**U.S. SECURITIES AND EXCHANGECOMMISSION**

 

**WASHINGTON, D.C.20549**

 

**FORM 10-Q**

 

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

 

**For The QuarterlyPeriod EndedJune 30, 2003**

 

**Commission filenumber: 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 the registrant:(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 registrantis an accelerated filer as defined in Rule 12b-2 of the Exchange Act.**

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

 

The number of shares of CommonStock, par value $.01 per share, outstanding as of August 6, 2003 was23,569,443.

 

 

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**MEDIS TECHNOLOGIES LTD.**

 

# **INDEX TO FORM10-Q**

 

**FOR THE QUARTER ENDEDJUNE 30, 2003**

 
| **PART I. FINANCIAL INFORMATION** |
|-----------------------------------|
|                              |
| Item 1.                           | Financial Statements |
|                              |   |
|                              | Condensed Consolidated Balance Sheets  December 31, 2002 and June 30, 2003 (Unaudited) |
|                              |   |
|                              | Condensed Consolidated Statements of  Operations (Unaudited)  Three and six months ended June 30, 2002 and 2003 |
|                              |   |
|                              | Condensed Consolidated Statements of Cash  Flows (Unaudited)  Six months ended June 30, 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 2.                           | Changes in Securities and Use of Proceeds |
|                              |   |
| Item 4.                           | Submission of Matters to a Vote of Security  Holders |
|                              |   |
| Item 6.                           | Exhibits and Reports on Form 8-K |

 

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**PARTI - FINANCIAL INFORMATION**

 

**Item1.****           Financial Statements**

** **

**MedisTechnologies Ltd. and SubsidiariesCondensed Consolidated BalanceSheets**

 
|                                                                                                                                                                |   | **December  31, 2002** |       | **June 30,  2003** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|--------------------|------------|
|                                                                                                                                                                |   |                   |       | **(unaudited)**    |       |
| **ASSETS**                                                                                                                                                          |   |                   | ** ** |               | ** ** |
|                                                                                                                                                                |   |                   | ** ** |               | ** ** |
| Current assets                                                                                                                                                      |   |                   | ** ** |               | ** ** |
| Cash and cash equivalents                                                                                                                                           |   | $                      | 6,036,000  |               | $          | 6,667,000 |   |
| Accounts receivable - trade                                                                                                                                         |   | —                 |       | 80,000             |       |
| Accounts receivable - other                                                                                                                                         |   | 50,000                 |       | 63,000             |       |
| Prepaid expenses and other current assets                                                                                                                           |   | 52,000                 |       | 242,000            |       |
|                                                                                                                                                                |   |                   |       |               |       |
| Total current assets                                                                                                                                                |   | 6,138,000              |       | 7,052,000          |       |
|                                                                                                                                                                |   |                   |       |               |       |
| Property and equipment, net                                                                                                                                         |   | 1,199,000              |       | 1,254,000          |       |
| Goodwill, net                                                                                                                                                       |   | 58,205,000             |       | 58,205,000         |       |
| Intangible assets, net                                                                                                                                              |   | 832,000                |       | 984,000            |       |
| Other assets                                                                                                                                                        |   | 520,000                |       | —             |       |
|                                                                                                                                                                |   |                   |       |               |       |
| Total assets                                                                                                                                                        |   | $                      | 66,894,000 |               | $          | 67,495,000 |   |
|                                                                                                                                                                |   |                   |       |               |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                      |   |                   |       |               |       |
|                                                                                                                                                                |   |                   |       |               |       |
|                                                                                                                                                                |   |                   |       |               |       |
| Current liabilities                                                                                                                                                 |   |                   |       |               |       |
| Accounts payable                                                                                                                                                    |   | $                      | 128,000    |               | $          | 210,000 |   |
| Accrued expenses and other current  liabilities                                                                                                                     |   | 973,000                |       | 1,129,000          |       |
|                                                                                                                                                                |   |                   |       |               |       |
| Total current liabilities                                                                                                                                           |   | 1,101,000              |       | 1,339,000          |       |
|                                                                                                                                                                |   |                   |       |               |       |
| Accrued severance pay                                                                                                                                               |   | 388,000                |       | 469,000            |       |
|                                                                                                                                                                |   |                   |       |               |       |
| Total liabilities                                                                                                                                                   |   | 1,489,000              |       | 1,808,000          |       |
|                                                                                                                                                                |   |                   |       |               |       |
| 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 23,562,873 issued and outstanding at  December 31, 2002 and June 30, 2003, respectively |   | 211,000                |       | 236,000            |       |
| Additional paid-in capital                                                                                                                                          |   | 161,584,000            |       | 167,139,000        |       |
| Long-term note secured by the Company’s  shares                                                                                                                |   | —                 |       | (155,000           | )          |
| Accumulated deficit                                                                                                                                                 |   | (96,390,000            | )          | (101,533,000       | )          |
|                                                                                                                                                                |   |                   |       |               |       |
| Total stockholders’ equity                                                                                                                                     |   | 65,405,000             |       | 65,687,000         |       |
|                                                                                                                                                                |   |                   |       |               |       |
| Total liabilities and stockholders’ equity                                                                                                                     |   | $                      | 66,894,000 |               | $          | 67,495,000 |   |

 

The accompanying notes are anintegral part of these statements.

 

1

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**Medis TechnologiesLtd. and Subsidiaries**

**CondensedConsolidated Statements of Operations**

**(Unaudited)**

 
|                                                                                     |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                                     |   | **2002**                          |   | **2003**                        |   | **2002** |   | **2003** |   |
|                                                                                     |   |                              |   |                            |   |   |   |   |   |
| Sales                                                                                    |   | $                                 | 36,000 |                            | $      | 38,000 |   | $ | 116,000 |   | $ | 75,000 |   |
| Cost of sales                                                                            |   | 27,000                            |   | 9,000                           |   | 78,000 |   | 27,000 |   |
|                                                                                     |   |                              |   |                            |   |   |   |   |   |
| Gross profit                                                                             |   | 9,000                             |   | 29,000                          |   | 38,000 |   | 48,000 |   |
|                                                                                     |   |                              |   |                            |   |   |   |   |   |
| Operating expenses                                                                       |   |                              |   |                            |   |   |   |   |   |
| Research and development costs, net                                                      |   | 989,000                           |   | 1,261,000                       |   | 1,940,000 |   | 2,453,000 |   |
| Selling, general and administrative  expenses                                            |   | 953,000                           |   | 1,057,000                       |   | 2,012,000 |   | 1,874,000 |   |
| Amortization of intangible assets                                                        |   | 663,000                           |   | 375,000                         |   | 1,330,000 |   | 893,000 |   |
|                                                                                     |   |                              |   |                            |   |   |   |   |   |
| Total operating expenses                                                                 |   | 2,605,000                         |   | 2,693,000                       |   | 5,282,000 |   | 5,220,000 |   |
|                                                                                     |   |                              |   |                            |   |   |   |   |   |
| Loss from operations                                                                     |   | (2,596,000                        | )      | (2,664,000                      | )      | (5,244,000 | ) | (5,172,000 | ) |
|                                                                                     |   |                              |   |                            |   |   |   |   |   |
| Other income (expenses)                                                                  |   |                              |   |                            |   |   |   |   |   |
| Interest income                                                                          |   | 45,000                            |   | 28,000                          |   | 69,000 |   | 61,000 |   |
| Interest and other expense                                                               |   | (14,000                           | )      | (22,000                         | )      | (38,000 | ) | (32,000 | ) |
|                                                                                     |   |                              |   |                            |   |   |   |   |   |
|                                                                                     |   | 31,000                            |   | 6,000                           |   | 31,000 |   | 29,000 |   |
|                                                                                     |   |                              |   |                            |   |   |   |   |   |
| NET LOSS                                                                                 |   | (2,565,000                        | )      | (2,658,000                      | )      | (5,213,000 | ) | (5,143,000 | ) |
|                                                                                     |   |                              |   |                            |   |   |   |   |   |
| Basic and diluted net loss per share (Note  B)                                           |   | $                                 | (.12   | )                               | $      | (.11 | ) | $ | (.24 | ) | $ | (.22 | ) |
|                                                                                     |   |                              |   |                            |   |   |   |   |   |
| Weighted-average shares used in computing  basic and diluted net loss per share (Note B) |   | 22,107,863                        |   | 23,562,873                      |   | 21,679,067 |   | 23,003,548 |   |

 

The accompanying notes are anintegral part of these statements.

 

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**Medis TechnologiesLtd. and Subsidiaries**

**CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**

 
|                                                                                                     |   | **Six Months  Ended June 30,** |       |
|----------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                                     |   | **2002**                       |       | **2003** |   |
|                                                                                                     |   |                           |       |   |   |
| Cash flows from operating activities                                                                     |   |                           |       |   |   |
| Net loss                                                                                                 |   | $                              | (5,213,000 | ) | $ | (5,143,000 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities                              |   |                           |       |   |   |
| Depreciation and amortization of property  and equipment                                                 |   | 112,000                        |       | 139,000 |   |
| Amortization of intangible assets                                                                        |   | 1,330,000                      |       | 893,000 |   |
| Non-cash compensation expense                                                                            |   | 213,000                        |       | 108,000 |   |
| Loss from sale of property and equipment                                                                 |   | 11,000                         |       | — |   |
|                                                                                                     |   |                           |       |   |   |
| Changes in operating assets and liabilities                                                              |   |                           |       |   |   |
| Accounts receivable - trade                                                                              |   | (30,000                        | )          | (80,000 | ) |
| Accounts receivable - other                                                                              |   | 4,000                          |       | (13,000 | ) |
| Prepaid expenses and other current assets                                                                |   | 46,000                         |       | (190,000 | ) |
| Accounts payable                                                                                         |   | 94,000                         |       | 82,000 |   |
| Accrued expenses and other current  liabilities                                                          |   | 170,000                        |       | 156,000 |   |
| Accrued severance pay                                                                                    |   | 112,000                        |       | 81,000 |   |
|                                                                                                     |   |                           |       |   |   |
| Net cash used in operating activities                                                                    |   | (3,151,000                     | )          | (3,967,000 | ) |
|                                                                                                     |   |                           |       |   |   |
| Cash flows from investing activities                                                                     |   |                           |       |   |   |
| Capital expenditures                                                                                     |   | (145,000                       | )          | (194,000 | ) |
| Long-term note                                                                                           |   | —                         |       | (155,000 | ) |
| Proceeds from sale of property and  equipment                                                            |   | 25,000                         |       | — |   |
|                                                                                                     |   |                           |       |   |   |
| Net cash used in investing activities                                                                    |   | (120,000                       | )          | (349,000 | ) |
|                                                                                                     |   |                           |       |   |   |
| Cash flows from financing activities                                                                     |   |                           |       |   |   |
| Proceeds from issuance of common stock, net                                                              |   | 7,042,000                      |       | 4,947,000 |   |
|                                                                                                     |   |                           |       |   |   |
| Net cash provided by financing activities                                                                |   | 7,042,000                      |       | 4,947,000 |   |
|                                                                                                     |   |                           |       |   |   |
| Net increase in cash and cash equivalents                                                                |   | 3,771,000                      |       | 631,000 |   |
|                                                                                                     |   |                           |       |   |   |
| Cash and cash equivalents at beginning of  period                                                        |   | 5,999,000                      |       | 6,036,000 |   |
| Cash and cash equivalents at end of period                                                               |   | $                              | 9,770,000  |   | $ | 6,667,000 |   |
|                                                                                                     |   |                           |       |   |   |
| Supplemental disclosures of cash flow  information:                                                      |   |                           |       |   |   |
| Cash paid during the period for Interest                                                                 |   | $                              | 10,000     |   | $ | 16,000 |   |
| Non-cash investing and financing  activities:                                                            |   |                           |       |   |   |
| Acquisition of shares of majority-owned  subsidiary – purchase price allocated to intangible assets |   | —                         |       | $ | 1,045,000 |   |
| Financed as follows:                                                                                     |   |                           |       |   |   |
| Issuance of common stock                                                                                 |   | —                         |       | $ | 525,000 |   |
| Cost of option purchased in prior period                                                                 |   | —                         |       | $ | 520,000 |   |

 

The accompanying notes are anintegral part of these statements.

 

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**Medis TechnologiesLtd. and Subsidiaries**

**Notes to Condensed Consolidated FinancialStatements**

** (Unaudited)**

 

**NoteA - Nature Of Operations And Basis Of Presentation**

 

MedisTechnologies Ltd. (the “Company”), a Delaware corporation, is a holdingcompany, which through its wholly-owned subsidiaries, Medis El Ltd.(“Medis El”) and More Energy Ltd. (“More Energy”), engages in research anddevelopment of technology products to license, sell, or enter into joint ventureswith large corporations. The Company’s primary business focus is on thedevelopment and commercialization of direct liquid fuel cells and attendantrefueling cartridges for use as primary and auxiliary power sources forportable 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 inherently conductive polymers (formerly known as highly conductivepolymers), the CellScan, the toroidal engine, stirling cycle system, and theRankin cycle linear compressor.

 

Theaccompanying condensed consolidated financial statements should be read inconjunction with the following notes and with the consolidated financialstatements for the year ended December 31, 2002 and related notes included inthe Company’s Annual Report on Form 10-K. The condensed consolidated financialstatements as of June 30, 2003 and for the three and six months ended June 30,2002 and 2003 are unaudited and have been prepared in accordance withaccounting principles generally accepted in the United States applicable tointerim financial information and the rules and regulations promulgated by theSecurities and Exchange Commission. Accordingly, such condensed consolidatedfinancial statements do not include all of the information and footnotedisclosures required in annual financial statements. In the opinion of theCompany’s management, the June 30, 2002 and 2003 unaudited condensedconsolidated interim financial statements include all adjustments, consistingof normal recurring adjustments, necessary for a fair presentation of suchcondensed consolidated financial statements. The results of operations for thethree and six months ended June 30, 2003 are not necessarily indicative of theresults to be expected for the entire year.

 

The condensedconsolidated balance sheet as of December 31, 2002 has been derived from theaudited financial statements at that date but does not include all of theinformation and notes required by accounting principles generally accepted inthe United States for complete financial statements.

 

**NoteB - Certain Transactions**

** **

*1.**         Rights Offering* - OnMarch 11, 2003, the Company completed a rights offering in which it offered toits existing stockholders subscription rights to purchase an aggregate of2,325,600 shares of its common stock at a purchase price of $2.15 per share.The Company received gross proceeds of $5,000,040 from the rights offering,which proceeds, after deducting related expenses of approximately $122,000, arebeing used for working capital, including for the continued development of itsdirect liquid fuel cell technology, as well as for selling, general andadministrative expenses.

 

In accordance with SFAS No. 128, theCompany has adjusted its net loss per share for three and six months ended June30, 2002 to give retroactive effect to shares issued in its March 11, 2003rights offering. Accordingly, as a result of such retroactive adjustment, forthe three months ended June 30, 2002, the net loss per share was unchanged andfor

 

4

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the six months ended June 30, 2002, the netloss per share decreased from $(.25) to $(.24), or $(.01) per share.

 

*2.**         ShareholderLoyalty Program* - During the six months ended June 30, 2003, stockholdersexercised warrants to acquire an aggregate of 10,972 shares of the Company’scommon stock, at an exercise price of $4.43 per share, for aggregate proceedsof approximately $48,600. These warrants were issued to eligible stockholdersof the Company pursuant to the Company’s shareholder loyalty program.

 

*3.**         Exercise of Option toAcquire Remaining Interest in Subsidiary* - On March 14, 2003, the Company acquired the remaining 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 (the “Seller”), which amendedthe terms of the Company’s existing option agreement to acquire such interest.Pursuant to the amendment, the vesting schedule of the option was acceleratedsuch that the Company could immediately exercise its option in full to acquirethe remaining 7% interest. Such acquisition was undertaken in order to makeMore Energy a wholly owned subsidiary of the Company.

 

The acquisition was accountedfor under the purchase method of accounting. The total purchase price of$1,045,000 was comprised of $520,000 paid in full in June 2001 for the purchaseof the original option to acquire such interest in More Energy and the issuanceas of March 14, 2003 of 120,000 shares of the Company’s common stock. Thecommon stock was valued at $4.374 per share, representing the average closingprice of the Company’s common stock for three days before and after March 14,2003 - the date of the acquisition agreement, or an aggregate of approximately$525,000.

 

Based on a purchase priceallocation analysis performed by the Company, the entire purchase price of$1,045,000 was allocated to intangible assets of More Energy. No goodwill wasgenerated in the transaction. Such intangible assets acquired are being amortizedover five year useful lives. During the six and three months ended June 30,2003, the Company has recorded amortization expense of approximately $61,000,related to such intangible assets acquired.

 

As of the date of theacquisition, More Energy’s total stockholder’s equity reflected a deficit.Since the Company, from More Energy’s inception, has consolidated in itsfinancial statements 100% of the losses of More Energy, such deficit is alreadyincluded in the Company’s accumulated deficit as of date of the acquisition andwas not reflected in the purchase price allocation.

 

In April 2003, the Companyloaned approximately $155,000 to the Seller, to enable the Seller to paycertain tax obligations arising from the sale of his interest to the Company.The Seller has executed a non-recourse secured promissory note (the “Note”) infavor of the Company evidencing such loan and any additional loans which may bemade by the Company to the Seller up to an aggregate principal amount of$258,000. The interest rate under the Note is equal to the applicable federalrate for mid-term loans in effect on the borrowing date which, for purposes ofthe amount borrowed to date, equals a rate of 2.94% per annum. Principal of,and accrued interest on, the Note must be paid in full by the December 31, 2006maturity date of the Note. The Seller has also entered into a pledge agreementwith the Company under which he has pledged as collateral for the payment infull of his obligations under the Note 120,000 shares of the Company’s commonstock

 

5

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owned by him. The Company hasaccounted for the Note as a reduction in stockholders’ equity.

 

*4.**         Grant of Warrants* - OnApril 1, 2003, the Company granted to a consultant warrants to purchase anaggregate of 50,000 shares of the Company’s common stock, in connection with aconsulting agreement of the same date. Such warrants provide for an exerciseprice of $5.35 per share, the market price on the date of the grant, and expirethree years from the date of the grant. Warrants to purchase 25,000 shares vestone year from the date of the grant and warrants to purchase the remaining25,000 shares vest two years from the date of the grant; provided that if theCompany does not extend the term of the consulting agreement for a secondtwelve month period, all of the warrants shall vest one year from the date ofthe grant. Using the Black-Scholes option pricing model assuming a 2.5% riskfree interest rate, 0% dividend yield, expected life of 2.75 years and 95%volatility, the Company has estimated the fair value of such warrants at June30, 2003 to be approximately $231,000, and has recorded expense ofapproximately $58,000 for the six and three months ended June 30, 2003.

 

*5.**         Exercise of Stock Options–* In June 2003, the Company issued 4,000shares of its common stock pursuant to the exercise of stock options grantedunder the Company’s 1999 Stock Option Plan, as amended, for an aggregateexercise price of $20,000.

 

*6.**         Stock-based Compensation* -In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.”SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” toprovide alternative methods of transition for a voluntary change to the fairvalue based methods of accounting for stock-based employee compensation. Inaddition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 torequire more prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.

 

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 stockoption plans 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:

 

6

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|                                                                                              |   | **Three  Months Ended June 30,** |       | **Six Months  Ended June 30,** |   |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|--------|
|                                                                                              |   | **2002**                         |       | **2003**                       |   | **2002** |   | **2003** |   |
| Net loss, as reported                                                                             |   | $                                | (2,565,000 | )                              | $      | (2,658,000 | ) | $ | (5,213,000 | ) | $ | (5,143,000 | ) |
|                                                                                              |   |                             |       |                           |   |   |   |   |   |   |   |   |   |
| Add: Total stock-based employee  compensation expense included in the reported loss               |   | (13,000                          | )          | —                         |   | 122,000 |   | — |   |
|                                                                                              |   |                             |       |                           |   |   |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method |   | (1,336,000                       | )          | (286,000                       | )      | (2,404,000 | ) | (684,000 | ) |
|                                                                                              |   |                             |       |                           |   |   |   |   |   |
| Pro forma net loss                                                                                |   | $                                | (3,914,000 | )                              | $      | (2,944,000 | ) | $ | (7,495,000 | ) | $ | (5,827,000 | ) |
|                                                                                              |   |                             |       |                           |   |   |   |   |   |
| Basic and diluted net loss per share as  reported  (Note B)                                  |   | $                                | (.12       | )                              | $      | (.11 | ) | $ | (.24 | ) | $ | (.22 | ) |
| Pro forma net loss per share                                                                      |   | $                                | (.18       | )                              | $      | (.12 | ) | $ | (.35 | ) | $ | (.25 | ) |

 

The fair value of each option granted isestimated on the date of the grant using the Black-Scholes option pricing modelwith the following weighted average assumptions:

 
|                    |   | **Three  Months Ended   June 30,** |   | **Six Months  Ended  June 30,** |   |
|-------------------------|--------|------------------------------------|--------|---------------------------------|--------|
|                    |   | **2002**                           |   | **2003**                        |   | **2002** |   | **2003** |   |
|                    |   |                               |   |                            |   |   |   |   |   |
| Dividend yield          |   | 0                                  | %      | 0                               | %      | 0 | % | 0 | % |
| Risk-free interest rate |   | 2.50                               | %      | 2.50                            | %      | 2.50 | % | 2.50 | % |
| Expected life in years  |   | 1-2                                |   | 1-2                             |   | 1-2 |   | 1-2 |   |
| Volatility              |   | 94                                 | %      | 95                              | %      | 94 | % | 95 | % |

 

*7.**         PolymerAgreement* – In January 2002, the Company entered into an agreement with aU.S. company to develop a new application for the use of its inherentlyconductive polymers in a proton exchange membrane fuel cell component whichcould advance the development of such fuel cells for automobile, home andstationary power uses. The agreement provides for the Company to receivepayments aggregating $300,000 over time. The Company recognized revenues ofapproximately $38,000 and $75,000 during the three and six months ended June30, 2003, respectively, with respect to such agreement.

 

*8.**         FuelCell Technology Cooperation Agreements* – In April 2001, the Companyentered into a mutually exclusive agreement with General Dynamics GovernmentSystems Corporation, a unit of General Dynamics Corporation (“GD”), to developand market fuel cells and fuel cell-powered portable electronic devices for theUnited States Department of Defense (the “DOD”). As part of such agreement,among other things, GD agreed to market the Company’s fuel cell products to theDOD. In May 2002, the Company received a $75,000 purchase order from GD todevelop an initial prototype of such a fuel cell charger. In March 2003, theCompany developed, on schedule, the prototype designated under the May 2002purchase order and recorded the

 

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$75,000 as a credit to research anddevelopment expense.

 

On May 5, 2003, the Company announcedthat it had signed a second agreement with GD, to design and develop on a bestefforts basis a pre-production prototype of its fuel cell Power Pack for theruggedized personal digital assistant system that General Dynamics isdeveloping for the military (the “Agreement”). The total price for theCompany’s services provided for in the Agreement is $500,000, with an initialpayment of $100,000 and the balance in accordance with the payment andperformance milestones established in the Agreement through January 2005. TheCompany expects that it will benefit from the development effort beyond thescope of the Agreement and anticipates that its development costs will exceedthe $500,000 price. The Company is accounting for the Agreement as a researchand development cost sharing arrangement and has recorded approximately $47,000as a credit to research and development expense for the three and six monthsended June 30, 2003.

 

**NoteC - Liquidity**

 

Sinceinception, the Company has incurred operating losses and has used cash in itsoperations. Accordingly, the Company has relied on financing activities,principally the sale of its stock, to fund its research and developmentactivities and operations. The Company believes this dependence will continueunless it is able to successfully develop and market its technologies. However,there can be no assurance that the Company will be able to continue to obtainfinancing or successfully develop and market its technologies.

 

On February20, 2003, the Company entered into a second amendment to the agreementgoverning its existing $5,000,000 revolving credit line. Pursuant to theamendment, the termination date of the revolving credit line was extended fromDecember 26, 2003 to July 1, 2004. No other terms of the agreement were amendedby the amendment. As of June 30, 2003, the Company had not borrowed any fundsunder this credit line.

 

**Item 2****.****           Management’sDiscussion And Analysis Of Financial Condition And Results Of Operations**

 

**ForwardLooking Statements**

 

Some of theinformation in this quarterly report contains forward-looking statements thatinvolve substantial risks and uncertainties. You can identify these statementsby forward-looking words such as “may,” “will,” “expect,” “anticipate,”“believe,” “estimate,” “plans,” and “continue” or similar words. You shouldread statements that contain 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 itis important to communicate our expectations to our investors. However, there maybe events in the future that we are not able to accurately predict or overwhich we have no control. The risk factors listed in our Annual Report on Form10-K for the fiscal year ended December 31, 2002, as well as any cautionarylanguage in this quarterly report, provide examples of risks, uncertainties andevents that may cause our actual results to differ materially from theexpectations we describe in our forward-looking statements. You should be awarethat the occurrence of the events described in these

 

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risk factors and elsewhere inthis quarterly report could have a material adverse effect on our business,operating results and financial condition.

 

**Introduction**

 

Thispresentation includes the operations of our wholly owned subsidiaries, unlesswe tell you otherwise.

 

**ResultsOf Operations**

 

From ourinception in April 1992 through June 30, 2003 we have generated anaccumulated deficit of approximately $101,533,000, including approximately$43,283,000 from amortization expense. We expect to incur additional operatinglosses during the remainder of 2003 and possibly thereafter, principally as aresult 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 annualresearch and development costs have increased from approximately $2,749,000 in1999 to approximately $4,161,000 in 2002. We anticipate that such costs willcontinue to increase in 2003 as we continue to devote substantial resources tothe development of our fuel cell technologies; however, we anticipate that ourfailure to successfully commercially develop our fuel cell technologies or anyof our other technologies will force us to curtail our spending levels untilsuch time, if ever, as we generate revenues or otherwise receive funds fromthird party sources. If we begin to market and sell any of our technologies, wewill increase such expenses to the extent necessary, which we expect to fundout of revenues.

 

***Six Months EndedJune 30, 2003 Compared To Six Months Ended June 30, 2002 And Three Months EndedJune 30, 2003 Compared To Three Months Ended June 30, 2002***

 

We sustained netlosses of $5,143,000 and $2,658,000 during the six and three months ended June30, 2003, compared to $5,213,000 and $2,565,000 during the six and three monthsended June 30, 2002. The decrease in the net losses during the six months endedJune 30, 2003 compared to the same period of 2002 can primarily be attributedto decreases in amortization of intangible assets and selling, general andadministrative expenses, somewhat offset by an increase in research anddevelopment costs. The increase in the net loss during the three months endedJune 30, 2003 compared to the same period of 2002 can primarily be attributedto increases in research and development costs and selling, general andadministrative expenses, somewhat offset by a decrease in amortization ofintangible assets.

 

We recognizedrevenues of approximately $75,000 and $38,000 and gross profit of approximately$48,000 and $29,000 during the six and three months ended June 30, 2003,compared to revenues of approximately $116,000 and $36,000 and gross profit ofapproximately $38,000 and $9,000 during the six and three months ended June 30,2002. The revenue in 2003 is attributable to a January 2002 agreement todevelop for a third party an application for the use of our inherentlyconductive polymers in its fuel cell products. An aggregate of $62,000 and$36,000 of such revenues recognized during the six and three month periodsended June 30, 2002, respectively, are attributable to that same January 2002agreement. The other $54,000 of revenues recognized during the six months endedJune 30, 2002 are attributable to work performed under a completed January 2002purchase order in which we designed a direct liquid fuel cell for use in a newenergy pack for infantry soldiers. All of such revenues are non-recurring.

 

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Research anddevelopment costs amounted to $2,453,000 and $1,261,000 during the six andthree months ended June 30, 2003, compared to $1,940,000 and 989,000 during thesix and three months ended June 30, 2002. The increase in research anddevelopment costs incurred during the six and three months ended June 30, 2003,compared to the same periods in 2002, can be attributed to increases ofapproximately $675,000 and $303,000 in costs related to our fuel celltechnologies, somewhat offset by decreases of approximately $109,000 and$18,000 in costs related to our CellScan and decreases of approximately $48,000and $11,000 in costs related to our toroidal technologies, stirling cyclesystem and linear compressor. The research and development activities for theperiods presented include:

 

•                       Fuel CellTechnologies. We incurred costs relating to our fuel cell technologies ofapproximately $1,690,000 and $877,000 during the six and three months endedJune 30, 2003, compared to costs of approximately $1,015,000 and $574,000during the six and three months ended June 30, 2002. This increase in ourresearch and development expenses relating to our fuel cell technologies ofapproximately $675,000 and $303,000 during the six and three months ended June30, 2003 reflect management’s decision to continue to devote substantial andincreasing amounts of resources to the development of our fuel celltechnologies.

 

•                       CellScan.We incurred costs relating to the refinement of the next generation CellScansystem and on various CellScan research activities of approximately $525,000and $267,000 during the six and three months ended June 30, 2003, compared tocosts of approximately $634,000 and $285,000 during the six and three monthsended June 30, 2002. The decrease during the six months ended June 30, 2003 canbe primarily attributed to decreases in (a) costs incurred related to theretention of third party researchers in the development and testing of newCellScan applications and completion of the desktop CellScan, (b) labor costs,including costs associated with the issuance of stock options, and (c) materialcosts, partially offset by an increase in other costs.

 

•                       ToroidalTechnologies, Stirling Cycle System and Linear Compressor. We incurred costsrelating to our toroidal engine and compressor, stirling cycle system andlinear compressor of approximately $232,000 and $114,000 during the six andthree months ended June 30, 2003, compared to costs of approximately $280,000and $125,000 during the six and three months ended June 30, 2002. The decreaseduring the six months ended June 30, 2003 can be primarily attributed todecreases in costs incurred from the use of consultants and subcontractors.

 

Selling,general and administrative (“SG&A”) expenses during the six and threemonths ended June 30, 2003 amounted to approximately $1,874,000 and $1,057,000compared to approximately $2,012,000 and $953,000 during the six and threemonths ended June 30, 2002. The decrease of $138,000 for the six months endedJune 30, 2003 compared to the same period in 2002 is primarily attributable toreductions in labor and executive consulting expenses of approximately $156,000and $155,000, respectively, partially offset by increases in selling andmarketing expenses of approximately $115,000 and net increases in otherSG&A expenses of approximately $58,000. The increase of $104,000 for thethree months ended June 30, 2003 compared to the same period in 2002 isprimarily attributable to an increase in selling and marketing expenses ofapproximately $42,000, an increase of approximately $98,000 in non-cash chargesrelating to stock options and warrants and net increases in other SG&Aexpenses of approximately $62,000, partially offset by a reduction in laborexpenses of approximately $98,000.

 

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Amortizationof intangible assets amounted to $893,000 and $375,000 during the six and threemonths ended June 30, 2003, compared to $1,330,000 and $663,000 during the sixand three months ended June 30, 2002. The decrease is attributable to certainintangible assets being fully amortized prior to June 30, 2003, partiallyoffset by amortization of intangible assets acquired in our March 2003acquisition of the remaining 7% of More Energy that we did not already own.

 

**LiquidityAnd Capital Resources**

 

We havehistorically financed our operations primarily through the proceeds of investorequity financing, long-term bank loans and grants to Medis El from the ChiefScientist of the Ministry of Industry and Commerce of Israel with respect tothe CellScan, initial sales of our products and fees from the granting ofexclusive distribution rights.

 

On March 11,2003, we completed a rights offering in which we offered to our existingstockholders subscription rights to purchase an aggregate of 2,325,600 sharesof our common stock at a purchase price of $2.15 per share. We received grossproceeds of approximately $5,000,000 from the rights offering, which proceeds,after deducting related expenses of approximately $122,000, are being used forworking capital, including for the continued development of our fuel celltechnologies, as well as for selling, general and administrative expenses.

 

On February20, 2003, we entered into a second amendment to the agreement governing ourexisting $5,000,000 revolving credit line. Pursuant to the amendment, the termination date of the revolving creditline was extended from December 26, 2003 to 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 sixmonths ended June 30, 2003, net cash used in operating activities was$3,967,000, compared to $3,151,000 for the six months ended June 30, 2002. Theincrease was primarily attributable to increases in levels of spending onresearch and development activities, during the six months ended June 30, 2003compared to the same period in 2002, for the reasons discussed in Results ofOperations above, as well as an increase in prepaid selling, general andadministrative expenses during the six months ended June 30, 2003.

 

For the sixmonths ended June 30, 2003, net cash used in investing activities was $349,000,which was comprised of a loan of approximately $155,000 to the General Managerof More Energy to enable him to satisfy certain tax obligations arising inconnection with our March 2003 purchase from him of the remaining 7% of MoreEnergy that we did not already own, and capital expenditures aggregatingapproximately $194,000. This is compared to $120,000 for the six months endedMarch 31, 2002, which represented capital expenditures of $145,000, somewhatoffset by the proceeds from the disposition of property and equipment of$25,000.

 

For the six monthsended June 30, 2003, cash aggregating $4,947,000 was provided by financingactivities, compared to $7,042,000 for the six months ended June 30, 2002. OnMarch 11, 2003, we completed a rights offering, which generated gross proceedsof approximately $5,000,000, as discussed above, less costs of such offering ofapproximately $122,000. Additionally, during the six months ended June 30,2003, (i) warrant holders under our loyalty program exercised warrants topurchase an aggregate of 10,972 shares of our common stock, for proceeds ofapproximately $48,600 and (ii) a former employee exercised options to acquirean aggregate of 4,000 shares or our common stock, for proceeds of approximately$20,000. The cash provided by financing activities during the six months endedJune 30, 2002 was provided by the completion of our March 18, 2002 rightsoffering, which generated gross proceeds of $7,000,000 less costs of suchoffering incurred during the six months ended

 

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June 30, 2002 of $267,000, andproceeds of approximately $309,000 from the exercise of options to purchase ourcommon stock.

 

As of June 30,2003, we had approximately $6,667,000 in cash and cash equivalents, as well asan unused $5,000,000 revolving credit line which terminates in accordance withits terms on July 1, 2004. Our working capital and capital requirements at anygiven time depend upon numerous factors, including, but not limited to:

 

•                  the progress ofresearch and development programs;

•                  the status ofour technologies; and

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

 

Anothercontributing factor is the status of collaborative arrangements with businessesand institutes for research and development and companies participating in thedevelopment of our technologies. We have entered into five collaborativearrangements with third parties relating to our fuel cell technologies, inwhich since January 2002 we have realized revenues of $267,000 on costs ofsales of $157,000, as well credits to our research and development costs of$122,000. 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 June 30,2003, we believe that our cash resources and monies available to us from ourcredit facility, will be sufficient to support our operating and developmentalactivities for at least the next 16 months. Beyond such time, we mayrequire capital infusions of cash to continue our operations, whether throughdebt financing, issuance of shares or from companies or other organizationsparticipating in the development of our technologies. However, to the extent weare unable to raise or acquire additional other funds, we will curtail researchand development of one or more technologies until such time as we acquireadditional funds.

 

**Item 3. Quantitative And QualitativeDisclosures About Market Risk**

 

**DisclosureAbout Market Risk**

 

***ImpactOf Inflation And Devaluation On Results Of Operations, Liabilities And Assets***

 

In connectionwith our currency use, we operate in a mixed environment. Payroll is paid inour local currency and the local currency of each of our subsidiaries, such asthe New Israeli Shekel (NIS) with respect to our Israeli-based operations, asare most of our other operating expenses. Consideration for virtually all salesis either in dollars or dollar-linked currency. As a result, not all monetaryassets and all monetary liabilities are linked to the same base in the sameamount at all points in time, which may cause currency fluctuation relatedlosses. In order to help minimize such losses, we currently invest our liquidfunds in both dollar-based and NIS-based assets.

 

For many yearsprior to 1986, the Israeli economy was characterized by high rates of inflationand devaluation of the Israeli currency against the United States dollar andother currencies. Since the institution of the Israeli Economic Program in1985, inflation, while continuing, has been significantly reduced and the rateof devaluation has been substantially diminished. However, Israel effecteddevaluations of the NIS against the dollar as follows:

 

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

 

In 1999 and2000, the rate of inflation in Israel exceeded the rate of devaluation of theNIS against the dollar, but in 1998, 2001 and 2002 the rate of devaluation ofthe NIS against the dollar exceeded the rate of inflation in Israel. In 2002,the rate of inflation in Israel was 6.5% and the rate of devaluation of the NISwas 7.3% against the dollar. Additionally, in 2003, through June 30, the rateof inflation in Israel was a negative (0.5)% and the rate of appreciation ofthe NIS was 9.0% against the dollar.

 

***Impact Of PoliticalAnd Economic Conditions***

 

The state ofhostility which has existed in varying degrees in Israel since 1948, itsunfavorable balance of payments and its history of inflation and currencydevaluation, all represent uncertainties which may adversely affect ourbusiness.

 

**Item 4. Controlsand Procedures**

 

Our managementcarried out an evaluation, with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of our disclosurecontrols and procedures as of June 30, 2003. Based upon that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed by us in reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized andreported, within the time periods specified in the rules and forms of theSecurities and Exchange Commission.

 

There have notbeen any change in our internal control over financial reporting in connectionwith the evaluation required by Rule 13a-15(d) under the Exchange Act thatoccurred during the quarter ended June 30, 2003 that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

 

**PARTII - OTHER INFORMATION**

 

**Item 2. Changes in Securities and Use ofProceeds**

 

On March 14,2003, we issued to one of our officers 120,000 shares of our common stock, aspartial payment of the purchase price for the remaining 7% of More Energy Ltd.,an Israeli corporation, we did not already own. The common stock was valued at$4.374 per share, or an aggregate of approximately $525,000.

 

On April 1,2003, we granted to a consultant warrants to purchase an aggregate of 50,000shares of our common stock, in connection with a consulting agreement of thesame date. Such warrants provide for an exercise price of $5.35 per share andexpire three years from the date of the grant. Warrants to purchase 25,000shares vest one year from the date of the grant and warrants to purchase theremaining 25,000 shares vest two years from the date of the grant; providedthat if we do not extend the term of the consulting agreement for a second twelvemonth period, all of the warrants shall vest one year from the date of thegrant.

 

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Exemption fromregistration under the Securities Act of 1933, as amended, in connection withthe foregoing transactions, is claimed under Section 4(2) of the Securities Actas a transaction by the issuer not involving a public offering.

 

**Item 4. Submission of Matters to a Vote ofSecurity Holders**

 

Our Annual Meeting ofStockholders was held on June 24, 2003.

 

At that meeting, all of ourthen-current directors were re-elected. The vote was as follows:

 
|             |   | **For**    |   | **Against** |   |
|------------------|--------|------------|--------|-------------|--------|
|             |   |       |   |        |   |
| Robert K. Lifton |   | 20,592,200 |   | 124,578     |   |
|             |   |       |   |        |   |
| Howard Weingrow  |   | 20,596,001 |   | 120,767     |   |
|             |   |       |   |        |   |
| Jacob S. Weiss   |   | 20,596,001 |   | 120,767     |   |
|             |   |       |   |        |   |
| Amos Eiran       |   | 20,656,615 |   | 60,163      |   |
|             |   |       |   |        |   |
| Zeev Nahmoni     |   | 20,662,665 |   | 54,113      |   |
|             |   |       |   |        |   |
| Jacob E. Goldman |   | 20,661,708 |   | 55,070      |   |
|             |   |       |   |        |   |
| Seymour Heinberg |   | 20,661,708 |   | 55,070      |   |
|             |   |       |   |        |   |
| Philip Weisser   |   | 20,661,708 |   | 55,070      |   |

 

At that meeting, ourshareholders ratified the amendment of our 1999 Stock Option Plan to increasethe number of shares of our common stock available thereunder from 3,000,000 to3,300,000. The vote was as follows:

 
| For: |   | 20,183,627 |   | Against: |   | 515,913 |   | Abstain |   | 17,238 |
|------|--------|------------|--------|----------|--------|---------|--------|---------|--------|--------|

 

**Item 6. Exhibitsand Reports on Form 8-K**

 

(a)                                  Exhibits.

 
| **Exhibit Number** |   | **Exhibit Description**                 |
|--------------------|--------|-----------------------------------------|
|               |   |                                    |
| 31                 |   | Rule 13a-14(a)/15d-14(a) Certifications |
|               |   |                                    |
| 32                 |   | Section 1350 Certifications             |

 

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

 

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| **Date of Report** |   | **Date Report Filed with SEC** |   | **Items Reported**                                                          |
|--------------------|--------|--------------------------------|--------|-----------------------------------------------------------------------------|
|               |   |                           |   |                                                                        |
| July 30, 2003      |   | July 30, 2003                  |   | Item 9. Regulation FD Disclosure                                            |
|               |   |                           |   |                                                                        |
| June 24, 2003      |   | June 24, 2003                  |   | Item 9. Regulation FD Disclosure                                            |
|               |   |                           |   |                                                                        |
| June 24, 2003      |   | June 24, 2003                  |   | Item 9. Regulation FD Disclosure                                            |
|               |   |                           |   |                                                                        |
| May 14, 2003       |   | May 14, 2003                   |   | Item 9. Regulation FD Disclosure                                            |
|               |   |                           |   |                                                                        |
| May 14, 2003       |   | May 14, 2003                   |   | Item 7. Financial Statements, Pro Forma Financial Information and  Exhibits |
|               |   |                           |   |                                                                        |
|               |   |                           |   | Item 9. Regulation FD Disclosure                                            |

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this Reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                  |   | 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: August  6, 2003 |   |                     |   |

 

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