Lithium Technology Corporation (LTHUQ)

[Q-reus]

Hi all. I'm surprised that no one has posted the release of the
Form 10QSB yet. GLTA

http://biz.yahoo.com/e/080829/lthu.pk10qsb.html

Form 10QSB for LITHIUM TECHNOLOGY CORP

29-Aug-2008

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read together with the financial statements and the accompanying notes thereto included elsewhere in this Report.

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This report contains certain forward-looking statements and information that are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements contained in this Report relating to matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, the successful commercialization of our batteries, future demand for our products, general economic conditions, government and environmental regulation, competition and customer strategies, technological innovations in the battery industries, changes in our business strategy or development plans, capital deployment, business disruptions, our ability to consummate future financings and other risks and uncertainties, certain of which are beyond our control. Additional factors that could affect the Company's forward-looking statements include, among other things: the restatement of the Company's financial statements for the fiscal year ended December 31, 2004, and the delay in filing financial statements and periodic reports with the Securities and Exchange Commission for the fiscal years ended December 31, 2005, December 31, 2006 and December 31, 2007; negative reactions from the Company's stockholders, creditors, customer or employees to the results of the review and restatement or delay in providing financial information and periodic reports; the impact and

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result of any litigation (including private litigation), or of any investigation by the Securities and Exchange Commission or any investigation by any other governmental agency related to the Company; the Company's ability to manage its operations during and after the financial statement restatement process; and the Company's ability to successfully implement internal controls and procedures that remediate any material weakness in controls and ensure timely, effective and accurate financial reporting. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those described herein as anticipated, believed, estimated or expected.

Forward-looking statements are based on management's current views and assumptions and involve known and unknown risks that could cause actual results, performance or events to differ materially from those expressed or implied in those statements.

GENERAL

We are engaged in continuing contract development and limited volume production, in both the United States and Germany, of large format lithium-ion rechargeable batteries used as power sources in advanced applications in the national security, transportation and stationary power markets. We have moved from a development and pilot-line production company to a small production business with our lithium-ion rechargeable batteries.

RESULTS OF OPERATIONS

NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO

NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2006

REVENUES FROM PRODUCTS SALES decreased by $473,000 or 19% to $2,024,000 in the nine months ended September 30, 2007 from $2,497,000 in the same period in 2006. For the three months period ended September 30, 2007 and 2006, revenues from product sales decreased by 24% or $262,000 from $1,105,000. The decrease in sales revenues is a result of some delays in projects that we were involved with and our focus on developing the iron-phosphate product line. As we are still in initial manufacturing stage enterprise, our mission continues to be to become a leading manufacturer of rechargeable lithium power solutions for advanced national security, transportation and stationary power applications. We can also license our technology and have the capability to enter into other collaborative efforts with third parties.

COST OF GOODS SOLD was $2,602,000 and $1,805,000 for the Nine months ended September 30, 2007 and 2006, respectively. For the three months periods ended September 30, 2006 and 2007, cost of goods sold increased from $546,000 to $1,034,000, respectively. We continue to look for cheaper sources of raw materials and more efficient production processes. We anticipate costs to decline substantially as we achieve larger economies of scale.

ENGINEERING, RESEARCH AND DEVELOPMENT EXPENSES during the nine months ended September 30, 2007 decreased by 11% to $2,320,000 from $2,603,000 in the same period in 2006. For the three months period ended September 30, 2007 and 2006, engineering, research and development expenses decreased by 33% from $1,034,000 to $690,000, respectively. These expenses are primarily from our advancement of technology in large high rate battery applications. These expenses relate to material consumed in the continued refinement of production process, as well as increased engineering and development time dedicated to advancement of manufacturing processes as well as time associated with the installation of new production equipment.

GENERAL AND ADMINISTRATIVE EXPENSES during the nine months ended September 30, 2007 decreased by $1,504,000 or approximately 28% to $3,930,000 from $5,434,000 in the same period in 2006. For the three months period ended September 30, 2007, general and administrative expenses decreased by 50% from $2,241,000 to $1,130,000 in the same period in 2006. This decrease is attributed to lower financing related efforts and costs and cost cutting measures.

SALES AND MARKETING EXPENSES were $318,000 for the nine months ended September 30, 2007 and $311,000 in the same period in 2006. For the three months period ended September 30, 2007 and 2006, sales and marketing expenses were $115,000 and $118,000, respectively. Sales and marketing expenses represent costs incurred from sales associates and participation in trade shows relating to the sale of cells and/or batteries.

DEPRECIATION AND AMORTIZATIONduring the nine months ended September 30, 2007 decreased by $762,000 or 52% to $693,000 from $1,455,000 in the same period in 2006. The decrease is mostly related to amortization of deferred financing costs, which was approximately $812,000 in the first nine months of 2006. For the three months period ended September 30, 2007 and 2006, depreciation and amortization expense was $235,000 and $355,000, respectively.

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INTEREST EXPENSE, NET OF INTEREST INCOME Interest expense, net of interest income for nine months ended September 30, 2007 decreased by $611,000 or 28% to $1,588,000 from $2,199,000 in the same period in 2006. For the three months period ended September 30, 2007, interest expense decreased by $701,000 to $252,000 from $953,000 in the same period in 2006. Interest expense mainly represents interest accrued on the loans from the European subsidiary debt financing, which was settled in the second quarter of 2007.

INTEREST EXPENSE RELATED TO BENEFICIAL CONVERSION Charge for beneficial conversion feature was $1,633,000 and $1,718,000, respectively, for the nine months ended September 30, 2007 and 2006. For the three months period ended September 30, 2007 and 2006, interest expense related to beneficial conversion was $58,000 and $7,000, respectively. For more information concerning this please refer to the Notes to Financial Statement contained herein.

DISCOUNT EXPENSE RELATED TO BENEFICIAL CONVERSION Charge for beneficial conversion feature with regards to the issuance of Series C Convertible Preferred share was $11,274,000 and $0, for the nine months ended September 30, 2007 and 2006, respectively. For the three months period ended September 30, 2007 and 2006, discount expense related to beneficial conversion was $137,000 and $0, respectively. For more information concerning this please refer to the Notes to Financial Statement contained herein.

WARRANTS EXPENSE Charges for warrants were $(16,242,000) and $2,096,000 in the nine months periods ended September 30, 2007 and 2006, respectively. For the three months period ended September 30, 2007 and 2006, warrant expenses related to warrant valuation were $(875,000) and $(91,000) for the respective periods. Warrants valuation is marked to market every reporting period using Black-Scholes valuation model. Fluctuation of the valuation of the warrants' liability are reflected in the Income Statement.

NET LOSS TO COMMON SHAREHOLDERS was $38,652,000 or $0.03 per share for the nine months ended September 30, 2007 as compared to a net loss of $11,058,000 or $0.02 per share for the nine months ended September 30, 2006. Net loss for common shareholders was $3,668,000 or $0.00 per share for the three months ended September 30, 2007 as compared to a net loss of $4,283,000 or $0.01 per share for the three months ended September 30, 2006.

ACCUMULATED DEFICIT Since inception, we have incurred substantial operating losses and expect to incur substantial additional operating losses over the next few years. As of September 30, 2007, our accumulated deficit was $133,988,000.

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LIQUIDITY AND FINANCIAL CONDITION

GENERAL

On September 30, 2006, cash and cash equivalents were $1,525,000. Total liabilities on September 30, 2006 were $30,979,000 consisting of all current liabilities. On September 30, 2006, assets included $1,154,000 in inventories, property and equipment, net, of $5,633,000, and prepaid expenses and other assets of $438,000. As of September 30, 2006, our working capital deficit was $27,536,000. On September 30, 2007, cash and cash equivalents were $279,000. Total liabilities on September 30, 2007 were $39,669,000 consisting of all current liabilities. On September 30, 2007, assets included $2,504,000 in inventories, property and equipment, net, of $7,134,000, and prepaid expenses and other assets of $348,000. As of September 30, 2007, our working capital deficit was $36,044,000 as compared to $27,528,000 at December 31, 2006. We expect to incur substantial operating losses as we continue our commercialization efforts.

Our debt and other liabilities as of September 30, 2007, December 31, 2006 and September 30, 2006 were as follows:

September 30, December 31, September 30,
2007 2006 2006
Current debt is summarized as follows:
July 2007 10% Convertible Deb., net of
discount $ 2,980,000 $ - $ -
March 2005 12% Convertible Deb., net of
discount - - 2,000,000
October 2005 8% Debenture, net of discount - 1,425,000 3,000,000
Portfolio Lenders II, LLC Convertible Note - - 200,000
8% Convertible Note - - 5,000
2006 GAIA and Dilo Debt Financing - 9,910,000 9,516,000
May 2006 12% Convertible Debenture, net of
discount 500,000 500,000 215,000
Loans From Financial Institutions 112,000 130,000 133,000
Silent Partner loans-TBG 2,189,000 2,027,000 1,946,000

Sub total current debt $ 5,781,000 $ 13,992,000 $ 17,015,000
Related party debt:
Subordinated Loans from related party $ 5,549,000 $ 4,665,000 $ 4,012,000
Promissory Notes 105,000 105,000 60,000

Sub total Related party debt $ 5,654,000 $ 4,770,000 $ 4,072,000

Warrant liability $ 21,789,000 $ 5,575,000 $ 4,119,000

Current Debt $ 33,224,000 $ 24,337,000 $ 25,206,000


For more detailed information on long-term liabilities, see Note 7 to our financial statements contained herein.

FINANCING TRANSACTIONS

We have financed our operations since inception primarily through equity and debt financings, loans from shareholders and other related parties, loans from silent partners and bank borrowings secured by assets. We have recently entered into a number of financing transactions and are continuing to seek other financing initiatives. We will need to raise additional capital to meet our working capital needs and to complete our product commercialization process. Such capital is expected to come from the sale of securities. No assurances can be given that such financing will be available in sufficient amounts or at all. If such financing is not available there can be no assurance that Arch Hill Capital or any other major shareholder will provide any further funding.

The following is a general description of our financing transactions through September 30, 2007. See also the Notes to Consolidated Financial Statements included with this Report.

JULY 2007 10% CONVERTIBLE DEBENTURE

On July 11, 2007, the European Subsidiaries Debt and accrued interest was satisfied with the payment of �6 million and the issuance of a Company convertible note in the principal amount of U.S. $3,247,106 (the "Convertible Note"). The Convertible Note is convertible into shares of Company common stock at $0.10 per share. The Convertible Note accrues interest at 10% per annum and is due and payable on September 1, 2008. The Company has the right to repay the Convertible Note at any time prior to maturity without penalty. The Convertible Note will be secured by 90 million shares of Company common stock. The Company did not pay any underwriting discounts or commissions in connection with the issuance of the Convertible Note in this transaction. Issuance of the Convertible Note was exempt from registration under Section 4(2) of the Securities Act. The Convertible Note was issued to an accredited investor in a private transaction without the use of any form of general solicitation or advertising. The underlying securities are "restricted securities" subject to applicable limitations on resale. As of September 30, 2007, December 31, 2006 and September 30, 2006, $3,247,106, 0, and 0 was outstanding under the convertible debenture, respectively. As of September 30, 2007, December 31, 2006 and September 30, 2006, accrued interest of $73,062, 0, and 0, respectively, was outstanding under the Convertible Note. Upon issuance the Company recorded a discount from beneficial conversion feature of $324,721 that is amortized over the life of the note using the effective interest method.

BRIDGE NOTES

The bridge notes were issued under a Bridge Financing Agreement, as amended, between LTC, Arch Hill Capital and related parties (the "Bridge Financing Agreement"). As of September 30, 2007 and 2006, $105,000 and $60,000 of advances were outstanding under the Bridge Financing Agreement, respectively. The Bridge Financing Agreement does not contain a maximum amount of funding that may be advanced under such Agreement. The amount of any additional notes provided will be related to the working capital requirements of the Company.

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OCTOBER 2005 8% CONVERTIBLE DEBENTURE (CORNELL CAPITAL)

On October 7, 2005, the Company entered into a securities purchase agreement with Cornell Capital pursuant to which the Company issued a convertible debenture in the principal amount of $3,000,000, with an original maturity date of October 1, 2006 and a conversion price of $0.06. The debenture was repayable in ten equal monthly installments with accrued interest at 8% per year commencing January 1, 2006 and ending October 1, 2006. Commissions to Cornell Capital in connection with this transaction included 7.5% cash compensation in the form of a discount to the purchase price of the debentures, or $225,000, and five-year warrants to purchase 20,000,000 shares of common stock at the following exercise prices: 10,000,000 at $0.06 per share, 5,000,000 at $0.07 per share and 5,000,000 at $0.10 per share (the "Warrants"). We also paid structuring fees to Yorkville Advisors Management of $10,000.

We entered into a pledge and escrow agreement pursuant to which we agreed to issue to Cornell Capital 250,000,000 shares of common stock in the event of default under the debenture as security for our obligations thereunder. We also granted Cornell Capital a security interest in the assets of LTC. In the event of default, Cornell Capital, in addition to any other remedies, may convert any or all of the outstanding principal of the debentures into common stock at a fixed conversion price equal to $0.0128 per share.

The Cornell Capital debenture was recorded using the guidance of EITF No. 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments", which involved allocation of the proceeds received between the convertible debenture and the warrants issued to the debenture holder. The Company measured the intrinsic value of the embedded conversion option using guidance of EITF No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios". The value of the beneficial conversion is recorded as a discount on the debt with the offset to additional-paid-in capital and has been amortized to interest expense using the effective interest method.

On January 31, 2006, we entered into an amendment of the debenture (the "First Amendment") which provided that all payments of principal and accrued interest on the Debenture otherwise due on or before March 15, 2006 were due on March 15, 2006. The First Amendment also provided that in the event we close on any debt or equity financing, we must use fifty percent of the proceeds of the new financing (net of placement fees and commissions) to repay principal and interest outstanding under the Debenture. The First Amendment further provided that in the event we did not repay all outstanding principal and accrued interest on the Debenture on March 15,2006, (i) we must repay $900,000 of principal and accrued interest on March 15, 2006 and repay the balance of the outstanding principal and interest on the Debenture over seven equal payments commencing April 1, 2006 until October 1, 2006, and (ii) the exercise price of the 20,000,000 Warrants would be reduced to $0.0128 on a pro-rata basis in relation to the amount of principal of the Debenture not repaid by us as of March 15, 2006. The First Amendment also provided that at any time prior to March 15, 2006 we could at our option with three business days advance written notice redeem a portion or all amounts outstanding under the Debenture in an amount equal to the principal amount outstanding and accrued interest being redeemed. No redemption premium was due by us for redemption of the Debenture prior to March 15, 2006. The Debenture was not convertible from January 31, 2006 through March 15, 2006 provided we were current on our payment obligations under the Debenture.

In the First Amendment we amended the provision that was contained in the registration rights agreement entered into in connection with the debenture modifying the date by when we must file a registration statement covering the shares of our common stock issuable upon conversion of the debenture and upon exercise of the warrants with the Securities and Exchange Commission by January 6, 2006, and to provide that such registration statement must be filed on or before February 10, 2006. We filed such registration statement on February 3, 2006.

In consideration of the First Amendment of the debenture and related agreements, we paid Cornell Capital a fee of $100,000.

On March 21, 2006, we entered into a second amendment with Cornell Capital (the "Second Amendment") whereby we amended the following provisions of the Debenture. All payments of principal and accrued interest on the Debenture otherwise due on or before March 15, 2006 are due on June 15, 2006. In the event we close on any debt or equity financing we must use fifty percent (50%) of the proceeds of the new financing (net of placement fees and commissions) to repay principal and interest outstanding under the Debenture. In the event we do not repay all outstanding principal and accrued interest on the Debenture on June 15, 2006, we must repay $1,800,000 of principal and accrued interest on June 15, 2006 and repay the balance of the outstanding principal and interest on the Debenture over four equal monthly payments commencing July 1, 2006 until October 1, 2006.

The Second Amendment further provides that Debentures are convertible from March 21, 2006 with four business days advance written notice (the "Advance Conversion Notice") after June 15, 2006, the Debentures are convertible without delivery of an Advance

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Conversion Notice. The conversion price of the Debenture is reduced from $0.06 to $0.03 and per share provided, however, if there is an Event of Default under the Debenture the conversion price will be reduced to $0.0128. At any time from March 21,2006, including after receipt of an Advance Conversion Notice and before the expiration of the four business day advance notice period, we may, at our option, redeem a portion or all amounts outstanding under the Debenture in an amount equal to the principal amount outstanding and accrued interest being redeemed and a payment of a premium by us equal to fifteen percent (15%) of the redemption amount subject to two (2) business days' advanced written notice for any redemption on or before June 15, 2006 and subject to three (3) business days' advanced written notice for any redemption after June 15, 2006.

In the Second Amendment, we amended the Warrants as follows. The Warrants will be exercisable to purchase an additional 20,000,000 shares of common stock for a total of 40,000,000 shares. The exercise price of the 40,000,000 Warrant Shares is $0.03 per share, provided, however that in the event we do not repay all outstanding principal and accrued interest on the Debenture on June 15, 2006, then on June 15, 2006 the exercise price of the Warrants will be reduced to $0.0128 on a pro-rata basis in relation to the amount of principal of the Debenture not repaid by us as of June 15, 2006. (By way of example, if $1,500,000 in principal of the Debenture has not been repaid by us by June 15, 2006, the exercise price of 50% of the Warrants shall be reduced to $0.0128 per share and the exercise price of the remaining 50% of the Warrants shall remain at $0.03 per share.)

In the Second Amendment we amended the provision that was contained in the Registration Rights Agreement, as amended, entered into in connection with the Debenture. We must file an amendment to the registration statement covering the shares of our common stock issuable upon conversion of the Debenture and Warrants with the Securities and Exchange Commission by April 20, 2006.

On November 9, 2006, the Board of Directors of the Company approved a third letter of amendment with Cornell Capital effective as of October 31, 2006 (the "Third Amendment") whereby the Company amended the following provisions of the Debenture and the Warrants. All payments of principal and accrued interest on the Debenture otherwise due on or before March 15, 2006 are due on or before March 1, 2007. The conversion price at which Cornell Capital may convert the outstanding principal and interest due to Cornell Capital under the Debenture into shares of the Company's common stock is reduced to $0.0128. The Warrants are amended to provide that the exercise price is reduced to $0.0128 per share. The balance due and owing under the Debenture as of October 31, 2006 was $3,257,096. In the Third Amendment the Company also agreed to pay Cornell Capital a forbearance fee of $375,000.

The Third Amendment also provides that: (i) the Company shall become current by February 1, 2007 on its required SEC periodic reporting filings; (ii) the Company shall obtain listing on the Over the Counter Bulletin Board (the "OTC BB") by March 1, 2007; (iii) the Company shall seek and receive an extension or deferral, in writing by December 15, 2006, of its obligation to repay the approximately $9.5 million in debt due in December 2006, until March 1, 2007; and (iv) Cornell Capital may not exercise its right to conversion under the Secured Debenture unless (a) the price of the Company's common stock is equal to or greater than $0.03 per share; or (b) the Company breaches any condition or requirement under the Third Amendment.

As of September 30, 2007, December 31, 2006 and September 30, 2006 $0, $3,000,000 and $3,000,000 were outstanding under the debenture, respectively.

The October 2005 Debenture was settled in five tranches in May and June of 2007. Settlement of the debenture consisted of issuance of a total of 77,228,495 shares of common stock and payment of $2,011,475 plus approximately $770,000 cash payment of accrued interest.

The Company recorded the conversions by debiting the note payable and crediting the common stock at par value with the balance of the credit recorded in additional paid in capital. The Company applied the accounting guidance of SFAS
140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities - A Replacement of FASB Statement 125" to account for the settlement of the transaction.

2006 GAIA AND DILO DEBT FINANCING

GAIA and Dilo Trading AG ("Dilo Trading"), subsidiaries of the Company, closed bridge financings with a European lender for a total of Euros 7.5 million (approximately $9.5 million upon issuance). The loan principal and accrued interest is due and payable on December 31, 2006. The loans are secured by a pledge of all of the assets of GAIA and Dilo Trading. The nonconvertible note bears an annual interest of 20%.

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A portion of the proceeds was used to repay the mortgage on the GAIA facility in Nordhausen, Germany and to repay existing loans on GAIA equipment. The remaining proceeds were used for the purchase of machinery and equipment to increase the production of lithium-ion cells and batteries in Germany, for working capital and partial repayment of debt.

MAY 2006 12% CONVERTIBLE DEBENTURES

On May 4, 2006, the Company sold $500,000 of equity units (the "2006 Units") in a private placement. The 2006 Units consist of (i) a 12% convertible debenture in the principal amount of $500,000 (the "12% Debentures"), (ii) 500,000 warrants to purchase Company common stock at an exercise price of $0.20 per share (the "0.20 Warrants"), (iii) 500,000 warrants to purchase Company common stock at an exercise price of $0.25 per share (the "0.25 Warrants"),
(iv) 1,000,000 warrants to purchase $0.10 per share (the "0.10 warrants"), and
(v) 250,000 warrants to purchase Company common stock at an exercise price equal to the Conversion Price (as defined below) of the 12% Debentures (the "Conversion Price Warrants"). The 12% Debentures are entitled to receive a 12% annual interest payment payable semi-annually at the option of the Company in . . .