Washington, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
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10-Q/A (AMENDMENT NO.1) (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . ---------------- ---------- Commission File Number: 0-24248 AMERICAN TECHNOLOGY CORPORATION (Exact name of registrant as specified in its charter) Delaware 87-03261799 -------- ----------- (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) (858) 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.
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[X] YES NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
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Yes [ ] No [X].
Indicate the number of shares outstanding of each of the issuer’sissuer's classes of
common stock, as of MayAugust 8, 2003.
Common Stock, $0.00001 par value 18,845,292
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(Class) (Number of Shares)
2003.
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of the original filing, (iii) certain updates concerning those legal
matters; and (iv) updates to the disclosure in Part I, Item 4 concerning
disclosure controls and procedures, this report does not attempt to update the
information included herein beyond the original filing date.
AMERICAN TECHNOLOGY CORPORATION
INDEX
PART I. FINANCIAL INFORMATION | |||
Financial Statements: | |||
Balance Sheets as of | 3 | ||
4 | |||
Statements of Cash Flows for the | 5 | ||
6 | |||
Item 2. |
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15 Item 3. |
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25 Item 4. |
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25 Item 1. |
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25 Item 2. |
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26 Item 3. |
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26 Item 4. |
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26 Item 5. |
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27 Item 6. |
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2
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| March 31, |
| September 30, |
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ASSETS |
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Current Assets: |
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Cash |
| $ | 1,866,335 |
| $ | 1,807,720 |
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Trade accounts receivable, less allowance of $8,091 and $20,191 for doubtful accounts |
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| 36,904 |
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| 111,486 |
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Subscription receivable |
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| 25,000 |
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| — |
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Inventories |
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| 431,756 |
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| 136,881 |
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Prepaid expenses and other |
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| 73,000 |
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| 20,130 |
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Total current assets |
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| 2,432,995 |
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| 2,076,217 |
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Equipment, net |
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| 165,247 |
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| 363,448 |
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Patents, net of accumulated amortization of $179,290 and $141,314 |
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| 988,785 |
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| 1,034,333 |
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Purchased technology, net of accumulated amortization of $1,157,278 and $946,864 |
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| 105,222 |
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| 315,636 |
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Total assets |
| $ | 3,692,249 |
| $ | 3,789,634 |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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Current Liabilities: |
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Accounts payable |
| $ | 360,640 |
| $ | 733,531 |
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Accrued liabilities: |
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Payroll and related |
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| 188,276 |
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| 202,432 |
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Deferred revenue |
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| 388,168 |
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| 276,667 |
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Other |
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| 60,264 |
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| 59,632 |
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Interest on notes |
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| 381,534 |
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| 240,279 |
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Capital lease short-term portion |
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| 9,110 |
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| 8,963 |
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12% Convertible Promissory Notes |
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| 1,725,000 |
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| — |
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Related party 12% Convertible Promissory Notes, |
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| 300,000 |
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| — |
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Total current liabilities |
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| 3,412,992 |
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| 1,521,504 |
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Long-Term Liabilities: |
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12% Convertible Promissory Notes net of $0 and $345,000 debt discount |
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| 1,380,000 |
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Related party 12% Convertible Promissory Notes, net of $0 and $60,000 debt discount |
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| — |
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| 240,000 |
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8% Senior Secured Promissory Notes |
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| 1,000,000 |
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| 1,500,000 |
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Capital lease long-term portion |
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| 28,497 |
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| 33,012 |
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Total liabilities |
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| 4,441,489 |
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| 4,674,516 |
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Commitments and contingencies |
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Stockholders’ deficit |
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Series C Preferred stock 300,000 shares designated: 0 and 10,000 issued and outstanding respectively. Liquidation preference of $0 and $230,510, respectively. |
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Series D Preferred stock 235,400 shares designated: 65,000 and 235,400 issued and outstanding, respectively. Liquidation preference of $685,474 and $2,412,046, respectively. |
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Series E Preferred stock 350,000 shares designated: 343,250 and 0 issued and outstanding, respectively. Liquidation preference of $3,449,126 and $0, respectively. |
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| 3 |
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Common stock, $0.00001 par value; 50,000,000 shares authorized 15,156,670 and 14,351,476 shares issued and outstanding |
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| 151 |
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| 144 |
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Additional paid-in capital |
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| 30,976,600 |
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| 27,255,016 |
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Accumulated deficit |
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| (31,725,995 | ) |
| (28,140,044 | ) |
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Total stockholders’ deficit |
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| (749,240 | ) |
| (884,882 | |
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Total liabilities and stockholders’ deficit |
| $ | 3,692,249 |
| $ | 3,789,634 |
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3
(Unaudited)
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| For the three months ended |
| For the six month ended |
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| 2003 |
| 2002 |
| 2003 |
| 2002 |
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Revenues: |
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Product sales |
| $ | 145,611 |
| $ | 99,155 |
| $ | 533,578 |
| $ | 324,110 |
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Contract and license |
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| 92,331 |
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| 100,278 |
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| 127,663 |
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| 131,944 |
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Total revenues |
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| 237,942 |
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| 199,433 |
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| 661,241 |
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| 456,054 |
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Cost of revenues |
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| 350,784 |
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| 122,385 |
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| 672,419 |
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| 238,845 |
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Gross (loss) profit |
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| (112,842 | ) |
| 77,048 |
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| (11,178 | ) |
| 217,209 |
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Operating expenses: |
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Selling, general and administrative |
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| 908,992 |
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| 610,463 |
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| 1,665,309 |
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| 1,103,120 |
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Research and development |
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| 727,298 |
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| 987,060 |
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| 1,308,719 |
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| 1,880,997 |
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Total operating expenses |
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| 1,636,290 |
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| 1,597,523 |
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| 2,974,028 |
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| 2,984,117 |
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Loss from operations |
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| (1,749,132 | ) |
| (1,520,475 | ) |
| (2,985,206 | ) |
| (2,766,908 | ) |
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Other income (expense): |
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Interest income |
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| 1,321 |
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| 9,910 |
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| 3,652 |
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| 12,556 |
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Interest expense |
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| (104,828 | ) |
| (464,918 | ) |
| (602,730 | ) |
| (929,474 | ) |
Other |
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| (1,667 | ) |
| — |
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| (1,667 | ) |
| (800 | ) |
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Total other income (expense) |
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| (105,174 | ) |
| (455,008 | ) |
| (600,745 | ) |
| (917,718 | ) |
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Net loss |
| $ | (1,854,306 | ) | $ | (1,975,483 | ) | $ | (3,585,951 | ) | $ | (3,684,626 | ) |
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Imputed dividends on convertible Preferred Stock |
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| 253,685 |
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| 2,959 |
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| 412,483 |
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| 22,915 |
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Net loss available to common stockholders |
| $ | (2,107,991 | ) | $ | (1,978,442 | ) | $ | (3,998,434 | ) | $ | (3,707,541 | ) |
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Net loss per share of common stock - basic and diluted |
| $ | (0.14 | ) | $ | (0.14 | ) | $ | (0.27 | ) | $ | (0.26 | ) |
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Average weighted number of common shares outstanding |
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| 14,897,662 |
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| 14,273,238 |
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| 14,629,077 |
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| 14,074,903 |
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4
STATEMENTS OF CASH FLOWS
(Unaudited)
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| For the six months ended |
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| 2003 |
| 2002 |
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Increase (Decrease) in Cash |
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Operating Activities: |
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Net loss |
| $ | (3,585,951 | ) | $ | (3,684,626 | ) |
Adjustments to reconcile net loss to net cash used in operations: |
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Depreciation and amortization |
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| 339,290 |
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| 362,826 |
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Allowance for doubtful accounts |
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| (12,100 | ) |
| — |
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Warranty reserves |
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| 41,542 |
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| — |
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Common stock issued for services and compensation |
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| 410,816 |
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| 7,199 |
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Write-down on patents |
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| 40,321 |
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Options and warrants granted for services |
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| — |
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| 137,590 |
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Amortization of debt discount |
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| 405,000 |
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| 810,000 |
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Changes in assets and liabilities: |
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Trade accounts receivable |
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| 86,682 |
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| (48,551 | ) |
Inventories |
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| (294,875 | ) |
| 27,005 |
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Prepaid expenses and other |
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| (52,870 | ) |
| 34,503 |
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Accounts payable |
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| (255,891 | ) |
| 254,479 |
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Accrued liabilities |
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| 197,690 |
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| 112,081 |
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Net cash used in operating activities |
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| (2,680,346 | ) |
| (1,987,494 | ) |
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Investing Activities: |
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Purchase of equipment |
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| (9,700 | ) |
| (27,086 | ) |
Patent costs paid |
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| (32,749 | ) |
| (55,476 | ) |
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Net cash used in investing activities |
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| (42,449 | ) |
| (82,562 | ) |
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Financing Activities: |
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Payments on capital lease |
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| (4,368 | ) |
| — |
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Proceeds from issuance of convertible promissory notes |
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| 500,000 |
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| — |
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Proceeds from the issuance of preferred stock |
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| 2,407,500 |
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| — |
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Cash paid for offering costs |
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| (141,222 | ) |
| — |
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Proceeds from issuance of convertible promissory notes |
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| — |
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| 1,225,000 |
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Proceeds from exercise of stock options |
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| 19,500 |
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| — |
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Net cash provided by financing activities |
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| 2,781,410 |
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| 1,225,000 |
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Net increase (decrease) in cash |
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| 58,615 |
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| (845,056 | ) |
Cash, beginning of year |
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| 1,807,720 |
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| 1,354,072 |
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Cash, end of year |
| $ | 1,866,335 |
| $ | 509,016 |
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Supplemental disclosures of cash information: |
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Cash paid during the period for: |
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Interest |
| $ | 72,305 |
| $ | — |
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Supplemental disclosure of noncash investing and financing activities: |
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Issuance of stock warrants in connection with convertible debt |
| $ | — |
| $ | 624,750 |
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Increase in additional paid in capital for the beneficial conversion feature of convertible debt |
| $ | — |
| $ | 600,250 |
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Common stock issued on conversion of Series B preferred stock |
| $ | — |
| $ | 2,102,412 |
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Sale of equipment for accounts payable |
| $ | 117,000 |
| $ | — |
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Secured Notes converted into Series E Preferred Stock |
| $ | 1,000,000 |
| $ | — |
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Issuance of Series E Preferred Stock for Subscription receivable |
| $ | 25,000 |
| $ | — |
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5
(Unaudited)
1. OPERATIONS
American Technology Corporation is engaged in design, development and
commercialization of sound, acoustic and other technologies. OurThe Company's
primary focus is on marketing four of our proprietary sound reproduction technologies
and supplying components based on these technologies to customers.
2. STATEMENT PRESENTATION
The accompanying unaudited interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America 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 presentation of the results for interim periods.
Operating results for the three and sixnine 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’sCompany's audited financial statements and notes thereto for the year ended
September 30, 2002 included in the Company’sCompany's annual report on Form 10K.
10-K.
The Company’sCompany's financial statements are presented on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The ability of the Company to continue as a going
concern is contingent upon it obtaining sufficient financing to sustain its
operations and its ability to ultimately generate profits and positive cash flow
from operations. The Company has funded its operations primarily through the
issuance of securities and debt financings. Other than cash of $1,866,335 at March 31, 2003$1,109,293 the
Company hashad no other material unused sources of liquidity at this time. Based on our current cash position and projections for future revenues and currently planned expenditures, we will needJune 30, 2003.
Subsequent to raise additional capital of approximately $2 million to continue operations at planned levels during the next twelve months. While we believe that investment capital in sufficient amounts will be available to us, there can be no guarantee that we will be able to raise funds on terms acceptable to us, or at all. The Company has significant debt that comes due in Decemberquarter ended June 30, 2003, and December 2004.
Based on its current plan and assumptions, the Company anticipatesobtained gross
proceeds of $10 million from the sale to institutional investors of 1,818,180
shares of common stock and warrants to purchase 454,547 shares of common stock.
Management believes that itexisting resources and this new financing will be ableallow it
to meet its cash requirements for the next twelve months.
ManagementBased on current plans and assumptions, management believes increased product
sales maywill provide additional operating funds and believes that any additional investment capital will be available if required.during the next twelve months.
Management has significant flexibility to adjust the level of research and
development and selling and administrative expenses based on the availability of
resources.
Management expects to incur additional operating losses as a result of
expenditures for research and development and marketing costs for sound and other products
and technologies. The timing and amounts of these expenditures and the extent of
the Company’sCompany's operating losses will depend on many factors, some of which are
beyond management’smanagement's control. Management anticipates that the commercialization
of the Company’sCompany's technologies may require increased operating costs, however
management cannot currently estimate the amounts of these costs.
There can be no assurance that any funds required during the next twelve months or thereafter can be generated from operations or that such required funds would be available from the aforementioned or other potential sources. The lack of sufficient funds from operations or additional capital could force the Company to curtail, scale back operations, or cease operations and would therefore have a material adverse effect on the Company’s business.
As such, there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments necessary to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
3. NET LOSS PER SHARE
The Company applies Statement of Financial Accounting Standards (“SFAS”("SFAS") No.
128, “Earnings"Earnings Per Share.”" SFAS No. 128 provides for the calculation of “Basic”"Basic"
and “Diluted”"Diluted" earnings per share (“EPS”("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’sCompany'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, convertible promissory
notes, stock options and warrants convertible or exercisable into approximately
6,745,4745,280,466 and 3,786,8055,127,879 shares of common stock were outstanding at
6
AMERICAN TECHNOLOGY CORPORATIONNOTES TO INTERIM FINANCIAL STATEMENTS(Unaudited)
March 31, June 30, 2003
and 2002, respectively. These securities were not included in the computation of
diluted EPS because of the net losses but could potentially dilute EPS in future
periods.
The Series C Preferred Stock providesprovided for an accretion in the conversion value
of 6% or $1.20 per share per annum. The Series D Preferred Stock provides for an accretion in the conversion value of 6% or $0.60 per share per annum. Theand Series E Preferred Stock
provides for an accretion in the conversion value of 6% or $0.60 per share per
annum. The accrued accretion increases the net loss available to common
stockholders. Net loss available to common stockholders is computed as follows:
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| Three months ended March 31 |
| Six months ended March 31 |
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| 2003 |
| 2002 |
| 2003 |
| 2002 |
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Net Loss |
| $ | (1,854,306 | ) | $ | (1,975,483 | ) | $ | (3,585,951 | ) | $ | (3,684,626 | ) |
Series D Preferred Stock imputed deemed dividends based on discount at issuance |
|
| (62,667 | ) |
| — |
|
| (126,726 | ) |
| — |
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Imputed deemed dividends on warrants issued with Series D Preferred Stock |
|
| (59,255 | ) |
| — |
|
| (115,370 | ) |
| — |
|
Series E Preferred Stock imputed deemed dividends based on discount at issuance |
|
| (59,821 | ) |
| — |
|
| (59,821 | ) |
| — |
|
Imputed deemed dividends on warrants issued with Series E Preferred Stock |
|
| (16,883 | ) |
| — |
|
| (16,883 | ) |
| — |
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Accretion on Series C, D, and E Preferred Stock at stated rate |
|
| (55,059 | ) |
| (2,959 | ) |
| (93,683 | ) |
| (22,915 | ) |
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Net loss available to common stockholders |
| $ | (2,107,991 | ) | $ | (1,978,442 | ) | $ | (3,998,434 | ) | $ | (3,707,541 | ) |
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6
4. RECENT ACCOUNTING PRONOUNCEMENTSFASBFinancial Accounting Standards Board ("FASB") issued SFAS
No. 143, “Accounting"Accounting for Asset Retirement Obligations.”" SFAS No. 143 requires
the fair value of a liability for an asset retirement obligation to be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. SFAS No. 143 is effective
for the Company for the fiscal year ending September 30, 2003. The Company
adopted this statement effective October 1, 2002. The adoption of this statement
did not have a material impact on its financial statements.
In October 2001, the FASB issued SFAS No. 144, “Accounting"Accounting for the Impairment or
Disposal of Long-Lives Assets”.Assets." SFAS 144 requires that those long-lived assets
be measured at the lower of carrying amount or fair value, less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively. The
adoption of this statement did not have a material impact on its financial
statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB No. 4, 44 and 64,
Amendment of FASB No.13, and Technical Corrections. SFAS rescinds FASB No. 4
Reporting Gains and Losses from Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This statement also rescinds SFAS No.44 Accounting
for Intangible Assets of Motor Carriers and amends SFAS No.13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. This statement is
effective for fiscal years beginning after May 15, 2002. The adoption of this
statement did not have a material impact on its financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized and measured
initially at fair value when the liability is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after March 31,June 30,
2003, with
7
AMERICAN TECHNOLOGY CORPORATIONNOTES TO INTERIM FINANCIAL STATEMENTS(Unaudited)
early application encouraged. The Company does not expect the adoption of this statement to have a material effect on its financial statements.
In December 2002, the FASB issued SFAS No. 148,, “Accounting "Accounting for Stock-Based
Compensation - Transition and Disclosure -- an Amendment of FASB Statement No.
123.”" This statement amends SFAS No. 123, “Accounting"Accounting for Stock-Based
Compensation”Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about
7
In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
provides guidance on how an entity classifies and measures certain financial
instruments with characteristics of both liabilities and equity. Many of these
instruments were previously classified as equity. This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The statement requires cumulative effect transition for
financial instruments existing at the adoption date. The Company does not expect
the adoption of this statement to have a material effect on its financial
statements.
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s"Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others” (“Others" ("FIN 45”45"). FIN 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN 45 are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure requirements of FIN 45 are applicable for financial statements of
interim periods ending after December 15, 2002. The Company adopted the
disclosure requirements of FIN 45 in the 1st1st quarter of 2002 and has includeincluded
the new disclosure requirements in the Notes to the Financial Statements (see
Note 6).
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:
|
| March 31, |
| September 30, |
| ||
|
|
|
| ||||
Finished goods |
| $ | 214,885 |
| $ | 78,361 |
|
Raw materials |
|
| 236,871 |
|
| 78,520 |
|
Reserve for obsolete inventory |
|
| (20,000 | ) |
| (20,000 | ) |
|
|
|
| ||||
|
| $ | 431,756 |
| $ | 136,881 |
|
|
|
|
|
June 30, 2003 September 30, 2002
- -----------------------------------------------------------------------------
Finished goods $188,242 $78,361
Raw materials 188,082 78,520
Reserve for obsolete inventory (20,000) (20,000)
- -----------------------------------------------------------------------------
$356,324 $136,881
- -----------------------------------------------------------------------------
6. PRODUCT WARRANTY COST
At the time revenue is recognized, the Company provides for estimated cost of
product warranties as provided under contractual arrangements. Warranty
obligations are affected by product failure rates and service delivery costs
incurred in correcting a product failure. Should such failure rates or costs
differ from these estimates, accrued warranty costs would be adjusted in the
period that such events or costs become known.
Changes in the warranty reserves during the sixnine months ended March 31,June 30, 2003 were
as follows:
Balance at October 1, 2002 |
| $ | 6,313 |
|
Accruals for warranty during the six months ended March 31, 2003 |
|
| 41,542 |
|
|
|
| ||
Balance at March 31, 2003 |
| $ | 47,855 |
|
|
|
|
- ------------------------------------------------------------------------------
Balance at October 1, 2002 $ 6,313
Accruals for warranty during the nine months
ended June 30, 2003 63,568
- ------------------------------------------------------------------------------
Balance at June 30, 2003 $69,881
- ------------------------------------------------------------------------------
7. PURCHASED TECHNOLOGY
In April 2000, the Company acquired all rights to certain loudspeaker technology
owned by David Graebener (“Graebener”("Graebener"), Stephen M. Williams (“Williams”("Williams") and
Hucon Limited, a Washington corporation (“Hucon”("Hucon"). The purchase price consisted
of $300,000 cash plus 200,000 shares of common stock. The 200,000 shares of
common stock were issued in June 2000 and were valued at $962,500. The Company
agreed to pay up to an additional 159,843 shares of common stock to Williams and
Graebener contingent upon the achievement of certain performance milestones
relating to gross revenues received by the Company from the purchased
technology. Contingent shares are recorded as compensation expense when earned.
During fiscal 2002, a total of 50,000 contingent shares were issued. In fiscal
2003, the Company issued the balance of 109,843109,844 contingent shares and recorded
$410,816 in compensation expense. The Company agreed to employ Mr. Williams and
Mr. Graebener for a term of three years subject to certain terms and conditions.
The Company did not renew the employment agreements which terminated on February 15, 2003.
8
(Unaudited)
8. SENIOR SECURED AND CONVERTIBLE SUBORDINATED PROMISSORY NOTES
8% Senior Secured Promissory Notes
- ----------------------------------
On September 30, 2002, the Company issued to accredited investors 8% Senior
Secured Promissory Notes (“("Senior Notes”Notes") for cash proceeds of $1,500,000. The
Senior Notes bear interest at a rate of eight percent (8%) per annum on the
principal outstanding until the earlier to occur of (i) December 31, 2003 or
(ii) when declared due and payable by the Holder upon the occurrence of an Event
of Default (the “Maturity Date”"Maturity Date"). Interest is payable on a quarterly basis with
the first payment due January 2, 2003. The Senior Notes are secured by accounts
receivable, certain equipment and inventory. The Senior Notes are convertible at
the option of the Company. In January 2003, the Company received an additional
$500,000 in cash proceeds from the issuance of a Senior Note to one accredited
investor. The terms of this note are the same as the 8% Senior Secured Notes
discussed above. In connection with the Series E Financing, the Company amended
its Senior Notes (i) to allow the holders of the Notes to convert all or a
portion of the principal balance of the Senior Notes into Series E Preferred
Stock and (ii) to extend the due date of the unconverted balance of the Senior
Notes from December 31, 2003 to December 31, 2004.The2004. On February 28, 2003, an
aggregate of $1,000,000 of Senior Notes wereNote principal was converted into Series E
Preferred Stock at a conversion price equal to the outstanding principal balance of the Senior Notes.Preferred. All accrued but unpaid interest on the converted principal balances
plus an amounta redemption premium of $13,333, equal to two months interest on the
converted principal balances, was paid in cash on the day of conversion. At March 31,On June
27, 2003, an aggregate$681,845 of $1,000,000Senior Note principal was converted into Series E Preferred Stock. The Senior Notes are also subject to mandatory redemption upon the closing of a sale of equity securities in an amount exceeding $3,000,000. The amendmentapplied to the Senior Notes clarified that Senior Note balances convertedexercise of
259,500 warrants leaving a remaining note balance of $318,155 at June 30, 2003.
Subsequent to Series E Stock would not be includedJune 30, 2003 the remaining balance of $318,155 plus interest was
redeemed for purposes of determining whether mandatorycash pursuant to the redemption terms of the remaining Senior Note balance is required.
Notes.
12% Convertible Subordinated Promissory Notes
- ---------------------------------------------
In September and October 2001, the Company sold for cash in a private offering
an aggregate of $2,025,000 of unsecured 12% Convertible Subordinated Promissory
Notes (“Notes”("Notes") to accredited investors and related parties. The Notes were
originally due December 31, 2002, but the maturity date was extended to December
31, 2003 by amendment dated November 19, 2002. The principal and interest amount
of each Note may,was convertible, at the election of the Note holder be converted one or more
times into fully paid and nonassessable shares of common stock, at a price of
$2.00 per share. The Notes may be calledwere callable by the Company for mandatory conversion
if the market price exceedsof the Company's common stock exceeded $5.00 per share for
five days and certain conditions arewere met. Each purchaser was granted a warrant
to purchase one common share of the Company at $2.00 per share until September
30, 2006 (the “Warrant”"Warrant") for each $2.00 of Notes (aggregate Warrants exercisable
into 1,012,500 shares).
At March 31,On June 2, 2003, the Company exercised its right to call the Notes could have been convertedfor mandatory
conversion into 1,193,738 shares of common stock.
stock of the Company. The principal balance of
the Notes of $2,025,000 and accrued interest of $410,032 was converted on June
13, 2003 into 1,217,516 shares of common stock.
The Warrants have antidilution rights reducing the conversion and exercise price for certain
issuances of equity securities by the Company at an effective price below the
applicable conversion or exercise price. In connection with the Notes and Warrants, the
Company recorded a $2,025,000 discount to the notes to reflect the value of the
beneficial conversion feature of the Notes and the value of the Warrants. The
Warrants were valued using the Black-Scholes model with a dividend yield of zero
percent; expected volatility of 89 to 90 percent; risk free interest rate of 4
percent; and an expected life of five years. The value was reflected as a
discount to the debt. This debt discount was being amortized as non-cash
interest expense over the original term of the Notes. For the sixnine month period
ending March 31,June 30, 2003, $405,000 was amortized as non-cash interest expense.
9. STOCKHOLDERS’ DEFICITAtSTOCKHOLDERS' EQUITY
On March 31, 2003, the 10,000 shares of Series C Preferred Stock outstanding
were automatically converted into 41,130 shares of Common stock.
In May 2002, the Company sold 235,400 shares of Series D Convertible Preferred
Stock (“("Series D Stock”Stock"), at $10.00 per share for gross cash proceeds of
$2,354,000. A total of 250,000 shares of Series D Stock have been authorized.
The dollar amount of Series D Stock, increased by $0.60 per share accretion per
annumandannum and other adjustments, is convertible one or more times into fully paid
shares of common stock at a conversion price which is the lower of (i) $4.50 per
share or (ii) 90% of the volume weighted average market price for the five days
prior to conversion, but in no event less than $2.00 per share, subject to
adjustment, provided however, that no such conversion could be made prior to
January 1, 2003 at a conversion price of less than $4.50 per share. The shares
of Series D Stock may be called by the Company for conversion if the market
price of the common stock exceeds $9.50 per share for ten days and certain
conditions are met. The Series D Stock is subject to automatic conversion on
March 31,June 30, 2006. The purchasers of the Series D Stock were
9
March 31,June 30, 2007 (“("D Warrants”Warrants"). The Series D
Stock and the D Warrants have antidilution rights reducing the floor conversion
9
AMERICAN TECHNOLOGY CORPORATIONNOTES TO INTERIM FINANCIAL STATEMENTS(Unaudited)
and warrant exercise price for certain issuances of equity securities by the Company at an effective price below the applicable floor conversion or warrant exercise price. In connection with the Series D Stock financing, the Company incurred closing costs of $78,752.
During the sixnine months ending March 31,June 30, 2003, 170,400180,400 shares of Series D Stock
were converted into 647,720683,344 shares of common stock. As of March 31,June 30, 2003, the
65,00055,000 remaining outstanding shares of Series D Stock (based on 360-day year) would have beenwere convertible into
208,986130,738 shares of common stock.
In connection with the Series D Stock and D Warrants, the Company recorded
$994,310 and $871,000 as the value of the discount at issuance of the Series D
Stock and the value of the D warrants,Warrants, respectively. The D warrantsWarrants were valued
using the Black-Scholes model with a dividend yield of zero percent; expected
volatility of 78 percent; risk free interest rate of 4.94 percent; and an
expected life of five years. The Series E Financing resulted in a repricing of
the 517,880 outstanding D warrantsWarrants from $4.50 per share to $3.01 per share in
accordance with repricing provisions of such warrants. In connection with the
repricing the Company recorded $158,519 in additional warrant value. For the
sixnine months ended March 31,June 30, 2003, $126,726$725,670 and $115,370$215,111 were amortized as a
deemed dividend related to the value of the discount at issuance and the value
of the D warrants.
Warrants.
Subsequent to March 31,June 30, 2003, 10,0005,000 shares of Series D Stock were converted into
35,62411,922 shares of common stock.
In March 2003, the Company sold $3,432,500343,250 shares of Series E Preferred Stock, par
value $.00001, at $10.00 per share (the “Series"Series E Stock”) to a limited number of investors (the “SeriesStock" or the "Series E
Financing”Financing"). In connection with the Series E Financing, the Company amended its
8% Senior Secured Promissory Notes (the “Notes”"Senior Notes") (i) to allow the holders
of the Senior Notes to convert all or a portion of the principal balance of the Notessuch
notes into Series E Stock and (ii) to extend the due date of the unconverted
balance of the Senior Notes from December 31, 2003 to December 31, 2004. The
Company raised an aggregate of $2,432,500 in new cash a subscription receivable and converted Senior Notes
with an aggregate value of $1,000,000.
A total of $1,000,000 in principal amount of the Senior Notes remains outstanding.
The dollar amount of Series E 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 at a conversion price which is the lower of (i) $3.25 per
share or (ii) 90% of the volume weighted average market price for the five days
prior to conversion, but in no event less than $2.00 per share, subject to
adjustment, provided however, that no such conversion can be made prior to
September 30, 2003 at a conversion price of less than $3.25 per share. The
shares of Series E Stock may be called by the Company for conversion if the
market price of the common stock exceeds $9.50 per share for ten days and
certain conditions are met. The Series E Stock is subject to automatic
conversion on December 31, 2006. Each purchaser of Series E Preferred Stock was also
granted a warrant to purchase 1.5 shares of common stock for each share of
Series E Preferred Stock purchased, exercisable until December 31, 2007 at a
price of $3.25 per share. In connection with the Series E financing,Financing, we issued
warrants exercisable for an aggregate of 514,875 shares (“("E Warrants”Warrants"). In
connection with the Series E Stock financing,Financing, the Company incurred closing costs of
$141,222.
$176,222.
During the nine months ending June 30, 2003, 5,000 shares of Series E Stock were
converted into 15,679 shares of common stock. As of March 31,June 30, 2003 the 338,250
remaining outstanding shares of Series E Stock (based on 360-daya 360 day year) would have beenwere
convertible into 1,061,2701,061,932 shares of common stock.
In connection with the Series E Stock and E Warrants, the Company recorded
$2,677,000 and $755,500 as the value of the discount at issuance of the Series E
Stock and the value of the warrants, respectively. The warrants were valued
using the Black-Scholes model with a dividend yield of zero percent; expected
volatility of 76.5 percent; risk free interest rate of 4.0 percent; and an
expected life of five years. For the sixnine months ended March 31,June 30, 2003, $59,821$270,597
and $16,883$226,951 were amortized as a deemed dividend related to the value of the
discount at issuance and the value of the E warrants.
In March 2003,Warrants.
The cash proceeds of the Company issuedpreferred stock were allocated prorata between the
relative fair values of the preferred stock and warrants at issuance using the
Black Scholes valuation model for valuing the warrants. After allocating the
proceeds between the preferred stock and warrant, an effective conversion price
was calculated for the convertible preferred stock to determine the beneficial
conversion discount for each share. The value of the beneficial conversion
discount is recorded as a $25,000 subscription receivable related to the sale of Series E Stock. The receivable was collected in April 2003.
deemed 10
(Unaudited)
dividend. The resultant combined discount to the preferred stock is accreted as an deemed dividend over the conversion period of the preferred stock. The following is a summary of the components of the discount recorded upon issuance of the preferred stock and warrants:
|
| Preferred Stock |
| Common Stock |
| Additional |
| Accumulated |
| ||||||||||
|
|
|
|
|
| ||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
|
|
| ||||||||
|
|
|
|
|
|
|
| ||||||||||||
Balance as of October 1, 2002 |
|
| 245,400 |
| $ | 2 |
|
| 14,351,476 |
| $ | 144 |
| $ | 27,255,016 |
| $ | (28,140,044 | ) |
Stock issued upon exercise of stock options |
|
| — |
|
| — |
|
| 6,500 |
|
| — |
|
| 19,500 |
|
| — |
|
Stock issued for services |
|
| — |
|
| — |
|
| 109,844 |
|
| 1 |
|
| 410,815 |
|
| — |
|
Stock issued on conversion of Series D Preferred Stock |
|
| (170,400 | ) |
| (1 | ) |
| 647,720 |
|
| 6 |
|
| (6 | ) |
| — |
|
Stock issued on conversion of Series C Preferred Stock |
|
| (10,000 | ) |
| — |
|
| 41,130 |
|
| — |
|
| — |
|
| — |
|
Issuance of Series E Preferred Stock, net of offering costs of $141,222 |
|
| 343,250 |
| $ | 3 |
|
| — |
|
| — |
|
| 3,291,275 |
|
| — |
|
Net loss |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (3,585,951 | ) |
|
|
|
|
|
|
|
| ||||||||||||
Balance as of March 31, 2003 |
|
| 408,250 |
| $ | 4 |
|
| 15,156,670 |
| $ | 151 |
| $ | 30,976,600 |
| $ | (31,725,995 | ) |
|
|
|
|
|
|
|
|
|
| Number of |
| Weighted Average |
| ||
|
|
|
| ||||
Outstanding October 1, 2002 |
|
| 1,459,175 |
| $ | 3.97 |
|
Canceled/expired |
|
| (84,450 | ) | $ | 4.25 |
|
Exercised |
|
| (6,500 | ) | $ | 3.00 |
|
Granted |
|
| 293,000 |
| $ | 3.37 |
|
|
|
|
| ||||
Outstanding March 31, 2003 |
|
| 1,661,225 |
| $ | 3.86 |
|
|
|
|
| ||||
Exercisable at March 31, 2003 |
|
| 1,289,559 |
| $ | 3.86 |
|
|
|
|
|
Number of Weighted Average
Options exercise price
- -------------------------------------------------------------------------------
Outstanding October 1, 2002 1,459,175 $3.97
Canceled/expired (97,650) $4.19
Exercised (110,625) $3.41
Granted 784,000 $3.35
- -------------------------------------------------------------------------------
Outstanding June 30, 2003 2,034,900 $2.80
- -------------------------------------------------------------------------------
Exercisable at June 30, 2003 1,367,722 $3.48
- -------------------------------------------------------------------------------
During the nine months ended June 30, 2003, the Company recorded non-cash
compensation expense of $25,597 for the granting of 13,000 options under its
stock options plans to non-employees.
In October 2001, the Company granted a total of 110,000 stock options to a
consultant in conjunction with related development and manufacturing agreements.
Options to purchase 65,000 shares of common stock vest depending on the
consultant's completion of various project milestones as well as the Company's
acceptance of the specified work. The Company estimates the period required to
complete the specified milestones each reporting period and records consulting
expense based on the current market price of the Company's stock and the
estimated percentage of the work completed. Consulting expense is adjusted each
reporting period until vesting occurs. The Company has recorded consulting
expense of $47,782 for the Black Scholes value of 10,000 milestone options
vested at June 30, 2003.
On April 8, 2003 the Company granted a warrant exercisable for 50,000 common
shares at $3.63 per share to a consultant for consulting services. The Company
recorded non-cash consulting expense of $106,616 for the value of these
warrants.
Options outstanding are exercisable at prices ranging from $2.50 to $9.03 and
expire over the period from 2003 to 2008 with an average life of 32 years.
12
March 31,June 30, 2003, the Company had the following warrants outstanding arising
from offerings and other transactions, each exercisable into one Common Share:
Number |
|
| Exercise Price |
|
| Expiration Date |
| |
|
|
| ||||||
| 50,000 |
| $ | 16.00 |
|
| May 12, 2003 |
|
| 50,000 |
| $ | 10.00 |
|
| January 5, 2004 |
|
| 375,000 |
| $ | 11.00 |
|
| March 31, 2005 |
|
| 1,012,500 |
| $ | 2.00 |
|
| September 30, 2006 |
|
| 517,880 |
| $ | 3.01 |
|
| March 31, 2007 |
|
| 100,000 |
| $ | 4.25 |
|
| September 30, 2007 |
|
| 514,875 |
| $ | 3.25 |
|
| December 31, 2007 |
|
|
|
| ||||||
| 2,620,255 |
|
|
|
|
|
|
|
|
|
|
Atcommon share:
Number Exercise Price Expiration Date
- ----------------------------------------------------------------------------
50,000 $10.00 January 5, 2004
75,000 $11.00 March 31, 2005
887,500 $2.00 September 30, 2006
495,880 $3.01 March 31, 2007
100,000 $4.25 September 30, 2007
394,875 $3.25 December 31, 2007
50,000 $3.63 April 8, 2008
- ----------------------------------------------------------------------------
2,053,255 $3.16
- ----------------------------------------------------------------------------
At June 30, 2003, the Company hashad two stock-based employee compensation plans.
The Company accounts for thosethe plans under the recognition and measurement
principles of APB Opinion No. 25, “Accounting"Accounting for Stock Issued to Employees, and
related Interpretations”Interpretations". No stock-based employee compensation cost is reflected
in net loss available to common shareholders, as all options granted under those
plans had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net loss available to common shareholders and basic and diluted
loss per common share if the Company had applied the fair value recognition
provisions of SFAS No. 123:
No.123:
2003,. The Company has accrued at June 30, 2003
$950,000 as an estimate of the liability associated with such settlement.
13
(Unaudited)
|
| For the three months ended |
| For the six months ended |
| ||||||||
|
|
|
| ||||||||||
|
| 2003 |
| 2002 |
| 2003 |
| 2002 |
| ||||
|
|
|
|
|
| ||||||||
Net loss available to common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss as reported |
| $ | (2,107,991 | ) | $ | (1,978,442 | ) | $ | (3,998,434 | ) | $ | (3,707,541 | ) |
Deduct: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation determined under fair value based method for all awards, net of related tax effects |
|
| 136,076 |
|
| 148,718 |
|
| 258,152 |
|
| 297,436 |
|
|
|
|
|
|
| ||||||||
Pro forma net loss |
| $ | (2,244,067 | ) | $ | (2,127,160 | ) | $ | (4,256,586 | ) | $ | (4,004,977 | ) |
|
|
|
|
|
| ||||||||
Net loss per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
| $ | (0.14 | ) | $ | (0.14 | ) | $ | (0.27 | ) | $ | (0.26 | ) |
|
|
|
|
|
| ||||||||
Pro forma |
| $ | (0.15 | ) | $ | (0.15 | ) | $ | (0.29 | ) | $ | (0.28 | ) |
|
|
|
|
|
|
10.
11. INCOME TAXES
At September 30, 2002, 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
$23,259,000 which expire through 2022 of which certain amounts are subject to
limitations under the Internal Revenue Code of 1986, as amended.
12
12. SUBSEQUENT EVENTS
On July 11, 2003, the Company sold 1,818,180 shares of its common stock at a
purchase price of $5.50 per share. The Company also issued warrants to the
investors to purchase 454,547 shares of common stock with an exercise price of
$6.75 per share subject to certain antidilution adjustments. The warrants are
exercisable until July 10, 2007.
The gross proceeds received from this financing were $10 million. The Company
incurred financing and closing costs of approximately $550,000. Net proceeds of
the financing were used to redeem the $318,155 principal balance of the Senior
Notes and accrued interest, and for working capital purposes.
14
Management’sManagement's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO OUR
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"BUSINESS
RISKS.”" ALSO SEE OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30,
2002.
Overview
We are focused on commercializing oura consumer electronics company that develops and markets proprietary
sound reproduction products, components and technologies. Our primary sound
technologies are:
o HSS(R), HyperSonic(R) Sound Technology
o LRAD(TM) and HIDA(TM)
o NeoPlanar(TM) Technology
o PureBass(TM), Woofer Technology
HyperSonic Sound (“HSS”), NeoPlanar, PureBass and HIDA sound technologies. Our HyperSonic Sound technology employs a laser-like beam to project sound to any listening environment. Our NeoPlanar(HSS) technology is a thin film magnetic speaker that usesnew method of sound reproduction. Sound
is generated in an air column using ultrasonic frequencies, those above the
normal range of hearing. Our proprietary electronic process generates an
ultrasonic beam to interact in mid-air producing wide spectrum audio along the
beam. The sound beam has a very high degree of directionality and maintains
sound volume over longer distances than traditional methods of sound
reproduction. We believe HyperSonic Sound has unique films and materials, which we believe resultsfeatures useful in superiornew
sound quality and volume for any given size with low distortion. PureBassapplications.
Our Long Range Acoustic Device (LRAD) technology is an extended range woofer designed to complementbased in part on our HSS
NeoPlanar technologiestechnology but is subject to additional pending patents and other high performance satellite systems. Our HIDA technologydistinct marketing
efforts. LRAD employs proprietary techniques and components to produce variable intensity
directional acoustical sound intended for use primarily in long-range delivery
of directional sound information, effectively a supercharged megaphone. LRAD is
employed as a long-range hailing device or supercharged megaphone orand warning system with minimal distraction to
others not in the directed beam. One version of this technology, our High
Intensity Directional Acoustics (HIDA) technology, has potential application as
a non-lethalscaleable nonlethal weapon. Our strategyhigh intensity directional technology has been
developed in part from sponsored research and development fees obtained from
Bath Iron Works, a General Dynamics company.
NeoPlanar technology is to commercialize these technologies through licensing and product sales to customers, distributors and OEMs.a thin film magnetic speaker that can be produced as
thin as 1/8". We believe the novel films and magnetic materials employed results
in superior sound quality, reduced distortion and greater sound volume for a
given size than traditional planar (flat or thin) magnetic speaker devices. Our
NeoPlanar speaker technology is targeted at the automotive, multimedia, home,
professional and marine speaker markets.
Our PureBass extended range woofer was designed to complement our high
performance NeoPlanar technology as well as other loudspeakers including those
used in professional and consumer applications. PureBass employs unique cabinet
construction and vent configurations along with multiple acoustic filters, which
we believe produces improved performance. We believe PureBass minimizes
distortion, provides high output for its size, and results in lower system costs
when compared to conventional woofer systems. It provides a high frequency
interface with upper range satellite speaker systems. This technology is a
complement to our NeoPlanar and other flat speaker technologies.
During the third quarter of 2003, we changed contract manufacturers for our HSS,
NeoPlanar and PureBass technologies meet customer and OEM requirements. These technologies have been licensed to OEMs and are being transferred to production. We expect product sales and royalties to commence in fiscal 2003 from these technologies. Wecomponents. Until high volume contract manufacturing is
successfully established we are also producing these components at our
facilities. We have also been preparing to introduce an improved second
generation HSS emitter component. These factors resulted in a delay in order
procurement and NeoPlanar systemsfulfillment in the third quarter for saleHSS products. We have been
shipping HSS units to customers distributorsworldwide for evaluation in markets including
retailing, point-of-purchase displays, museums, trade show booths, law
enforcement, television, expositions, transportation, government and OEMs.military.
We areexpect growth in HSS shipments in the early stagefourth fiscal quarter.
Commercial deliveries of salesLRAD/HIDA products commenced in May 2003 and licensingaccounted
for a majority of our sound technologies with many customers purchasing systems for evaluationthird quarter revenues. LRAD/HIDA products are currently
produced by us. LRAD/HIDA technology-based devices have been successfully
demonstrated to various military, government and demonstration.
commercial parties. We incurred net losses of $8,220,132, $5,046,219 and $3,068,046expect
continued growth in LRAD/HIDA shipments in the fourth fiscal years ended September 30, 2002, 2001quarter.
15
2000sold NeoPlanar speaker components for installation in
outside entertainment, luxury yacht and amilitary ship applications. We expect
growth in NeoPlanar shipments as new contract production is successfully
established.
The net loss of $3,585,951$5,968,603 for the sixnine months ended March 31, 2003.June 30, 2003 included
$405,000 of debt amortization expense, $590,811 of expenses paid with common
stock and options and $601,769 of depreciation, amortization and other reserves
and write downs. We have substantial research and development and selling,
general and administrative expenses, and our revenues from our audiosound
technologies and portable consumer products have not yet been sufficient to offset these costs. We also invest
significant funds in patent applications. We expect to incur additional
operating losses during the balance of fiscal 2003 andbut we anticipate that we will need to raise additional capital of approximately $2 million to continue operations at planned levels during the next twelve months.expect a reduction in
our non-cash expense outlays. See “Liquidity"Liquidity and Capital Resources”Resources" below.
As a result of our needpast needs for capital and our net losses to date, our
independent auditors noted in their audit report on our financial statements for
the fiscal year ended September 30, 2002 substantial doubt about our ability to
continue as a going concern. WeSince that time to the date of this report, we have
obtained equity proceeds of approximately $14,092,000 from the issuance of
preferred and common stock and from the exercise of options and warrants, with
some proceeds applied to reduce debt. As of the date of this report, we have no
long-term debt other than approximately $25,000 of capital lease obligations.
Although we will need to generate additional revenue to achieve profitability
and generate positive cash flow from operations in future periods.
We licenseperiods, we believe we
have sufficient resources to meet our operating requirements for the next twelve
months.
Our primary marketing focus is on providing sound reproduction products and
components to customers and licensing our technologies for production by others.customer
applications. When we supply systems or components used in other products to
customers, distributors or OEMs, we include our intellectual property fees in
the selling prices of the systems or components. We currently produce HSS
systems and NeoPlanar panels which are installed as a component of a sound
system. When we license an audioa sound technology, we typically receive a flat fee
up-front, with the balance of payments based upon a percentage of net revenues
of the products in which our technology is incorporated. Revenues from up-front
license fees are recognized ratably over the specified term of the particular
license. Contract fees are recorded as services are performed.
In other instances we supply complete systems or components used in other products to customers, distributors or OEMs. In these cases we include our intellectual property fees in the selling prices of the systems or components. We currently produce HSS systems and NeoPlanar panels which are installed as a component of a sound system.
Our various technologies are high risk in nature. Unanticipated technical obstacles can arise at any time and disrupt sales or licensing activities and result in lengthy and costly delays. There can be no assurance commercially viable sound products offered by us or by our customers, distributors or OEMs will meet with market acceptance or that such products will perform on a cost-effective basis.
Our future is largely dependent upon the success of our sound technologies. We invest significant funds in research and development and on patent applications related to our proprietary technologies.
There can be no assurance our technologies will achieve market acceptance
sufficient to sustain operations or achieve future profits. See “Business Risk”"Business Risks"
below.
Effective in October 2002, we discontinued our portable consumer product line in
order to focus financial, personnel and facility resources on our sound
technologies, which we expect to provide substantially all of our fiscal 2003
revenues. For the sixnine months ended March 31,June 30, 2003 and for fiscal 2002 we
recorded revenues of $78,680$83,360 and $301,116,$274,245, respectively for portable consumer
products. These revenues represented products sourced by us, private labeled
under our name and resold to sporting good stores and other retailers.
Historically, portable consumer product revenues accounted for the majority of
our revenues.
13
Demand for our sound technologies and products is subject to significant month to month variability resulting from seasonal demand fluctuations and the limited number of customers and market penetration achieved by us to date. Further, we expect future sales may be concentrated with a limited number of customers. We are also reliant on outside suppliers for components of our products and outside manufacturers for assembly and there can be no assurance of future supply. The markets for our products and future products and technologies are subject to rapidly changing customer tastes and a high level of competition. Demographic trends in society, marketing and advertising expenditures, and product positioning in retail outlets, technological developments, seasonal variations and general economic conditions influence demand for our products. Because these factors can change rapidly, customer demand can also shift quickly. We may not be able to respond to changes in customer demand because of the time required to change or introduce products, production limitations and/or limited financial resources.
Recent Developments
On July 11, 2003, we entered into a Securities Purchase Agreement with certain
institutional investors pursuant to which we issued and sold 1,818,180 shares of
common stock at a purchase price of $5.50 per share. In connection with such
financing, we also issued warrants to the investors to purchase 454,547 shares
of common stock with an exercise price of $6.75 per share, subject to adjustment
if we sell securities in the future for less than an effective price of $6.75
per share. The warrants are exercisable until July 10, 2007. We agreed to give
each investor in the offering the first right to participate in any proposed
sale of equity securities by us until July 11, 2004. This right does not apply
to the issuance of securities upon exercise or conversion of previously
outstanding securities, to the grant of options under company plans, to certain
strategic transactions, or to a firm commitment underwriting that results in net
proceeds to us of at least $10 million.
16
Management’sManagement's Discussion and Analysis of Financial Condition and
Results of Operations when such policies affect our reported and expected
financial results.
In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
We do not have off-balance sheet arrangements, financings, or other
relationships with unconsolidated entities or other persons, also known as
“special"special purpose entities”entities" (SPEs).
Revenue Recognition
We derive our revenue primarily from two sources: (i) component and product revenuesale
revenues and (ii) contract and license fee revenue. ProductComponent and product sale
revenues are recognized in the periods that products are shipped to customers,
FOB shipping point, if a signed contract exists, the fee is fixed and
determinable, collection of resulting receivables is probable and there are no
resulting obligations. Revenues from ongoing per unit license fees are earned
based on units shipped incorporating our patented proprietary technologies and
are recognized in the period when the manufacturers’manufacturers' units shipped information
is available to us and collectibility is reasonably assured. Revenues from
up-front license and other fees and annual license fees are recognized ratably
over the specified term of the particular license or agreement.
Research and Development Expenses
Research and development expenses are salaries and related expenses associated
with the development of our proprietary sound technologies and include
compensation paid to engineering personnel and fees to outside contractors and
consultants.
Deferred Tax Asset
We have provided a full valuation reserve related to our substantial deferred
tax assets. In the future, if sufficient evidence of our ability to generate
sufficient future taxable income in certain tax jurisdictions becomes apparent,
we may be required to reduce our valuation allowances, resulting in income tax
benefits in our consolidated statement of operations. We evaluate the
realizability of the deferred tax assets and assess the need for valuation
allowance quarterly. The utilization of the net operating loss carryforwards
could be substantially limited due to restrictions imposed under federal and
state laws upon a change in ownership.
17
sixnine month period ended March 31,June 30, 2003 and 2002 were
$661,241and $456,054,$974,853 and $691,745, respectively. Total revenues for the three month period
ended March 31,June 30, 2003 and 2002 were $237,942$313,612 and $199,433,$235,691, respectively. Product
revenues for the sixnine months ended March 31,June 30, 2003 were $533,578$808,296, a 65%55% increase
from the comparable sixnine month total of $324,110$521,798 for the prior year. For the
sixnine months ended March 31,June 30, 2003 product sales included $78,680$83,360 of consumer
portable product sales and $454,898$724,936 from the sale of NeoPlanar, LRAD/HIDA and
HSS products. For the sixnine months ended March 31,June 30, 2002 product sales included
$165,463$274,245 of consumer portable product sales and $158,647$247,553 from the sale of
NeoPlanar, LRAD/HIDA and HSS products. Product revenues for the secondthird quarter
ended March 31,June 30, 2003 and 2002 were $145,611$274,718 and $99,155, respectively.$197,688, respectively with the
majority of 2003 revenues from LRAD/HIDA shipments. We experienced manufacturing
quality control problems with some of our initial
14
commercial HSS units, which
negatively impacted product sales during the secondthird quarter of fiscal 2003. We
have worked closely with ourestablished a new contract manufacturemanufacturing relationship and are working to
resolve thesemanufacturing issues, but because our HSS emitters are a new and unique
product, we may continue to experience manufacturing problems that could
adversely impactaffect product sales in future periods. Consumer product revenues were historically volatile due to changing customers and product offerings and reliance on a limited number of customers. Since we have discontinued our
portable consumer products line, fiscal 2003 revenues for these products will be
substantially below those for fiscal 2002, and will be limited to sales of
inventory on hand. Sales of sound products are also expected to be volatile as a
result of manufacturing startup requirements and the need to recruit new
customers for products not previously available in the marketplace.
Contract and license revenues for the quarters ended March 31,June 30, 2003 and 2002 were
$127,663$166,557 and $131,944,$169,947, respectively. We recognize upfront fees and advance
revenues over the term of respective license agreements. At March 31,June 30, 2003 and
September 30, 2002 we had $388,168$274,170 and $276,667, respectively, collected and
recorded as unrecognized revenue for existing contracts and licenses.
At March 31,June 30, 2003, we received purchase orders for approximately $240,000$558,000 for military
product expected to ship during our fiscal thirdfourth quarter ending JuneSeptember 30,
2003. Anticipated shipments are subject to change due to a variety of factors,
many outside our control. Our customers may modify or cancel orders and delay or
change schedules. Shipments may also be delayed due to production delays,
component shortages and other production related issues.
Cost of revenues for the sixnine months ended March 31,June 30, 2003 was $672,419$858,520 resulting
in a gross lossprofit of $11,178$116,333 or 1.7%12%. This compares to a gross profit of
$217,209$293,902 or 48%42% for the comparable period of the prior year. It is difficult to
compare historical gross profit percentages due to changes in contract and
license revenues as a percentage of total revenues and changes in the product
mix in each year. Cost of revenues for the three months ended March 31,June 30, 2003 and
2002 were $350,784$186,101 and $122,385$158,998 resulting in a gross lossprofit of 47%41% and a gross
profit of 39%32%, respectively. The lower gross profit percentage in the six and threenine
months ended March 31,June 30, 2003 resulted from lower margins on consumer product
sales, and establishing a warranty reservereserves and startup production costs for HSS, LRAD/HIDA and
NeoPlanar products. Gross profit percentage is highly dependent on product mix,
sales prices, volumes, purchasing costs and overhead allocations. Overall gross
margins will also be impacted by future contract and licensing revenues and the
types of products sold to customers. Margins may vary significantly from period
to period.
Selling, general and administrative expenses for the sixnine months ended March 31,June 30,
2003 and 2002 were $1,665,309$3,393,605 and $1,103,120,$1,864,087, respectively. The $562,189$1,529,518
increase resulted from an accrual of $950,000 in the 2003 period for estimated
liability related to the HST litigation described under the heading "Legal
Proceedings" below, an increase in legal costs and fees of $166,055,$257,111, an increase
in professional services of $61,461,$61,508, an increase in personnel and related costs
of $333,972$221,604 and an increase of $8,284$39,505 for print advertising.accounting and shareholder costs. The
increase in personnel costs included fourfive new hires. Selling, general and
administrative expense for the three month period ending March 31,June 30, 2003 increased
by $298,529 or 49%$967,329 from the comparable prior year period. This increase is the result
of the $950,000 accrual for estimated liability related to the HST litigation.
We may expend additional resources on marketing our sound technologies in future
quarters, which may increase selling, general and administrative expenses in
future periods.
Research and development expenses for the sixnine months ended March 31,June 30, 2003 were
$1,308,719$2,023,095 compared to $1,880,997$2,883,977 for the comparable sixnine months of the prior
year. The $572,278$860,882 decrease resulted from a reduction of $386,470$436,148 for supplies
and materials used in the development of our sound technologies and a decrease
of $314,468$433,409 for consulting services, a $43,585 decrease in depreciation and a
$37,642 decrease in travel expenditures offset by an increase in personnel and
related costs of $182,798.$115,926. The increase in personnel and related costs can be attributed toprimarily
represent the addition of an engineer administrative assistant twoand three lab
technicians and a quality control director.technicians. Research and development costs for the three months ended March 31,June 30,
2003 decreased by $259,762$288,604 or 26%29% from the comparable prior year period.
Research and development costs vary quarter by quarter due to the timing of
projects, the availability of funds for research and development and the timing
and extent of use of outside consulting, design and development firms. We expect
that fiscal 2003 research and development costs may be at lower levels than the
prior year based on current staffing and budgeting as we focus resources on
sales of products from developed technologies.
18
sixnine
months ended March 31,June 30, 2002 for services paid through the issuance of 1,425
shares of common stock.
We experienced a loss from operations of $2,985,206$5,300,367 during the sixnine months ended
March 31,June 30, 2003, compared to a loss from operations of $2,766,908$4,454,162 for the
comparable sixnine months ended March 31,June 30, 2002. The $218,298$846,205 increase is primarily
due to the increase in selling, general and administrative expenses accompanied
with a decrease in our gross profit on product sales reflecting production start
up costs offset by a decrease in research and development costs.
Interest expense of $602,730$670,769 for the sixnine months ended March 31,June 30, 2003 included
$405,000 of noncash amortization of debt discount, $121,529$169,753 of accrued interest
on convertible subordinated promissory notes and $72,305$91,802 of paid interest on
senior secured promissory notes.
15
The net loss available to common stockholders for the sixnine months ended March 31,June 30,
2003 of $3,998,434$7,562,339 included $93,683$155,407 of accretion on the Series C, D and E
Preferred Stock and also included $126,726$725,670 and $59,821$270,597 on Series D and Series E
Preferred Stock imputed deemed dividends based on discount at issuance,
respectively, and $115,370$215,111 and $16,883$226,951 on imputed deemed dividends on warrants
issued in connection with the Series D and Series E Preferred Stock,
respectively. The net loss available to common stockholders for the three months
ended March 31,June 30, 2003 of $2,107,991$3,011,097 included $55,059$61,725 of accretion on the Series C,
D and E Preferred Stock and also included $62,667$47,223 and $59,821$209,452 on Series D and
Series E Preferred Stock imputed deemed dividends based on discount at issuance,
respectively, and $59,255$100,350 and $16,883$209,695 on imputed deemed dividends on warrants
issued in connection with the Series D and Series E Preferred Stock,
respectively.
respectively
The net loss available to common stockholders for the sixnine months ended March 31,June 30,
2002 of $3,707,541$5,960,805 included $22,915$40,385 on Series D imputed deemed dividends based
on discount at issuance, $35,377 on imputed deemed dividends on warrants issued
in connection with the Series D Preferred Stock and $48,351 of accretion on the
Series C and D Preferred Stock. The net loss available to common stockholders
for the three months ended March 31,June 30, 2002 of $1,978,442$2,253,264 included $2,959$25,436 of
accretion on the Series C and D Preferred Stock.
We have federal net loss carryforwards of approximately $23,259,000 for federal tax purposes expiring through 2022. The amount and timing of the utilization of our 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
We have experienced significant negative cash flow from operating activities
including developing and introducing our sound technologies. Due to our need for additional capital and our net losses, our independent auditors have noted in their report on our financial statements a substantial doubt about our ability to continue as a going concern. Our negative cash
flow from operating activities was $2,680,346$3,768,145 for the sixnine months ended March 31,June 30,
2003. As of March 31,June 30, 2003, the net loss of $3,585,951$5,968,603 included certain expenses
not requiring the use of cash totaling $1,124,869.$2,546,440. In addition, cash was used in
operating activities through an increase of $294,875$219,443 in inventories, an increase
of $52,870$15,106 in prepaid expenses and other and a decrease of $255,891$333,033 in accounts
payable. Cash provided by operating activities included an $86,682a $97,013 decrease in
accounts receivable and a $197,690$124,587 increase in accrued liabilities.
At March 31,June 30, 2003, we had gross accounts receivable of $44,995$35,064 as compared to $131,677
at September 30, 2002. This represented approximately 254 days of sales. Terms
with individual customers vary greatly. We typically require pre-payment or a
maximum of thirty day terms for our sound technology components and products.
Our receivables can vary dramatically due to overall sales volumes and due to
quarterly and seasonal variations in sales and timing of shipments to and
receipts from large customers.
For the sixnine months ended March 31,June 30, 2003, we used approximately $9,700 for the
purchase of laboratory and computer equipment and made a $32,749$71,098 investment in
patents and new patent applications. We anticipate a continued investment in
patents in fiscal 2003. Dollar amounts to be invested on these patents are not
currently estimable by management.
At March 31,June 30, 2003, we had negativea working capital deficit of $979,997$601,283 compared to
working capital of $554,713 at September 30, 2002.
19
preferred stock, exercises
of stock options, sale of convertible and non-convertible notes proceeds from the sale of investment securities and margins from
product sales. At March 31,June 30, 2003, we had cash of $1,866,335,$1,109,293, representing an increasea
decrease of $58,615$698,427 from cash at September 30, 2002. The increasedecrease resulted from
cash used in operating activities offset by proceeds from our Series E Preferred
Stock a subscription receivablefinancing, exercise of stock options and warrants and an 8% Senior Note
funding, in aggregate an amount of $2,932,500.
$3,333,990.
During the quarter ended March 31,June 30, 2003, we obtained $24,375 from the exercise of
warrants issued in connection with our 12% Convertible Subordinated Notes and
our Series D Preferred Stock, and $377,115 from the exercise of stock options.
In July 2003, we raised an additional $500,000 throughnet proceeds of $9.45 million from the sale of an 8% Senior Secured Note. We previously issued $1,500,000 of such notes on September 30, 2002. In connection with our sale of Series E Preferred Stock, all of the outstanding senior notes were amended in February 2003:
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The senior notes bear interest at a rate of eight percent per annum. Interest is payable on a quarterly basis with the first payment due January 2, 2003. The senior notes are secured by accounts receivable, certain equipment and inventory. The senior notes are also subject to mandatory redemption upon the closing of a sale of equity securities in an amount exceeding $3,000,000. The February 2003 amendment clarified that senior note balances converted to Series E Preferred Stock would not be included for purposes of determining whether mandatory redemption of the remaining senior note balance is required.
During the quarter ended March 31, 2003, we sold 343,250 shares of Series E Preferred Stock at $10.00 per share, and issued 514,875 related common
stock purchase warrants exercisable at $3.25 per share. Through this sale, we raised approximately $2,266,278 in new cash after deducting offering costs, a subscription receivable and converted outstanding senior secured promissory notes with an aggregate principal value of $1,000,000. The terms of the Series E Preferred Stock and related warrants are described under Part II, Item 2 below.
warrants. See "Recent Developments" above.
Based on our current cash position and assuming (a) currently planned
expenditures and level of operations, (b) continuation of product sales and (c)
expected royalty and licensing proceeds;proceeds we believe we will require approximately $2 million of additionalhave sufficient cash for
operations for the next twelve months. We believe increased sales of HSS,
LRAD/HIDA and NeoPlanar products may provide a portion of thisalso contribute cash. We believe that any required investment capital will be available to us, but there can be no guarantee that we will be able to raise funds on terms acceptable to us, or at all. We have significant
flexibility to adjust the level of research and development and selling and
administrative expenses based on the availability of resources. However
reductions in expenditures could delay development and adversely affect our
ability to generate future revenues.
Any equity-based source of additional funds could be dilutive to existing equity holders and the dilution could be material. The lack of sufficient funds from operations or additional capital could force us to curtail or scale back operations and would therefore have an adverse effect on our business.
Other than cash and cash equivalents, we have no unused sources of liquidity at
this time. We expect to incur additional operating losses as a result of
expenditures for research and development and marketing costs for our sound
products and technologies. The timing and amounts of these expenditures and the
extent of our operating losses will depend on many factors, some of which are
beyond our control. Accordingly, there can be no assurance that our current
expectations regarding required financial resources will prove to be accurate.
We anticipate that the commercialization of our technologies may require
increased operating costs; however, we cannot currently estimate the amounts of
these costs.
Contractual Commitments and Commercial Commitments
The following table summarizes our contractual obligations, including purchase
commitments at March 31,June 30, 2003, and the effect such obligations are expected to
have on our liquidity and cash flow in future periods:
Payments Due by Period
Contractual Obligations |
| Less than 1 |
| 1-3 Year |
| 4-5 Years |
| After 5 Years |
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Capital leases |
| $ | 9,110 |
| $ | 28,497 |
| $ | — |
| $ | — |
|
Operating lease |
|
| 63,964 |
|
| — |
|
| — |
|
| — |
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Employment agreements |
|
| 386,000 |
|
| 536,250 |
|
| — |
|
| — |
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Convertible promissory notes due December 31, 2003 |
|
| 2,569,890 | (1) |
| — |
|
| — |
|
| — |
|
Senior secured promissory notes due December 31, 2004 |
|
| — |
|
| 1,159,726 |
|
| — |
|
| — |
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Total contractual cash obligations |
| $ | 3,028,964 |
| $ | 1,724,473 |
| $ | — |
| $ | — |
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(1) Assumes
Employment AgreementsThe Company has entered into four employment agreements with executive officers and key employees. These agreements are each for 90 days to three-year terms expiring from May 2003 to October 2005. Certain of the agreements provide for up to twelve months severance for certain terminations and payments for the term of the agreement (orLegal Settlement discussed
in one case twelve months, if longer) on certain changes in control.
17
Note 10.
New Accounting Pronouncements
A number of new pronouncements have been issued for future implementation as
discussed in the footnotes to our 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 our financial statements.
Business Risks
You should consider each of the following factors as well as the other
information in this Quarterly Report in evaluating our business and our
prospects. The risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to us or that we
currently consider immaterial may also impair our business operations. If any of
the following risks actually occur, our business and financial results could be
harmed. In that case the trading price of our common stock could decline. You
should also refer to the other information set forth in this Quarterly Report
and in our Annual Report on Form 10-K for the fiscal year ended September 30,
2002, including our financial statements and the related notes.
20
March 31,June 30, 2003, we had an accumulated deficit of
$31,725,995.$34,108,647. Due to our net losses and our prior need for additional capital to
sustain operations, our independent auditors have noted in their November 19, 2002
report on our financial statements for the fiscal year ended September 30, 2002
a substantial doubt about our ability to continue as a going concern. We need to
generate additional revenue to be profitable in future periods. Failure to
achieve profitability, or maintain profitability if achieved, may cause our
stock price to decline.
We will need additional capital to support our operations during
In July 2003, we raised net proceeds of $9.45 million from the next twelve months. If additional capital is not available, we may have to curtail or cease operations.Our current plans indicate we will need approximately $2.0 million in additional capital to support our planned levelsale of operations for the next twelve months. Due to our need for additional capital and our net losses, our independent auditors have noted in their report on our financial statements a substantial doubt about our ability to continue as a going concern. A portion of these funds may be generated from operations from licensing and HSS product sales. The actual amount of funds that we will need will be determined by many factors, some of which are beyond our control, and we may need funds sooner than currently anticipated. These factors include:
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When we require additional funds, general market conditions or the then-current market price of our common
stock may not support capital raising transactions. If we require additional funds and we are unable to obtain them on a timely basis or on terms favorable to us, we may be required to scale back our research and development efforts, sell or license some or all of our technology or assets or curtail or cease operations. If we raise additional funds by selling additional shares of our capital stock or securities convertible into common stock, the ownership interest of our stockholders will be diluted.
We have substantial debt which adversely affects us.We have a substantial amount of debt, including the following as of March 31, 2003:
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The substantial amount of our indebtedness impacts us in a number of ways:
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These factors generally place us at a disadvantage to our less leveraged competitors. Any or all of these factors could cause our stock price to decline.
We may not have sufficient funds to pay the balance on promissory notes due December 31, 2003 and December 31, 2004. We have issued convertible subordinated promissory notes in the aggregate face amount of $2.025 million which mature on December 31, 2003 and senior secured promissory notes in the aggregate face amount of $1.0 million which mature on December 31, 2004, and if they are not sooner paid or, in the case of the convertible notes, converted, we will owe $2,569,890 in principal and accrued interest on December 31, 2003 and $1,159,726 due on December 31, 2004.
We have a right to force conversion of the amounts due under the convertible subordinated promissory notes to common shares at conversion price of $2.00 per share, but we can exercise that right only if our stock price exceeds $5.00 per share for five trading days in a row, and we have on file with the SEC an effective registration statement for the resale of such shares. The convertible note holders may voluntarily convert the notes to common shares at a conversion price of $2.00 per share any time before payment, but they are not obligated to do so unless the conditions for mandatory conversion are met. If our stock price is below $2.00 per share at March 31, 2003, it is unlikely any remaining holders will elect to convert, and the notes will be due and payable unless they are renegotiated. Even if our stock price exceeds $2.00 per share on that date or before, some or all of the holders may not elect to convert their notes. During the last 30 trading days, the closing sale price of our common shares has ranged from $3.12 to $3.70.
We may not have sufficient funds available to make the required maturity payments. If we do not have sufficient funds, one or more note holders could declare its note in default. The senior secured promissory notes are secured by our accounts receivable, equipment, goods, instruments and inventory. If we default on the payment of such notes, the holders will have the right to take control of all of the assets which secure the notes.
Although the convertible subordinated notes are unsecured, those note holders could obtain a judgment and enforce that judgment by taking control of some or all of our assets. Upon default, note holders could also commence involuntary bankruptcy proceedings, which could significantly impair our business and the value of your stock. Even if we do have sufficient funds to pay those notes at maturity, such payments could impair our ability to meet other critical operating expenses, and could require us to scale back our research and development efforts, sell or license some or all of our technology or assets or curtail or cease operations.
warrants.
We are an early stage company introducing new products and technologies. If
commercially successful products do not result from our efforts, we may be
unprofitable or forced to cease operations.
Our HSS, NeoPlanar, PureBass and LRAD/HIDA technologies have only
recently been introduced to market and are still being improved. Commercially
viable sound technology systems may not be successfully and timely produced by
OEMsoriginal equipment manufacturers (OEMs) due to the inherent risks of technology
development, new product introduction, limitations on financing, manufacturing
problems, competition, obsolescence, loss of key technical personnel and other
factors. Our revenues from our sound technology have been limited to date, and
we cannot guarantee significant revenues in the future. The development and
introduction of our sound technology has taken longer than anticipated by
management and could be subject to additional delays. We have also experienced
manufacturing quality control problems with some of our initial commercial HSS
units, and we may not be able to resolve future manufacturing problems in a
timely and cost-effectivecost effective manner. Products employing our sound technology may
not achieve market acceptance. Our various sound projects are high risk in
nature, and unanticipated technical obstacles can arise at any time and result
in lengthy and costly delays or result in a determination that further
exploitation is unfeasible. If we do not successfully exploit our technology,
our financial condition and results of operations and business prospects would
be adversely affected.
Our portable
Portable consumer products have beenwere the primary source of our historical revenues.
You cannot rely on period-to-period comparisons of our results of operations as
an indication of future performance.
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We have derived most of our historical revenues from the sale of portable
consumer electronics products. We expect future revenues will primarily be
generated from our proprietary sound reproduction and other electronic
technologies, but there can be no assurance we will achieve substantial revenues
from these technologies. If we do not achieve substantial revenues from these
technologies, you may not be able to rely on period-to-period comparisons of our
results of operations as an indication of future performance.
We do not have the ability to predict future operating results. Our quarterly
and annual revenues will likely be subject to fluctuations caused by many
factors, any of which could result in our failure to achieve our revenue
expectations.
Our historical revenues derived almost exclusively from portable
consumer products, and we expect a majority of future revenues to be generated
from our sound reproduction technologies. Revenues from our sound reproduction
technologies are expected to vary significantly due to a number of factors. Many
of these factors are beyond our control. Any one or more of the factors listed
below or other factors could cause us to fail to achieve our revenue
expectations. These factors include:
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o our ability to develop and license our sound reproduction
technologies or our ability to supply components to customers,
distributors or OEMs;
o market acceptance of and changes in demand for products of our
customers;
o gains or losses of significant customers, distributors or
strategic relationships;
o unpredictable volume and timing of customer orders;
o the availability, pricing and timeliness of delivery of
components for our products and OEM products;
o fluctuations in the availability of manufacturing capacity or
manufacturing yields and related manufacturing costs;
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Most of our operating expenses are relatively fixed in the short term. We may be unable to rapidly adjust spending to compensate for any unexpected sales or license revenue shortfalls, which could harm our quarterly operating results. We do not have the ability to predict future operating results with any certainty.
Our expenses may vary from period to period, which could affect quarterly
results and our stock price.
If we incur additional expenses in a quarter in which we do not
experience increased revenue, our results of operations would be adversely
affected and we may incur larger losses than anticipated for that quarter.
Factors that could cause our expenses to fluctuate from period to period
include:
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o the timing and extent of our research and development efforts;
o the extent of marketing and sales efforts to promote our
products and technologies; and
o the timing of personnel and consultant hiring.
Sound reproduction markets are subject to rapid technological change, so our
success will depend on our ability to develop and introduce new technologies.
Technology and standards in the sound reproduction markets evolve
rapidly, making timely and cost-effective product innovation essential to
success in the marketplace. The introduction of products with improved
technologies or features
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may render our technologies obsolete and unmarketable. If we cannot develop products in a timely manner in response to industry changes, or if our technologies do not perform well, our business and financial condition will be adversely affected. The life cycles of our technologies are difficult to estimate, particularly those such as HSS and LRAD/HIDA for which there are no established markets. As a result, our technologies, even if successful, may become obsolete before we recoup our investment.
Our HSS technology is subject to government regulation, which could lead to
unanticipated expense or litigation.
Our HyperSonic Sound technology emits ultrasonic vibrations, and as
such is regulated by the Food and Drug Administration. In the event of certain
unanticipated defects in an HSS product, a licenseecustomer or we may be required to
comply with FDA requirements to remedy the defect and/or notify consumers of the
problem. This could lead to unanticipated expense, and possible product
liability litigation against a licenseecustomer or us. Any regulatory impediment to full
commercialization of our HSS technology, or any of our other technologies, could
adversely affect our results of operations. For a further discussion of the
regulation of our HSS technology, see Part I, Item 1 of our Annual Report on
Form 10-K, under the heading “Government"Government Regulation.”
"
We may not be successful in obtaining the necessary licenses required for us to
sell some of our products abroad.
Licenses for the export of certain of our products may be required from
government agencies in accordance with various statutory authorities, including
the Export Administration Act of 1979, the International Emergency Economic
Powers Act, the Trading with the Enemy Act of 1917 and the Arms Export Control
Act of 1976. We may not be able to obtain the necessary licenses in order to
conduct business abroad. In the case of certain sales of defense equipment and
services to foreign governments, the U.S. Department of State must notify
Congress at least 15 to 30 days, depending on
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Many potential competitors who have greater resources and experience than we do
may develop products and technologies that make ours obsolete.
Technological competition from other and longer established electronic
and loudspeaker manufacturers is significant and expected to increase. Most of
the companies with which we expect to compete have substantially greater capital
resources, research and development staffs, marketing and distribution programs
and facilities, and many of them have substantially greater experience in the
production and marketing of products. In addition, one or more of our
competitors may have developed or may succeed in developing technologies and
products that are more effective than any of ours, rendering our technology and
products obsolete or noncompetitive.
Commercialization of our sound technologies depends on collaborations with other
companies. If we are not able to maintain or find collaborators and strategic
alliance relationships in the future, we may not be able to develop our sound
technologies and products.
As we do not have the production, marketing and selling resources to
commercialize our products on our own, our strategy is to establish business
relationships with leading participants in various segments of the electronics
and sound reproduction markets to assist us in producing, marketing and selling
products that include our sound technologies.
Our success will therefore depend on our ability to maintain or enter into new strategic arrangements with partners on commercially reasonable terms. If we fail to enter into such strategic arrangements with third parties, our financial condition, results of operations, cash flows and business prospects will be adversely affected. Any future relationships may require us to share control over our development, manufacturing and marketing programs or to relinquish rights to certain versions of our sound and other technologies.
We are dependent on outside suppliers including HST, Inc.and manufacturers. Our relationships with
two key manufacturers have recently terminated, and our new manufacturer has not
yet produced our products in quantity. Disruptions in supply could adversely
affect us.
We have developed a strategicrecently terminated our manufacturing relationship with HST, Inc. providing for,
formerly our sub-contract manufacturingmanufacturer of our HSS and NeoPlanar products. The loss or disruption of HST, Inc. as a supplier could have a negative impact on our financial condition and results of operations. We also have a manufacturing arrangement withIn
addition, Amtec Manufacturing, forthe sole manufacturer of our PureBass subwoofer
units. These are sole supplier arrangements, and the loss or a disruptionunits, recently went out of supplybusiness. We have contracted with Magnotek
Manufacturing to manufacture all three of these products, but Magnotek has not
yet commenced large scale production of our products. Magnotek's production
start-up requirements may cause longer lead times, particularly for larger
orders, which could have a negative impact on our ability to introduce these
technologies in volume. Once introduced in volume,The agreement with Magnotek is non-exclusive and either
party may terminate the agreement on 90 days advance notice. Any loss or
disruption of supply could reduce future revenues, adversely affecting financial
condition and results of operations.
Any inability to adequately protect our proprietary technologies could harm our
competitive position.
We are heavily dependent on patent protection to secure the economic
value of our technologies. We have both issued and pending patents on our sound
reproduction technologies and we are considering additional patent applications.
Patents may not be issued fromfor some or all of our pending applications. Claims
allowed from existing or pending patents may not be of sufficient scope or
strength to protect the economic value of our technologies. Issued patents may
be
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challenged or invalidated. Further, we may not receive patents in all
countries where our products can be sold or licensed. Our competitors may also
be able to design around our patents. The electronics industry is characterized
by vigorous protection and pursuit of intellectual property rights or positions,
which have resulted in significant and often protracted and expensive
litigation. There is currently no pending litigation against us that questions
our intellectual property litigation against us.rights. Third parties may charge that our technologies
or products infringe their patents or proprietary rights. Problems with patents
or other rights could potentially increase the cost of our products, or delay or
preclude our new product development and commercialization. If infringement
claims against us are deemed valid, we may be forced to obtain licenses, which
might not be available on acceptable terms or at all. Litigation could be costly
and time-consuming but may be necessary to protect our future patent and/or
technology license positions, or to defend against infringement claims. A
successful challenge to our sound technology could have a negative effect on our
business prospects.
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We may issue preferred stock in the future, and the terms of the preferred stock
may reduce the value of your common stock.
We are authorized to issue up to 5,000,000 shares of preferred stock in
one or more series. Our board of directors may determine the terms of future
preferred stock without further action by our stockholders. If we issue
additional preferred stock, it could affect your rights or reduce the value of
your common stock. In particular, specific rights granted to future holders of
preferred stock could be used to restrict our ability to merge with or sell our
assets to a third party. These terms may include voting rights, preferences as
to dividends and liquidation, conversion and redemption rights, and sinking fund
provisions.
Our convertible subordinated note financing may result in dilution to our common stockholders.Dilution of the per share value of our common shares could result from the conversion of most or all of the convertible subordinated notes we sold in September and October of 2001. Holders of these notes may convert the principal balance of these notes and all accrued interest into shares of our common stock at a conversion price of $2.00. The conversion price may be adjusted downward if we sell securities for less than an effective price of $2.00 per share. We have the right to require conversion of the notes after our stock trades above $5.00 per share for five consecutive trading days and we have an effective registration statement for the resale of the conversion shares. We intend to exercise this right as soon as we are able. In addition, the purchasers in these transactions received warrants to purchase one common share for each $2.00 in note principal purchased. The exercise price is $2.00 per share, subject to downward adjustment if we sell securities for less than an effective price of $2.00 per share. We initially issued $2.025 million in principal amount of convertible subordinated notes, which as of March 31, 2003 were convertible into an aggregate of 1,193,738 common shares, and 1,012,500 warrants, all of which are outstanding. The 12% convertible subordinated notes are due December 31, 2003, and accrue interest at 12% per annum.
Holders of our common stock could experience substantial dilution form the conversion of the convertible subordinated notes and exercise of the related warrants. In the event the conversion or exercise price is lower than the actual trading price on the day of conversion or exercise, the holder could immediately sell all of its converted common shares and exercised warrant shares, which would have a dilutive effect on the value of the outstanding common shares. Even the mere perception of eventual sales of common shares issued on the conversion of the convertible subordinated notes or exercise of the related warrants could lead to a decline in the trading price of our common stock.
Our Series D and Series E Preferred Stock financings may result in dilution to
our common stockholders. The holders of Series D and Series E Preferred Stock
will receive more common shares on conversion if the market price of our common
stock declines.
Dilution of the per share value of our common shares could result from
the conversion of the outstanding Series D and Series E Preferred Stock. In May
2002, we issued a total of 235,400 shares of our Series D Preferred Stock.
180,400185,400 of these shares have been converted into 683,344695,266 common shares, and
55,00050,000 shares of Series D Preferred Stock remain outstanding as of May 7,July 28,
2003. We have alsoIn March 2003, we issued 343,250 shares of Series E Preferred Stock.
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5,000
of these shares have been converted into 15,679 common shares and 338,250 shares
of Series E Preferred Stock remain outstanding as of July 28, 2003.
The holders of our outstanding shares of Series D Preferred Stock may
convert these shares into shares of our common stock at a conversion price equal
to the lower of $4.50 or 90% of volume-weighted average price of our common
stock for the five trading days prior to conversion. The conversion rate cannot
however be lower than lower than $2.00. The $2.00 floor price may however be
adjusted downward if we sell securities for less than an effective price of
$2.00 per share. As of May 7,July 28, 2003, the outstanding 55,00050,000 shares of Series D
Preferred Stock are convertible into an aggregate of 193,598119,348 common shares. In
addition, the Series D Preferred Stock purchasers received warrants to purchase
2.2 common shares for each share of Series D Preferred Stock purchased. The
exercise price of the warrants was initially $4.50 per share, but was reduced to
$3.01 per share as a result of anti-dilution provisions in the warrants. The
exercise price will be subject to further reduction if we sell securities for
less than an effective price of $3.01 per share.
The holders of our outstanding shares of Series E Preferred Stock may
convert these shares into shares of our common stock at a conversion price equal
to the lower of $3.25 or 90% of volume-weighted average price of our common
stock for the five trading days prior to conversion. The conversion rate cannot
however be lower than $3.25 before September 30, 2003, or lower than $2.00 after
such date. As of May 7,July 28, 2003, the 343,250338,250 outstanding shares of Series E
Preferred Stock are convertible into an aggregate of 1,067,7821,066,785 common shares. In
addition, the Series E Preferred Stock purchasers received warrants to purchase
1.5 common shares for each share of Series E Preferred Stock purchased at an
exercise price of $3.25 per share.
Holders of our common stock could experience substantial dilution from
the conversion of the Series D and Series E Preferred Stock and exercise of the
related warrants. As a result of the floating conversion price, the holders of
Series D and Series E Preferred Stock will receive more common shares on
conversion if the price of our common shares declines. To the extent that the
Series D or Series E stockholders convert and then sell their common shares, the
common stock price may decrease due to the additional shares in the market. This
could allow the Series D or Series E stockholders to receive greater amounts of
common stock, the sales of which would further depress the stock price.
Furthermore, the significant downward pressure on the trading price of our
common stock as Series D and Series E Preferred Stock and related warrant
holders convert or exercise these securities and sell the common shares received
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Our common stock trades on the NASDAQNasdaq SmallCap Market. The market price
of our common stock has fluctuated significantly to date. In the future, the
market price of our common stock could be subject to significant fluctuations
due to general market conditions and in response to quarter-to-quarter
variations in:
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o our anticipated or actual operating results; o developments concerning our sound reproduction technologies; o technological innovations or setbacks by us or our competitors; o conditions in the consumer electronics market; o announcements of merger or acquisition transactions; and o other events or factors and general economic and market conditions. The stock market in recent years has experienced extreme price and volume fluctuations that have affected the market price of many technology companies, and that have often been unrelated or disproportionate to the operating performance of companies.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position, results of operations or cash due to adverse changes in market prices, including interest rate risk and other relevant market rate or price risks.
We are exposed to some market risk through interest rates, related to our
investment of our cash of $1,866,335$1,109,293 at March 31,June 30, 2003. Based on this balance, a
change of one percent in interest rate would cause a change in interest income
of $18,663.$11,093. We do not consider this risk to be material, and we manage the risk
by continuing to evaluate the best investment rates available for short-term
high quality investments.
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We have long-term debt of $1,000,000 earning an 8% fixed interest rate, this rate is not affected by the change in the market. At the present time we do not have any significant foreign sales or foreign currency transactions.
Item 4. Controls and Procedures
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(a) Evaluation of disclosure controls and procedures. Based on their evaluation as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Notwithstanding the foregoing, and in connection with the Restatement described in the Explanatory Note to this report, the principal executive officer and the principal financial officer have concluded that the manner in which information brought to the attention of senior management is evaluated for proper recording in the financial statements should be improved, and the principal executive officer and the principal financial officer intend to develop new disclosure controls and procedures toward this end. The principal executive officer and the principal financial officer will continue to evaluate the effectiveness of its disclosure controls and procedures on an ongoing basis, and will take further action as appropriate. (b) Changes in internal controls. There were no significant changes in our internal controls over financial reporting identified in connection with the evaluation described above which occurred during the period covered by this report which have affected or are reasonably likely to affect our internal controls over financial reporting PART II. OTHER INFORMATION
On May 27, 2003, Horizon Sports Technologies, Inc. d/b/a HST filed a complaint
in the Superior Court of California, County of San Diego, alleging breach of
contract and fraud in connection with the various agreements between us and HST.
HST sought damages of approximately $811,000, plus other unspecified damages. We
answered the complaint
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ThereExpect as set forth above, there are currently no
material pending legal proceedings to which we are a party or to which any of
our property is subject.
(a) Not applicable
(b) As more particularly described below, we issued 343,250 shares of Series E Preferred Stock during the quarter ended March 31, 2003. The Series E Preferred Stock is entitled to a liquidation preference over the common stock equal to the purchase price of the Series E Preferred Stock increased by 6% per annum. The Series E Preferred Stock is also entitled to a cash dividend equal 6% of the liquidation preference when, as and if a cash dividend is declared on the common stock. The Series E Preferred Stock dividend must be paid in preference and priority to a dividend on the common stock. The liquidation preference could materially diminish the rights of the common stockholders in the event of a liquidation, and the dividend preference will impair our ability to declare a dividend on the common stock were we to choose to do so. At this time, we do not intend to declare dividends on the common stock in the foreseeable future.
(c) The following is a description of the equity securities sold by us during the second fiscal quarter ended March 31, 2003 that were not registered under the Securities Act:
During the quarter ended March 31,June 30, 2003, we sold in a private offering $3,432,500issued 267,000 shares upon the
exercise of Series E Preferred Stock, par value $.00001, at $10.00 per share to a limited number of investors. In connection with the Series E financing, we amended our 8% Senior Secured Promissory Notes:
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We raised an aggregate of $2,432,500 in new cash and converted senior notes with an aggregate value of $1,000,000. A total of $1,000,000 in principal amount of the senior notes remains outstanding. The amendment to the senior notes also clarified that senior note balances converted to Series E Preferred Stock would not be included for purposes of determining whether mandatory redemption of the remaining senior note balance is required.
The purchase price of the 343,250 shares of Series E Preferred Stock, increased by $0.60 per share per year, may be converted at the election of a Series E Preferred shareholder one or more times into fully paid and non-assessable shares ofoutstanding common stock at a conversion pricepurchase warrants, for total proceeds of
$3.25. If after September 30, 2003, 90% of the volume weighted average price of our common stock for the five trading days prior to conversion (the “Discount Market Price”) is less than $3.25, the conversion price will be reduced to the Discount Market Price; provided, however, that the conversion price cannot be below $2.00 per share. We may call the Series E Preferred Stock for conversion if the market price of our common
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stock exceeds $9.50 per shares for ten consecutive trading days and certain conditions are met. The Series E Preferred Stock will be subject to mandatory conversion on December 31, 2006.
Each purchaser of Series E Preferred Stock was also granted a warrant to purchase 1.5 shares of common stock for each share of Series E Preferred Stock purchased, exercisable until December 31, 2007 at a price of $3.25 per share. In connection with the Series E financing, we issued warrants exercisable for an aggregate of 514,875 shares.
The Series E financing resulted in a repricing of the 517,880 warrants previously issued in connection with our Series D Preferred Stock financing from $4.50 per share to $3.01 per share in accordance with repricing provisions of such warrants.
The Series E Preferred and the related warrants$706,220. These securities were offered and sold without the registration under the
Securities Act to a limited number of accredited investors in reliance upon the
exemption provided by Rule 506 of Regulation D thereunder, and to a limited number of foreign investorsmay not be
offered or sold in sales outside the United States in accordance with Regulation S thereunder.the absence of an effective registration
statement or exemption from the registration requirements under the Securities
Act. An appropriate legend was placed on the Series E Preferred Stock and the warrants and will be placed upon the shares issuable upon conversion of the Series E Preferred Stock or upon exercise of the warrants unless registered under the Securities Act prior to issuance. We have agreed to fileissued. The shares issued
are included in a currently effective registration statement covering the stock issuable upon conversion of the Series E Preferred Stock and exercise of the warrants on or before May 31, 2003. The 8% Senior Secured Notes were modified without registration under the Securities Act in reliance on Section 3(a)(9) of the Securities Act. The modification involved solely existing security holders and no commission or other remuneration was paid or given directly or indirectly for soliciting such modification.
Net proceeds from the Series E financing of $2,266,278 (excluding estimated finders fees, offering costs and the value of converted senior notes) are intended primarily for working capital.
During the quarter ended March 31, 2003, we issued 54,922 shares to each of Stephen M. Williams and David Graebener pursuant to the terms of an Asset Purchase Agreement dated April 11, 2000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. Each recipient of shares was a senior level employee of the company who had access to the kind of information normally provided in a prospectus.
their resale.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security HoldersNot applicable
At the Company's fiscal 2003 Annual Meeting of Stockholders held on May 29,
2003, the following individuals, constituting all of the members of the Board of
Director were elected: Elwood G. Norris, James M. Irish, Terry Conrad, Richard
M. Wagner, David J. Carter and Daniel Hunter. For each elected director, the
results of the voting were:
Our stockholders also voted to ratify the selection of BDO Seidman, LLP as our
independent auditors for the fiscal year ended September 30, 2003. The results
of the voting on this proposal were:
Affirmative Votes Negative Votes Votes Withheld
-----------------------------------------------------------
13,651,212 68,931 44,068
The foregoing proposal was approved and accordingly ratified.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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31 Certifications of Principal Executive Officer and Principal Financial Officer as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2003. * 32 Certification of Chairman and Chief Financial Officer as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2003. * * Filed concurrently herewith.
Reports on Form 8-K
On MarchMay 28, 2003, we filed a Form 8-K containing disclosure in Item 5.
On June 6, 2003, we filed a Form 8-K containing disclosure in Item 5.
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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.
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CERTIFICATIONS
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Dated: May 13,
AMERICAN TECHNOLOGY CORPORATION
Date: October 1, 2003
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By: /s/ RENEE' WARDEN --------------------- Renee' Warden, Chief Accounting Officer, Treasurer and Corporate Secretary (Principal Financial and Accounting Officer and duly authorized to sign on behalf of the Registrant) 27
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Dated: May 13, 2003
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