<PAGE> 1
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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 March 31, 1999
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
(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:
Common Stock, $0.00001 par value 11,416,562
- -------------------------------- ----------------------------
(Class) (Outstanding at May 6, 1999)
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AMERICAN TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements:
Balance Sheets as of March 31, 1999 and
September 30, 1998 (unaudited) 3
Statements of Operations for the six months ended
March 31, 1999 and 1998 (unaudited) 4
Statements of Comprehensive Income for the six months
March 31, 1999 and 1998 (unaudited) 5
Statements of Cash Flows for the six months ended
March 31, 1999 and 1998 (unaudited) 6
Notes to Interim Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN TECHNOLOGY CORPORATION
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,224,751 $ 1,034,577
Investment securities available for sale (note 6) 37,175 14,645
Trade accounts receivable, less allowance of $5,367 and $17,000
for doubtful accounts, respectively 56,459 71,737
Inventories (note 5) 140,383 87,292
Prepaid expenses and other 46,047 58,470
------------ ------------
TOTAL CURRENT ASSETS 2,504,815 1,266,721
------------ ------------
Equipment, net 133,592 169,367
Patents 337,230 245,919
Other -- 1,738
------------ ------------
TOTAL ASSETS $ 2,975,637 $ 1,683,745
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 245,603 $ 202,042
Accrued liabilities 40,303 78,791
------------ ------------
TOTAL CURRENT LIABILITIES 285,906 280,833
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series B Preferred stock, $0.00001 par value; 5,000,000
shares authorized: 250,000 shares issued and
outstanding at March 31, 1999 (note 7) 3 --
Common stock, $0.00001 par value; 20,000,000 shares
authorized: 11,413,541 and 11,356,014
shares issued and outstanding, respectively 114 114
Additional paid-in capital 13,614,034 10,180,265
Notes receivable (27,895) (27,895)
Accumulated deficit (10,933,496) (8,764,013)
Accumulated other comprehensive income (note 6) 36,971 14,441
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,689,731 1,402,912
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,975,637 $ 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 March 31, Six Months Ended March 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 116,398 $ 23,695 $ 280,855 $ 84,579
Cost of products sold 93,805 183,354 213,275 284,519
------------ ------------ ------------ ------------
GROSS PROFIT (LOSS) 22,593 (159,659) 67,580 (199,940)
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 463,080 508,695 980,124 966,932
Research and development 260,121 258,363 498,462 450,459
Non-cash compensation expense 49,900 11,625 160,583 37,273
------------ ------------ ------------ ------------
Total operating expenses 773,101 778,683 1,639,169 1,454,664
------------ ------------ ------------ ------------
Loss from operations (750,508) (938,342) (1,571,589) (1,654,604)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 26,067 36,057 34,435 84,611
Interest expense - non-cash -- (1,167) -- (6,555)
Other -- -- (231) 15,000
------------ ------------ ------------ ------------
Total other income (expense) 26,067 34,890 34,204 93,056
------------ ------------ ------------ ------------
NET LOSS $ (724,441) $ (903,452) $ (1,537,385) $ (1,561,548)
============ ============ ============ ============
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS (NOTE 3) $ (904,504) $ (903,452) $ (2,199,483) $ (1,561,548)
============ ============ ============ ============
NET LOSS PER SHARE OF COMMON STOCK - BASIC AND DILUTED $ (0.08) $ (0.08) $ (0.19) $ (0.15)
============ ============ ============ ============
AVERAGE WEIGHTED NUMBER OF COMMON SHARES OUTSTANDING 11,398,149 10,880,598 11,380,836 10,475,165
============ ============ ============ ============
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
4
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AMERICAN TECHNOLOGY CORPORATION
Statement of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
1999 1998
----------- -----------
<S> <C> <C>
Net loss $(1,537,385) $(1,561,548)
Unrealized holding gain (loss) on securities available
for sale 36,971 14,441
----------- -----------
Comprehensive net loss $(1,500,414) $(1,547,107)
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
5
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AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
1999 1998
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH
OPERATING ACTIVITIES:
Net loss $(1,537,385) $(1,561,548)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 53,290 65,737
Common stock issued for services and compensation 83,583 37,273
Stock options granted for services 77,000 --
Non-cash accrued interest on long term debt -- 6,555
Write-down of inventory and loss accrual -- 160,000
Changes in assets and liabilities:
Trade accounts receivable 15,278 184,956
Inventories (53,091) 6,711
Prepaid expenses and other 12,423 (48,087)
Accounts payable 43,561 137,706
Accrued liabilities (38,488) --
----------- -----------
Net cash used in operating activities (1,343,829) (1,010,697)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (15,777) (59,137)
Patent costs paid (91,311) (43,223)
----------- -----------
Net cash used in investing activities (107,088) (102,360)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock warrants -- 105,000
Proceeds from issuance of preferred stock, net 2,480,000 --
Proceeds from exercise of stock options 161,091 50,000
----------- -----------
Net cash provided by financing activities 2,641,091 155,000
----------- -----------
Net increase (decrease) in cash 1,190,174 (958,057)
Cash, beginning of period 1,034,577 3,338,458
----------- -----------
Cash, end of period $ 2,224,751 $ 2,380,401
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-cash financing activities:
Convertible notes exchanged for common stock -- $ 375,000
Interest paid by issuance of common stock -- $ 18,206
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
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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
and six 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 2,722,800 shares of common stock
were outstanding at March 31, 1999 and stock options, warrants, preferred stock
and debt convertible or exercisable into approximately 2,172,500 shares of
common stock were outstanding as of March 31, 1998. 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 six months
ended March 31, 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 $595,000. The net loss available to common stockholders was also
reduced by the amortization of an additional $60,000 deemed dividend computed
from the discount provision included in the Series B Preferred Stock, which is
being 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 March 31, 1999 was $37,098, which also increases the
net loss available to common stockholders. Net loss available to common
stockholders is computed as follows:
<TABLE>
<CAPTION>
Six months Ended March 31,
1999 1998
----------- -----------
<S> <C> <C>
Net loss $(1,537,385) $(1,561,548)
Imputed deemed dividend on warrants
issued with Series B Preferred Stock (595,000) --
Accretion on Series B Preferred Stock at stated rate (37,098) --
Series B Preferred Stock dividends based on imputed discount
at issuance (30,000) --
----------- -----------
Net loss available to common stockholders $(2,199,483) $(1,561,548)
=========== ===========
</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 March 31, 1999 and for the six month periods ended
March 31, 1999 and 1998. Total comprehensive income did not differ materially
from the Company's net loss for the six months ended March 31, 1999 or 1998.
7
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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
March 31, 1999:
<TABLE>
<S> <C>
Finished goods $120,481
Work in process 4,440
Raw materials 15,462
--------
$140,383
========
</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
March 31, 1999 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 $36,971 $37,175
</TABLE>
7. STOCKHOLDERS' EQUITY
During December 1998 and January 1999, the Company issued 250,000 shares of
Series B Preferred Stock, par value $0.00001 ("Preferred Stock") for cash at
$10.00 per share for net proceeds of $2,480,000. 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.
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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 250,000 shares of Common Stock at $6.00 per share until November 30,
2001. At March 31, 1999 the Preferred Stock would have been convertible into
507,420 shares of Common Stock.
The following table summarizes changes in equity components from transactions
during the six months ended March 31, 1999:
<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 41,000 -- -- -- 161,091 --
Issuance of Series B Preferred Stock, net
of $20,000 in offering costs -- -- 250,000 3 2,479,997 --
Deemed dividends on 250,000 warrants
issued with Series B Preferred Stock -- -- -- -- 595,000 (595,000)
Accrued 6% accretion on Series B Preferred
Stock -- -- -- -- 37,098 (37,098)
Valued assigned to 30,000 stock options
granted for services -- -- -- -- 77,000 --
Issuance of Common Stock for compensation
and services 16,527 -- -- -- 83,583 --
Net loss -- -- -- -- -- (1,537,385)
------------ ------------ ------------ ------------ ------------ ------------
Balance March 31, 1999 11,413,541 $ 114 250,000 $ 3 $ 13,614,034 $(10,933,496)
============ ============ ============ ============ ============ ============
</TABLE>
The following table summarizes information about stock option activity during
the period ended March 31, 1999:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Outstanding October 1, 1998 1,338,100 $4.51
Granted 269,300 $4.71
Canceled/expired (24,500) $7.44
Exercised (22,500) $4.13
---------
Outstanding March 31, 1999 1,560,400 $4.43
=========
Exercisable at March 31, 1999 1,095,334 $3.36
=========
</TABLE>
The following table summarizes information about stock options outstanding at
March 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 3/31/99 Life Price at 3/31/99 Price
------ ---------- ----------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$0.50-$0.55 480,000 1.90 $0.52 480,000 $0.52
$3.59-$4.48 291,000 3.20 3.61 212,001 3.50
$4.98-$5.90 448,300 3.17 5.28 295,433 5.42
$7.81 41,100 2.04 7.81 27,900 7.81
$8.50 250,000 3.58 8.50 55,000 8.49
$16.00 50,000 3.51 16.00 25,000 16.00
------------ --------- ---- ----- --------- -----
$0.50-$16.00 1,560,400 2.94 $4.43 1,095,334 $3.36
============ ========= ==== ===== ========= =====
</TABLE>
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AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
7. STOCKHOLDERS' EQUITY (cont'd)
At March 31, 1999, 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
250,000 $ 6.00 November 30, 2001
50,000 $16.00 May 12, 2003
50,000 $10.00 January 5, 2004
-------
655,000
=======
</TABLE>
8. INCOME TAXES
At March 31, 1999, 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 2019 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"), HyperSonic Sound ("HSS") sound reproduction
technologies and its Magnified Force Woofer Technology ("MFW"). 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. The Company believes that its MFW
technology is compatible with home theatre systems, while improving output
performance. ATC's strategy is to 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. In addition, the Company
has recently filed a new patent application on the technology of its MFW. 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
10
<PAGE> 11
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.
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 six months ended March 31, 1999 were $280,855, a 232%
increase from the first six months of the prior year. Substantially all revenues
in both periods were from electronic products. Sales for the three months ended
March 31, 1999 were $116,398 compared to $23,695 for the comparable prior
period. Second quarter fiscal 1999 product sales consist of the 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 six months ended March 31, 1999 were $213,275 resulting in
a gross profit of $67,580 or 24%. This compares to a gross loss of $199,940 for
the comparable period of the prior year. Cost of sales for the three months
ended March 31, 1999 were $93,805 and gross profit was $22,593. The fiscal 1999
gross profit is the result of the new product line. The prior year's 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 $966,932 for the six
months ended March 31, 1998 to $980,124 for the six months ended March 31, 1999.
The increase of $13,192 is in personnel costs primarily associated with the
addition of senior executives and SFT/HSS technology marketing personnel.
Selling, general and administrative expenses decreased to $463,080 in the second
quarter compared to $508,695 in the prior years' comparable second quarter.
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 six months ended March 31, 1999 were
$498,462 compared to $450,459 for the comparable six months of the prior year.
The $48,003 increase resulted primarily from an increase in SFT and HSS
technology development activities and related personnel and component costs.
Research and development costs of $260,121 in the second quarter of fiscal 1999
were comparable to the prior year $258,363 in the second fiscal quarter of
fiscal 1998.
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 $160,583 for the six
months ended March 31, 1999 compared to $37,273 for the comparable prior period.
Non-cash compensation expense for the current period included
11
<PAGE> 12
the $77,000 value attributable to stock options granted to consultants on 30,000
shares of Common Stock and $83,583 of services paid through the issuance of
16,527 shares of Common Stock.
As a result of the above factors, the Company experienced a loss from operations
of $1,571,589 during the six months ended March 31, 1999, compared to a loss
from operations of $1,654,604 for the comparable six months ended March 31,
1998. The net loss for the six months ended March 31, 1999 was $1,537,385
comparable to the $1,561,548 for the prior year's comparable six month period.
The net loss available to common stockholders for the six month ended March 31,
1999 of $2,199,483 includes $595,000 of imputed dividends on the issuance of the
Series B Preferred Stock, $37,098 of accretion and amortization of $30,000
related to the imputed discount at issuance.
The Company has federal net loss carryforwards of approximately $7,200,000 for
federal tax purposes expiring through 2019. 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 six months
ended March 31, 1999, the net loss of $1,537,385 included non-cash expenses of
$213,872 resulting in an adjusted net cash loss of $1,323,513. In addition to
this amount of $1,323,513, $53,091 cash was used in operating activities through
an increase in inventories and a reduction of $38,488 in accrued liabilities, as
adjusted. Operating cash was provided by a $15,278 decrease in account
receivables, a $12,423 reduction in prepaid expenses and other and a $43,561
increase in accounts payable.
At March 31, 1999, the Company had accounts receivable of $ 56,459 as compared
to $71,737 at September 30, 1998. This represented approximately 37 days of
sales. The reduction in receivables resulted from a decrease in days outstanding
and in the collection cycle for product sales in the current year. 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 six months ended March 31, 1999, the Company used approximately $15,777
for the purchase of laboratory equipment and made a $91,311 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 March 31, 1999, the Company had working capital of $2,2,18,909 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 March 31, 1999 and 1998, ATC owned 225,300
shares of EDIG with a market value of $37,175 and $18,955, 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 March 31, 1999,
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 and January 1999,
ATC sold 250,000 shares of Series B Preferred Stock providing net proceeds to
the Company of $2,480,000.
Other than cash of $2,224,751 at March 31, 1999, 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
12
<PAGE> 13
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.
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 READINESS DISCLOSURE
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 which could
lead to business disruptions in the U.S. and internationally.
The Company has identified the following areas, which could be impacted by the
Year 2000 issue. They are: Company products; internally used systems and
software; products or services provided by key third parties; and the inability
of licensees and prospective licensees or customers to process business
transactions relating to licensing revenue and product sales.
During the first calendar quarter ended March 31, 1999 the Company completed an
initial review its internal systems. The review consisted of an evaluation of
significant internal hardware systems and major software application programs,
which are primarily, packaged third party "off-the-shelf" software programs. As
a result of this review the Company has identified certain systems which require
further review and probable upgrades to be Year 2000 ready, the costs of which
are included in management's estimates outlined below. The Company is currently
evaluating new business software applications and one major selection and
evaluation criterion will be full compliance with Year 2000. The Company's
licensable technology and consumer products do not have any material Year 2000
problems.
In addition, the Company is in the process of assessing the compliance of its
major customers, suppliers and vendors. Management believes that third-party
relationships upon which the Company relies represent the greatest risk with
respect to the Year 2000 issue, because the Company cannot guarantee that third
parties will be able to adequately assess and address their Year 2000 compliance
issues in a timely manner. As a consequence, the Company can give no assurances
that issues related to Year 2000 will not have a material adverse effect on
future results of operations or financial condition.
Total costs relating to the Company's compliance efforts, based on management's
best estimates range from $10,000 to $20,000 consisting primarily of obtaining,
installing and testing new computers and upgrades of third party "off-the-shelf"
software programs. To date there have been no material direct out-of-pocket
costs. Maintenance or modification costs will be expensed as incurred, while the
costs of new computers or software will be capitalized and amortized over the
respective useful life.
Should the Company not be completely successful in mitigating internal and
external Year 2000 risks, the likely worst case scenario could be a system
failure causing disruptions of operations, including, among other things, a
temporary inability to process transactions, develop or distribute products,
send invoices or engage in similar normal business activities at the Company or
its vendors and suppliers. If the Company determines certain suppliers are not
Year 2000 compliant, it may have to arrange for alternative sources of supply
and the stockpiling of inventory in the fall of 1999 in preparation for the Year
2000. The Company cannot estimate at this time the cost or effect on the
Company's financial condition of any stockpiling of inventory. The Company
currently does not have any other contingency plans with respect to potential
Year 2000 failures of its suppliers or customers and at the present time, after
an initial evaluation, does not intend to develop one. If these failures would
occur, depending upon their duration and severity, they could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The information set forth above under this caption "Year 2000 Readiness
Disclosure" relates to the Company's efforts to address the Year 2000 concerns
regarding the Company's (a) operations, (b) products and technologies licensed
or
13
<PAGE> 14
sold to third parties and (c) major suppliers and customers. Such statements
are intended as Year 2000 Statements and Year 2000 Readiness Disclosures and are
subject to the "Year 2000 Information Readiness Act."
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.
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 second fiscal quarter ended March 31, 1999 that were not
registered under the Securities Act:
In January 1999 the Company sold in a private offering for cash at
$10.00 per share a total of 48,400 shares of Series B Preferred Stock,
par value $.00001 ("Preferred Stock") to a limited number of investors
("Preferred Shareholders") for an aggregate of $484,000. 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 48,400 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
14
<PAGE> 15
registered under the Act prior to issuance. The Company 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.
In December 1998, the Company initially sold 201,600 shares of Preferred Stock
and issued warrants on 201,600 shares on the same terms. Gross proceeds were
$2,016,000. Net proceeds from the December and January sale of the Preferred
Stock of approximately $2,480,000 is intended primarily for working capital to
continue the Company's efforts to exploit its SFT and HSS technology and other
technologies.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's fiscal 1999 Annual Meeting of Stockholders held on March 5,
1999, the following individuals, constituting all of the members of the Board of
Director were elected: Cornelius J. Brosnan, Elwood G. Norris, Richard M.
Wagner, David J. Carter, O'Connell J. Benjamin.
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>
Cornelius J. Brosnan 6,019,782 -0- 700
Elwood G. Norris 6,019,682 -0- 800
Richard M. Wagner 6,019,782 -0- 700
David J. Carter 6,019,782 -0- 700
O'Connell J. Benjamin 6,019,782 -0- 700
</TABLE>
2. To approve of the Company's 1997 Employee Stock Compensation Plan
<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C> <C>
6,015,757 1,605 3,120
</TABLE>
3. To ratify the selection of BDO Seidman, LLP as independent auditors of the
Company for the fiscal year ended September 30, 1999.
<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C> <C>
6,019,982 300 200
</TABLE>
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
15
<PAGE> 16
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: May 13, 1999 By: /s/ RENEE' WARDEN
----------------------------------
Renee' Warden, Chief Accounting
Officer and Treasurer
(Principal Financial and
Accounting Officer and duly
authorized to sign on behalf
of the Registrant)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
UNAUDITED INTERIM STATEMENTS FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,224,751
<SECURITIES> 37,175
<RECEIVABLES> 61,826
<ALLOWANCES> 5,367
<INVENTORY> 140,383
<CURRENT-ASSETS> 2,504,815
<PP&E> 557,906
<DEPRECIATION> 424,314
<TOTAL-ASSETS> 2,975,637
<CURRENT-LIABILITIES> 285,906
<BONDS> 0
0
3
<COMMON> 114
<OTHER-SE> 2,689,614
<TOTAL-LIABILITY-AND-EQUITY> 2,975,637
<SALES> 280,855
<TOTAL-REVENUES> 280,855
<CGS> 213,275
<TOTAL-COSTS> 213,275
<OTHER-EXPENSES> 1,639,169
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,537,385)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,537,385)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,537,385)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
