”), engages in research and development oftechnology products to license, sell, or enter into joint ventures with largecorporations. The Company’s primary focus is the development and commercializationof direct liquid fuel cells and attendant refueling cartridges for use inportable electronic devices which currently use rechargeable or disposablebatteries as their power source. These devices include cell phones, personaldigital assistants (PDAs), laptop computers and certain military devices. TheCompany’s other technologies, which are in various stages of development,include highly electrically conductive polymers, the CellScan, the toroidalcompressor and internal combustion engine, the stirling cycle linear compressorand the reciprocating electrical machine.

 

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, 2001 andrelated notes included in the Company’s Annual Report on Form 10-K. Thecondensed consolidated financial statements as of September 30, 2002 and forthe three and nine months ended September 30, 2001 and 2002 are unaudited andhave been prepared in accordance with accounting principles generally acceptedin the United States applicable to interim financial information and the rulesand regulations promulgated by the Securities and Exchange Commission.Accordingly, such condensed consolidated financial statements do not includeall of the information and footnote disclosures required in annual financialstatements. In the opinion of the Company’s management, the September 30, 2001and 2002 unaudited condensed consolidated interim financial statements includeall adjustments, consisting of normal recurring adjustments necessary for afair presentation of such condensed consolidated financial statements. Theresults of operations for the three and nine months ended September 30, 2002are not necessarily indicative of the results to be expected for the entireyear.

 

The condensed consolidated balance sheet as ofDecember 31, 2001 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 - CertainTransactions**

 

*1.**         Rights Offering andShareholder Loyalty Program* - On March 18, 2002, the Company completed arights offering in which it offered to its existing stockholders subscriptionrights to purchase an aggregate of 3,500,000 shares of its common stock at apurchase price of $2.00 per share. The Company received gross proceeds of$7,000,000 from the rights offering, which proceeds, after deducting relatedexpenses of approximately $461,000, are being used for working capital,including for the continued development of its direct liquid fuel celltechnology, as well as for selling, general and administrative expenses.

 

Additionally, pursuant to the Company’s shareholderloyalty program, all stockholders who purchased shares in the rights offeringand who have met other specified requirements, have received at no costone-tenth of a warrant for each share of common

 

4

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stock owned in such stockholder’s name onFebruary 13, 2002. Accordingly, as of September 18, 2002, the Companyissued 853,336 warrants to stockholders in the shareholder loyalty program.Each full warrant entitles the holder to purchase one share of the Company’scommon stock at a price of $4.43, increasing to $4.92 on September 18, 2003 andto $5.41 on September 18, 2004.  Suchwarrants expire on September 18, 2005. The Company has estimated the fair valueof such warrants to be approximately $2,241,000, using the Black-Scholes optionpricing model, and has accounted for such amount as a preferred dividend duringthe three and nine months ended September 30, 2002.

 

In accordance withStatement of Financial Accounting Standards No. 128, *Earning Per Share*, theCompany has restated its net loss per share for the three and nine months endedSeptember 30, 2001 to give retroactive effect to shares issued in its March 18,2002 rights offering. Accordingly, as a result of such retroactive adjustment,for the three and nine month periods ended September 30, 2001, the net loss pershare decreased from $(.42) to $(.37), or $(.05) per share, and from $(1.30) to$(1.14), or $(.16) per share, respectively.

 

*2.**         Option to AcquireRemaining Interest in Subsidiary* - The Company, through Medis El, owns93% of the outstanding ordinary shares of More Energy. Additionally, theCompany has an option expiring in November 2004 to acquire the remaining 7% ofthe outstanding shares of More Energy, which are held by its general manager,for 120,000 shares of the Company’s common stock. The purchase price of theoption, which was paid in full in June 2001, was $520,000. Subject to atermination provision, the Company has the right to exercise the option toacquire a maximum of 25% of More Energy’s shares not yet beneficially owned byMedis El in each of the four 12 month periods following the date of theagreement, with any unexercised amount being carried over to the followingtwelve month period until the expiration of the option in November 2004. TheCompany plans to exercise the option to acquire the entire remaining 7% of theoutstanding shares of More Energy prior to the expiration of such option. Therehas been no exercise of such option to date.

 

*3.**         Exercise of Stock Options–* In February and March 2002 certain officers and employees of the Companyexercised options to acquire an aggregate of 66,180 shares of the Company’scommon stock, for an aggregate exercise price of approximately $309,000.

 

*4.**         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 electrically conductivepolymers (HECPs) in a proton exchange membrane fuel cell component which couldadvance the development of such fuel cells for automobile, home and stationarypower uses. The agreement provides for the Company to receive paymentsaggregating $300,000 over time. The Company recognized revenues ofapproximately $38,000 and $100,000 during the three and nine months endedSeptember 30, 2002, respectively, with respect to such agreement.

 

*5.**         Military ApplicationOrder* - In January 2002, the Company received a purchase order from anIsraeli electronics manufacturer to define a specification and carry out thepreliminary design of a direct liquid fuel cell for a new energy pack forinfantry soldiers. Upon completion of the services under such purchase order,the Company recognized revenue of approximately $54,000 during the nine monthsended September 30, 2002 with respect to such purchase order.

 

*6.**         Fuel Cell ChargerDevelopment Cooperation**-* The Company is cooperating with GeneralDynamics C4 Systems on the development of a highly mobile fuel cell battery

 

5

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charger system to meet the battery recharging needs ofdeployed soldiers of the U.S. Army. As part of this development effort, in June2002, the Company received a $75,000 purchase order from General Dynamics C4Systems to develop an initial prototype of such a fuel cell charger. As ofSeptember 30, 2002, the Company had not recognized any revenue pursuant to suchpurchase order.

 

*7.**         Adoption of SFAS No. 142*-In June 2001, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*(“SFAS No. 142”). SFAS No. 142 requires goodwill to be subject to at least anannual assessment for impairment with amortization over its estimated usefullife to be discontinued effective January 1, 2002. The Company has adoptedSFAS No. 142 and has discontinued amortization of its goodwill as ofJanuary 1, 2002, which resulted in a reduction of approximately $4,600,000 and$13,800,000 in amortization expense for the three and nine months endedSeptember 30, 2002, respectively.

 

Furthermore, in accordance with SFAS 142, the Companyhas evaluated its goodwill and other intangible assets as of January 1, 2002for any possible impairment. In performing such evaluation, the Company firstdetermined its reporting units. Once the reporting units were established andgoodwill was allocated to such reporting units, the Company compared theestimated fair value of each reporting unit to the carrying amount of theunits’ assets and liabilities, including its goodwill. Since the fair value ofits reporting units exceeded the carrying amount, the second step of theimpairment test, in which the current fair market value of the units’ assetsand liabilities would determine the current implied fair value of the units’goodwill, was not performed. The Company has also reassessed the useful livesof its other intangible assets previously recorded in connection with earlierpurchase acquisitions.

 

The Company’s projected annual amortization expense forthe years 2002 through 2006, relating to definite lived intangible assetbalances as of January 1, 2002, is approximately as follow:

 

| 2002 |   | $      | 2,612,000 |   |
|------|--------|--------|-----------|--------|
| 2003 |   | $      | 847,000   |   |
| 2004 |   | — |      |
| 2005 |   | — |      |
| 2006 |   | — |      |

 

The following pro forma information is presented toreflect net loss and net loss per share to exclude amortization of goodwill forthe three and nine month periods ended September 30, 2001, as if SFAS No. 142was implemented effective January 1, 2001:

 

6

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|                                                   |   | **Three  Months Ended   September 30, 2001** |       | **Nine  Months Ended  September 30, 2001** |   |
|--------------------------------------------------------|--------|----------------------------------------------|------------|--------------------------------------------|--------|
|                                                   |   |                                         |       |                                       |   |
| Reported  net loss attributable to common shareholders |   | $                                            | (7,334,000 | )                                          | $      | (22,342,000 | ) |
| Goodwill  amortization                                 |   | 4,615,000                                    |       | 13,829,000                                 |   |
| Adjusted  net loss                                     |   | $                                            | (2,719,000 | )                                          | $      | (8,513,000 | ) |
|                                                   |   |                                         |       |                                       |   |
| Net  loss per share                                    |   |                                         |       |                                       |   |
| Reported net loss                                      |   | $                                            | (.37       | )*                                         | $      | (1.14 | )* |
| Goodwill amortization                                  |   | .23                                          |       | .71                                        |   |
| Adjusted net loss                                      |   | $                                            | (.14       | )                                          | $      | (.43 | ) |

 

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*  See note B-1

 

*8.**         Change in AuthorizedShares*.  The Company’s stockholdersapproved an amendment to its Certificate of Incorporation on June 12, 2002,authorizing an increase in the number of authorized shares of the Company’scommon stock to 35,000,000, which amendment became effective in July 2002.

 

**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 October 24, 2002, the Company entered into anamendment to the agreement governing its existing $5,000,000 revolving creditline.  Pursuant to the amendment, thetermination date of the revolving credit line was extended from December 28,2002 to December 26, 2003.  No otherterms of the agreement were amended by the amendment.  As of September 30, 2002, the Company had not borrowed any fundsunder this credit line.

 

**Note D -Revenue Recognition Policy**

 

Revenues relating to development cooperationagreements are recognized ratably over the term of the agreement. Revenues fromproducts shall be recognized upon delivery provided there is persuasiveevidence of an agreement, the amount is fixed or determinable and collection ofthe related receivable is probable. Amounts billed and/or received whererevenue recognition criteria have not been fully met, and thus the revenue isnot yet earned, are reflected as liabilities and are offset against the relatedreceivable.

 

**Item 2.****           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

 

7

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such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,”“plans,” and “continue” or similar words. You should read statements thatcontain these words carefully because they:

 

•                  discuss ourfuture expectations;

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

•                  state other“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, 2001, 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 ourwholly and majority owned subsidiaries, unless we tell you otherwise.

 

**Results Of Operations**

 

From our inception in April 1992 through September 30,2002 we have generated an accumulated deficit of approximately $93,690,000,which includes approximately $41,752,000 from amortization expense andapproximately $8,416,000 charged to the accumulated deficit related to stockpurchase warrants issued to our stockholders in our shareholder loyalty programand pursuant to certain of our capital-raising transactions. We expect to incuradditional operating losses during the remainder of 2002 and possiblythereafter, principally as a result of our continuing anticipated research anddevelopment costs, amortization expense and the uncertainty of bringing ourfuel cell technology or any of our other technologies to commercial success. Wehave increased our research and development budget since 1999 fromapproximately $2,750,000 annually to approximately $4,500,000 annually;however, we anticipate that a failure to successfully commercially develop ourfuel cell technology or any of our other technologies will force us to curtailour spending levels until such time, if ever, as we generate substantialrevenues 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.

 

***Nine Months EndedSeptember 30, 2002 Compared To Nine Months Ended September 30, 2001 And ThreeMonths Ended September 30, 2002 Compared To Three Months Ended September 30,2001***

 

We sustained net losses of $7,605,000 and $2,392,000during the nine and three months ended September 30, 2002, respectively,compared to $22,342,000 and $7,334,000 during the nine and three months ended September30, 2001, respectively. The decrease in the net losses can primarily beattributed to the discontinuation of the amortization of goodwill pursuant toour adoption of SFAS No. 142, resulting in reductions in amortization expenseof approximately $13,800,000 and $4,600,000 for the nine and three months endedSeptember 30, 2002, respectively, and decreases in costs related to stockoptions and warrants of $1,450,000 and $491,000 for the nine and three monthsended September 30, 2002, respectively.

 

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We recognized revenues of approximately $154,000 and$38,000 and gross profit of approximately $44,000 and $6,000 during the nineand three month periods ended September 30, 2002, respectively, compared tonone during the same periods in 2001. An aggregate of $100,000 and $38,000 ofsuch revenues recognized during the nine and three month periods endedSeptember 30, 2002, respectively, are attributable to a January 2002 agreementto develop for a third party an application for the use of our HECPs in itsfuel cell products. The remaining $54,000 of revenues recognized in the ninemonth period ended September 30, 2002 are attributable to work performed undera completed January 2002 purchase order in which we designed a direct liquidfuel cell for use in a new energy pack for infantry soldiers.

 

Research and development costs amounted to $2,978,000and $1,038,000 during the nine and three month periods ended September 30,2002, respectively, compared to $2,877,000 and $919,000 during the nine andthree month periods ended September 30, 2001, respectively. Although totalresearch and development costs incurred during the nine and three months endedSeptember 30, 2002 increased only slightly compared to the same periods in2001, costs relating to our fuel cell technologies increased by approximately$498,000 and $196,000 during the nine and three months ended September 30,2002, respectively, compared to the same periods in 2001. These increases incosts related to our fuel cell technologies were somewhat offset by reductionsin costs related to our CellScan of approximately $313,000 and $65,000 duringthe nine and three month periods ended September 30, 2002, respectively,compared to the same periods in 2001, and reductions in costs related to ourtoroidal technologies and stirling cycle system of approximately $104,000 and$14,000 during the nine and three month periods ended September 30, 2002,respectively, compared to the same periods in 2001. The research anddevelopment activities for the periods presented include:

 

•                  *FuelCell Technologies*. We incurred costs relating to our fuel celltechnologies of approximately $1,610,000 and $595,000 during the nine and threemonth periods ended September 30, 2002, respectively, compared to costs ofapproximately $1,112,000 and $399,000 during the nine and three month periodsended September 30, 2001, respectively. These increases in our research anddevelopment expenses relating to our fuel cell technologies of approximately$498,000 and $196,000 during the nine and three month periods ended September30, 2002, respectively, reflect management’s decision to continue to devotesubstantial resources to the development of our fuel cell technologies.

 

•                  *CellScan*. We incurred costsrelating to the refinement of the next generation CellScan system and onvarious CellScan research activities of approximately $916,000 and $282,000during the nine and three month periods ended September 30, 2002, respectively,compared to costs of approximately $1,229,000 and $347,000 during the nine andthree month periods ended September 30, 2001, respectively. The decrease can beprimarily attributed to lower labor, materials and depreciation costs, somewhatoffset by increases in costs incurred related to the retention of third partyresearchers in the development and testing of new CellScan applications.

 

•                  *ToroidalTechnologies and Stirling Cycle System*. We incurred costs relatingto our toroidal engine and compressor and the stirling cycle linear system ofapproximately $438,000 and $158,000 during the nine and three month periodsended September 30, 2002 respectively, compared to costs of approximately$542,000 and $172,000 during the nine and three month periods ended September30, 2001, respectively. For the nine months ended September 30, 2002,

 

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the decrease can be primarily attributed to decreasesin costs incurred from the use of consultants and subcontractors, as well asdecreases in labor costs, with respect to such technologies.

 

Selling, general and administrative expenses duringthe nine and three month periods ended September 30, 2002 amounted toapproximately $2,735,000 and $723,000, respectively, compared to approximately$3,720,000 and $1,198,000 during the nine and three month periods endedSeptember 30, 2001, respectively. The decrease of $985,000 for the nine monthsended September 30, 2002 is primarily attributed to a reduction ofapproximately $1,386,000 in non-cash charges relating to stock options andwarrants during the nine months ended September 30, 2002 compared to the ninemonths ended September 30, 2001, partially offset by increases in salary andrelated costs. The decrease of $475,000 for the three months ended September30, 2002 is primarily attributed to a reduction of approximately $476,000 innon-cash charges relating to stock options and warrants during the three monthsended September 30, 2002 compared to the three months ended September 30, 2001.

 

Amortization of intangible assets amounted to$1,995,000 and $665,000 during the nine and three month periods ended September30, 2002, respectively, compared to $15,849,000 and $5,279,000 during the nineand three month periods ended September 30, 2002, respectively. The decreasesduring the nine and three month periods ended September 30, 2002 compared tothe same periods in 2001 were primarily due to our adoption of Statement ofFinancial Accounting Standards No.142, *Goodwill**and Other Intangible Assets*.In accordance with SFAS No. 142, we discontinued amortization of our goodwillas of January 1, 2002, which resulted in decreases in amortization expense ofapproximately $13,800,000 and $4,600,000 for the nine and three months endedSeptember 30, 2002, compared to the same periods of the prior year.

 

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. All companies do not calculate EBITDA the same way.

 

The computations of EBITDA for the nine and threemonths ended September 30, 2002 and 2001 are set forth in the table below:

 
|                                          |   | **Three  Months Ended  September 30,** |       | **Nine  Months Ended  September 30,** |   |
|-----------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|--------|
|                                          |   | **2001**                               |       | **2002**                              |   | **2001** |   | **2002** |   |
| Net  Loss attributable to common shareholders |   | $                                      | (7,334,000 | )                                     | $      | (4,633,000 | ) | $ | (22,342,000 | ) | $ | (9,846,000 | ) |
| Add:  value of warrants issued                |   | —                                 |       | 2,241,000                             |   | — |   | 2,241,000 |   |
| Add:  interest expense                        |   | 12,000                                 |       | 15,000                                |   | 36,000 |   | 42,000 |   |
| Less:  interest income                        |   | (74,000                                | )          | (43,000                               | )      | (144,000 | ) | (112,000 | ) |
| Add:  amortization                            |   | 5,279,000                              |       | 665,000                               |   | 15,849,000 |   | 1,995,000 |   |
| Add:  depreciation                            |   | 117,000                                |       | 62,000                                |   | 330,000 |   | 174,000 |   |
| EBITDA                                        |   | $                                      | (2,000,000 | )                                     | $      | (1,693,000 | ) | $ | (6,271,000 | ) | $ | (5,506,000 | ) |
|                                               |        |                                        |            |                                       |        |  |  |  |  |  |  |  |  |  |

 

EBITDA includes as an expense non-cash compensationrelated to the issuance of stock options and stock purchase warrants charges ofapproximately $213,000 and none for the nine and three months ended September30, 2002, respectively, and charges of $1,663,000 and $491,000 for the nine andthree months ended September 30, 2001, respectively.

 

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The decrease in loss before interest, taxes,depreciation and amortization for the nineand three months ended September 30, 2002 as compared to the nine and three months ended September 30,2001 occurred primarily due to reasons discussed earlier in this section.

 

**Liquidity And 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 18, 2002, we completed a rights offering inwhich we offered to our existing stockholders subscription rights to purchasean aggregate of 3,500,000 shares of our common stock at a purchase price of$2.00 per share. We received gross proceeds of $7,000,000 from the rightsoffering, which proceeds, after deducting related expenses of approximately$461,000, are being used for working capital, including for the continued developmentof our direct liquid fuel cell technology, as well as for selling, general andadministrative expenses. Furthermore, pursuant to our shareholder loyaltyprogram, as of September 18, 2002, we issued warrants to purchase 853,336shares of our common stock, of which warrants to purchase 234 shares have beenexercised in October and November 2002, generating proceeds of approximately$1,040. We intend to use the proceeds from these exercises as well as from anyfuture exercises for working capital and selling, general and administrativeexpenses.

 

On October 24, 2002, we entered into an amendment tothe 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 28, 2002 toDecember 26, 2003.  No other terms ofthe agreement were amended by the amendment. We have not borrowed any funds under this credit line to date.

 

For the nine months ended September 30, 2002, net cashused in operating activities was $4,906,000, as compared to $4,341,000 for thenine months ended September 30, 2001. The increase was primarily attributableto increases in levels of spending on research and development and selling,general and administrative expenses, during the nine months ended September 30,2002 compared to the same period in 2001, for the reasons discussed above.

 

For the nine months ended September 30, 2002, net cashused in investing activities was $201,000, which represented purchases ofproperty and equipment of $226,000, partially offset by proceeds from disposalsof property and equipment of $25,000. This is compared to $1,150,000 for thenine months ended September 30, 2001, which represented $520,000 used toacquire an option to purchase the remaining 7% of More Energy we do not own and$655,000 for the purchase of property and equipment, partially offset byproceeds of $25,000 from the disposal of property and equipment.

 

For the nine months ended September 30, 2002, cashaggregating $7,042,000 was provided by financing activities, compared to$10,278,000 for the nine months ended September 30, 2001. The cash provided byfinancing activities during the nine months ended September 30, 2002 wasprimarily provided by the completion on March 18, 2002 of our rightsoffering, which generated gross proceeds of $7,000,000, as discussed above,less costs of such offering incurred during the nine months ended September 30,2002 of $267,000, and proceeds of approximately $309,000 from the exercise ofoptions to purchase our common stock. The cash provided by financing activitiesduring the nine months ended September 30, 2001 was provided by our sale inprivate placements of 660,688 shares of our common stock and warrants topurchase 660,688 shares of our common stock, for aggregate proceeds of$10,571,000, less issuance costs of approximately $331,000. Additionally, inJuly 2001, we issued

 

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pursuant to the exercise of warrants 10,275 shares of our common stock,for aggregate proceeds of approximately $38,000.

 

As of September 30, 2002, we had approximately$7,934,000 in cash and cash equivalents, as well as an unused $5,000,000revolving credit line which terminates in accordance with its terms on December26, 2003. Our working capital and capital requirements at any given time dependupon numerous factors, including, but not limited to:

 

•                  the progress of research and developmentprograms;

•                  the status of our technologies; and

•                  the level of resources that we devote to thedevelopment 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 three collaborative arrangements withthird parties, in which we realized revenues of $154,000 on costs of sales of$110,000. 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. Additionally, we are consideringvarious financing approaches, including the sale of our securities, in order tostrengthen our balance sheet so as to better negotiate such additionalcollaborative arrangements, if any, from a more advantageous financialposition. There can be no assurance that we will raise additional funds throughany financing approach implemented by us.

 

As of September 30, 2002, we believe that our cashresources, including monies available to us from our credit facility, butexcluding funds raised through additional financings, if any, will besufficient to support our operating and developmental activities for at leastthe next 20 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.

 

**Critical Accounting Policies**

 

The following represents our critical accountingpolicies which reflect significant judgments and uncertainties and couldpossibly result in materially different results under different conditions andassumptions.

 

***Goodwill and Other Intangible Assets***

 

We consider accounting policies related to ourgoodwill and other intangible assets to be critical due to the estimationprocesses involved and their materiality to our financial statements. As ofSeptember 30, 2002, the net book value of our goodwill and other intangibleassets totaled $59,675,000. Our goodwill and other intangible assets aroseprimarily as a result of two purchase accounting transactions: our acquisitionof the minority interest in Medis Inc. in 1997 and our exchange of our sharesfor the minority interest in Medis El in 2000. In amortizing our goodwillthrough December 31, 2001 and our other intangible assets through September 30,2002, we made estimates and assumptions regarding the useful lives of suchassets. If our estimates and assumptions change, the useful lives and resultingcharges to operations for amortization of such assets would also change.

 

Additionally, with respect to our goodwill andintangible assets, as of January 1, 2002, we adopted Statement of FinancialAccounting Standards No. 142, *Goodwill and Other Intangible Assets*,which was issued by the Financial Accounting Standards Board in June 2001.SFAS No. 142 requires goodwill be subject to at least an annual assessment forimpairment with amortization over its estimated useful life to be discontinuedeffective January 1, 2002. As part of our evaluation of our goodwill andother intangible assets for any possible impairment, as of January 1, 2002, wewere required to use

 

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estimates and assumptions with respect to future cash flows, discountrates and timing of commercialization of our technologies. If these estimatesand/or assumptions change, we may, in the future, be required to record chargesto operations for impairment of our goodwill and/or other intangible assets.Additionally, should our stock price drop substantially to a price where ourtotal market capitalization was less than or close to the net book value of ourgoodwill and other intangible assets, we may, in the future, be required torecord charges to operations for impairment of our goodwill and/or otherintangible assets.

 

***Stock Options and Warrants***

 

We also consider accounting policies related to stockoptions and warrants to be critical due to the estimation process involved. Weutilize stock options as an important means of compensation for employees,directors and consultants and warrants as an instrument in our fundraisingprocess. Accounting for such options and warrants, in some circumstances,results in significant non-cash charges to operations or accumulated loss.There are assumptions and estimates involved in determining the value of suchstock options and warrants and the timing of related charges to our operationsor accumulated loss. These estimates and assumptions include the expected termof the option, volatility of our stock and interest rates. The market price ofour stock also has a significant impact on charges we incur from period toperiod related to stock options and warrants. If these estimates and assumptionschange or if our stock price changes, the charges to operations and/oraccumulated loss would also change.

 

***Deferred Income Taxes***

 

We record a valuation allowance to reduce our deferredtax assets to zero. In the event that we were to determine that we would beable to realize all or part of our deferred tax assets in the future, anadjustment to the deferred tax assets would be credited to operations in theperiod such determination was made.

 

**Item 3.****           Quantitative AndQualitative Disclosures About Market Risk**

 

**Disclosure About Market Risk**

 

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

 

In connection with ourcurrency use, we operate in a mixed environment. Payroll is paid in our localcurrency and the local currency of each of our subsidiaries, such as the NewIsraeli Shekel (NIS) with respect to our Israeli-based operations, as are mostof our other operating expenses. Consideration for our sales is either indollars or dollar-linked currency or in the local currency of our subsidiaries.As a result, not all monetary assets and all monetary liabilities are linked tothe same base in the same amount at all points in time, which may causecurrency fluctuation related losses. In order to help minimize such losses, wecurrently invest our liquid funds in both dollar-based and NIS-based assets.

 

For many years prior to1986, the Israeli economy was characterized by high rates of inflation anddevaluation of the Israeli currency against the United States dollar and othercurrencies. Since the institution of the Israeli Economic Program in 1985,inflation, while continuing, has been significantly reduced and the rate ofdevaluation has been substantially diminished. However, Israel effecteddevaluations of the NIS against the dollar as follows:

 

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| 1997 |   | 8.8   | %      |
|------|--------|-------|--------|
| 1998 |   | 17.6  |   |
| 1999 |   | (0.17 | )      |
| 2000 |   | (2.7  | )      |
| 2001 |   | 9.2   |   |

 

In 1999 and 2000, therate of inflation in Israel exceeded the rate of devaluation of the NIS againstthe dollar, but in 1997, 1998 and 2001 the rate of devaluation of the NISagainst the dollar exceeded the rate of inflation in Israel. In 2001, the rateof inflation in Israel was 1.4% and the rate of devaluation of the NIS was 9.2%against the dollar. Additionally, in 2002, through September 30, the rate ofinflation in Israel was 7.0% and the rate of devaluation of the NIS was 10.3%against the dollar.

 

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

 

The state of hostilitywhich has existed in varying degrees in Israel since 1948, its unfavorablebalance of payments and its history of inflation and currency devaluation, allrepresent uncertainties which may adversely affect our business.

 

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

 

Within the 90 days priorto the date of this report, under the supervision and with the participation ofmanagement, including our Chief Executive Officer and our Chief FinancialOfficer, we have evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Basedupon that evaluation, our Chief Executive Officer and our Chief FinancialOfficer have concluded that our disclosure controls and procedures areeffective in timely alerting them to material information relating to us (includingour consolidated subsidiaries) required to be included in our periodic SECfilings. There have been no significant changes in our internal controls or inother factors that could significantly affect internal controls subsequent tothe date of their evaluation.

 

**PART II - OTHER INFORMATION**

 

**Item5.****           Other Information**

 

Our shareholder loyaltyprogram instituted on March 18, 2002 expired on September 18, 2002.Shareholders who satisfied all of the conditions of the shareholder loyaltyprogram were entitled to receive 0.10 warrants for each share of common stockof the Registrant owned in such shareholder’s name on February 13, 2002. Wedetermined that 394 of our shareholders satisfied all of such conditions.Consequently, we issued to such shareholders, as of September 18, 2002,warrants to purchase an aggregate of 853,336 shares of our common stock at anexercise price of $4.43, increasing to $4.92 on September 18, 2003 and to $5.41on September 18, 2004, pursuant to and in accordance with the terms of theshareholder loyalty program. We are currently evaluating whether additionalshareholders satisfied the conditions of the shareholder loyalty program and,consequently, we may issue additional warrants pursuant to the shareholderloyalty program.

 

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**Item 6.**           Exhibits andReports on Form 8-K

 

(a)           Exhibits.

 
| **Exhibit Number** |   | **Exhibit  Description**                                                                                                                            |
|--------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                |
| 10.10              |   | Amendment to Loan  Agreement dated October 24, 2002 but effective as of September 30, 2002  between Medis Technologies Ltd. and Fleet National Bank |

 

(b)           Reportson Form 8-K.  We filed the followingreport on Form 8-K during the third quarter of the year ending December 31,2002.

 
| **Date of Report** |   | **Date  Report Filed with SEC** |   | **Items  Reported**                    |
|--------------------|--------|---------------------------------|--------|----------------------------------------|
|               |   |                            |   |                                   |
| August 8, 2002     |   | August 8, 2002                  |   | Item 9.  Regulation FD Disclosure |

 

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**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: November 12, 2002 |   |   |   |   |

 

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