<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended June 30, 1998
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:
<TABLE>
<S> <C>
Common Stock, $.00001 par value 11,351,764
- ------------------------------- ----------
(Class) (Outstanding at July 31, 1998)
</TABLE>
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
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<PAGE> 2
AMERICAN TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Balance Sheets as of June 30, 1998 and
September 30, 1997 3
Statements of Operations for the three and nine months ended
June 30, 1998 and 1997 4
Statements of Cash Flows for the nine months ended
June 30, 1998 and 1997 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 and Use of Proceeds *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
* No information provided due to inapplicability of the item.
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN TECHNOLOGY CORPORATION
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 30, September 30,
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,798,790 $ 3,338,458
Investment securities 26,833 29,289
Trade accounts receivable - net 120,085 307,174
Inventories 66,232 189,815
Prepaid expenses and other 50,673 27,376
----------- -----------
Total current assets 2,062,613 3,892,112
EQUIPMENT - NET 188,173 196,422
OTHER ASSETS
Patents 219,695 137,440
Other 7,779 25,904
----------- -----------
$ 2,478,260 $ 4,251,878
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 283,081 $ 172,305
LONG-TERM DEBT (NOTE 7) -- 386,651
----------- -----------
Total Liabilities 283,081 558,956
----------- -----------
STOCKHOLDERS' EQUITY (NOTE 8)
Preferred stock $.00001 par value; authorized
5,000,000 shares;
Series A Convertible preferred stock, 350,000
shares designated, -0- and 350,000
issued and outstanding, respectively,
(liquidation preference of $10 per share) -- 3,321,153
Common stock $.00001 par value; authorized
20,000,000 shares; 11,340,764 and 9,758,779 shares
issued and outstanding, respectively 113 98
Additional paid-in capital 9,972,245 4,666,035
Notes receivable (27,895) (153,150)
Accumulated deficit (7,775,914) (4,170,300)
Net unrealized gain on securities available for sale 26,630 29,086
----------- -----------
Total stockholders' equity 2,195,179 3,692,922
----------- -----------
$ 2,478,260 $ 4,251,878
=========== ===========
</TABLE>
See notes to interim financial statements.
3
<PAGE> 4
AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 79,257 $ 88,013 $ 163,836 $ 771,117
Cost of goods sold 93,978 79,610 378,497 624,098
------------ ------------ ------------ ------------
GROSS PROFIT (LOSS) (14,721) 8,403 (214,661) 147,019
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 442,214 243,377 1,420,771 852,781
Research and development 269,210 165,608 708,045 371,216
Non-cash compensation expense 427,255 137,707 464,528 142,207
------------ ------------ ------------ ------------
Total operating expenses 1,138,679 546,692 2,593,344 1,366,204
------------ ------------ ------------ ------------
Loss from operations (1,153,400) (538,289) (2,808,005) (1,219,185)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest income 29,334 8,832 113,946 14,257
Interest expense -- -- -- (158)
Interest expense - non-cash (920,000) (14,477) (926,555) (139,677)
Other -- -- 15,000 (800)
------------ ------------ ------------ ------------
Total other income (expense) (890,666) (5,645) (797,609) (126,378)
------------ ------------ ------------ ------------
Loss before taxes on income (2,044,066) (543,934) (3,605,614) (1,345,563)
Taxes on income -- -- -- --
------------ ------------ ------------ ------------
NET LOSS $ (2,044,066) $ (543,934) $ (3,605,614) $ (1,345,563)
============ ============ ============ ============
BASIC NET LOSS PER SHARE
OF COMMON STOCK (NOTE 3) $ (0.18) $ (0.06) $ (0.34) $ (0.15)
============ ============ ============ ============
AVERAGE WEIGHTED NUMBER OF
COMMON SHARES OUTSTANDING 11,250,244 9,550,807 10,733,524 9,118,393
============ ============ ============ ============
</TABLE>
See notes to interim financial statements.
4
<PAGE> 5
AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH Nine Months Ended
June 30,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(3,605,614) $(1,345,563)
Adjustments to reconcile net loss
to cash used in operating activities:
Amortization and depreciation 99,826 69,754
Warrants issued for services 122,000 4,500
Options granted for services 180,000 --
Non-cash interest on cashless exercise
of warrants 920,000 --
Non-cash interest on long-term debt 6,555 128,914
Compensation and services paid in common stock 37,273 137,707
Bonus paid on exchange for payment on note receivable 125,255 --
Non-cash accrued interest on long term debt -- 10,763
Inventory and loss accrual 160,000 --
Changes in operating assets and liabilities:
Prepaid expenses and other (23,297) 44,396
Trade accounts receivable 187,089 22,561
Inventories (36,417) (4,247)
Accounts payable and accrued expenses 110,776 (214,514)
----------- -----------
Net cash provided by (used in) operating activities (1,716,554) (1,145,729)
----------- -----------
INVESTING ACTIVITIES:
Purchase of equipment (73,452) (195,039)
Purchase of other assets (82,255) (62,378)
----------- -----------
Net cash provided by (used in) investing activities (155,707) (257,417)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock warrants 136,250 20,000
Proceeds from exercise of stock options 196,343 325,250
Proceeds loaned on notes receivable - officers for
option exercise -- (173,150)
Principal payments on notes receivable - officer -- 20,000
Proceeds from convertible notes -- 1,000,000
----------- -----------
Net cash provided by (used in) financing activities 332,593 1,192,100
----------- -----------
Increase (decrease) in cash (1,539,668) (211,046)
CASH, BEGINNING OF PERIOD 3,338,458 657,331
----------- -----------
CASH, END OF PERIOD $ 1,798,790 $ 446,285
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ -- $ 158
Non-cash financing activities:
Convertible notes exchanged for common stock $ 375,000 $ 325,000
Interest paid by issuance of common stock 18,206 --
</TABLE>
See notes to interim financial statements.
5
<PAGE> 6
AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
1. OPERATIONS
American Technology Corporation (the "Company") is engaged in the design,
development and commercialization of sound, acoustics and other technologies and
the sales and marketing of consumer electronic products.
The Company's plan of operation for the next twelve months is to introduce to
market the Company's patent-pending sound and acoustics technologies, continue
research and development on proprietary existing and new technologies and
distribute its new line of portable electronic products. The Company expects to
incur additional operating losses primarily as a result of research and
development and marketing costs for its sound and acoustics technologies known
as Stratified Field Technology(TM) ("SFT(TM)"), Hypersonic Sound Technology(TM)
("HSS(TM)") and other technologies. The Company anticipates that the
introduction to market of its sound and acoustics technologies will require
increased personnel, patent preparation and filing fees and operating costs. 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.
At the current rate of expenditures, the Company believes it will require
approximately $750,000 in additional funds during the next twelve months.
Management believes these funds may be generated from operations but there can
be no assurance thereof. These estimates are subject to significant variability
and change due to management decisions regarding technology development and
marketing, operations and the result of factors beyond management's control. 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.
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 and nine month
periods are not necessarily indicative of the results that may be expected for
the year.
3. NET LOSS PER SHARE
The Company has implemented Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." Previously the Company followed the provisions of
Accounting Principles Board Opinion ("APB") 15, "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, similar to fully
diluted earnings per share. 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. Stock options and warrants to purchase
1,386,800 shares of common stock were outstanding at June 30, 1998 and stock
options, warrants and convertible debt exercisable into 1,416,432 shares of
common stock were outstanding as of June 30, 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. All prior period loss per share data
is presented in conformity with the requirements of SFAS No. 128.
6
<PAGE> 7
AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
4. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 130
"Reporting Comprehensive Income", SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" and SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post retirement Benefits." 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 is displayed 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. SFAS No. 132 standardizes the disclosure requirements for pensions
and other post retirement benefits and requires additional information on
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis.
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. 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. Management
believes the adoption of these statements will have no material impact on the
Company's financial statements and that results of operations and financial
position will be unaffected by their implementation.
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
June 30, 1998:
<TABLE>
<S> <C>
Finished goods $ 44,200
Work in process 8,005
Raw materials 14,027
--------
$ 66,232
========
</TABLE>
6. INVESTMENT SECURITIES
The Company's investment securities consist 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 June 30, 1998 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 $26,630 $26,833
</TABLE>
7. LONG-TERM DEBT
During the nine month period ended June 30, 1998 the Company's $375,000 of
unsecured 6% convertible subordinated promissory notes due March 1, 1999 and
accrued interest of $18,206 were converted into 128,459 common shares.
7
<PAGE> 8
AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
8. STOCKHOLDERS' EQUITY
The following summarizes equity transactions for the nine months ended June 30,
1998:
<TABLE>
<CAPTION>
Common Stock
--------------------------------- Preferred Stock
Common (Par Value and -------------------------------
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 122,494 375,000 -- --
Stock issued for interest on convertible 6%
notes 5,965 18,206 -- --
Stock issued on conversion of warrants 215,000 136,250 -- --
Cashless exercise of warrants 106,029 920,000 -- --
Value assigned to 75,000 warrants granted as
consulting services -- 122,000 -- --
Value assigned to 40,000 options granted for
services -- 180,000 -- --
Stock issued on exercised stock options 150,300 196,343 -- --
Common stock issued on conversion of
Series A Convertible Preferred Stock 974,197 3,321,153 (350,000) (3,321,153)
Common stock issued for compensation
and services 8,000 37,273 -- --
----------- ----------- ----------- -----------
Balance June 30, 1998 11,340,764 $ 9,972,358 -- --
=========== =========== =========== ===========
</TABLE>
The following table summarizes information about stock option activity during
the period ended June 30, 1998:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
---------- ----------------
<S> <C> <C>
Outstanding October 1, 1997 1,672,500 $3.79
Granted 246,600 $7.23
Canceled/expired (742,000) $5.81
Exercised (150,300) $1.31
---------- -----
Outstanding June 30, 1998 1,026,800 $3.52
==========
Exercisable at June 30, 1998 843,733 $2.67
==========
</TABLE>
During the nine months ended June 30, 1998, the Company recorded non-cash
compensation expense of $180,000 under its stock option plans to non-employees
through the granting of 40,000 options.
The following table summarizes information about stock options outstanding at
June 30, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 06/30/98 Life Price at 06/30/98 Price
------------ ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.50-$0.55 480,000 2.65 $ 0.52 480,000 $ 0.52
$2.00-$2.15 8,500 0.05 2.04 8,500 2.04
$3.59-$4.48 217,000 3.90 3.27 103,333 4.08
$4.98-$5.90 210,000 5.81 4.03 205,000 5.83
$7.81 61,300 2.76 7.81 46,900 7.81
$16.00 50,000 4.26 16.00 -0- --
----------------------------------------------------------------------------------------------------------------
$0.50-$16.00 1,026,800 3.52 $ 3.13 843,733 $ 2.67
================================================================================================================
</TABLE>
8
<PAGE> 9
AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
In the third quarter ended June 30, 1998, the Company amended the terms of a
warrant to purchase 100,000 shares of Common Stock granted to a director in
connection with a 1992 financing transaction. The amendment provided for a
cashless exercise, which was completed in May 1998. The Company recorded
non-cash interest expense of $920,000 in connection with the cashless exercise.
Also, during the third fiscal quarter of 1998, the Company granted warrants to
purchase 75,000 shares at $16.00 per share in connection with consulting
services. These warrants were valued at $122,000.
At June 30, 1998, the Company had the following warrants outstanding, each
exercisable into one common share:
<TABLE>
<CAPTION>
Number Exercise Price Expiration Date
------ -------------- ---------------
<S> <C> <C>
50,000 $5.00 March 1, 2000
175,000 $7.50 August 1, 2000
60,000 $5.00 February 5, 2000
25,000 $16.00 June 18, 2000
50,000 $16.00 May 12, 2003
-------
360,000
=======
</TABLE>
9. INCOME TAXES
At June 30, 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 $3,600,000
which expire through 2012 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, 1997.
OVERVIEW
The Company is focusing on completing development and commercializing its
patent-pending Stratified Field Technology ("SFT") and Hypersonic Sound
Technology(TM) ("HSS") sound reproduction technologies. The SFT technology
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. The Company has entered into
working agreements with three global consumer product companies for HSS and one
license for SFT technology. The Company's strategy is to enter into additional
arrangements with the goal of establishing additional definitive licensing or
supply agreements. There can be no assurance the Company will be successful in
commercially exploiting the SFT or HSS technology.
From 1988 to early 1992 the Company was inactive. In early 1992 the Company
commenced its current business activities related to electronic products and
technologies and in 1996 commenced development of its acoustical technologies.
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 the
Company's control. The Company has not generated any significant revenues from
its SFT or HSS technology to date.
9
<PAGE> 10
In June 1998 the Company executed its first license agreement on its SFT
technology with Authentic, Ltd. providing for initial license payments of
$250,000 based on the achievement of certain milestones and for future minimum
royalties. Although management believes this license agreement has the potential
for significant future royalties, the realization thereof is subject to
successful product implementation and acceptance.
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 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
Company is also developing its patented and patent-pending GPS and jet engine
noise reduction technologies.
The future of the Company is largely dependent upon the success of the SFT
and/or HSS technology, other technologies or the development of new
technologies. The Company invests significant funds in research and development
and on patent applications related to its proprietary technologies. There can be
no assurance the Company's technologies will achieve market acceptance
sufficient to sustain the Company or achieve profitable operations. See also
"Business Risks" below.
To date substantially all of the Company's revenues have been derived from
portable consumer electronic products. In the first quarter of fiscal 1998 the
Company began phasing out its ear radio line and sourcing a line of miniature
radios and portable consumer electronic products manufactured by others to be
marketed and distributed by the Company. The Company terminated ear radio
production in the second fiscal quarter and included in cost of sales is a
$160,000 charge for the write-off of obsolete parts inventory and writedown of
finished goods. The Company also terminated its mini-headphone radio development
to focus on sourced products and the Company's acoustical technologies. The
Company has sourced a total of eight portable electronic products (including FM
and solar radios) targeted for niche markets at retail prices ranging from
$11.99 to $51.99. Sourcing is on both an exclusive and nonexclusive basis and
for different market territories on a product by product basis. The Company's
market focus is in North America. The Company intends to inventory finished
goods as well as provide direct factory shipment to certain customers. The
Company recently obtained initial purchase orders and commenced shipments during
the third fiscal quarter ending June 30, 1998.
Demand for the Company's portable consumer electronic products is subject to
significant month to month variability resulting from seasonal demand issues and
the limited number of customers and market penetration achieved to date by the
Company. Prior ear radio sales were concentrated with a few customers and sales
of the new sourced product line may also be concentrated in a few customers. The
Company is reliant on outside manufacturers to supply the products and there can
be no assurance of future supply. 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.
There can be no assurance that the new line of sourced radios and other products
can be marketed successfully. As a result, the Company anticipates significantly
lower portable consumer electronic product sales in the current fiscal year
compared to the prior year.
RESULTS OF OPERATIONS
Net sales for the nine months ended June 30, 1998 were $163,836, a 79% decrease
from the first nine months of the prior year. Substantially all sales in both
periods were from radio products. Sales for the three months ended June 30, 1998
were $79,257 compared to $88,013 for the comparable prior period. Sales in the
first nine months of fiscal 1998 included sales to several new large chain
retailers and the significant decrease in the current nine month period reflects
the phasing out and termination of the ear radio line. Future portable
electronic product sales are expected to consist of the new line of sourced
products manufactured by others. The Company anticipates significantly lower
portable consumer electronic product sales in the current fiscal year compared
to the prior year. 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 sourced higher margin portable electronic products that it can
achieve better results over time with a broader product line than achieved in
the past. There can be no assurance that the planned new product line can be
successfully introduced to market.
10
<PAGE> 11
Cost of sales for the nine months ended June 30, 1998 were $378,497 resulting in
a gross loss of $214,661. Cost of sales for the three months ended June 30, 1998
were $93,978 and the gross loss was $14,721. Included in the cost of sales for
the current year was $160,000 for the write-off of obsolete parts inventory and
writedown of finished goods to be liquidated. In the prior year the Company
recorded a gross margin of $147,019 for the first nine months and $8,403 for the
third fiscal quarter. The current year gross loss is the result of the phasing
out of the ear radio product line and included special closeout pricing to
reduce inventory levels as well as the $160,000 charge. Until the new products
are introduced in volume there is significant uncertainty about future gross
margins. Gross margin percentage is highly dependent on sales prices, volumes,
purchasing costs and overhead allocations.
Research and development costs for the nine months ended June 30, 1998 were
$708,045 compared to $371,216 for the comparable nine months of the prior year.
The $336,829 increase resulted primarily from an increase in HSS and SFT
technology development activities and related personnel and component costs.
Personnel costs increased $260,000 in the current period due to additional
research employees and component and equipment costs increased by $58,000 due to
the increased level of activity in the current period. Research and development
costs increased from $165,608 in the third quarter of the prior year to $269,210
in the third fiscal quarter of 1998 reflecting the increased personnel and
activity.
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 SFT and HSS
technology development. The Company is seeking additional engineering and
support personnel to further expand in-house research and development activities
in future periods.
Selling, general and administrative expenses increased from $852,781 for the
nine months ended June 30, 1997 to $1,420,771 for the nine months ended June 30,
1998. The $567,990 increase included a $290,000 increase in personnel costs
primarily associated with the addition of senior executives and SFT/HSS
technology marketing personnel, a $97,000 increase in outside marketing and
professional services, a $75,000 increase in occupancy related costs due to a
new leased facility and increased personnel and a $45,000 increase in legal and
audit costs related to financing and pre-licensing activities. Selling, general
and administrative expenses increased to $442,214 in the third quarter compared
to $243,377 in the prior years comparable third quarter as a result of the
increased costs outlined above. Management anticipates that selling, general and
administrative costs will continue at higher levels in fiscal 1998 due to the
additions of senior executive and 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.
The Company incurred $427,255 of non-cash compensation expenses in the third
fiscal quarter 1998 including $122,000 for warrants issued for services,
$180,000 for stock options granted to non-employees for services, and a $125,255
bonus paid in exchange for payment on notes receivable. In the prior year's
third fiscal quarter the Company issued $4,500 warrants for services and common
stock for services of $137,707.
As a result of the above factors, the Company experienced a loss from operations
of $2,808,005 during the nine months ended June 30, 1998, compared to a loss
from operations of $1,219,185 for the comparable nine months ended June 30,
1997. The operating loss for the third fiscal quarter of 1998 was $1,153,400
compared to $538,289 for the prior year's third quarter. The increase in the
operating losses resulted primarily from the increases in research and
development costs and increases in selling, general and administrative costs
associated with the SFT and HSS technology combined with the gross loss from
product sales.
During the nine months ended June 30, 1998, the Company recognized interest
income of $113,946 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 nine months the Company incurred $926,555 of non-cash interest
including $920,000 computed on the cashless exercise of previously issued
warrants.
As a result of the above factors, the Company reported a net loss of $3,605,614
for the nine months ended June 30, 1998, compared to a net loss of $1,345,563
for the nine month period ended June 30, 1997. The Company has federal net loss
carryforwards of approximately $3,600,000 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.
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.
11
<PAGE> 12
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 $1,145,729 for the fiscal year ended September 30,
1997 and $1,716,554 for the nine months ended June 30, 1998. During the nine
months ended June 30, 1998, the net loss of $3,605,614 included non-cash
expenses of $1,650,909 resulting in an adjusted net cash loss of $1,954,705. In
addition to this amount of $1,954,705, cash was used in operating activities
through an increase in prepaid expenses and other of $23,297 and an increase in
inventories of $36,714, as adjusted. Operating cash was provided by a $187,089
reduction in accounts receivable and a $110,776 increase in accounts payable and
accrued liabilities.
At June 30, 1998 the Company had accounts receivable of $120,085 as compared to
$307,174 at September 30, 1997. The reduction in receivables is a direct result
of the significantly reduced sales in the first two quarters from the phasing
out of the ear radio product line. 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 nine months ended June 30, 1998, the Company used approximately $73,000
for the purchase of laboratory equipment and made an $82,000 investment in
patents and new patent applications. The Company estimates a significant level
of investments in patents in fiscal 1998 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 June 30, 1998 the Company had working capital of $1,779,532 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, 1998,
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 $1,798,790 at June 30, 1998 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 expenditures for
research and development and marketing costs for its SFT and 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 the SFT and HSS technology will require increased personnel
and operating costs. At the current rate of expenditures, without any
contribution from product sales or technology exploitation, the Company
estimates it will require approximately $750,000 of additional funding during
the next twelve months. Management believes that operations during the next
twelve months may be able to generate the required funds, but there can be no
assurance thereof. Management's estimates are subject to significant variability
and change due to decisions regarding technology development and marketing,
operations and the result of outside factors. Should additional funding be
required there can be no assurance of its availability nor the terms thereof.
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 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 6, 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, 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 the
Company to resolve this problem range from $10,000 to $20,000. 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. 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.
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
12
<PAGE> 13
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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's fiscal 1997 Annual Meeting of Stockholders held on April 24,
1998 the following individuals, constituting all of the members of the Board of
Director were elected: Dale Williams, Elwood G. Norris, Richard M. Wagner, Joel
A. Barker, Cornelius J. Brosnan.
The following proposals were approved at the Company's Annual Meeting of
Stockholders:
1. Election of Directors:
<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C> <C>
Dale Williams 6,121,512 -0- 2,843,817
Elwood G. Norris 8,960,729 -0- 4,600
Richard M. Wagner 8,961,329 -0- 4,000
Joel A. Barker 8,961,729 -0- 3,600
Cornelius J. Brosnan 8,959,609 -0- 5,720
</TABLE>
2. To Approve the Company's 1997 Stock Option Plan.
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
8,702,354 219,597 26,865
3. To ratify the selection of BDO Seidman, LLP as independent auditors of the
Company for the fiscal year ended September 30, 1998.
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
8,954,431 21,339 20,500
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The following exhibits required by Item 601 of Regulation S-B are
filed as part of this report:
*4.4 Stock Purchase Warrant dated June 18, 1998 exercisable at
$16.00 per share until June 18, 2000 between ATC and to L.H.
Friend, Weinress, Frankson & Presson, Inc. for an aggregate
of 25,000 common shares.
*4.5 Stock Purchase Warrant dated May 12, 1998 exercisable at
$16.00 per share until May 12, 2003 between ATC and Jackson
Strategic, Inc. (subsequently transferred to Jonathan A.
Berg) for an aggregate of 50,000 common shares.
**10.18 Agreement dated as of June 1, 1998, between the Company and
Authentic, Ltd. (Portions of this Exhibit have been omitted,
based on a request for confidential treatment, and have been
filed with the Securities and Exchange Commission pursuant
to rule 406)
27 Financial Data Schedule (as amended)
* Exhibits previously filed with Form 10-KSB for September 30, 1998 filed
on December 29, 1998.
** Exhibit previously filed with Form 10-QSB for June 30, 1998 filed on
August 10, 1998.
(b) Reports on Form 8-K
By Form 8-K report dated June 29, 1998, the Company reported an Item 5 event
related to the Resignation of Dale Williams.
13
<PAGE> 14
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: January 8, 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 NINE MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10QSB/A FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1998 AS AMENDED.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,798,790
<SECURITIES> 26,833
<RECEIVABLES> 128,290
<ALLOWANCES> 8,205
<INVENTORY> 66,232
<CURRENT-ASSETS> 2,062,613
<PP&E> 534,588
<DEPRECIATION> 346,415
<TOTAL-ASSETS> 2,478,260
<CURRENT-LIABILITIES> 283,081
<BONDS> 0
0
0
<COMMON> 113
<OTHER-SE> 2,195,066
<TOTAL-LIABILITY-AND-EQUITY> 2,478,260
<SALES> 163,836
<TOTAL-REVENUES> 163,836
<CGS> 378,497
<TOTAL-COSTS> 378,497
<OTHER-EXPENSES> 2,593,344
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 926,555
<INCOME-PRETAX> (3,605,614)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,605,614)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,605,614)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
