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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
Commission File Number 0-24248
AMERICAN TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(619) 679-2114
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<S> <C>
Common Stock, $0.00001 par value 11,398,568
- -------------------------------- ----------
(Class) (Outstanding at February 10, 1999)
</TABLE>
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1
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AMERICAN TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Balance Sheets as of December 31, 1998 (unaudited) and
September 30, 1998 3
Statements of Operations for the three months ended December 31, 1998
and 1997 (unaudited) 4
Statements of Cash Flows for the three months ended December 31, 1998
and 1997 (unaudited) 5
Notes to Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II. OTHER INFORMATION 13
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN TECHNOLOGY CORPORATION
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,320,613 $ 1,034,577
Investment securities available for sale (note 6) 14,419 14,645
Trade accounts receivable, less allowance of $5,367 and $17,000
for doubtful accounts, respectively 101,666 71,737
Inventories (note 5) 111,959 87,292
Prepaid expenses and other 48,357 58,470
----------- -----------
Total current assets 2,597,014 1,266,721
----------- -----------
Equipment, net 156,435 169,367
Patents 299,375 245,919
Other 1,044 1,738
----------- -----------
Total assets $ 3,053,868 $ 1,683,745
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 261,872 $ 202,042
Accrued liabilities 46,282 78,791
----------- -----------
Total current liabilities 308,154 280,833
----------- -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Series B Preferred stock, $0.00001 par value; 5,000,000 shares
authorized: 201,600 shares issued and outstanding at
December 31, 1998 (note 7) 2 --
Common stock, $0.00001 par value; 20,000,000 shares
authorized: 11,374,314 and 11,356,014 shares issued and
outstanding, respectively 114 114
Additional paid-in capital 12,818,269 10,180,265
Notes receivable (27,895) (27,895)
Accumulated deficit (10,058,992) (8,764,013)
Net unrealized gain on securities available for sale (note 6) 14,216 14,441
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,745,714 1,402,912
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,053,868 $ 1,683,745
=========== ===========
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
3
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AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1998 1997
-------------------------------
<S> <C> <C>
Net sales $ 164,457 $ 60,884
Cost of products sold 119,470 101,165
----------- -----------
Gross profit (loss) 44,987 (40,281)
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 517,044 458,237
Research and development 238,341 192,096
Non-cash compensation expense 110,683 25,648
----------- -----------
Total operating expenses 866,068 675,981
----------- -----------
Loss from operations (821,081) (716,262)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 8,368 48,554
Interest expense -- non-cash -- (5,388)
Other (231) 15,000
----------- -----------
Total other income (expense) 8,137 58,166
----------- -----------
NET LOSS $ (812,944) $ (658,096)
=========== ===========
Net loss available to common stockholders (note 3) $(1,294,979) $ (658,096)
=========== ===========
Net loss per share of common stock - basic and diluted $ (0.11) $(0.07)
=========== ===========
Average weighted number of common shares outstanding 11,363,724 10,078,545
=========== ===========
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
4
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AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1998 1997
-------------------------------
INCREASE (DECREASE) IN CASH
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (812,944) $ (658,096)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 26,244 30,822
Common stock issued for services and compensation 33,683 25,648
Stock options granted for services 77,000 --
Non-cash accrued interest on long term debt -- 872
Changes in assets and liabilities:
Trade accounts receivable (29,929) 63,497
Inventories (24,667) 59,434
Prepaid expenses and other 10,113 (19,866)
Accounts payable 59,830 73,103
Accrued liabilities (32,508) --
---------- ----------
Net cash used in operating activities (693,178) (424,586)
---------- ----------
INVESTING ACTIVITIES:
Purchase of property and equipment (12,618) (12,442)
Patent costs paid (53,456) (48,776)
---------- ----------
Net cash used in investing activities (66,074) (61,218)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock, net 2,000,000 --
Proceeds from exercise of stock options 45,288 --
---------- ----------
Net cash provided by financing activities 2,045,288 --
---------- ----------
Net increase (decrease) in cash 1,286,036 (485,804)
Cash, beginning of period 1,034,577 3,338,458
---------- ----------
Cash, end of period $2,320,613 $2,852,654
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-cash financing activities:
Convertible notes exchanged for common stock -- $ 25,000
Interest paid by issuance of common stock -- $ 872
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
5
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AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
1. OPERATIONS
American Technology Corporation (the "Company" or "ATC") is engaged in the
design, development and commercialization of sound, acoustics and other
technologies and the sales and marketing of consumer electronic products. ATC's
primary business is the marketing of two proprietary sound reproduction
technologies, (i) SFT(TM), Stratified Field Technology and (ii) HSS(TM),
HyperSonic Sound technology.
2. STATEMENT PRESENTATION
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. 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 periods are not necessarily indicative of the results that may be expected
for the year. 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, 1998.
3. NET LOSS PER SHARE
The Company has implemented Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." SFAS No. 128 provides for the calculation of
"Basic" and "Diluted" earnings per share ("EPS"). Basic EPS includes no dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in the earnings
of an entity. The Company's net losses for the periods presented cause the
inclusion of potential common stock instruments outstanding to be antidilutive
and, therefore, in accordance with SFAS No. 128, the Company is not required to
present a diluted EPS. Convertible preferred stock, stock options and warrants
convertible or exercisable into approximately 2,365,000 shares of common stock
were outstanding at December 31, 1998 and stock options, warrants, preferred
stock and debt convertible or exercisable into approximately 3,030,000 shares of
common stock were outstanding as of December 31, 1997. These securities were not
included in the computation of diluted EPS because of the net losses but could
potentially dilute EPS in future periods.
Net loss available to common stockholders was increased during the first quarter
of fiscal 1999 in computing net loss per share by an imputed deemed dividend
based on the value of warrants issued in connection with Series B Preferred
Stock (see Note 7). The Company calculated the fair value of the warrants at
$480,000. In future periods the net loss available to common stockholders will
also be reduced by the amortization of an additional $20,000 deemed dividend
computed from the discount provision included in the Series B Preferred Stock
which will be amortized to the earliest period at which the discount can be
utilized (May 31, 1999). Such imputed dividends are not contractual obligations
of the Company to pay such imputed dividends.
The provisions of the Series B Preferred Stock also provide for an accretion in
the conversion value (similar to a dividend) of 6% or $0.60 per share per annum.
The accrued accretion at December 31, 1998 was $2,035 which also increases the
net loss available to common stockholders. Net loss available to common
stockholders is computed as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Net loss $ (812,944) $(658,096)
Imputed deemed dividend on warrants
issued with Series B Preferred Stock (480,000) --
Accretion on Series B Preferred Stock at
stated rate (2,035) --
----------- ---------
Net loss available to common stockholders $(1,294,979) $(658,096)
=========== =========
</TABLE>
4. RECENT ACCOUNTING PRONOUNCEMENTS
Effective October 1, 1998, the Company adopted the Financial Accounting
Standards Board SFAS No. 130, "Reporting Comprehensive Income". This statement
established standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. The adoption
of this statement had no material impact on the Company's financial condition or
results of operation as of December 31, 1998 and for the three month periods
ended December 31, 1998 and 1997. Total comprehensive income did not differ
materially from the Company's net loss for the three months ended December 31,
1998 or 1997.
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AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
4. RECENT ACCOUNTING PRONOUNCEMENTS (cont'd)
The Company has also adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which supersedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 establishes standards for the way that public companies
report 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
disclosures regarding products and services, geographic areas and major
customers. SFAS 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. Quarterly disclosures are not required in this first year
of adoption. Management believes that SFAS 131 will not have a significant
impact on the Company's disclosure of segment information in the future.
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 132,
"Employers' Disclosure about Pensions and Other Post-retirement Benefits" and
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 132 standardizes the disclosure requirements for pensions and other
post-retirement benefits and requires additional information on change in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis. SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair market value. Gains or
losses resulting from changes in the values of those derivatives are accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows.
SFAS No. 132 is effective for years beginning after December 15, 1997, and
requires comparative information for earlier years to be restated, unless such
information is not readily available. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management believes that
the adoption of SFAS No. 132 and SFAS No. 133 will have no material effect on
its financial statements.
5. 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, 1998:
<TABLE>
<S> <C>
Finished goods $ 93,932
Work in process 4,296
Raw materials 13,731
--------
$111,959
========
</TABLE>
6. INVESTMENT SECURITIES
The Company's investment securities consist of 225,300 shares of e.Digital
Corporation ("EDIG") 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, 1998 the Company's market value of available for sale securities
consisted of:
<TABLE>
<S> <C> <C> <C>
Gross Estimated
Unrealized Fair
Cost Gains Value
---- ---------- ---------
Common Stock $203 $14,216 $14,419
</TABLE>
7. STOCKHOLDERS' EQUITY
During December 1998, the Company issued 201,600 shares of Series B Preferred
Stock, par value $0.00001 ("Preferred Stock") for cash at $10.00 per share for
gross proceeds of $2,016,000. The dollar amount of Preferred Stock, increased by
$0.60 per share accretion per annum and other adjustments, is convertible one or
more times into fully paid shares of Common Stock of the Company at a conversion
price which is the lower of (i) $5.00 per share or (ii) 92% of the average of
the five days closing bid market price prior to conversion, but in no event less
than $3.50 per share. The Preferred Stock may not be exercised at less than
$5.00 per share until after May 31, 1999. The shares of Preferred Stock may be
called by the Company for conversion if the market price of the Common Stock
exceeds $12.00 per share for ten days and certain conditions are met. The
Preferred Stock is subject to automatic conversion on November 30, 2001.
7
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AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
7. STOCKHOLDERS' EQUITY (cont'd)
In connection with the sale of Preferred Stock the Company issued warrants to
purchase 201,600 shares of Common Stock at $6.00 per share until November 30,
2001. At December 31, 1998 the Preferred Stock would have been convertible into
403,607 shares of Common Stock.
In January 1999 the Company issued an additional 48,400 shares of Preferred
Stock for gross proceeds of $484,000 and issued warrants to purchase 48,400
shares of Common Stock on the same terms as above.
The following table summarizes changes in equity components from transactions
during the three months ended December 31, 1998:
<TABLE>
<CAPTION>
Additional
Common Stock Series B Preferred Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit
---------- ------ ------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance October 1, 1998 11,356,014 $114 -- -- $10,180,265 $(8,764,013)
Stock issued on exercised options 11,000 -- -- -- 45,288 --
Issuance of Series B Preferred Stock
net of $16,000 in offering costs -- -- 201,600 2 1,999,998 --
Deemed dividends on 201,600 warrants
issued with Series B Preferred Stock -- -- -- -- 480,000 (480,000)
Accrued 6% accretion on Series B
Preferred Stock -- -- -- -- 2,035 (2,035)
Valued assigned to 30,000 stock options
granted for services -- -- -- -- 77,000 --
Issuance of Common Stock for compensation
and services 7,300 -- -- -- 33,683 --
Net loss -- -- -- -- -- (812,944)
---------- ---- ------- -- ----------- ------------
Balance December 31, 1998 11,374,314 $114 201,600 $2 $12,818,269 $(10,058,992)
========== ==== ======= == =========== ============
</TABLE>
The following table summarizes information about stock option activity during
the period ended December 31, 1998:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding October 1, 1998 1,338,100 $4.51
Granted 30,000 $4.06
Canceled/expired (2,500) $4.19
Exercised (11,000) $4.12
---------
Outstanding December 31, 1998 1,354,600 $4.41
=========
Exercisable at December 31, 1998 969,068 $3.22
=========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/98 Life Price at 12/31/98 Price
----------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.50-$0.55 480,000 2.15 $ 0.52 480,000 $ 0.52
$3.59-$4.48 301,500 3.04 3.62 176,168 3.48
$4.98-$5.90 210,000 1.71 5.81 207,500 5.82
$7.81 63,100 2.30 7.81 47,900 7.81
$8.50 250,000 3.78 8.50 32,500 8.47
16.00 50,000 3.76 16.00 25,000 16.00
----- ------ --------- ---- ------ ------- ------
$0.50-$16.00 1,354,600 2.79 $ 4.41 969,068 $ 3.22
===== ====== ========= ==== ====== ======= ======
</TABLE>
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AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
7. STOCKHOLDERS' EQUITY (cont'd)
At December 31, 1998, the Company had warrants outstanding, exercisable into the
following number of common shares:
<TABLE>
<CAPTION>
Number Exercise Price Expiration Date
------ -------------- ---------------
<S> <C> <C>
60,000 $ 5.00 February 5, 2000
47,500 $ 5.00 March 1, 2000
172,500 $ 7.50 August 1, 2000
25,000 $16.00 June 18, 2000
201,600 $ 6.00 November 30, 2001
50,000 $16.00 May 12, 2003
50,000 $10.00 January 5, 2004
-------
606,600
=======
</TABLE>
8. INCOME TAXES
At December 31, 1998, 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 $7,200,000
which expire through 2018 of which certain amounts are subject to limitations
under the Internal Revenue Code of 1986, as amended.
------------------
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, 1998.
OVERVIEW
ATC is focusing on completing development and commercializing its proprietary
Stratified Field Technology ("SFT") and HyperSonic Sound ("HSS") sound
reproduction technologies. SFT features a thin form factor, in a variety of
shapes and sizes, producing high fidelity, low distortion sound reproduction.
HSS technology employs a laser-like beam to project sound to any listening
environment. ATC's strategy is commercialize the technologies through OEMs by
entering into licensing or contract supply agreements. There can be no assurance
ATC will be successful in commercially exploiting the SFT or HSS technology.
The HSS technology has not been developed to the point of commercialization, and
SFT has only recently been licensed for the first time. There can be no
assurance that commercially viable systems 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 ATC's
control. ATC has not generated any significant revenues from its SFT or HSS
technology to date.
ATC'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 SFT and/or HSS
products or that, if available, such products will perform on a cost-effective
basis, or that, they will achieve market acceptance.
The future of ATC is largely dependent upon the success of the SFT and/or HSS
technology, other technologies or the development of new technologies. ATC
invests significant funds in research and development and on patent applications
related to its proprietary technologies. There can be no assurance ATC's
technologies will achieve market acceptance sufficient to sustain ATC or achieve
profitable operations. See "Business Risks" below.
9
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To date substantially all of ATC's revenues have been derived from the sale of
portable consumer electronic products. ATC has sourced a total of eleven
products (including FM and solar radios) targeted for niche markets at retail
prices ranging from $9.99 to $51.99. Sourcing is on both an exclusive and
nonexclusive basis and for different market territories on a product by product
basis. ATC's market focus is in North America. ATC intends to inventory finished
goods as well as provide direct factory shipment to certain customers. There can
be no assurance that the line of products can be marketed successfully.
Demand for ATC's portable consumer electronic products is subject to significant
month to month variability resulting from seasonal demand fluctuations and the
limited number of customers and market penetration achieved to date by ATC.
Further, sales have been concentrated with a few customers. ATC is also reliant
on outside manufacturers to supply the products that it sells and markets and
there can be no assurance of future supply. The markets for ATC's products and
future products and technologies are subject to rapidly changing customer tastes
and a high level of competition. Demand for ATC's products is influenced by
demographic trends in society, marketing and advertising expenditures, and
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. ATC 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.
RESULTS OF OPERATIONS
Total revenues for the three months ended December 31, 1998 were $164,457, a
170% increase from the first three months of the prior year. Substantially all
revenues in both periods were from electronic products. First quarter fiscal
1999 product sales consist of the new line of sourced products manufactured by
others only recently introduced by the Company. There can be no assurance that
the new product line can be successfully marketed in any significant volume.
Consumer product sales are 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.
Cost of sales for the three months ended December 31, 1998 were $119,470
resulting in a gross profit of $44,987 or 27%. This compares to a gross loss of
$40,281 or 66% for the comparable period of the prior year. The first quarter
fiscal 1999 gross profit is the result of the new product line. The prior year's
first quarter gross loss resulted from the phasing out of the previous FM and AM
Sounds product line and included special close-out pricing to reduce inventory
levels. Gross profit percentage is highly dependent on sales prices, volumes,
purchasing costs and overhead allocations.
Selling, general and administrative expenses increased from $458,237 for the
three months ended December 31, 1997 to $517,044 for the three months ended
December 31, 1998. The $58,807 increase included a $57,816 increase in personnel
costs primarily associated with the addition of senior executives and SFT/HSS
technology marketing personnel. Management anticipates that selling, general and
administrative costs will continue at higher levels in fiscal 1999 due to the
additions of senior executive and marketing personnel, an expanded facility and
related operations. Management may expend additional resources on marketing SFT
and HSS technology in the current year, which will increase selling, general and
administrative expenses.
Research and development costs for the three months ended December 31, 1998 were
$238,341 compared to $192,096 for the comparable three months of the prior year.
The $46,245 increase resulted primarily from an increase in SFT and HSS
technology development activities and related personnel and component costs.
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. ATC
expects fiscal 1999 research and development costs to remain at comparable
levels to fiscal 1998 or at higher levels should the Company increase staffing
or expand the use of outside design and consultants.
The Company recorded non-cash compensation expense of $110,683 for the three
months ended December 31, 1998 compared to $25,648 for the comparable prior
period. Non-cash compensation expense for the current period included the
$77,000 value attributable to stock options granted to consultants on 30,000
shares of Common Stock and $33,683 of services paid through the issuance of
7,300 shares of Common Stock.
As a result of the above factors, the Company experienced a loss from operations
of $821,081 during the three months ended December 31, 1998, compared to a loss
from operations of $716,262 for the comparable three months ended December 31,
1997. The net loss for the first fiscal quarter of 1999 was $812,944 compared to
$658,096 for the prior year's first quarter. The increase in the operating
losses resulted primarily from the increases in research and
10
<PAGE> 11
development costs, increases in selling, general and administrative costs
associated with the SFT and HSS technology and the non-cash compensation
expense.
The Company has federal net loss carryforwards of approximately $7,200,000 for
federal tax purposes expiring through 2018. 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. A valuation allowance has been recorded to
offset the related net deferred tax asset as management was unable to determine
that it is more likely than not that the deferred tax asset will be realized.
Future operations are subject to significant variability as a result of
licensing activities, product sales and margins, timing of new product
offerings, the success and timing of new technology exploitation, 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. During the three
months ended December 31, 1998, the net loss of $812,944 included non-cash
expenses of $136,927 resulting in an adjusted net cash loss of $676,017. In
addition to this amount of $676,017, $29,929 cash was used in operating
activities through an increase in accounts receivable, an increase in
inventories of $24,667, and a reduction of $32,508 in accrued liabilities, as
adjusted. Operating cash was provided by a $10,113 reduction in prepaid expenses
and other and a $59,830 increase in accounts payable.
At December 31, 1998, the Company had accounts receivable of $101,666 as
compared to $71,737 at September 30, 1998. This represented approximately 56
days of sales for the first quarter. The increase in receivables is a direct
result of the increase in product sales in the first quarter. 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 three months ended December 31, 1998, the Company used approximately
$12,618 for the purchase of laboratory equipment and made a $53,456 investment
in patents and new patent applications. The Company estimates a significant
level of investments in patents in fiscal 1999 and requirements for additional
equipment for developing SFT, HSS and other technologies. Dollar amounts of
these patent investments and equipment additions are not currently estimable by
management.
At December 31, 1998, the Company had working capital of $2,288,859 and at
September 30, 1998, the Company had working capital of $985,888. Included in
working capital is the unrealized holding gain in the shares held by ATC in
e.Digial Corporation ("EDIG"). At December 30, 1998 and 1997, ATC owned 225,300
shares of EDIG with a market value of $14,419 and $18,024, respectively. This
investment is carried on the balance sheet as a current asset of ATC at market
value.
Since the Company's reorganization in January 1992 and through December 31,
1998, ATC has financed its operation primarily through the sale of common and
preferred equity, exercise of stock options, issuances of convertible notes and
proceeds from the sale of shares of EDIG. During December 1998, ATC sold 201,600
shares of Series B Preferred Stock providing net proceeds to the Company of
$2,000,000. In January 1999 the Company sold an additional 48,400 Preferred
Shares for gross proceeds of $484,000.
Other than cash of $2,230,613 at December 31, 1998, the proceeds of the January
Series B Preferred Stock sales and the EDIG shares, ATC has no other material
unused sources of liquidity at this time. ATC expects to incur additional
operating losses as a result of continued product sales and as a result of
expenditures for research and development and marketing costs for the SFT and
the HSS technology and other products and technologies. The timing and amounts
of ATC's expenditures and the extent of operating losses will depend on many
factors, some of which are beyond ATC's control. ATC anticipates that the
commercialization of SFT and the HSS technology may require increased operating
costs, however the amounts are not currently estimable by management. ATC
believes it has sufficient financial resources for the next twelve months of
operations given existing cash resources and assuming the current level of
operations and cash expenditures. Management believes product sales, licensing
and other operations may also contribute financial resources during the next
twelve months, but there can be no assurance thereof. The level of expenditures
during the next twelve months could also exceed prior levels or management's
estimates and the variances could be material. Management's estimates are
subject to significant variability and change due to management decisions
regarding technologies, operations and the result of outside factors. The
long-term success of ATC is dependent upon achieving a level of revenues
adequate to support ATC's capital and operating requirements. The failure to
raise additional funds, if required, could have a material adverse effect on ATC
and could force ATC to reduce or curtail operations.
11
<PAGE> 12
NEW ACCOUNTING PRONOUNCEMENTS
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 7, Note 4). 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.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The "Year 2000" problem
is concerned with whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Year 2000 problem is pervasive and complex as the computer
operation of virtually every company will be affected in some way.
The Company, like most owners of computer software, will be required to modify
significant potions of its software so that it will function properly in the
Year 2000. Preliminary estimates of the total costs to be incurred by ATC to
resolve this problem range from $10,000 to $20,000. Maintenance or modification
costs will be expensed as incurred, while the costs of new software will be
capitalized and amortized over the software's useful life.
Since the Company mainly uses third party "off-the-shelf" software, it does not
anticipate a problem in resolving the Year 2000 problem in a timely manner. ATC
is currently taking steps to ensure that its computer systems and services will
continue to operate on and after January 1, 2000. However, there can be no
assurance that Year 2000 problems will not occur with respect to ATC's computer
systems. Furthermore, the Year 2000 problem may impact other entities with which
ATC transacts business, and ATC cannot predict the effect of the Year 2000
problem on such entities or the resulting effect on ATC. For such externally
maintained systems, the Company has begun to work with venders to ensure that
each such system is currently Year 2000 compliant or will be Year 2000 compliant
during 1998 or 1999. The cost to be incurred by the Company related to
externally maintained systems is expected to be minimal. Because of the many
uncertainties associated with Year 2000 issues, and because the Company's
assessment of externally maintained systems is necessarily based on information
provided by third party vendors and suppliers, there can be no assurance that
the Company's assessment is correct. As a result, if preventative and/or
corrective actions by ATC and those ATC does business with are not made in a
timely manner, the Year 2000 issue could have a material adverse effect on ATC's
business, financial condition, results of operations and cash flows. ATC has not
yet developed a contingency plan to operate in the event that any noncompliant
critical systems are not remedied by January 1, 2000, but ATC intends to develop
such a plan by March 31, 1999.
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, 1998 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
market prices, including interest rate risk and other relevant market rate or
price risks.
The Company is exposed to some market risk through interest rates, related to
its investment of its current cash and cash equivalents of approximately $2.3
million. The risk is not considered material and the Company manages such risk
by continuing to evaluate the best investment rates available for short-term
high quality investments.
The Company has no activities in long-term indebtedness and its other
investments are insignificant.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is involved in routine litigation incidental to
the conduct of its business. There are currently no material pending legal
proceedings to which the Company is a party or to which any of its property is
subject.
ITEM 2. CHANGES IN SECURITIES
(a) None
(b) None
(c) The following is a description of the equity securities sold by the Company
during the first fiscal quarter ended December 31, 1998 that were not
registered under the Securities Act:
In December 1998 the Company sold in a private offering for cash at $10.00
per share a total of 201,600 shares of Series B Preferred Stock, par value
$.00001 ("Preferred Stock") to a limited number of investors ("Preferred
Shareholders") for an aggregate of $2,016,000. The dollar amount of
Preferred Stock, increased by $.60 per share per annum and other
adjustments, at the election of the Preferred Shareholder, may be converted
one or more times into fully paid and nonassessable shares of common stock,
$.00001 par value, of the Company, at a conversion price which is the lower
of (i) $5.00 per share or (ii) 92% of the average of the five days closing
bid market price prior to conversion, but in no event less than $3.50 per
share. The Preferred Stock may not be exercised at less than $5.00 per
share until after May 31, 1999. The shares of Preferred Stock may be called
by the Company for conversion if the market price of the common stock
exceeds $12.00 per share for ten days and certain conditions are met. The
Preferred Stock shall be subject to automatic conversion on November 30,
2001.
Each purchaser was granted a warrant to purchase 1,000 common shares of the
Company at $6.00 per share, subject to certain future adjustments, until
November 30, 2001 ("Warrant") for each 1,000 shares of Preferred Stock
(aggregate Warrants exercisable into 201,600 shares). These securities were
offered and sold without registration under the Securities Act of 1933, as
amended (the "Act"), in reliance upon the exemption provided by Regulation
D thereunder and an appropriate legend was placed on the Preferred Stock
and Warrants and will be placed on the shares issuable upon conversion of
the Preferred Stock or exercise of the Warrants unless registered under the
Act prior to issuance. The Company has agreed to file a registration
statement on the common stock obtained on conversion of the Preferred Stock
and the Warrants. No underwriter was employed in the offering.
Net proceeds from the sale of the Preferred Stock of approximately
$2,000,000 is intended primarily for working capital to continue the
Company's efforts to exploit its SFT and HSS technology and other
technologies. In January 1999 the Company sold an additional 48,400 shares
of Preferred Stock and issued warrants on an additional 48,400 shares on
the same terms. Gross proceeds were $484,000.
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:
27 Financial Data Schedule
13
<PAGE> 14
SIGNATURES
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 thereunto duly authorized.
AMERICAN TECHNOLOGY CORPORATION
Date: February 12, 1999 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)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
INTERIM STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED DECEMBER 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,320,613
<SECURITIES> 14,419
<RECEIVABLES> 107,033
<ALLOWANCES> 5,367
<INVENTORY> 111,959
<CURRENT-ASSETS> 2,597,014
<PP&E> 554,747
<DEPRECIATION> 398,312
<TOTAL-ASSETS> 3,053,868
<CURRENT-LIABILITIES> 308,154
<BONDS> 0
0
2
<COMMON> 114
<OTHER-SE> 2,745,598
<TOTAL-LIABILITY-AND-EQUITY> 3,053,868
<SALES> 164,457
<TOTAL-REVENUES> 164,457
<CGS> 119,470
<TOTAL-COSTS> 119,470
<OTHER-EXPENSES> 866,068
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (812,944)
<INCOME-TAX> 0
<INCOME-CONTINUING> (812,944)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (812,944)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
