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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 1996.
Commission File Number 0-24248
AMERICAN TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 87-0361799
(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
12725 Stowe Drive, Poway, California, 92064
(Address of principal executive offices)
(619) 679-2114
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 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
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
<TABLE>
<CAPTION>
Common Stock, $.00001 par value 7,541,228
- ------------------------------- ---------
<S> <C>
(Class) (Outstanding at July 15, 1996)
</TABLE>
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AMERICAN TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of June 30, 1996 and
September 30, 1995 (unaudited) 3
Statements of Operations for the three and nine months ended
June 30, 1996 and 1995 4
Statements of Cash Flows for the nine months ended
June 30, 1996 and 1995 5
Notes to Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION 9
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
</TABLE>
* No information provided due to inapplicability of the item.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN TECHNOLOGY CORPORATION
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 30, September 30,
1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash $ 65,904 $ 58,903
Investment securities 254,589 491,250
Trade accounts receivable - net 55,459 113,292
Inventories 265,842 285,375
Prepaid expenses 2,852 9,362
----------- -----------
Total current assets 644,646 958,182
EQUIPMENT -NET 66,357 103,633
PURCHASED TECHNOLOGY - NET 45,000 60,000
OTHER ASSETS - PATENTS 22,925 --
----------- -----------
$ 778,928 $ 1,121,815
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit $ 25,000 $ 25,000
Accounts payable and accrued liabilities 180,839 358,826
Deferred income taxes -- 10,000
----------- -----------
Total current liabilities 205,839 393,826
LONG-TERM DEBT (NOTE 6) 320,000 144,584
----------- -----------
Total liabilities 525,839 538,410
STOCKHOLDERS' EQUITY:
Common stock $.00001 par value; authorized
20,000,000 shares; 7,541,228 and 7,291,228 shares
issued and outstanding, respectively 75 73
Additional paid-in capital 1,692,803 1,567,805
Accumulated deficit (1,694,175) (1,465,489)
Net unrealized gain on securities available for sale 254,386 481,016
----------- -----------
Total stockholders' equity 253,089 583,405
----------- -----------
$ 778,928 $ 1,121,815
=========== ===========
</TABLE>
See notes to interim financial statements.
3
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AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales $ 67,738 $ 431,611 $ 732,625 $1,471,828
Cost of goods sold 62,327 310,666 602,290 1,111,416
---------- ---------- ---------- ----------
GROSS PROFIT 5,411 120,945 130,335 360,412
OPERATING EXPENSES:
Selling, general and administrative 116,152 125,679 328,970 479,786
Research and development 28,259 41,746 79,212 251,471
---------- ---------- ---------- ----------
Total operating expenses 144,411 167,425 408,182 731,257
---------- ---------- ---------- ----------
Loss from operations (139,000) (46,480) (277,847) (370,845)
OTHER INCOME (EXPENSES):
Gain on sale of investment securities -- 71,078 55,019 71,078
Interest expense (5,477) (2,719) (10,672) (7,372)
Other -- 100 4,814 5,141
---------- ---------- ---------- ----------
Total other income (5,477) 68,459 49,161 68,847
---------- ---------- ---------- ----------
Income (loss) before taxes on income (144,477) 21,979 (228,686) (301,998)
Taxes on income -- -- -- --
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (144,477) $ 21,979 $ (228,686) $ (301,998)
========== ========== ========== ==========
NET INCOME (LOSS) PER SHARE
OF COMMON STOCK $ (0.02) $ Nil $ (0.03) $ (0.04)
========== ========== ========== ==========
AVERAGE WEIGHTED NUMBER OF
COMMON SHARES OUTSTANDING 7,541,228 7,291,228 7,402,542 7,291,228
========== ========== ========== ==========
</TABLE>
See notes to interim financial statements.
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AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(228,686) $(301,998)
Adjustments to reconcile net income (loss)
to cash used in operating activities:
Gain on sale of investment securities (55,019) (71,078)
Amortization and depreciation 56,675 57,199
Gain on sale of equipment (4,758) --
Changes in operating assets and liabilities:
Prepaid expenses 6,510 24,078
Trade accounts receivable 57,833 49,230
Inventories 19,533 24,538
Accounts payable and accrued expenses (177,987) 106,688
Accrued interest on long-term debt 6,204 6,980
--------- ---------
Net cash used in operating activities (319,695) (104,363)
INVESTING ACTIVITIES:
Proceeds received from sale of
investment securities 55,050 71,078
Proceeds from sale of equipment 4,605 --
Purchase of other assets (22,925) --
Purchase of equipment (4,246) (117,091)
--------- ---------
Net cash provided by (used in) investing activities 32,484 (46,013)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 125,000 --
Proceeds from convertible debentures 220,000
Reduction of note payable - shareholder (Note 6) (50,788)
Proceeds from bank line of credit 25,000 25,000
Payment on bank line of credit (25,000) --
--------- ---------
Net cash provided by financing activities 294,212 25,000
--------- ---------
Increase (decrease) in cash 7,001 (125,376)
CASH, BEGINNING OF PERIOD 58,903 223,441
--------- ---------
CASH, END OF PERIOD $ 65,904 $ 98,065
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ 8,539 $ 392
Income taxes -- $ 9,322
Issuance of convertible note in exchange
for shareholder debt $ 100,000 $ --
</TABLE>
See notes to interim financial statements.
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AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
1. OPERATIONS
American Technology Corporation is engaged in the development, manufacture and
marketing of electronic products and technologies.
2. STATEMENT PRESENTATION
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. They do not include all information and footnotes required by
generally accepted accounting principles. The interim financial statements and
notes thereto should be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended September 30, 1995.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. Operating results for the three month and nine
month periods are not necessarily indicative of the results that may be expected
for the year.
3. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method. Inventories consist of the following at
June 30, 1996:
<TABLE>
<S> <C>
Finished goods $ 21,249
Work in process 152,025
Raw materials 92,568
--------
$265,842
========
</TABLE>
4. INVESTMENT SECURITIES
The Company's investment securities consists of 225,300 shares of Norris
Communications Corp. ("Norris") common stock, an affiliated corporation. These
securities are reported at fair value as a current asset with unrealized gains
and losses reported as a net amount as a separate component of stockholders'
equity. At June 30, 1996 the Company's market value of available for sale
securities consisted of:
<TABLE>
<CAPTION>
Gross Estimated
Unrealized Fair
Cost Gains Value
---- ---------- ---------
<S> <C> <C> <C>
Common stock $203 $254,386 $254,589
</TABLE>
5. LINE OF CREDIT
The Company has a $40,000 bank line of credit secured by receivables, inventory
and other assets. At June 30, 1996 the Company had $25,000 outstanding on the
line of credit.
6. LONG-TERM DEBT
Long-term debt consists of $320,000 of unsecured 8% convertible subordinated
notes due May 31, 1999. Interest is payable quarterly. The notes are convertible
into common stock at $1.00 per share.
A total of $220,000 represented cash proceeds obtained by the Company during the
third fiscal quarter. A total of $100,000 of the notes is due to a
stockholder/director representing the balance of an 8% note that was due October
1, 1996 and was refinanced (after a $50,788 cash principal and accrued interest
reduction) on the same terms as new note holders.
7. STOCKHOLDERS' EQUITY
In February 1996 the Company completed a private placement of 250,000 common
shares for proceeds of $125,000. In connection with the placement the Company
granted the purchasers warrants to purchase 250,000 common shares at $0.50 per
share until February 23, 1999.
In connection with the issuance of convertible debt (Note 6) the Company granted
warrants to purchase 320,000 common shares at $1.00 per share until May 31,
1998.
At June 30, 1996 the Company had 844,167 options outstanding pursuant to its
1992 ISO Stock Option Plan execrable at prices ranging from $0.50 to $1.59 per
share expiring beginning 1996 through 2001. The Company also had 939,000 options
outstanding pursuant to its 1992 NSO Stock Option Plan exercisable at prices
ranging from $0.50 to $1.59 per share expiring beginning 1996 through 2001.
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8. INCOME TAXES
At June 30, 1996 a valuation allowance has been provided to offset the net
deferred tax asset as the Company was unable to determine that it is more likely
than not that the deferred tax asset will be realized. The Company has for
federal income tax purposes net operating loss carryforwards of approximately
$1,370,000 which expire through 2009 of which certain amounts are subject to
limitations under the Internal Revenue Code of 1986, as amended. As a result of
the net loss and loss carryforward, no provision for income taxes has been
provided for the period ended June 30, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
From 1988 to early 1992 the Company was inactive. In early 1992 the Company
commenced its current business activities. Although the Company owns several
technologies, initial efforts concentrated on developing and producing patented
electronic ear-radios of which the FM version was introduced in September 1993
and the AM version in July 1995.
The Company is planning the introduction of additional products and accessories.
The Company also is conducting research and development on various technologies
in development including its GPS (Global Positioning System) and sound
reproduction technologies. The introduction of new products and accessories and
the continuation of research will require additional funds to be generated from
operations, additional sales of the Norris stock, the sale of additional Company
debt or equity or from other sources. There can be no assurance additional
funding will be available in the future.
Demand for the Company's ear-radios is subject to significant month to month
variability resulting from the limited marketing penetration achieved to date by
the Company. Initial sales have been concentrated on a limited number of
customers and there can be no assurance of future orders from these or new
customers. The markets for the Company's product and proposed products are
subject to rapidly changing customer tastes and a high level of competition.
Demand for the Company's products is influenced by demographic trends in
society, marketing and advertising expenditures, product positioning in retail
outlets, technological developments and general economic conditions. Because
these factors can change rapidly, customer demand can also shift quickly. The
Company may not be able to respond to changes in customer demand because of the
time to change or introduce products, production limitations and because of
limited financial resources.
RESULTS OF OPERATIONS
Net sales for the nine months ended June 30, 1996 were $732,625, substantially
all from ear-radio sales. Net sales for the comparable nine months ended June
30, 1995 were $1,471,828. The stronger results in the prior year included
initial seasonal and opening stocking orders for the FM radio and large orders
from a few customers. The Company has encountered foreign competition for its
primary FM radio product, which due to the Company's U.S. patent, has primarily
impacted foreign sales which decreased from 50% of sales in the prior period to
30% in the current nine month period. The Company has responded by (1)
contracting off-shore assembly to reduce production costs and (2) reducing
prices to remain competitive for foreign accounts. These factors have also
required reduced prices for U.S. customers. Net sales for the three months ended
June 30, 1996 were $67,738 compared to $431,611 for the comparable period of the
prior year. In addition to the above factors, the sales in the third fiscal
quarter of 1995 included large stocking orders from new customers.
Management believes it has successfully completed the transition to off-shore
assembly of the current version of its FM radio which has reduced per unit costs
and reduced working capital requirements for parts and labor due to terms
obtained from the manufacturer. However, reliance on off-shore production
imposes certain risks including delays, shortages and quality issues. The
Company is focusing its strategy on increasing its marketing and sales efforts
in North America and overseas and believes it can be competitive on the factors
of price, terms and quality. The Company's manufacturing strategy is to
prototype and produce initial quantities of product in the U.S. (e.g. AM radio)
and thereafter arrange for off-shore contract assembly to reduce costs (e.g. FM
radio).
Product orders in the first nine months of fiscal 1996 were spread across a
larger number of customers. The Company's sales have been concentrated on one
product, the FM ear-radio and in addition to the above are affected by a variety
of factors including seasonal requirements of customers. The Company has been
expanding its radio distribution to limit the exposure to particular customers
and to seasonality. The Company anticipates increased sales in the fourth fiscal
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quarter as compared to the third fiscal quarter of the current year but sales
are expected to be less than comparable periods of the prior year until the
Company can obtain broader distribution of the FM and AM ear-radios.
Cost of sales for the nine months ended June 30, 1996 were $602,290 resulting in
a gross margin of $130,335 or 18%. This compares to a gross margin of 24% for
the comparable period of the prior year. Gross margins were impacted by the
factors described above. Gross margin percentage is highly dependent on sales
prices, production costs and manufacturing overhead allocations. During the
current period, the Company experienced price pressure from customers from
increased competition, especially on foreign orders. The Company established
contract manufacturing for FM ear-radios effective in January 1996 which is
expected to reduce costs and reduce the variability of margins to sales levels.
However there can be no assurance improved margins can be achieved as production
volumes, production costs and sales prices can change significantly.
Research and development costs for the nine months ended June 30, 1996 were
$79,212 compared to $251,471 for the comparable nine months of fiscal 1995.
During the first nine months of the prior year the Company incurred significant
costs related to development efforts on the Company's various technologies,
primarily its portable GPS tracking technology to prove technical feasibility.
These prior year costs included significant outside design and consultancy
costs. The Company did not allocate the same level of resources to research and
development in the current period with more resources devoted to establishing
outside manufacturing and preparing for the 1996 selling season. However, the
Company continued technology development during the quarter including improving
its AM ear-radio, furthering its GPS tracker and sound reproduction
technologies.
Research and development costs vary quarter by quarter due to the timing of
projects, the availability of funds for research and development and the timing
and extent of use of outside consulting, design and development firms. The
Company expects fiscal 1996 research and development costs to be at lower levels
than the prior year due to less use of outside design and consultants.
Selling, general and administrative expenses decreased from $479,786 for the
nine months ended June 30, 1995 to $328,970 for the nine months ended March 31,
1996. The major decreases in the current period were commissions which decreased
by $26,000 due to the lower sales and less use of representatives. Advertising
and promotion costs decreased by $80,000 primarily due to reduced advertising,
trade show, corporate promotion and brochure costs. The Company also reduced its
occupancy costs by approximately $30,000 with the move to off-shore production
and relocation to smaller facilities. The Company anticipates that selling,
general and administrative cost levels will not vary dramatically with sales
levels and will continue at lower levels than the prior year.
The Company experienced a loss from operations of $277,847 during the nine
months ended June 30, 1996 compared to a loss from operations of $370,845 for
the comparable nine months ended June 30, 1995. The reduction in the operating
losses resulted primarily from reductions in research and development costs and
management's control of selling, general and administrative costs. The operating
loss for the three months ended June 30, 1996 was $139,000 compared to $46,840
for the prior period. The increased operating loss resulted primarily from the
sharply reduced sales and gross margin in the latest quarter compared to the
prior year.
During the nine months ended June 30, 1996 the Company paid 36,700 shares of
Norris common stock to a creditor for $55,050. In the nine months ended June 30,
1995 the Company sold 25,000 shares for proceeds of $71,078. The timing and
amount of Norris stock sales by the Company can have a significant impact on net
operations. The decision on timing of sales is dependent on Norris stock prices,
management's expectations as to Norris' future operations and Company financial
requirements.
As a result of the above factors, the Company reported a net loss of $144,477
and $228,686 for the three and nine month periods ended June 30, 1996, compared
to net income of $21,979 and a net loss of $301,998 for the three month and nine
month periods ended June 30, 1995. The Company has federal net loss
carryforwards of approximately $1,370,000 for federal tax purposes expiring
through 2009. The amount and timing of the utilization of the Company's net loss
carryforwards may be limited under Section 382 of the Internal Revenue Code.
Future operations are subject to significant variability as a result of product
sales and margins, decisions regarding future research and development,
variability in other expenditures, and gains from Norris stock sales when and if
made.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company recommenced operations in January 1992, the Company has had
significant negative cash flow from operating activities. The cash used in
operating activities was $319,695 for the nine months ended June 30, 1996
compared to cash used in operating activities of $104,363 for the comparable
period of the prior year. In addition to the approximate $278,000 net loss from
operations reduced by depreciation and amortization of $57,000, the Company
reduced accounts payable by $178,000 while reducing inventories by $20,000 and
accounts receivable by $58,000 all
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changes due in part to the transition to off-shore manufacturing. At June 30,
1996 the Company had approximately 20 days sales in accounts receivable which is
considered by management to be reasonable based on terms offered customers.
However, the Company's sales are affected by a variety of factors including
seasonal requirements of customers and therefore the Company's levels of
inventory, accounts receivable and accounts payable can vary significantly from
quarter to quarter.
At June 30, 1996 the Company had working capital of $438,807 compared to working
capital of $564,356 at September 30, 1995. Included in the calculations of
working capital is the unrealized holding gain in the shares held by the Company
in NASDAQ quoted Norris. At June 30, 1996 the Company owned 225,300 shares of
Norris with a market value of $254,589 compared to 262,000 shares with a market
value of $491,250 at September 30, 1995. The reduction in value more than
accounted for the reduction in working capital during the quarter which
otherwise increased approximately $111,000 excluding the value of the Norris
shares. Although the shares of Norris have experienced significant price and
volume variability, these shares have provided and are an unused source of
liquidity for the Company.
The Company has no material commitments for capital expenditures.
Since January 1992 the Company has financed its operations primarily through the
sale of common equity and the proceeds from the sale of shares of Norris. The
Company obtained $125,000 during the current period from the sale of its common
stock and $220,000 from the sale of convertible debentures and paid $55,050 of
Norris shares to a creditor, actions which improved the Company's liquidity. In
March 1996, the Company renewed a one year bank line of credit for $40,000
secured by substantially all assets. At June 30, 1996 the Company had drawn
$25,000 against this line.
The Company has no other material unused sources of liquidity at this time and
the Company expects to incur additional operating losses as a result of
continued operations and as a result of expenditures for research and
development, patent applications and marketing costs for present and future
products and technologies. Based on the current rate of expenditures and
operations, the Company does not have sufficient funds for the next twelve
months and thereafter. The timing and amounts of expenditures and the extent of
operating losses will depend on many factors, some of which are beyond the
Company's control.. The Company could be required to further curtail research
and development expenditures or other operations if there is a cash shortage.
Potential sources of any such funds may include the sale of additional Norris
shares, bank financing, other debt financing, and additional offerings of the
Company's equity securities. There can be no assurance that any funds will be
available from these or other potential sources and the lack of such capital
could have a material adverse affect on the Company's business.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - NONE
(b) Reports on Form 8-K - By Form 8-K report dated June 12, 1996, the Company
reported an Item 5 event related to a $220,000 private placement of convertible
notes and warrants and the refinancing of $100,000 of shareholder debt.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN TECHNOLOGY CORPORATION
Date: July 26, 1996 By: /s/ ROBERT PUTNAM
-----------------
Robert Putnam, President,
CEO and Director
(Principal Executive, Financial and
Accounting Officer and duly
authorized to sign on behalf
of the Registrant)
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
INTERIM STATEMENTS FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-QSB FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 65,904
<SECURITIES> 254,589
<RECEIVABLES> 55,459
<ALLOWANCES> 0
<INVENTORY> 265,842
<CURRENT-ASSETS> 644,646
<PP&E> 246,929
<DEPRECIATION> 180,572
<TOTAL-ASSETS> 778,928
<CURRENT-LIABILITIES> 205,839
<BONDS> 320,000
1,692,878
0
<COMMON> 0
<OTHER-SE> 254,386
<TOTAL-LIABILITY-AND-EQUITY> 778,928
<SALES> 732,625
<TOTAL-REVENUES> 732,625
<CGS> 602,290
<TOTAL-COSTS> 602,290
<OTHER-EXPENSES> 408,182
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,672
<INCOME-PRETAX> (228,686)
<INCOME-TAX> 0
<INCOME-CONTINUING> (228,686)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (228,686)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
