<PAGE> 1
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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 December 31, 1997.
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)
13114 Evening Creek Drive South, San Diego, California 92128
(Address of principal executive offices) (Zip Code)
(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:
Common Stock, $.00001 par value 10,849,965
- ------------------------------- ----------
(Class) (Outstanding at January 30, 1998)
Transitional Small Business Disclosure Format (check one): YES __ NO X
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AMERICAN TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Balance Sheets as of December 31, 1997 and
September 30, 1997 3
Statements of Operations for the three months ended
December 31, 1997 and 1996 4
Statements of Cash Flows for the three months ended
December 31, 1997 and 1996 5
Notes to Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION 12
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 12
SIGNATURES 12
</TABLE>
* No information provided due to inapplicability of the item.
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN TECHNOLOGY CORPORATION
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
December 31, September 30,
1997 1997
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,852,654 $ 3,338,458
Investment securities 18,024 29,289
Trade accounts receivable - net 243,677 307,174
Inventories 130,381 189,815
Prepaid expenses and other 51,758 27,376
------------- -------------
Total current assets 3,296,494 3,892,112
EQUIPMENT - NET 220,417 196,422
OTHER ASSETS
Patents 149,882 137,440
Other 19,863 25,904
------------- -------------
$ 3,686,656 $ 4,251,878
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 245,408 $ 172,305
LONG-TERM DEBT (NOTE 6) 366,167 386,651
------------- -------------
Total Liabilities 611,575 558,956
STOCKHOLDERS' EQUITY (NOTE 7)
Preferred stock $.00001 par value: authorized
5,000,000 shares;
Series A Convertible preferred stock, 350,000
shares designated, 170,000 and 350,000
issued and outstanding, respectively,
(liquidation preference of $10 per share) 1,613,132 3,321,153
Common stock $.00001 par value; authorized
20,000,000 shares; 10,176,469 and 9,758,779 shares
issued and outstanding, respectively 102 98
Additional paid-in capital 6,425,572 4,666,035
Notes receivable (153,150) (153,150)
Accumulated deficit (4,828,396) (4,170,300)
Net unrealized gain on securities available for sale 17,821 29,086
------------- -------------
Total stockholders' equity 3,075,081 3,692,922
------------- -------------
$ 3,686,656 $ 4,251,878
============= =============
</TABLE>
See notes to interim financial statements.
3
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AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
NET SALES $ 60,884 $ 601,671
Cost of goods sold 101,165 476,341
------------ ------------
GROSS PROFIT (LOSS) (40,281) 125,330
OPERATING EXPENSES:
Selling, general and administrative 458,237 242,496
Research and development 217,744 97,946
------------ ------------
Total operating expenses 675,981 340,442
------------ ------------
Loss from operations (716,262) (215,112)
OTHER INCOME (EXPENSES):
Interest income 48,554 --
Interest expense -- (68)
Non-cash interest expense (5,388) --
Other 15,000 2,528
------------ ------------
Total other income (expense) 58,166 2,460
------------ ------------
Loss before taxes on income (658,096) (212,652)
Taxes on income -- --
------------ ------------
NET LOSS $ (658,096) $ (212,652)
============ ============
NET LOSS PER SHARE
OF COMMON STOCK $ (.07) $ (0.02)
============ ============
AVERAGE WEIGHTED NUMBER OF
COMMON SHARES OUTSTANDING 10,078,545 8,665,440
============ ============
</TABLE>
See notes to interim financial statements.
4
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AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH Three Months Ended
December 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (658,096) $ (212,652)
Adjustments to reconcile net loss
to cash used in operating activities:
Amortization and depreciation 30,822 21,440
Non-cash interest on long-term debt 872 --
Compensation and services paid in common stock 25,648 --
Changes in operating assets and liabilities:
Prepaid expenses and other (19,866) 9,117
Trade accounts receivable 63,497 (312,648)
Inventories 59,434 (12,990)
Accounts payable and accrued expenses 73,103 176,406
----------- -----------
Net cash (used in) operating activities (424,586) (331,327)
INVESTING ACTIVITIES:
Purchase of other assets (12,442) (14,258)
Purchase of equipment (48,776) (20,463)
----------- -----------
Net cash provided by (used in) investing activities (61,218) (34,721)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options -- 55,600
----------- -----------
Net cash provided by financing activities -- 55,600
----------- -----------
Increase (decrease) in cash (485,804) (310,448)
CASH, BEGINNING OF PERIOD 3,338,458 657,331
----------- -----------
CASH, END OF PERIOD $ 2,852,654 $ 346,883
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ -- $ 68
Non-cash financing activities:
Convertible notes exchanged for common stock $ 25,000 $ --
Interest paid by issuance of common stock 872 $ --
</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, 1997.
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 period are
not necessarily indicative of the results that may be expected for the year.
The Company's plan of operation for the next twelve months is to introduce to
market the Company's sound reproduction technology, continue research and
development on existing and new technologies and distribute new portable
electronic products. The Company expects to incur additional operating losses as
a result of continued product sale operations and as a result of expenditures
for research and development and marketing costs for HSS technology and other
products. The timing and amounts of the Company's expenditures and the extent of
operating losses will depend on many factors, some of which are beyond the
Company's control. The Company anticipates that the commercialization of HSS
technology will require increased personnel and operating costs. The Company
believes it has sufficient financial resources for the next twelve months of
operations. However this estimate is subject to significant variability and
change due to management decisions regarding technologies, operations and the
result of outside factors. The long-term success of the Company is dependent
upon achieving a level of revenues adequate to support the Company's capital and
operating requirements.
3. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" and Statement of
Financial Accounting Standards No. 129 "Disclosures of Information About an
Entity's Capital Structure." SFAS No. 128 provides a different method of
calculating earnings per share than is currently used in accordance with
Accounting Principles Board Opinion No. 15, "Earnings Per Share." SFAS No. 128
provides for the calculation of "Basic" and "Dilutive" earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings per share. SFAS No. 129 establishes standards for
disclosing information about an entity's capital structure. SFAS No. 128 and
SFAS No. 129 are effective for financial statements issued for periods ending
after December 15, 1997. Their implementation is not expected to have a material
effect on the financial statements.
The Financial Accounting Standards Board has also issued SFAS No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that displays with the
same prominence as other financial statements. SFAS No. 131 supersedes SFAS No.
14 "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosure
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
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AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
SFAS No. 130 and No. 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, the standards
may have on the future financial statement disclosures. Results of operations
and financial position, however, will be unaffected by implementation of these
standards.
4. 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
December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Finished goods $ 18,447
Work in process 61,193
Raw materials 50,741
--------
$130,381
========
</TABLE>
5. INVESTMENT SECURITIES
The Company's investment securities consists of 225,300 shares of Norris
Communications Inc. ("NCI") 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 December 31, 1997 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 $17,281 $18,204
</TABLE>
6. LONG-TERM DEBT
Long-term debt at December 31, 1997 consists of $350,000 of unsecured 6%
convertible subordinated promissory notes due March 1, 1999. Annual simple
interest is payable upon maturity or in common stock when and as converted. The
principal and interest amount of the notes may at the election of each
Noteholder be converted one or more times into common stock at a price which is
the lower of (i) $3.50 per share or (ii) 85% of the ten days average closing bid
price prior to conversion but not less than $2.50 per share or (iii) for any
conversions on or after March 1, 1998 the average of the closing bid prices for
the prior thirty days but in no event less than $1.00 per share. The notes may
be called by the Company for conversion if the market price exceeds $9.00 per
share for ten days and certain conditions are met. At December 31, 1997 the
notes and accrued interest would have been convertible into approximately
108,250 common shares.
Subsequent to December 31, 1997, the balance of $350,000 principal and accrued
interest of $17,334 was converted through the issuance of 121,067 common shares.
7. STOCKHOLDERS' EQUITY
The following summarizes equity transactions for the three months ended December
31, 1997:
<TABLE>
<CAPTION>
Dollars
Common (Par Value and Preferred
Shares Paid in Capital) Shares Dollars
---------- ---------------- --------- -----------
<S> <C> <C> <C> <C>
Balance October 1, 1997 9,758,779 $ 4,666,133 350,000 $ 3,321,153
Stock issued on conversion of convertible
6% notes 7,142 25,000 -- --
Stock issued for interest on convertible 6%
notes 250 872 -- --
Common stock issued on conversion of
Series A Convertible Preferred Stock 405,298 1,708,021 (180,000) (1,708,021)
Common stock issued for compensation
and services 5,000 25,648 -- --
---------- ---------------- -------- -----------
Balance December 31, 1997 10,176,469 $ 6,425,674 170,000 $ 1,613,132
========== ================ ======== ===========
</TABLE>
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Subsequent to December 31, 1997 an additional 165,000 shares of Series A
Convertible Preferred Stock were converted into 552,429 common shares. As of the
date of this report 5,000 shares of Series A Convertible Preferred Stock remain
outstanding.
The following table summarizes information about stock option activity during
the period ended December 31, 1997:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
--------- -------------------
<S> <C> <C>
Outstanding October 1, 1997 1,672,500 $3.79
Granted 55,000 $15.00
Canceled/expired -- --
Exercised -- --
---------
Outstanding December 31, 1997 1,727,500 $4.15
=========
Exercisable at December 31, 1997 1,073,500 $2.72
=========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/97 Life Price at 12/31/97 Price
------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.50-$0.55 580,000 3.15 $0.52 580,000 $0.52
$1.59-$2.25 38,500 0.56 1.95 38,500 1.95
$4.00-$4.98 112,000 1.85 4.30 69,000 4.31
$5.06-$5.90 947,000 4.65 5.81 386,000 5.82
$16.00 50,000 4.76 16.00 -0- --
------------ ----------- ----------- -------- ----------- --------
$0.50-$16.00 1,727,500 3.87 $4.15 1,073,500 $2.72
============ =========== =========== ======== =========== ========
</TABLE>
At December 31, 1997 the Company had the following warrants outstanding, each
exercisable into one common share:
<TABLE>
<CAPTION>
Number Exercise Price Expiration Date
-------- -------------- -----------------
<S> <C> <C>
210,000 $0.50 February 23, 1999
100,000 $1.00 May 31, 1998
50,000 $5.00 March 1, 2000
175,000 $7.50 August 1, 2000
90,000 $5.00 February 5, 2000
--------
625,000
========
</TABLE>
Subsequent to December 31, 1997 a total of 80,000 common shares were issued on
exercise of a portion of the $0.50 warrants listed above for proceeds of
$40,000.
8. INCOME TAXES
At December 31, 1997, a valuation allowance has been provided to offset the net
deferred tax asset as management has determined that it is more likely than not
that the deferred tax asset will not be realized. The Company has for federal
income tax purposes net operating loss carryforwards of approximately $3,600,000
which expire through 2012 of which certain amounts are subject to limitations
under the Internal Revenue Code of 1986, as amended.
8
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- - - - - - - - - - - - - - - - - -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING,
"BUSINESS RISKS." SEE ALSO THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED SEPTEMBER 30, 1997.
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 FM ear
radios beginning in September 1993 and AM ear radios beginning in July 1995. The
Company is currently focusing its primary efforts on completing development and
commercializing its HSS technology.
To date substantially all of the Company's revenues have been derived from
portable consumer electronic products, primarily its ear radio line of products.
In the first quarter of fiscal 1998 the Company began phasing out its prior ear
radio line and sourcing a line of miniature radios and portable consumer
electronic products manufactured by others intended to be marketed and
distributed by the Company. The Company has no present plans to manufacture
additional of its FM or AM ear radios for sale. The Company has also designed
and developed a mini-headphone radio scheduled for introduction by mid-1998.
This new product incorporates the Company's ear radio technology and is smaller
than similar headphone radio products currently on the market. There can be no
assurance that the new line of out-sourced miniature radios and other products
can be marketed successfully or that the Company can successfully introduce the
new mini-headphone radio to market as planned. The Company anticipates
significantly lower portable consumer electronic product sales in the current
fiscal year compared to the prior year, at least until the mini-headphone
product is introduced. Future electronic product sales are subject to
substantial uncertainty.
Demand for the Company's portable consumer electronic products is subject to
significant month to month variability resulting from the limited number of
customers and market penetration achieved to date by the Company. Initial sales
have been concentrated with a few customers and there can be no assurance of
future orders from these or new customers. The markets for the Company's
products and future products and technologies 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, seasonal variations 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
required to change or introduce products, production limitations and because of
limited financial resources.
The HSS technology has not been developed to the point of commercialization.
There can be no assurance that a commercially viable system can be completed due
to the inherent risks of new technology development, limitations on financing,
competition, obsolescence, loss of key technical personnel and other factors
beyond the Company's control. The Company has not generated any revenues from
the HSS technology to date, and has no agreements or arrangements providing any
assurance of revenues in the future. The Company's various development projects
are high risk in nature. Unanticipated technical obstacles can arise at any time
and result in lengthy and costly delays or result in determination that further
development is unfeasible. There can be no assurance of timely completion of
commercially viable HSS technology or that if available that it will perform on
a cost-effective basis, or that if introduced, it will achieve market
acceptance. The Company is also developing its GPS and jet engine noise
reduction technologies.
The future of the Company is largely dependent upon the success of the HSS
technology, other technologies or the development of new technologies. There can
be no assurance the Company can introduce any of its technologies or that if
introduced they will achieve market acceptance sufficient to sustain the Company
or achieve profitable operations. See also "Business Risks" below.
RESULTS OF OPERATIONS
Net sales for the three months ended December 31, 1997 were $60,884, a 90%
decrease from the first three months of the prior year. Substantially all sales
in both periods were from ear radio product sales. Sales in the first quarter of
fiscal 1997 included sales to several new large chain retailers and the
significant decrease in the current quarter reflects
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the phasing out of the current FM and AM Sounds ear radio line. After sales of
existing inventory of FM and AM Sounds ear radios manufactured for the Company,
future portable electronic product sales are expected to consist of the new line
of out-sourced products manufactured by others and later in fiscal 1998 the
planned introduction of a mini-headphone radio product to be manufactured for
the Company by a contract manufacturer yet to be selected. The Company
anticipates significantly lower portable consumer electronic product sales in
the current fiscal year compared to the prior year, at least until the
mini-headphone product is introduced. Sales are also subject to significant
month to month and quarter to quarter variability based on the timing of orders,
new accounts, lost accounts and other factors. The Company's sales are further
affected by a variety of factors including seasonal requirements of customers.
Management believes, but there can be no assurance, that with the marketing and
distribution of out-sourced portable electronic products along with the higher
margins anticipated with the mini-headphone radio (versus ear radios) that it
can achieve better results over time with such a broader product line. There can
be no assurance that the planned new product line or that the mini-headphone
radio can be successfully introduced to market.
Cost of sales for the three months ended December 31, 1997 were $101,165
resulting in a gross loss of $40,281 or 66%. This compares to a gross margin of
$125,330 or 21% for the comparable period of the prior year. The first quarter
gross loss is the result of the phasing out of the current FM and AM Sounds
product line and included special close-out pricing to reduce inventory levels.
Until the new products are introduced there is significant uncertainty about
future gross margins. Gross margin percentage is highly dependent on sales
prices, volumes, purchasing costs and manufacturing overhead allocations.
Research and development costs for the three months ended December 31, 1997 were
$217,744 compared to $97,946 for the comparable three months of the prior year.
The $119,798 increase resulted primarily from an increase in HSS technology
development activities and related personnel and component costs. Personnel
costs increased $70,000 in the current period due to additional research
employees and component and equipment costs increased by $30,000 due to the
increased level of activity in the current period.
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 1998 research and development costs to be at
significantly higher levels than the prior year due to increased staffing and
use of outside design and consultants primarily associated with HSS technology
development. The Company is seeking additional engineering and support personnel
to further expand research and development in future periods.
Selling, general and administrative expenses increased from $242,496 for the
three months ended December 31, 1996 to $458,237 for the three months ended
December 31, 1997. The $215,741 increase included a $105,000 increase in
personnel costs primarily associated with the addition of senior executive and
HSS technology marketing personnel, a $38,000 increase in outside marketing and
professional services, a $23,000 increase in marketing travel and related costs,
a $22,000 increase in occupancy related costs due to a new leased facility and
increased personnel and $27,000 increase in legal and audit costs related to
expanded financing and pre-licensing activities. Management anticipates that
selling, general and administrative costs will continue at higher levels in
fiscal 1997 due to the recent additions of senior executive and HSS technology
marketing personnel, the expanded facility and related operations. Management
anticipates hiring additional licensing and marketing personnel during the
current fiscal year which will further increase selling, general and
administrative expenses.
As a result of the above factors, the Company experienced a loss from operations
of $716,262 during the three months ended December 31, 1997, compared to a loss
from operations of $215,112 for the comparable three months ended December 31,
1996. The increase in the operating losses resulted primarily from increases in
research and development costs and selling, general and administrative costs
associated with HSS technology combined with the gross loss from product sales.
During the three months ended December 31, 1997, the Company recognized interest
income of $48,554 from the increased cash on hand and also realized a $15,000
gain from the sale of the Company's royalty interest in EarPHONE technology.
During the first quarter the Company incurred $5,388 of noncash interest payable
in common shares related to outstanding 6% convertible notes.
As a result of the above factors, the Company reported a net loss of $658,096
for the three months ended December 31, 1997, compared to a net loss of $212,652
for the three month period ended December 31, 1996. The Company has federal net
loss carryforwards of approximately $3,600,000 for federal tax purposes expiring
through 2011. 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.
10
<PAGE> 11
Future operations are subject to significant variability as a result of product
sales and margins, timing of new product offerings, decisions regarding future
research and development and variability in other expenditures.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company recommenced operations in January 1992, the Company has had
significant negative cash flow from operating activities. The negative cash flow
from operating activities was $1,572,425 for the fiscal year ended September 30,
1997 and $424,586 for the first fiscal quarter ended December 31, 1997. During
the first fiscal 1998 quarter, the net loss of $658,096 included non-cash
expenses of $57,342 resulting in an adjusted net cash loss of $600,754. In
addition to this amount of $600,754, cash was used in operating activities
through an increase in prepaid expenses and other of $19,866. Operating cash was
provided by a $63,497 reduction in accounts receivable, a $59,434 reduction in
inventories and a $73,103 increase in accounts payable and accrued liabilities.
At December 31, 1997 the Company had approximately 370 days sales in accounts
receivable as compared to 115 days at September 30, 1997. The unusually high
level of receivables is a direct result of the significantly reduced sales in
the first quarter from the phasing out of the ear radio product line. Management
anticipates a reduction in receivables in future quarters commensurate with
reduced sales levels. Receivables can vary dramatically due to quarterly and
seasonal variations in sales and timing of shipments to and receipts from large
customers many of which demand extended terms of 90-120 days.
For the first fiscal quarter ended December 31, 1997, the Company used
approximately $49,000 for the purchase of laboratory equipment and made a
$12,442 investment in patents. The Company estimates a significant level of
investments in patents in fiscal 1998 and requirements for additional equipment
for developing HSS and other technologies. Dollar amounts of these patent
investments and equipment additions are not currently estimable by management.
At December 31, 1997 the Company had working capital of $3,051,086 and at
September 30, 1997, the Company had working capital of $3,719,807. The reduction
is the result of the Company's operating loss and cash used in operating
activities.
Since the Company's reorganization in January 1992 and through June 30, 1997,
the Company has financed its operations primarily through the sale of common
equity, exercise of stock options, issuances of convertible notes and proceeds
from the sale of shares of NCI.
Other than cash of $2,852,654 at December 31, 1997 and the NCI shares, the
Company has no other material unused sources of liquidity at this time. The
Company expects to incur additional operating losses as a result of continued
product sale operations and as a result of expenditures for research and
development and marketing costs for HSS technology and other products and
technologies. The timing and amounts of the Company's expenditures and the
extent of operating losses will depend on many factors, some of which are beyond
the Company's control. The Company anticipates that the commercialization of HSS
technology will require increased personnel and operating costs. The Company
believes it has sufficient financial resources for the next twelve months of
operations. However this estimate is subject to significant variability and
change due to management decisions regarding technologies, operations and the
result of outside factors. The long-term success of the Company is dependent
upon achieving a level of revenues adequate to support the Company's capital and
operating requirements.
NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board has issued a number of new
pronouncements for future implementation as discussed in the footnotes to the
Company's interim financial statements (see page 6). As discussed in the notes
to the interim financial statements, the implementation of these new
pronouncements is not expected to have a material effect on the financial
statements.
BUSINESS RISKS
This report contains a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results or
those anticipated. In this report, the words "anticipates," "believes,"
"expects," "intends," "future" and similar expressions identify forward-looking
statements. Readers are cautioned to consider the specific risk factors
described in the Company's Annual Report on Form 10-KSB for the year ended
September 30, 1997 and not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements, to
reflect events or circumstances that may arise after the date hereof.
11
<PAGE> 12
PART II. OTHER INFORMATION
None
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: February 6, 1998 By: /s/ ROBERT PUTNAM
--------------------------------
Robert Putnam, Vice President,
Treasurer and Director
(Principal Financial and
Accounting Officer and duly
authorized to sign on behalf
of the Registrant)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
INTERIM STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-QSB FOR THE
QUARTERLY PERIOD ENDED DECEMBER 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,852,654
<SECURITIES> 18,024
<RECEIVABLES> 251,882
<ALLOWANCES> 8,205
<INVENTORY> 130,381
<CURRENT-ASSETS> 3,296,494
<PP&E> 509,912
<DEPRECIATION> 289,495
<TOTAL-ASSETS> 3,686,656
<CURRENT-LIABILITIES> 245,408
<BONDS> 366,167
0
1,613,132
<COMMON> 102
<OTHER-SE> 1,461,847
<TOTAL-LIABILITY-AND-EQUITY> 3,686,656
<SALES> 60,884
<TOTAL-REVENUES> 60,884
<CGS> 101,165
<TOTAL-COSTS> 101,165
<OTHER-EXPENSES> 675,981
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (658,096)
<INCOME-TAX> 0
<INCOME-CONTINUING> (658,096)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (658,096)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
