SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
Quarterly Report Under Section 13
of the Securities Exchange Act of 1934
For the quarter ended July 31, 1998
Commission file number 0-24083
AMERICAN QUANTUM CYCLES, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2651232
- ------------------------------- ---------------------
(State or other jurisdiction of ( I.R.S. Employer
incorporation or organization) Identification number)
731 Washburn Road
Melbourne, Florida 32934
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 752-0008
---------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ____
Common stock outstanding at September 1, 1998 was 2,827,545 shares.
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
July 31, 1998 April 30, 1998
------------- --------------
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents $ 116,035 $ 48,768
Accounts receivable - trade (Note 8) 2,726,958 35,602
Inventory - raw materials (at FIFO) 330,097 682,575
Inventory - work in process 724,417 66,796
Inventory - finished goods 13,787 13,787
Prepaid expenses and other current assets 34,936 39,308
-------------------- --------------------
Total current assets 3,946,230 886,836
Property and equipment, net 1,081,850 587,013
Patents and licenses, net (Note 4) 345,750 349,667
Other assets 41,767 40,700
-------------------- --------------------
Total Assets $ 5,415,597 $ 1,864,216
==================== ====================
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Liabilities
Current liabilities
Accounts payable - trade $ 1,485,714 $ 370,658
Accrued compensation 6,250 21,921
Notes payable - bridge loan (Note 6) 700,000 650,000
Convertible debentures - 8% (Note 7) 1,579,500 1,524,500
Convertible debentures - 7% (Note 7) 699,500 143,000
Deferred income (Note 8) 2,857,972 0
Other accrued expenses and current liabilities 550,338 295,182
-------------------- --------------------
Total current liabilities 7,879,274 3,005,261
Long term liabilities
Capitalized leases (Note 5) 85,905 99,604
Notes payable - bank 25,802 27,074
Notes payable - other 32,034 35,487
-------------------- --------------------
Total long term liabilities 143,741 162,165
-------------------- --------------------
Total Liabilities 8,023,015 3,167,426
-------------------- --------------------
Stockholders' Equity
Preferred stock - $.001 par value; 2,500,000
shares authorized; no shares issued 0 0
Common stock - $.001 par value; 50,000,000
shares authorized; 2,827,545 shares and
2,471,045 shares issued and outstanding 2,828 2,471
Capital in excess of par value 1,750,895 1,328,664
Retained earnings (deficit) (4,361,141) (2,634,345)
-------------------- --------------------
Total stockholders' equity (deficit) (2,607,418) (1,303,210)
-------------------- --------------------
Total Liabilities & Stockholders' Equity $ 5,415,597 $ 1,864,216
===================== ====================
</TABLE>
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended
July 31, 1998 July 31, 1997
------------------------ -----------------------
<S> <C> <C>
Net sales of tangible goods $ 168,024 $ 0
Cost of goods sold 275,193 0
------------------------ -----------------------
Gross profit (deficit) (107,169) 0
Selling, general and administrative expenses 1,231,745 212,162
---------------------- -----------------------
Operating profit (deficit) (1,338,914) (212,162)
Other income (expense):
Interest expense (507,709) 0
Other income (Note 9) 1,494 4
------------------------ -----------------------
Net Operating Loss $ (1,726,796) $ (212,158)
======================== =======================
Weighted average shares outstanding 2,649,295 745,858
======================== =======================
Loss per common share $ (0.652) $ (0.284)
======================== =======================
</TABLE>
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended
July 31, 1998 July 31, 1997
--------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,726,796) $ (212,158)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 46,950 0
Changes in assets and liabilities:
Receivables 166,616 30,100
Inventories (305,143) (240,379)
Prepaid expenses and other 3,305 0
Accounts payable 1,115,056 25,827
Other accrued expenses and current liabilities 239,485 6,202
---------------------- ---------------------
Net cash used by operating activities (460,527) (390,408)
Cash flows from financing activities:
Loan proceeds 50,000 200,000
Convertible debenture proceeds 611,500 475,090
Retirement of prior debt 0 (175,000)
Payment of loan principal (18,423) 0
Net capital and stock changes 422,588 113,868
---------------------- ---------------------
Net cash provided by financing activities 1,065,665 613,958
Cash flows from investing activities:
Additions to property and equipment (537,871) (183,764)
Additions to intangible assets (Note 4) 0 (235,000)
---------------------- ---------------------
Net cash used by investing activities (537,871) (418,760)
---------------------- ---------------------
Net (decrease) increase in cash 67,267 (195,210)
Cash at beginning of period 48,768 244,985
---------------------- ---------------------
Cash at end of period $ 116,035 $ 49,775
====================== =====================
</TABLE>
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Notes to Condensed Financial Statements
(Unaudited)
(1) Basis of Presentation, General and Business
-------------------------------------------
American Quantum Cycles, Inc. ("The Company") is a development stage company
that designs, produces, markets, distributes and sells American-made, high
performance V-twin engine cruiser and touring style motorcycles. These
motorcycle products include stock models and motorcycles built to customer
specified configurations. The Company was originally incorporated on March 20,
1986 as "Norbern, Inc." and was inactive until March 1997 when it began
developing and implementing its business and financing plans. On May 8, 1997 the
Company changed its name to American Quantum Cycles, Inc. and its fiscal year
end to April 30.
The accompanying interim financial statements are prepared in accordance with
the instructions to Form-10QSB, are unaudited and do not include all the
information and disclosures required by generally accepted accounting principles
for complete financial statements. All adjustments that, in the opinion of
management, are necessary for a fair presentation of the results of operations
for the interim periods have been made and are of a recurring nature unless
otherwise disclosed herein. The results of operations for such interim periods
are not necessarily indicative of results of operations for a full year.
(2) Concentration of Credit Risk
----------------------------
The Company occasionally maintains deposits in excess of federally insured
limits. Statement of Financial Accounting Standards No, 105 identifies these
items as a concentration of credit risk requiring disclosure, regardless of the
degree of risk. The risk is managed by maintaining all deposits in high quality
financial institutions.
(3) Transition from Development Stage Company to Production
-------------------------------------------------------
The Company is in the process of transitioning from a development stage company
into full production ramp-up. The Company has been engaged in various activities
necessary for this transition including entering into dealership agreements, a
technology license agreement (see Note 4), employment agreements with key
executives, leasing and upgrading facilities, purchasing supplies and equipment,
and hiring and training employees. While the Company anticipates that the
current fiscal year ending April 30, 1999 will have deficit earnings, the fourth
quarter of the current year is expected to be profitable. Except for the
historical information contained herein, the matters set forth in this Form
10-QSB are forward looking and involve a number of risks and uncertainties.
Results of operations in the future will be influenced by numerous factors
including technological developments, competition, regulation, increases in
expenses associated with sales growth, market acceptance of the products of the
Company, the capacity of the company to expand and maintain the quality of its
motorcycles and related services, continued development of the dealer
organization, favorable sourcing of supplies, recruitment of highly skilled
employees and integration of such persons into a cohesive organization, and the
ability of the Company to raise funds and control costs.
(4) Patents and Licenses
--------------------
In August 1997, the Company entered into a license agreement (the "Agreement")
with Feuling whereby the Company, as licensee, obtained a license to use certain
proprietary technologies including among
<PAGE>
other things, patents trade secrets, techniques, tooling designs, product
designs, and trademarks. Pursuant to the terms of the Agreement, so long as the
Company complies with certain other provisions including non-disclosure of the
proprietary technology, the Company has an exclusive license, for motorcycle
applications, in perpetuity for the 4-Valve technology. This technology will be
used in connection with the Company motorcycles and bolt-on kits for the Harley
Davidson motorcycles which feature the evolution engine, evolution big twin,
other Harley Davidson clones and aftermarket parts.
(5) Capitalized Leases
------------------
The Company has executed capital leases with Nations Commercial Credit
Corporation for purchasing manufacturing and production equipment, and for
computer equipment to expand and improve the Company's network infrastructure.
All leases provide a $1 purchase buy-out provision at the end of the term of the
lease.
(6) Bridge Loan Financing
---------------------
Notes payable consist of nine (9) unsecured promissory notes dated March 30,
1998 to individuals providing bridge loan financing. The principal aggregate is
$700,000 with interest payable at 10% at maturity on September 30, 1998. The
Company also contracted to issue a total of 142,000 shares of common stock to
these individuals at maturity in order to obtain a favorable interest rate and
repayment terms. Loan costs are expensed as incurred.
(7) Convertible Debentures
----------------------
As part of its equity funding and financing, the Company has issued two separate
series of convertible notes to investors:
Beginning in October 1997, the Company issued thirty-four (34) 8%
Subordinated Notes, for an aggregate of $1,579,500. The notes mature one year
from date of issue, convertible at $2.00 per share, with no warrants attached.
Interest is convertible at the same rate as the principal, at the discretion of
the note holder.
Beginning in April 1998, the Company issued twenty-nine (29) 7%
Subordinated Notes, for an aggregate of $699,500. The notes mature one year from
the date of issue, convertible at $8.00 per share. Interest is payable in cash
or convertible at the same rate as the principal, at the discretion of the
Company. A warrant is attached at 10% above the final price of a secondary
offering.
(8) Recognition of Income
---------------------
Orders received from the Company's dealers are booked as received in Accounts
Receivable, with an offset in Deferred Income. As the motorcycle proceeds
through the production process, revenue is recognized based on "percentage of
completion."
(9) Other Income
------------
To maximize the use of cash on a short-term basis, the Company participates in
Treasury Management Services with NationsBank. Cash in the Company checking
account is swept out each night, invested for earnings, and swept back in the
next morning. The Company receives dividend earnings on the nightly use of the
cash each month, which is reflected on the Statements of Operations of the
Company.
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
Management's Discussion, Analysis and Plan of Operation
Results of Operation
- --------------------
The Company is in the process of transitioning from a development stage company
into full production. The Company was originally incorporated on March 20, 1986
as "Norbern, Inc." and was inactive until March 1997 when it began developing
and implementing its business and financing plans. On May 8, 1997 the Company
changed its name to American Quantum Cycles, inc. and its fiscal year end to
April 30.
As the Company was inactive prior to March 1997, there was no income and only
incidental supply costs and the accrued interest expense from seven promissory
notes totaling $250,000 in principal. The fiscal year ended April 30, 1997 had a
deficit carried forward of ($2,634). During the fiscal year ended April 30, 1998
the Company's efforts have been principally devoted to research, development and
design of products, marketing activities and raising capital, and has sustained
cumulative losses of ($2,634,345). These losses have resulted primarily from
expenditures for general and administrative activities, including salaries and
professional fees for outside services in the amount of $1,164,291, travel and
marketing expenses of $457,590, and accrued interest expense of $187,232 from
the bridge loan and convertible debentures issued.
The Company sustained continuing losses in the first quarter of this fiscal year
in the amount of ($1,726,796). These losses include $1,231,745 in general and
administrative activities, representing significant increases in personnel and
the outside professional services necessary for production ramp-up, and $507,709
in accrued interest expense.
Revenues in the fiscal year ended April 30, 1998 of $192,856 resulted from the
sale of the initial ten motorcycles produced plus some after-market 4-Valve
engine parts. An additional eight motorcycles were produced, of which two were
used for engineering and regulatory testings, and the remaining six are used for
marketing purposes. An additional 14 motorcycles have been produced during this
fiscal year to-date, and an additional 180 motorcycles have been booked into
production slots from 24 dealers. The Company expects after-market 4-Valve
engine and part sales to increase significantly during this fiscal year.
While the Company anticipates that the current fiscal year ending April 30, 1999
will have deficit earnings, the fourth quarter of the current year is expected
to be profitable. Results of operations in the future will be influenced by
numerous factors including technological developments, competition, regulation,
increases in expenses associated with sales growth, market acceptance of the
products of the Company, the capacity of the company to expand and maintain the
quality of its motorcycles and related services, continued development of the
dealer organization, favorable sourcing of supplies, recruitment of highly
skilled employees and integration of such persons into a cohesive organization,
and the ability of the Company to raise funds and control costs.
Liquidity and Capital Resources
- -------------------------------
As part of its equity funding and financing, the Company has issued two separate
series of convertible notes to investors:
Beginning in October 1997, the Company issued thirty-four (34) 8%
Subordinated Notes, for an aggregate of $1,579,500. The notes mature one year
from date of issue, convertible at $2.00 per share, with no warrants attached.
Interest is convertible at the same rate as the principal, at the discretion of
the note holder.
<PAGE>
Beginning in April 1998, the Company issued twenty-nine (29) 7%
Subordinated Notes, for an aggregate of $699,500. The notes mature one year from
the date of issue, convertible at $8.00 per share. Interest is payable in cash
or convertible at the same rate as the principal, at the discretion of the
Company. A warrant is attached at 10% above the final price of a secondary
offering.
Also, notes payable consist of nine (9) unsecured promissory notes dated March
30, 1998 to individuals providing bridge loan financing. The principal aggregate
is $700,000 with interest payable at 10% at maturity on September 30, 1998. The
Company also contracted to issue a total of 142,000 shares of common stock to
these individuals at maturity in order to obtain a favorable interest rate and
repayment terms. Loan costs are expensed as incurred.
The proceeds from the Company's fund raising efforts have been used for
investment in inventory, equipment, licenses and intellectual rights for an
aggregate out-lay during the fiscal year ended April 30, 1998 of $978,182 and to
supply working capital for the Company's operations to-date.
Plan of Operation
- -----------------
The Company projects significant investments in plant and people which will
support a significant ramp-up in monthly production of motorcycles and engines
during the next twelve months. Investment in plant includes manufacturing
equipment, materials handling equipment along with computer hardware and
software (enterprise resource planning software including integration with the
Company's Dealer oriented Intranet). During this same period, the Company's
headcount (number of full time employees) is projected to increase from 44 to
over 70. Most of the increase in headcount will be in production and key support
functions such as quality control, procurement and inventory management.
During the remainder of calendar year 1998 the Company anticipates producing 300
additional motorcycles. This projection is based on a plan to ramp production
through refinement of the assembly process and investment in jigs, fixtures and
material handling equipment such as pneumatic hoists, lifts and conveyor belts.
The total monthly production is projected to increase from 30 to 120 in November
with the addition of a second assembly line and starting two shift operations.
Production is projected to be increased to 188 per month from January through
April 1999.
The Company will invest in the research and development of two new product lines
during the next twelve months: a Touring motorcycle and a 96 cubic inch engine.
The Touring motorcycle will be a second product line to the existing Cruiser
model and will include saddle bags and windshields/fairings. The Touring
motorcycle is targeted at one of the fastest growing market segments. The 96
cubic inch engine will use the same 4-Valve technology as the Company's present
88 cubic inch engine. With the larger displacement, the Company projects an
increase in peak horsepower in the 10-20% range which should maintain the
Company's competitive position in engine price/performance. Neither the Touring
motorcycle nor the 96 cubic inch engine are required product introductions in
the next twelve months in order to achieve the Company's business plan and
financial objectives.
Equity investments will be raised during the next twelve month period to support
these investments and provide the operating capital to reach cash-positive
operations. A Private Placement Memorandum (PPM) is planned for October 1998
which is projected to raise a minimum of $5 million. A public secondary offering
is planned for mid-fiscal year 2000 which is projected to raise a minimum of $25
million. A minimum of $8 million will be needed to fund the investments and
support operational cash flow needs (e.g. procurement of parts for production)
in order for the Company to accomplish its business plan goals and objectives
for FY 98/99.
<PAGE>
AMERICAN QUANTUM CYCLES, INC.
PART II
Other Information
Item 1. Legal Proceedings - None
-----------------
Item 2. Changes in Securities - None
---------------------
Item 3. Defaults upon Senior Securities - None
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders - None
---------------------------------------------------
Item 5. Other Information - None
-----------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the
three months ended July 31, 1998.
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned as both a duly authorized officer and as the principal financial
officer by the Registrant.
AMERICAN QUANTUM CYCLES, INC.
Date: September 22, 1998 By: /s/ Richard K. Hagen
------------------ ---------------------
Richard K. Hagen
Chairman of the Board of Directors,
Chief Executive Officer,
Chief Financial Officer and President
Officer of Registrant
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 116,035
<SECURITIES> 0
<RECEIVABLES> 2,726,958
<ALLOWANCES> 0
<INVENTORY> 1,068,301
<CURRENT-ASSETS> 3,946,230
<PP&E> 1,187,370
<DEPRECIATION> 105,520
<TOTAL-ASSETS> 5,415,597
<CURRENT-LIABILITIES> 7,879,274
<BONDS> 0
0
0
<COMMON> 2,828
<OTHER-SE> 1,750,895
<TOTAL-LIABILITY-AND-EQUITY> 5,415,597
<SALES> 168,024
<TOTAL-REVENUES> 169,518
<CGS> 275,193
<TOTAL-COSTS> 1,506,938
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 507,709
<INCOME-PRETAX> (1,726,796)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,726,796)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,726,796)
<EPS-PRIMARY> (0.652)
<EPS-DILUTED> (0.471)
</TABLE>
