In fiscal 2001 Business Group revenues were $855,342. Sound product revenues were $150,898, consumer portable product sales were $664,961 and contract and licensing revenues were $39,483. Sound product sales increased in 2002 and consumer portable product sales decreased compared to 2001 as we began to focus efforts on sound products and reduce our focus on consumer portable products.
Government Group net revenues in fiscal 2001 were not significant.
We encountered warranty issues in the fourth quarter of fiscal 2003 on some of our HSS Generation I product which had a vacuum behind the film on the ultrasonic emitter component. As a result of warranty expenses of $313,187 and accruals for future warranty work of $319,500, we reported a gross loss on revenues of $228,651 in fiscal 2003 compared to a gross profit of $326,908 in fiscal 2002 and a gross profit of $277,066 in fiscal 2001. Presented below is the gross profit or loss by business segment.
We have changed our emitter design to remove the vacuum element and we have improved film quality, and we believe our Generation II emitter is more reliable. We expect to make further raw material improvements in January 2004 and additional improvements are expected in Generation III scheduled for later in fiscal 2004. We expect HSS product sales to produce positive margins in fiscal 2004 as we grow manufacturing capacity. Our Government Group has only recently been formed and gross profit historical results are not sufficient for prediction of future results. Gross profit percentage is highly dependent on sales prices, volumes, purchasing costs and overhead allocations. Our various sound products have different margins so product sales mix can materially affect gross profits. We continue to make model changes including raw material and component changes thus changing cost inputs. Margins may vary significantly from period to period.
Selling, general and administrative expenses as a percentage of sales were 370% in fiscal 2003, 301% in 2002 and 271% in 2001. These costs in fiscal 2003 totaled $4,863,711, an increase of $1,817,174 from the $3,046,537 incurred in fiscal 2002. Legal and professional costs increased $1,494,365 to $2,168,967 in fiscal 2003 compared to $674,602 in fiscal 2002. Included in legal and professional costs in 2003 were settlement costs and accruals of $1,233,754 related to our manufacturing contract termination and a dispute regarding and a buyout of NeoPlanar royalties. A total of $585,000 of the settlement costs were paid through issuance of shares of common stock in fiscal 2003. Personnel costs increased from $1,393,973 in fiscal 2002 to $1,562,852 as a result of both new executives and staff increases. We formed the Government Group in fiscal 2003 to focus efforts on LRAD and government business opportunities.
Selling, general and administrative expenses were $2,319,690 in fiscal 2001 and increased to $3,046,537 in fiscal 2002. The major factor accounting for the $726,847 increase was an increase in personnel costs of $504,074 to $1,393,973 in fiscal 2002. During fiscal 2002 we added personnel to begin marketing and support of the introduction of HSS. Professional costs also increased by $203,832 from fiscal 2001 to fiscal 2002.
We incurred non-cash selling, general and administrative expenses in each of the three years. In fiscal 2003 we incurred $410,816 of non-cash compensation from the issuance of 109,844 common shares related to purchased technology and $179,995 for the issuance of stock options and warrants to nonemployees. In fiscal 2002 we had non-cash compensation of $304,920 for services paid through the issuance of 74,129 shares of common stock and $517,836 for the issuance of stock options and warrants to nonemployees. In fiscal 2001 we recorded in selling, general and administrative $136,020 for services paid through the issuance of 36,093 shares of common stock and $20,924 for the issuance of stock options to nonemployees.
We may expend additional resources on marketing our sound technologies in the future periods which may increase selling, general and administrative expenses.
Research and development expenses declined from fiscal 2002 to 2003. Fiscal 2003 expenses totaled $2,493,351 including $315,636 of NeoPlanar technology amortization. Salaries and benefits and consultant costs accounted for $1,780,345 or 71% of these costs. Fiscal 2002 expenses totaled $3,622,063 including $420,808 of amortization. Salaries and benefits and consultant costs accounted for $2,243,586 or 62% of fiscal 2002 research and development costs. Fiscal 2001 expenses were $3,136,109 including $420,829 of amortization. In fiscal 2002 and 2003 we paid an electronics design consultant partially in stock options and incurred non-cash costs of $183,834 and $47,782. In fiscal 2001 outside cash consulting costs and testing supplies totaled $800,173. These costs increased to $1,066,597 in 2002 and declined to $207,390 in 2003 as we made the transition from research and development to product manufacturing and sales.
Research and development costs vary period to period 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 fiscal 2004 research and development costs to remain at comparable levels to fiscal 2003 or at lower levels based on current staffing.
Total operating expenses were $7,332,549 in fiscal 2003 compared to $6,689,292 in fiscal 2002 and $5,455,799 in 2001. The increase in fiscal 2003 resulted primarily from the increase in selling, general and administrative costs. Due to this increase and the negative gross profit in fiscal 2003, our loss from operations was $7,561,200. The loss from operations was $6,362,384 in fiscal 2002 and $5,178,733 in 2001. We expect increased product sales in fiscal 2004 to reduce the loss from operations from fiscal 2003 levels.
The major item in other income (expense) is interest expense. In fiscal 2003 we incurred interest expense of $686,639 which included non-cash amortization of debt discount of $405,000 and $169,753 of interest paid in common stock. In fiscal 2002 we incurred interest expense of $1,872,544 which included non-cash amortization of bond discount of $1,620,000. We incurred no interest expense in 2001. During fiscal 2003 our outstanding long-term debt was converted to equity causing the decline in interest expense from fiscal 2002 to 2003. We do not expect any significant interest costs in fiscal 2004.
The net loss for fiscal 2003 was $8,227,013 comparable to the net loss of $8,220,132 in fiscal 2002. The net loss for fiscal 2001 was $5,046,219.
Net loss available to common stockholders was increased during fiscal 2002 and 2003 in computing net loss per share by imputed deemed dividends based on the value of warrants issued in connection with convertible preferred stock. The net loss available to common stockholders was also increased in fiscal 2002 and 2003 by an additional deemed dividend computed from a discount provision in convertible preferred stock. The imputed deemed dividends are not contractual obligations to pay such imputed dividends. Net loss available to common stockholders is also increased by the 6% accretion (similar to a dividend) on outstanding preferred stock. These amounts aggregated $2,409,228 in fiscal 2003, $282,912 in fiscal 2002 and $120,722 in fiscal 2001 increasing the net loss in each year. Accordingly the net loss available to common stockholders was $10,636,241, $8,503,044 and $5,166,941 in fiscal 2003, 2002 and 2001, respectively.
We have experienced significant negative cash flow from operating activities including developing and introducing our sound technologies. Our net cash used in operating activities was $5,457,369 for the year ended September 30, 2003. As of September 30, 2003, the net loss of $8,227,013 included certain expenses not requiring the use of cash totaling $2,448,419 or a net of $5,778,594. In addition, cash was used in operating activities through an increase of $272,063 in inventories, an increase of $77,485 in accounts receivable and an increase of $13,719 in prepaid expenses. Further cash provided by operating activities included a $684,492 decrease in accounts payable and accrued liabilities.
At September 30, 2003, we had accounts receivable of $184,162 as compared to $111,486 at September 30, 2002. This represented approximately 51 days of revenues. 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 and the timing of contract payments.
For the year ended September 30, 2003, we used $108,246 for the purchase of laboratory and computer equipment and software and made a $112,007 investment in patents and new patent applications. We anticipate a continued investment in patents in fiscal 2004. Dollar amounts to be invested on these patents are not currently estimable by management.
At September 30, 2003, we had working capital of $8,484,210 compared to working capital of $554,713 at September 30, 2002.
We have financed our working capital requirements primarily through the sale of common and preferred stock and warrant exercises of stock options, sale of convertible and non-convertible notes and margins from product sales. At September 30, 2003, we had cash of $9,850,358 representing an increase of $8,042,638 from cash at September 30, 2002.
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, we believe we have sufficient cash for operations for the next twelve months. We believe increased sales of HSS, LRAD and NeoPlanar products will also contribute cash in fiscal 2004. We have 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.
Our total stockholders’ equity was $9,728,171 at September 30, 2003 compared with a stockholders’ deficit of $884,882 at September 30, 2002. The increase resulted primarily from equity investments during the year offset by the net loss.
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.
32
TABLE OF CONTENTS
Contractual Commitments and Commercial Commitments
The following table summarizes our contractual obligations, including purchase commitments at September 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
Year | | 1-3 Year | | 4-5 Years | | After 5 Years | |
Capital leases | | $ | 12,806 | | $ | 25,612 | | $ — | | $ — | |
Operating leases | | | 16,600 | | | 33,828 | | — | | — | |
Employment agreements | | | 232,000 | | | 220,000 | | — | | — | |
Total contractual cash obligations | | $ | 261,406 | | $ | 279,440 | | $ — | | $ — | |
New Accounting Pronouncements
The Financial Accounting Standards Board has issued new pronouncements for future implementation as discussed in our financial statements (see page F-11). As discussed in the notes to the financial statements, the implementation of these new pronouncements is not expected to have a material effect on our financial statements.
Item 7A. 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 flows due to adverse changes in market prices, including interest rate risk and other relevant market rate or price risks. We do not use derivative financial instruments in our investment portfolio.
We are exposed to some market risk through interest rates, related to our investment of current cash and cash equivalents of approximately $9.8 million. Based on this balance, a change of one percent in interest rate would cause a change in interest income of $98,000. The risk is not considered material and we manage such risk by continuing to evaluate the best investment rates available for short-term high quality investments.
Item 8. Financial Statements and Supplementary Data
The financial statements required by this item begin on page F-1 with the index to financial statements followed by the financial statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that material information related to ATC, including our consolidated subsidiaries, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
(a) As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded, as of the date of such evaluation, that the design and operation of such disclosure controls and procedures were effective.
33
TABLE OF CONTENTS
(b) Except as discussed below, no significant changes were made in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter. During the quarter ended September 30, 2003, we determined that the manner in which information brought to the attention of senior management was evaluated for proper recording in the financial statements should be improved, and we developed new mandatory review procedures for contracts, letters of intent and matters relating to the conduct of litigation.
Limitations. Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART III
Certain information required by this Part III is omitted from this Annual Report and is incorporated by reference to our Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held in 2004 (the Proxy Statement).
Item 10. Directors and Executive Officers of the Registrant
| (a) | Executive Officers—See “Executive Officers” in Part I, Item 1 hereof. |
| (b) | Directors—The information required by this Item is incorporated herein by reference to our Proxy Statement. |
| (c) | Audit Committee Financial Expert—The board of directors has determined that Daniel Hunter is an “audit committee financial expert” and “independent” as defined under applicable SEC and NASDAQ rules. The board’s affirmative determination was based, among other things, upon his over 25 years as a certified public accountant. |
| (d) | We have adopted a “Code of Business Conduct and Ethics”, a code of ethics that applies to all employees, including our executive officers. A copy of the Code of Business Conduct and Ethics is posted on our Internet site at www.atcsd.com. In the event we make any amendments to, or grant any waivers of, a provision of the Code of Business Conduct and Ethics that applies to the principal executive officer, principal financial officer, or principal accounting officer that requires disclosure under applicable SEC rules, we intend to disclose such amendment or waiver and the reasons therefor on a Form 8-K or on our next periodic report. |
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the Proxy Statement.
34
TABLE OF CONTENTSItem 14. Principal Accounting Fees and Services
The information required by this item is incorporated by reference to the Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
| (a) | The following documents are filed as part of this report: |
Financial Statements: | | |
Report of Independent Certified Public Accountants | | F-2 |
Balance Sheets as of September 30, 2003 and 2002 | | F-3 |
Statements of Operations for the Years Ended September 30, 2003, 2002 and 2001 | | F-4 |
Statements of Stockholders’ Equity for the Years Ended September 30, 2003, 2002 and 2001 | | F-5 |
Statements of Cash Flows for the Years Ended September 30, 2003, 2002 and 2001 | | F-6 |
Summary of Accounting Policies | | F-7 - F-12 |
Notes to Financial Statements | | F-13- F-26 |
Schedule II – Valuation and Qualifying Accounts | | F-27 |
Exhibit Index
3. Articles and Bylaws
3.1 | Certificate of Incorporation of American Technology Corporation (Delaware) dated March 1, 1992. Filed as Exhibit 2.1 on Form 10-SB effective August 1, 1994. |
| |
3.1.1 | Amendment to Certificate of Incorporation of American Technology Corporation dated March 24, 1997 and filed with Delaware on April 22, 1997. Filed as Exhibit 3.1.1 on Form 10-QSB for March 31, 1997. |
| |
3.1.2 | Corrected Certificate of Designations of Series A Convertible Preferred Stock dated and filed with Delaware on August 25, 1997. Filed as Exhibit 3.1.3 on Form 8-K dated August 29, 1997. |
| |
3.1.3 | Corrected Certificate of Designations of Series B Convertible Preferred Stock filed with Delaware on December 23, 1998. Filed as Exhibit 3.1.4 on Form 10-KSB dated December 29, 1998. |
| |
3.1.4 | Corrected Certificate of Designation of Series C Preferred Stock filed with Delaware on April 19, 2000. Filed as exhibit 3.1.5 on Form 8-K dated April 19, 2000. |
| |
3.1.5 | Certificate of Designation of Series D Preferred Stock filed with Delaware on May 3, 2002. Filed as exhibit 3.1 on Form 10-Q for the quarter ended March 31, 2002. |
| |
3.1.6 | Certificate of Amendment to Certificate of Incorporation filed with Delaware on September 26, 2002. Filed as exhibit 3.1.6 on Form 10-K for the year ended September 30, 2002. |
| |
3.1.7 | Certificate of Designation of Series E Preferred Stock filed with Delaware on February 28, 2003. Filed as exhibit 4.2 on Form 8-K dated March 6, 2003. |
| |
3.2 | Bylaws of American Technology Corporation. Filed as Exhibit 2.3 on Form 10-SB effective August 1, 1994 |
| |
35
TABLE OF CONTENTS
10. Material Contracts
10.1 | Royalty Agreement between ATC and Elwood G. Norris dated September 3, 1985 filed as Exhibit 6.2 on Form 10-SB effective August 1, 1994. |
| |
10.2 | Assignment of Technology Agreement between ATC and Elwood G. Norris dated March 2, 1992. Filed as Exhibit 6.3 on Form 10-SB effective August 1, 1994. |
| |
10.2.1 | Addendum Agreement to Assignment of Technology Agreement between ATC and Elwood G. Norris dated December 2, 1996. Filed as Exhibit 10.3.1 on Form 10-KSB for September 30, 1996. |
| |
10.3 | 1992 Incentive Stock Option Plan adopted by the Board of Directors on March 2, 1992 and approved by the shareholders on June 19, 1992. Filed as Exhibit 6.8 on Form 10-SB effective August 1, 1994. |
| |
10.3.1 | Standard form of Incentive Stock Option Plan Agreement. Filed as Exhibit 6.8.1 on Form 10-SB effective August 1, 1994. |
| |
10.4 | 1992 Non-Statutory Stock Option Plan. Filed as Exhibit 6.9 on Form 10-SB effective August 1, 1994. |
| |
10.5 | Sublease agreement between ATC and Smiths Industries Aerospace & Defense Systems, Inc. as amended, dated September 1, 2000. |
| |
10.6 | 1997 Employee Stock Compensation Plan of ATC dated March 10, 1997 filed as Exhibit 10.11 on Form S-8 dated March 24, 1997. |
| |
10.7 | Employment Agreement dated as of September 1, 1997 between ATC and Elwood G. Norris filed as Exhibit 10.16 on Form 10-KSB for September 30, 1997. |
| |
10.8 | 1997 Stock Option Plan as adopted on January 23, 1998 filed as Exhibit 10.1 on Form S-8 dated July 27, 1998. |
| |
10.9 | Employment Agreement dated July 8, 1998 between ATC and James Croft. Filed as Exhibit 10.14 on Form 10-KSB dated December 29, 1998. |
| |
10.10 | Employment Agreement effective as of October 15, 2002 between the Company and Terry Conrad. Filed as exhibit 10.10 to Form 10-K for the year ended September 30, 2002. |
| |
10.11 | 2002 Stock Option Plan. Filed as Exhibit 99.1 on Form S-8 dated November 18, 2002. |
| |
10.12 | Form of 12% Convertible Subordinated Promissory Note due December 31, 2002 aggregating $2,025,000 granted to accredited investors (individual notes differ as to holder, amount and issuance date). Filed as Exhibit 4.11 on Form 8-K dated October 12, 2001. |
| |
10.12.1 | Amendment to 12% Convertible Subordinated Promissory Note dated November 19, 2002. Filed as Exhibit 10.12.1 to Form 10-K for the year ended September 30, 2002. |
| |
10.13 | Form of Stock Purchase Warrant exercisable until September 30, 2006 granted to accredited investors for an aggregate of 1,012,500 common shares (individual warrants differ as to holder, number of shares and issuance date). Filed as Exhibit 4.12 on Form 8-K dated October 12, 2001. |
| |
10.14 | Series D Stock and Warrant Purchase Agreement dated May 3, 2002. Filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2002. |
| |
10.14.1 | Amendment No. 1 to Series D Preferred Stock and Warrant Purchase Agreement dated July 3, 2002. Filed as Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2002. |
| |
10.15 | Form of Stock Purchase Warrant exercisable until March 31, 2007 granted to investors for an aggregate of 517,880 common shares (individual warrants differ as to holder, number of shares and issuance date). Filed as Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2002. |
| | |
|
36
TABLE OF CONTENTS
10.16 | Form of 8% Senior Secured Promissory Note due December 31, 2003 aggregating $1,500,000 granted to accredited investors (individual notes differ as to holder and amount). Filed as Exhibit 4.1 on Form 8-K dated October 7, 2002. |
| |
10.16.1 | Form of Amendment to 8% Senior Secured Promissory Note. Filed as exhibit 4.6 to Form 8-K dated March 6, 2003. |
| |
10.17 | Form of Security Agreement. Filed as Exhibit 4.2 on Form 8-K dated October 7, 2002. |
| |
10.18 | License Agreement between ATC and Harman International Industries, Inc. dated August 24, 2001. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934. Filed as exhibit 10.19 to Form 10-K for the year ended September 30, 2002. |
| |
10.19 | Series E Preferred Stock and Warrant Purchase Agreement dated February 28, 2003. Filed as Exhibit 4.1 to Form 8-K filed on March 6, 2003. |
| |
10.20 | Form of Stock Purchase Warrant exercisable until December 31, 2007 granted to accredited investors for an aggregate of 514,875 common shares (individual warrants differ as to holder, number of shares and issuance date). Filed as Exhibit 4.3 on Form 8-K dated March 6, 2003. |
| |
10.21 | Employment agreement/offer letter of James M. Irish dated January 27, 2003. Filed as exhibit 10.5 to Form 10-Q for the quarter ended March 31, 2003. |
| |
10.22 | Stock Purchase Warrant exercisable until September 30, 2007 granted to Sunrise Capital, Inc. for 100,000 common shares. Filed as exhibit 4.4 to Form S-3 dated May 29, 2003. |
| |
10.23 | Stock Purchase Warrant exercisable until April 4, 2008 granted to Jonathan Berg for 50,000 common shares. Filed as exhibit 4.5 to Form S-3 dated May 29, 2003. |
| |
10.24 | Securities Purchase Agreement dated July 11, 2003. Filed as Exhibit 4.1 to Form 8-K dated July 17, 2003. |
| |
10.25 | Registration Rights Agreement dated July 11, 2003. Filed as Exhibit 4.2 to Form 8-K dated July 17, 2003. |
| |
10.26 | Form of Common Stock Warrant exercisable until July 10, 2007 granted to accredited investors for an aggregate of 454,547 common shares (individual warrants differ as to holder, number of shares and issuance date). Filed as Exhibit 4.3 to Form 8-K dated July 17, 2003. |
| |
10.27 | License and Remarketer Agreement between ATC and General Dynamics Armament and Technical Products, Inc. dated February 14, 2003.* Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934. |
| |
10.28.1 | License and Remarketer Agreement between ATC and Bath Iron Works Corporation dated February 13, 2003. * Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934. |
| |
10.28.2 | Assignment of License and Remarketer Agreement from Bath Iron Works Corporation to General Dynamics Armament and Technical Products, Inc., dated September 23, 2003.* |
| |
10.29 | Employment Agreement of Kalani Jones dated August 28, 2003, as amended.* |
| |
10.30 | Employment Agreement of Carl Gruenler, as amended.* |
| |
37
TABLE OF CONTENTS23 Consents of Experts and Council
23.1 | Consent of BDO Seidman, LLP* |
| |
Certifications |
| |
31.1 | Certification of Elwood G. Norris, Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| |
31.2 | Certification of Carl Gruenler, Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Elwood G. Norris, Principal Executive Officer, and Carl Gruenler, Principal Financial Officer.* |
* Filed concurrently herewith
(b) Reports on Form 8-K
We filed a Form 8-K on September 24, 2003 containing disclosure in Item 5, 7 and 12.
We filed a Form 8-K on September 22, 2003 containing disclosure in Item 5 and 7.
We filed a Form 8-K on July 17, 2003 containing disclosure in Item 5 and 7.
38
TABLE OF CONTENTS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | AMERICAN TECHNOLOGY CORPORATION
December 29, 2003 |
| | By |
/s/ ELWOOD G. NORRIS
|
| | | Elwood G. Norris
(Chairman of the Board)
Principal Executive Officer |
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature appears below constitutes and appoints Elwood G. Norris and Carl Gruenler, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substituted, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of registrant in the capacities and on the dates indicated.
| | | |
Date: December 29, 2003
| | By |
/s/ ELWOOD G. NORRIS
|
| | | | Elwood G. Norris
Chairman of the Board and Director
(Principal Executive Officer) |
| | | |
Date: December 29, 2003
| | By |
/s/ CARL GRUENLER
|
| | | | Carl Gruenler, Vice President, Military Operations and Interim
Chief Financial Officer
(Principal Financial and Accounting Officer) |
| | | |
Date: December 29, 2003
| | By |
/s/ RICHARD M. WAGNER
|
| | | | Richard M. Wagner
Director |
| | | |
Date: December 29, 2003
| | By |
/s/ DAVID J. CARTER
|
| | | | David J. Carter
Director |
| | | |
Date: December 29, 2003
| | By |
/s/ DANIEL HUNTER
|
| | | | Daniel Hunter
Director |
39
TABLE OF CONTENTS
Report of Independent Certified Public Accountants | F-2 |
| |
Balance Sheets as of September 30, 2003 and 2002 | F-3 |
| |
Statements of Operations for the Years Ended
September 30, 2003, 2002 and 2001 | F-4 |
| |
Statements of Stockholders’ Equity (Deficit) for the Years Ended
September 30, 2003, 2002 and 2001 | F-5 |
| |
Statements of Cash Flows for the Years Ended
September 30, 2003, 2002 and 2001 | F-6 |
| |
Summary of Accounting Policies | F-7 – F-12 |
| |
Notes to Financial Statements | F-13- F-26 |
| |
Schedule II – Valuation and Qualifying Accounts | F-27 |
F-1
TABLE OF CONTENTS
Report of Independent Certified Public Accountants |
|
To the Stockholders and Board of Directors
American Technology Corporation
San Diego, California
We have audited the accompanying balance sheets of American Technology Corporation as of September 30, 2003 and 2002, and the related statements of operations, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended September 30, 2003. We have also audited the schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Technology Corporation at September 30, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2003 in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedules present fairly, in all material respects, the information set forth therein.
| | | |
/s/ BDO SEIDMAN, LLP
| | |
|
Costa Mesa, CA
December 5, 2003
| | | |
F-2
TABLE OF CONTENTS
American Technology Corporation
BALANCE SHEETS
September 30, | | 2003 | | 2002 | |
| |
| |
| |
| | | | | | | |
ASSETS | | | | | | | |
Current Assets: | | | | | | | |
Cash | | $ | 9,850,358 | | $ | 1,807,720 | |
Trade accounts receivable, less allowance of $25,000 and $20,191 for doubtful accounts | | | 184,162 | | | 111,486 | |
Inventories | | | 408,944 | | | 136,881 | |
Prepaid expenses and other | | | 33,849 | | | 20,130 | |
| | |
|
| |
|
| |
Total current assets | | | 10,477,313 | | | 2,076,217 | |
Equipment, net | | | 200,262 | | | 363,448 | |
Patents, net | | | 1,066,796 | | | 1,034,333 | |
Purchased technology, net | | | — | | | 315,636 | |
| | |
|
| |
|
| |
Total assets | | $ | 11,744,371 | | $ | 3,789,634 | |
| | |
|
| |
|
| |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | | | | | | |
Current Liabilities: | | | | | | | |
Accounts payable | | $ | 604,343 | | $ | 733,531 | |
Accrued liabilities: | | | | | | | |
Payroll and related | | | 463,788 | | | 202,432 | |
Deferred revenue | | | 276,708 | | | 276,667 | |
Warranty reserve | | | 319,500 | | | 6,313 | |
Other | | | 318,849 | | | 53,319 | |
Interest on notes | | | — | | | 240,279 | |
Capital lease short-term portion | | | 9,915 | | | 8,963 | |
| | |
|
| |
|
| |
Total current liabilities | | | 1,993,103 | | | 1,521,504 | |
| | |
|
| |
|
| |
Long-Term Liabilities: | | | | | | | |
12% Convertible Promissory Notes, net of $-0- and $345,000 debt discount | | | — | | | 1,380,000 | |
Related party 12% Convertible Promissory Notes net of $-0- and $60,000 debt discount | | | — | | | 240,000 | |
8% Senior Secured Promissory Notes | | | — | | | 1,500,000 | |
Capital lease long-term portion | | | 23,097 | | | 33,012 | |
| | |
|
| |
|
| |
Total liabilities | | | 2,016,200 | | | 4,674,516 | |
| | |
|
| |
|
| |
Commitments and contingencies | | | | | | | |
| | | | | | | |
Stockholders’ equity (deficit) | | | | | | | |
Preferred stock, $0.00001 par value; 5,000,000 shares authorized: | | | | | | | |
Series C Preferred stock 300,000 shares designated: -0- and 10,000 issued and outstanding, respectively. Liquidation preference of $-0- and $230,510, respectively. | | | — | | | — | |
Series D Preferred stock 250,000 shares designated: 50,000 and 235,400 issued and outstanding, respectively. Liquidation preference of $542,000 and $2,412,046, respectively. | | | — | | | 2 | |
Series E Preferred stock 350,000 shares designated: 263,250 and -0- issued and outstanding, respectively. Liquidation preference of $2,725,000 and $-0-, respectively. | | | 3 | | | — | |
Common stock, $0.00001 par value; 50,000,000 shares authorized; 19,342,657 and 14,351,476 shares issued and outstanding | | | 193 | | | 144 | |
Additional paid-in capital | | | 46,095,032 | | | 27,255,016 | |
Accumulated deficit | | | (36,367,057 | ) | | (28,140,044 | ) |
| | |
|
| |
|
| |
Total stockholders’ equity (deficit) | | | 9,728,171 | | | (884,882 | ) |
| | |
|
| |
|
| |
Total liabilities and stockholders’ equity (deficit) | | $ | 11,744,371 | | $ | 3,789,634 | |
| | |
|
| |
|
| |
See accompanying summary of accounting policies and notes to financial statements.
F-3
TABLE OF CONTENTS
American Technology Corporation
STATEMENTS OF OPERATIONS
Years Ended September 30, | | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | | | | | | | | | |
Revenues: | | | | | | | | | | |
Product sales | | $ | 1,070,645 | | $ | 649,020 | | $ | 815,859 | |
Related party product sales | | | — | | | 44,077 | | | — | |
Contract and license | | | 244,781 | | | 317,655 | | | 39,483 | |
| | |
|
| |
|
| |
|
| |
Total revenues | | | 1,315,426 | | | 1,010,752 | | | 855,342 | |
Cost of revenues | | | 1,544,077 | | | 683,844 | | | 578,276 | |
| | |
|
| |
|
| |
|
| |
Gross profit | | | (228,651 | ) | | 326,908 | | | 277,066 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Selling, general and administrative | | | 4,863,711 | | | 3,046,537 | | | 2,319,690 | |
Research and development | | | 2,493,351 | | | 3,622,063 | | | 3,136,109 | |
Loss on sales of asset | | | (24,513 | ) | | (11,500 | ) | | — | |
Loss on impairment of equipment | | | — | | | 32,192 | | | — | |
| | |
|
| |
|
| |
|
| |
Total operating expenses | | | 7,332,549 | | | 6,689,292 | | | 5,455,799 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Loss from operations | | | (7,561,200 | ) | | (6,362,384 | ) | | (5,178,733 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Other income (expense): | | | | | | | | | | |
Interest income | | | 23,293 | | | 15,596 | | | 130,314 | |
Interest expense | | | (686,639 | ) | | (1,872,544 | ) | | — | |
Other | | | (2,467 | ) | | (800 | ) | | 2,200 | |
| | |
|
| |
|
| |
|
| |
Total other income (expense) | | | (665,813 | ) | | (1,857,748 | ) | | 132,514 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net loss | | | (8,227,013 | ) | | (8,220,132 | ) | | (5,046,219 | ) |
Dividend requirements on convertible preferred stock | | | 2,409,228 | | | 282,912 | | | 120,722 | |
| | |
|
| |
|
| |
|
| |
Net loss available to common stockholders | | $ | (10,636,241 | ) | $ | (8,503,044 | ) | $ | (5,166,941 | ) |
| | |
|
| |
|
| |
|
| |
Net loss per share of common stock - basic and diluted | | $ | (0.67 | ) | $ | (0.60 | ) | $ | (0.38 | ) |
| | |
|
| |
|
| |
|
| |
Average weighted number of common shares outstanding | | | 15,857,569 | | | 14,193,508 | | | 13,563,101 | |
| | |
|
| |
|
| |
|
| |
See accompanying summary of accounting policies and notes to financial statements.
F-4
TABLE OF CONTENTS
American Technology Corporation
Statements of Stockholders' Equity (Deficit)
Years Ended September 30, 2003, 2002 and 2001 | | | |
| |
| |
| | Convertible Preferred Stock | | | |
| | |
| |
| |
| | Series B | | Series C | | Series D | | Series E | | Common Stock | |
| | |
| |
| |
|
|
| |
| |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Additional Paid-
in Capital | | Notes
Receivable | | Accumulated
Deficit | | Total
Stockholders’
Equity (Deficit) | |
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Balance, September 30, 2000 | | 192,260 | | | 2 | | 10,000 | | | — | | — | | | — | | — | | | — | | 13,282,099 | | | 133 | | | 21,731,328 | | | (27,895 | ) | (14,873,693 | ) | | 6,829,875 | |
| | |
| |
|
| |
| |
|
| |
| |
|
| |
| |
|
| |
| |
|
| |
|
| |
|
| |
| |
|
| |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Upon exercise of stock options | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | 315,000 | | | 3 | | | 224,997 | | | — | | — | | | 225,000 | |
For compensation and services | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | 36,093 | | | — | | | 136,020 | | | — | | — | | | 136,020 | |
Conversion of Series B preferred stock | | (23,400 | ) | | — | | — | | | — | | — | | | — | | — | | | — | | 70,947 | | | 1 | | | (1 | ) | | — | | — | | | — | |
Value assigned to 20,000 options granted for services | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 20,924 | | | — | | — | | | 20,924 | |
Write-off of note receivable | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | 27,895 | | — | | | 27,895 | |
Debt discount on 12% Convertible Notes | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 800,000 | | | — | | — | | | 800,000 | |
Accretion on convertible preferred stock of $120,722 | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | — | | | — | |
Net loss for the year | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | (5,046,219 | ) | | (5,046,219 | ) |
| | |
| |
|
| |
| |
|
| |
| |
|
| |
| |
|
| |
| |
|
| |
|
| |
|
| |
| |
|
| |
Balance, September 30, 2001 | | 168,860 | | | 2 | | 10,000 | | | — | | — | | | — | | — | | | — | | 13,704,139 | | | 137 | | | 22,913,268 | | | — | | (19,919,912 | ) | | 2,993,495 | |
| | |
| |
|
| |
| |
|
| |
| |
|
| |
| |
|
| |
| |
|
| |
|
| |
|
| |
| |
|
| |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Upon exercise of stock options | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | 6,250 | | | — | | | 18,750 | | | — | | — | | | 18,750 | |
For compensation and services | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | 74,129 | | | 1 | | | 304,920 | | | — | | — | | | 304,921 | |
Value assigned to 130,000 options granted for services | | | | | — | | — | | | — | | — | | | — | | — | | | — | | | | | — | | | 256,135 | | | — | | — | | | 256,135 | |
Value assigned to 100,000 warrants granted for services | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 218,803 | | | | | — | | | 218,803 | |
Value assigned to 30,000 options, granted to consultant | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 42,898 | | | — | | — | | | 42,898 | |
Debt discount on 12% Convertible Notes | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 1,225,000 | | | — | | — | | | 1,225,000 | |
Conversion of Series B preferred stock | | (168,860 | ) | | (2 | ) | — | | | — | | — | | | — | | — | | | — | | 566,958 | | | 6 | | | (4 | ) | | — | | — | | | — | |
Issuance of Series D preferred stock, net of offering costs of $78,752 | | — | | | — | | — | | | — | | 235,400 | | | 2 | | — | | | — | | — | | | — | | | 2,275,246 | | | — | | — | | | 2,275,248 | |
Deemed dividends and accretion on convertible preferred stock of $282,912 | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | — | | | — | |
Net loss for the year | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | (8,220,132 | ) | | (8,220,132 | ) |
| | |
| |
|
| |
| |
|
| |
| |
|
| |
| |
|
| |
| |
|
| |
|
| |
|
| |
| |
|
| |
Balance, September 30, 2002 | | — | | | — | | 10,000 | | | — | | 235,400 | | | 2 | | — | | | — | | 14,351,476 | | | 144 | | | 27,255,016 | | | — | | (28,140,044 | ) | | (884,882 | ) |
| | |
| |
|
| |
| |
|
| |
| |
|
| |
| |
|
| |
| |
|
| |
|
| |
|
| |
| |
|
| |
Issuance of Series E preferred stock, net of offering costs of $176,225 | | — | | | — | | — | | | — | | — | | | — | | 343,250 | | | 3 | | — | | | — | | | 3,256,272 | | | — | | — | | | 3,256,275 | |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Upon exercise of stock options | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | 408,951 | | | 4 | | | 1,614,223 | | | — | | — | | | 1,614,227 | |
For compensation and services | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | 109,844 | | | 1 | | | 410,815 | | | — | | — | | | 410,816 | |
For cash at $5.50 per share, net of offering costs of $545,000 | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | 1,818,180 | | | 18 | | | 9,454,982 | | | — | | — | | | 9,455,000 | |
Conversion of Series C preferred stock | | — | | | — | | (10,000 | ) | | — | | — | | | — | | — | | | — | | 41,130 | | | — | | | — | | | — | | — | | | — | |
Conversion of Series D preferred stock | | — | | | — | | — | | | — | | (185,400 | ) | | (2 | ) | — | | | — | | 695,266 | | | 7 | | | (5 | ) | | — | | — | | | — | |
Conversion of Series E preferred stock | | — | | | — | | — | | | — | | — | | | — | | (80,000 | ) | | — | | 253,294 | | | 3 | | | (3 | ) | | — | | — | | | — | |
Exercise of warrants | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | 347,000 | | | 3 | | | 903,718 | | | — | | — | | | 903,721 | |
Legal settlement at $5.85 per share | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | 100,000 | | | 1 | | | 584,999 | | | — | | — | | | 585,000 | |
Conversion of 12% convertible subordinated notes | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | 1,217,516 | | | 12 | | | 2,435,020 | | | — | | — | | | 2,435,032 | |
Issuance of stock options and warrants for services | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 179,995 | | | — | | — | | | 179,995 | |
Deemed dividends and accretion on convertible preferred stock of $2,409,228 | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | | | | — | | — | | | — | |
Net loss for the year | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | | | | | | (8,227,013 | ) | | (8,227,013 | ) |
| | |
| |
|
| |
| |
|
| |
| |
|
| |
| |
|
| |
| |
|
| |
|
| |
|
| |
| |
|
| |
Balance, September 30, 2003 | | — | | $ | — | | — | | $ | — | | 50,000 | | $ | — | | 263,250 | | $ | 3 | | 19,342,657 | | $ | 193 | | $ | 46,095,032 | | $ | — | | ($36,367,057 | ) | $ | 9,728,171 | |
| | |
| |
|
| |
| |
|
| |
| |
|
| |
| |
|
| |
| |
|
| |
|
| |
|
| |
| |
|
| |
See accompanying summary of accounting policies and notes to financial statements.
F-5
TABLE OF CONTENTS
American Technology Corporation
STATEMENTS OF CASH FLOWS
Years Ended September 30, | | 2,003 | | 2,002 | | 2001 | |
| |
| |
| |
| |
Increase (Decrease) in Cash | | | | | | | | | | |
Operating Activities: | | | | | | | | | | |
Net loss | | $ | (8,227,013 | ) | $ | (8,220,132 | ) | $ | (5,046,219 | ) |
Adjustments to reconcile net loss to net cash used in operations: | | | | | | | | | | |
Depreciation and amortization | | | 549,612 | | | 737,248 | | | 621,967 | |
Allowance for doubtful accounts | | | 4,809 | | | — | | | 4,139 | |
Warranty reserves | | | 313,187 | | | — | | | — | |
Settlement costs paid in fixed assets | | | — | | | — | | | — | |
Gain on sale of asset | | | — | | | (11,500 | ) | | — | |
Common stock issued for services and compensation | | | 410,816 | | | 304,920 | | | 136,020 | |
Options and warrants granted for services | | | 179,995 | | | 517,836 | | | 20,924 | |
Common stock issued for legal settlement | | | 585,000 | | | — | | | — | |
Write-off of note receivable, officer | | | — | | | — | | | 27,895 | |
Write-off of abandoned patents | | | — | | | 58,138 | | | — | |
Write down for asset held for sale | | | — | | | 32,192 | | | — | |
Amortization of debt discount | | | 405,000 | | | 1,620,000 | | | — | |
Changes in assets and liabilities: | | | | | | | | | | |
Trade accounts receivable | | | (77,485 | ) | | 6,098 | | | 116,190 | |
Inventories | | | (272,063 | ) | | 60,132 | | | (24,540 | ) |
Prepaid expenses and other | | | (13,719 | ) | | 47,030 | | | 117,320 | |
Accounts payable | | | (12,188 | ) | | 411,756 | | | 87,974 | |
Accrued liabilities | | | 696,680 | | | 256,996 | | | 310,077 | |
| | |
|
| |
|
| |
|
| |
Net cash used in operating activities | | | (5,457,369 | ) | | (4,179,286 | ) | | (3,628,253 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Investing Activities: | | | | | | | | | | |
Purchase of equipment | | | (108,246 | ) | | (84,080 | ) | | (441,616 | ) |
Patent costs paid | | | (112,007 | ) | | (305,418 | ) | | (246,674 | ) |
Proceeds from sales of equipment | | | — | | | 11,500 | | | — | |
| | |
|
| |
|
| |
|
| |
Net cash used in investing activities | | | (220,253 | ) | | (377,998 | ) | | (688,290 | ) |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Financing Activities: | | | | | | | | | | |
Proceeds from issuance of preferred stock | | | 2,432,500 | | | 2,354,000 | | | — | |
Proceeds from issuance of common stock | | | 10,000,000 | | | — | | | — | |
Offering costs paid | | | (721,225 | ) | | (78,752 | ) | | — | |
Payments on capital lease | | | (8,963 | ) | | (8,066 | ) | | — | |
Proceeds from issuance of convertible promissory notes | | | — | | | 1,225,000 | | | 800,000 | |
Proceeds from exercise of common stock warrants | | | 221,876 | | | — | | | — | |
Proceeds from issuance of senior secured promissory notes | | | 500,000 | | | 1,500,000 | | | — | |
Payments on senior secured promissory notes | | | (318,155 | ) | | — | | | — | |
Proceeds from exercise of stock options | | | 1,614,227 | | | 18,750 | | | 225,000 | |
| | |
|
| |
|
| |
|
| |
Net cash provided by financing activities | | | 13,720,260 | | | 5,010,932 | | | 1,025,000 | |
| | |
|
| |
|
| |
|
| |
Net increase (decrease) in cash | | | 8,042,638 | | | 453,648 | | | (3,291,543 | ) |
| | | | | | | | | | |
Cash, beginning of year | | | 1,807,720 | | | 1,354,072 | | | 4,645,615 | |
| | |
|
| |
|
| |
|
| |
Cash, end of year | | $ | 9,850,358 | | $ | 1,807,720 | | $ | 1,354,072 | |
| | |
|
| |
|
| |
|
| |
See accompanying summary of accounting policies and notes to financial statements.
F-6
TABLE OF CONTENTS
American Technology Corporation
Summary of Accounting Policies |
|
ORGANIZATION AND BUSINESS
American Technology Corporation (the “Company”), a Delaware corporation, is engaged in design, development and commercialization of sound, acoustic and other technologies. The Company produces products based on its HyperSonic Sound (HSS), Long Range Acoustic Device (LRAD), NeoPlanar and Purebass sound technologies.
The Company’s principal markets for its proprietary sound reproduction technologies and products are in North America and Europe.
CONTINUED EXISTENCE AND MANAGEMENT’S PLAN
Other than cash of $9,850,358 at September 30, 2003, the Company has no other material unused sources of liquidity at this time. The Company has financed its operations primarily through the sale of preferred stock, exercise of stock options, sale of notes, proceeds from the sale of investment securities and margins from product sales and licensing. Based on the Company’s cash position assuming (a) currently planned expenditures and level of operations, (b) continuation of product sales and (c) royalty revenue from licensing agreements, management believes the Company will have sufficient capital resources for the next twelve months. Management believes increased product sales will provide additional operating funds. 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 products. The timing and amounts of these expenditures and the extent of the Company’s operating losses will depend on future product sales levels and other factors, some of which are beyond management’s control. There can be no assurance that revenues from products and technologies will become sufficient to sustain operations or achieve profits in the future.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions (e.g. reserves for accounts receivable and inventory, patent realizability and warranty reserves) that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and trade accounts receivable.
The Company’s cash is placed in quality money market accounts with major financial institutions. This investment policy limits the Company’s exposure to concentrations of credit risk. Such deposit accounts at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Concentration of credit risk with respect to the trade accounts receivable are limited due to the wide variety of customers and markets that comprise the Company’s customer base, as well as their dispersion across many different geographic areas. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that the trade accounts receivable credit risk exposure is limited. Generally, the Company does not require collateral or other security to support customer receivables.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivables, accounts payable and accrued liabilities approximate fair values due to the short-term maturities of these instruments.
F-7
TABLE OF CONTENTS
American Technology Corporation
Summary of Accounting Policies |
|
INVENTORIES
Inventories are valued at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.
EQUIPMENT AND DEPRECIATION
Equipment is stated at cost. Depreciation is computed over the estimated useful lives of three to five years using the straight-line method.
INTANGIBLES
Purchased technology is carried at cost, and was amortized over three years. Patents are carried at cost and, when granted are amortized over their estimated useful lives. The carrying value of patents is periodically reviewed and impairments, if any, are recognized when the expected future benefit to be derived from an individual intangible asset is less than its carrying value.
Amortization expense for purchased technology was $315,636, $420,828 and $420,829 for fiscal 2003, 2002 and 2001, respectively. Amortization expense for patents was $79,544, $61,730 and $38,405 for fiscal 2003, 2002 and 2001, respectively.
LEASES
Leases entered into are classified as either capital or operating leases. At the time a capital lease is entered into, an asset is recorded together with its related long-term obligation to reflect the purchase and financing. At September 30, 2003 the Company had recorded $9,915 in short-term and $23,097 in long-term capital lease obligations.
GUARANTEES AND INDEMNIFICATIONS
In November 2002, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others -- an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34.” The following is a summary of the Company’s agreements that the Company has determined are within the scope of FIN No. 45:
The Company provides a one year warranty for most of its products. See “Warranty Liabilities.”
Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director’s serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has a directors and officer liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of September 30, 2003.
The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically with business partners, contractors, customers and landlords and (ii) its agreements with investors. Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of September 30, 2003.
F-8
TABLE OF CONTENTS
American Technology Corporation
Summary of Accounting Policies |
|
REVENUE RECOGNITION
Product sales 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 remaining obligations. Revenues from on going per unit license fees are earned based on units shipped incorporating the Company’s patented proprietary technologies and are recognized in the period when the ultimate customer accepts the product 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.
SHIPPING AND HANDLING COSTS
Amounts paid by customers for shipping and handling are included in product revenues. Actual shipping and handling costs are included in product cost of revenues. Shipping and handling costs were $62,810, $67,850 and $67,977 for the fiscal years ended September 30, 2003, 2002 and 2001, respectively.
ADVERTISING
Advertising costs are charged to expenses as incurred. The Company expensed $8,695, $-0- and $8,305 for the years ended September 2003, 2002 and 2001, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
WARRANTY LIABILITIES
The Company warrants its products to be free from defects in materials and workmanship for a period ranging up to one year from the date of purchase, depending on the product. The warranty is generally a limited warranty, and in some instances imposes certain shipping costs on the customer. The Company currently provides direct warranty service. Some agreements with OEM customers require certain quantities of product be made available for use as warranty replacements. International market warranties are generally similar to the U.S. market.
The Company establishes a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. Factors affecting warranty reserve levels include the number of units sold and anticipated cost of warranty repairs and anticipated rates of warranty claims. The Company evaluates the adequacy of the provision for warranty costs each reporting period. See Note 9 for additional information regarding warranties.
INTEREST EXPENSE
Interest expense includes interest expense, redemption premiums and non-cash amortization of debt discount.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting Standards (“SFAS”) No. 109. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. A valuation allowance is recorded by the Company to the extent it is more likely than not that a deferred tax asset will not be realized.
COMPREHENSIVE INCOME
The Company follows the provisions of SFAS No. 130, Reporting Comprehensive Income. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. There were no differences between net loss and comprehensive loss for any of the periods presented.
F-9
TABLE OF CONTENTS
American Technology Corporation
Summary of Accounting Policies |
|
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles held for use are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of undiscounted expected future cash flows is less than the carrying amount of the asset or if changes in facts and circumstances indicate, an impairment loss is recognized and measured using the asset’s fair value.
SEGMENT INFORMATION
In the fourth quarter of fiscal 2003 the Company organized operations into two segments by the end-user markets they serve. The Business Products and Licensing Group (Business Group) licenses and markets HSS, NeoPlanar and Purebass speakers to companies that employ audio in consumer, commercial and professional applications. The Government and Force Protection Systems Group (Government Group) markets LRAD, NeoPlanar and HSS products to government and military customers and to the expanding force protection market. See Note 14.
NET LOSS PER SHARE
Basic earnings (loss) per share includes no dilution and is computed by dividing income (loss) available to common stockholders, after deduction for cumulative imputed and accredited dividends, by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution of securities that could share in the earnings of an entity. The Company’s losses for the years presented cause the inclusion of potential common stock instruments outstanding to be antidilutive. Stock options, warrants and convertible preferred stock exercisable into 4,999,522 shares of common stock were outstanding at September 30, 2003, stock options, warrants and convertible preferred stock and notes exercisable into 5,462,166 shares of common stock were outstanding at September 30, 2002 and stock options, warrants and convertible preferred stock exercisable into 3,453,500 shares of common stock were outstanding at September 30, 2001. These securities were not included in the computation of diluted earnings (loss) per share because of the losses but could potentially dilute earnings (loss) per share in future periods.
Net loss available to common stockholders was increased during fiscal 2003 and 2002 in computing net loss per share by imputed deemed dividends based on the value of warrants issued in connection with convertible preferred stock (see Note 6). The net loss available to common stockholders was also increased in fiscal 2002 and 2003 by an additional deemed dividend computed from a discount provision in convertible preferred stock (see Note 6). Such imputed deemed dividends are not included in the Company’s stockholders’ equity as the Company has an accumulated deficit. Amounts are included in net loss available to common stockholders. The imputed deemed dividends are not contractual obligations of the Company to pay such imputed dividends.
The provisions of each of the Company’s series of preferred stock provided for a 6% per annum accretion in the conversion value (similar to a dividend). These amounts increase the net loss available to common stockholders. Net loss available to common stockholders is computed as follows:
Years Ended September 30, | | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
Net loss | | $ | (8,227,013 | ) | $ | (8,220,132 | ) | $ | (5,046,219 | ) |
Imputed deemed dividends on Series D and E warrants issued with preferrd stock [note 6] | | | (538,070 | ) | | (91,492 | ) | | — | |
Imputed deemed dividends on Series D and E preferred stock [note 6] | | | (1,683,500 | ) | | (104,444 | ) | | — | |
Accretion on preferred stock at 6% stated rate: | | | | | | | | | | |
Series B preferred stock | | | — | | | (16,932 | ) | | (108,722 | ) |
Series C preferred stock | | | (6,000 | ) | | (12,000 | ) | | (12,000 | ) |
Series D preferred stock | | | (65,844 | ) | | (58,044 | ) | | — | |
Series E preferred stock | | | (115,814 | ) | | — | | | — | |
| | |
|
| |
|
| |
|
| |
Net loss available to common stockholders | | $ | (10,636,241 | ) | $ | (8,503,044 | ) | $ | (5,166,941 | ) |
| | |
|
| |
|
| |
|
| |
F-10
TABLE OF CONTENTS
American Technology Corporation
Summary of Accounting Policies |
|
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, “Accounting for Stock-Based Compensation,” for disclosure purposes. Under SFAS No. 123, the Company measures compensation expense for its stock-based employee compensation plan using the intrinsic value method prescribed in Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees” and its related interpretations. The Company provides pro forma disclosure of the effect on net income or loss as if the fair value based method prescribed in SFAS No. 123 has been applied in measuring compensation expense.
The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2003, 2002 and 2001, respectively: dividend yield of zero percent for all years; expected volatility of 68 to 84 percent in 2003, expected volatility of 63 percent in 2002 and expected volatility of 89 percent in 2001; risk-free interest rates of 4.00 to 6.72 percent; and expected lives of 2.21 to 5 years.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information follows:
Years Ended September 30, | | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
Net loss available to common shareholders | | $ | (10,636,241 | ) | $ | (8,503,044 | ) | $ | (5,166,941 | ) |
Plus: Stock-based employee compensation expense included in reported net loss | | | — | | | — | | | — | |
Less:Total stock-based employee compensation expense determined using fair value based method | | | (972,896 | ) | | (933,704 | ) | | (693,270 | ) |
| | |
|
| |
|
| |
|
| |
Pro forma net loss available to common stockholders | | $ | (11,609,137 | ) | $ | (9,436,748 | ) | $ | (5,860,211 | ) |
| | |
|
| |
|
| |
|
| |
Net loss per common share - basic and diluted - pro forma | | $ | (0.73 | ) | $ | (0.66 | ) | $ | (0.43 | ) |
| | |
|
| |
|
| |
|
| |
Net loss per common share - basic and diluted - as reported | | $ | (0.67 | ) | $ | (0.60 | ) | $ | (0.38 | ) |
| | |
|
| |
|
| |
|
| |
COMMON STOCK ISSUED FOR SERVICES
The Company records compensation expense for common stock issued for services based on the estimated fair market value. Estimated fair market value is determined based on the quoted stock price on the day of issuance.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the SFAS issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived 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 the Company’s financial statements.
F-11
TABLE OF CONTENTS
American Technology Corporation
Summary of Accounting Policies |
|
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 the Company’s 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 December 31, 2002, with early application encouraged. The adoption of this statement did not have a material impact on the Company’s financial statements.
In December 2002, FASB issued SFAS No. 148, “Accounting for Stock–Based Compensation — Transition and Disclosure—an Amendment of FASB Statement No. 123.” This statement amends SFAS No. 123, “Accounting for Stock-Based 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 the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the disclosure requirements effective October 1, 2002, in its financial statements.
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 adoption of this statement did not have a material impact on the Company’s financial statements.
In November 2002, FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 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 1st quarter of 2003 and has included the new disclosure requirements in the Notes to the Financial Statements.
In January 2003, FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). This interpretation clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” relating to consolidation of certain entities. FIN 46 will require identification of the Company’s participation in variable interests entities (“VIEs”), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIEs, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE, if any, bears a majority of the exposure to its expected losses, or stands to gain from a majority of its expected returns. FIN 46 also sets forth certain disclosures regarding interests in VIEs that are deemed significant, even if consolidation is not required. The adoption of FIN 46 did not have a material impact on the Company’s financial position, results of operations or cash flows.
RECLASSIFICATIONS
Where necessary, prior year’s information has been reclassified to conform with the fiscal 2003 statement presentation.
F-12
TABLE OF CONTENTS
American Technology Corporation
Notes to the Financial Statements |
|
1. INVENTORIES
| Inventories consisted of the following at September 30, | | 2003 | | 2002 | |
Finished goods | | $ | 13,690 | | $ | 78,361 | |
| Work in process | | | 182,638 | | | — | |
| Raw materials | | | 232,616 | | | 78,520 | |
| | | | 428,944 | | | 156,881 | |
| Reserve for obsolescence | | | (20,000) | | | (20,000) | |
| | | $ | 408,944 | | $ | 136,881 | |
2. EQUIPMENT
| Equipment consisted of the following at September 30, | | 2003 | | 2002 | |
| Machinery and equipment | | $ | 571,927 | | $ | 702,219 | |
| Office furniture and equipment | | | 480,536 | | | 365,611 | |
| Leasehold improvements | | | 198,491 | | | 198,491 | |
| | | | 1,250,955 | | | 1,266,321 | |
| Accumulated depreciation | | | (1,050,692) | | | (902,873) | |
| Net equipment | | $ | 200,262 | | $ | 363,448 | |
Depreciation expense was $157,404, $254,690 and $162,733 for the years ended September 30, 2003, 2002 and 2001, respectively.
3. INTANGIBLES
Purchased Technology
In April 2000, the Company acquired all rights to certain loudspeaker technology. 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 was obligated to pay up to an additional 159,843 shares of common stock contingent upon the achievement of certain performance milestones relating to gross revenues from the purchased technology. During fiscal 2002 the Company issued 50,000 shares of the contingent common stock recording compensation expense of $210,000 at an estimated fair market value of $4.20 per share and during fiscal 2003 issued the balance of 109,844 shares of the contingent common stock recording compensation expense of $410,816. Two principals involved with the purchased technology were employed under three year agreements which terminated on February 15, 2003.
| Purchased technology consisted of the following at September 30, | | 2003 | | 2002 | |
Cost | | $ | 1,262,500 | | $ | 1,262,500 | |
| Accumulated depreciation | | | (1,262,500) | | | (946,864) | |
| Net purchased technology | | $ | — | | $ | 315,636 | |
Patents
| Patents consisted of the following at September 30, | | 2003 | | 2002 | |
Cost | | $ | 1,287,058 | | $ | 1,175,647 | |
| Accumulated depreciation | | | (220,262) | | | (141,314) | |
| Net patent | | $ | 1,066,796 | | $ | 1,034,333 | |
F-13
TABLE OF CONTENTS
American Technology Corporation
Notes to the Financial Statements |
|
Aggregate Amortization Expense for Intangibles
Aggregate amortization expense for the Company’s intangible assets are summarized as follows. In addition to amortization, the Company wrote off $58,138 of patent costs during the year ended September 30, 2002.
| Years Ended September 30, | | 2003 | | | 2002 | | | 2001 |
| | | | | | | | | |
| Purchased technology | $ | 315,636 | | $ | 420,828 | | $ | 420,829 |
| Patents | | 79,544 | | | 61,730 | | | 38,405 |
| | $ | 395,180 | | $ | 482,558 | | $ | 459,234 |
| Estimated Amortization Expense Years Ended September 30, | | |
| 2004 | $ | 86,300 |
| 2005 | | 86,300 |
| 2006 | | 86,300 |
| 2007 | | 86,300 |
| 2008 | | 86,300 |
| Thereafter | | 635,296 |
4. INCOME TAXES
Income taxes consisted of the following:
Years ended September 30, | | 2003 | | 2002 | | 2001 | |
Deferred (benefit) | | | | | | | | | | |
Federal | | $ | (2,801,000 | ) | $ | (2,053,000 | ) | $ | (1,815,000 | ) |
State | | | (494,000 | ) | | (362,000 | ) | | (320,000 | ) |
| | | (3,295,000 | ) | | (2,415,000 | ) | | (2,135,000 | ) |
Change in valuation allowance | | | 3,295,000 | | | 2,415,000 | | | 2,135,000 | |
| | $ | — | | $ | — | | $ | — | |
A reconciliation of income taxes at the federal statutory rate of 34% to the effective tax rate is as follows:
Years ended September 30, | | 2003 | | 2002 | | 2001 | |
Income taxes (benefit) computed at the federal statutory rate | | $ | (2,797,000 | ) | $ | (2,795,000 | ) | $ | (1,716,000 | ) |
Tax effect of change in valuation allowance | | | 3,295,000 | | | 2,415,000 | | | 2,135,000 | |
Nondeductible compensation interest expense and other | | | 30,000 | | | 957,000 | | | 13,000 | |
State income taxes (benefit), net of federal tax benefit | | | (494,000 | ) | | (493,000 | ) | | (303,000 | ) |
Other | | | (34,000 | ) | | (84,000 | ) | | (129,000 | ) |
| | $ | — | | $ | — | | $ | — | |
F-14
TABLE OF CONTENTS
American Technology Corporation
Notes to the Financial Statements |
|
The types of temporary differences between the tax basis of assets and liabilities and their approximate tax effects that give rise to a significant portion of the net deferred tax asset (liability) at September 30, 2003 and 2002 are as follows:
Deferred tax assets: | | 2003 | | 2002 | |
| |
| |
| |
Net operating loss carryforwards | | $ | 12,382,000 | | $ | 9,304,000 | |
Research and development credit | | | 220,000 | | | 185,000 | |
Equipment | | | 176,000 | | | 93,000 | |
Purchased technology | | | 93,000 | | | 151,000 | |
Accruals and other | | | 341,000 | | | 186,000 | |
Allowances | | | 10,000 | | | 8,000 | |
| | |
|
| |
|
| |
Gross deferred tax asset | | | 13,222,000 | | | 9,927,000 | |
Less valuation allowance | | | (13,222,000 | ) | | (9,927,000 | ) |
| | |
|
| |
|
| |
| | $ | — | | $ | — | |
| | |
|
| |
|
| |
The utilization of the net operating loss carryforwards could be substantially limited due to restrictions imposed under federal and state laws upon a change ownership. The amount of the limitation, if any, has not been determined at this time.
A valuation allowance has been recorded to offset the net deferred tax asset as management has been unable to determine that it is more likely than not that the deferred tax asset will be realized.
At September 30, 2003, the Company, for federal income tax purposes, has net operating loss carryforwards of approximately $28,500,000 which expire through 2024 of which certain amounts are subject to limitations under the Internal Revenue Code of 1986, as amended.
5. 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”) for cash proceeds of $1,500,000. The Senior Notes were due on 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”) and were secured by accounts receivable, certain equipment and inventory. In January 2003 the Company received an additional $500,000 in cash proceeds on the Senior Notes. In February 2003 a total of $1,000,000 of Senior Note principal was converted into shares of Series E Preferred Stock (see Note 6). Accrued interest and a redemption premium of $13,333 was paid in cash at conversion. In June 2003 $681,845 of Senior Note principal was applied to the exercise of 259,500 warrants and in July 2003 the remaining principal balance of $318,155 plus accrued interest and a redemption premium of $13,333 was paid in cash pursuant to the redemption terms of the Senior Notes triggered by the Company’s July 2003 private placement of common stock and warrants.
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”) 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 was convertible, at the election of the Note holder one or more times into fully paid and nonassessable shares of common stock at a price of $2.00 per share. 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”) for each $2.00 of Notes (aggregate Warrants exercisable into 1,012,500 shares). As of September 30, 2003 a total of 887,500 of these warrants were outstanding.
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 and the value was reflected as a discount to the debt. This debt discount was amortized as non-cash interest expense over the original term of the Notes. For the years ended September 30, 2003 and 2002, $405,000 and $1,620,000 was amortized as non-cash interest expense, respectively.
F-15
TABLE OF CONTENTS
American Technology Corporation
Notes to the Financial Statements |
|
In June 2003 the Company exercised its right to call the Notes for mandatory conversion into shares of common stock. The principal of the Notes of $2,025,000 and accrued interest of $410,032 was converted into 1,217,516 shares of common stock.
6. STOCKHOLDERS’ EQUITY
Common Stock
In July 2003 the Company obtained gross proceeds of $10,000,000 from an offering of common stock and warrants. The offering included 1,818,180 shares of common stock at a purchase price of $5.50 per share and warrants to purchase 454,547 shares of common stock with an exercise price of $6.75 per share. The warrants are exercisable until July 10, 2007. The warrants contain certain antidilution rights if we sell common stock equivalents, as defined, below $6.75. Offering costs were $545,000.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock, $0.00001 par value, without any action by the stockholders. The board of directors has the authority to divide any and all shares of preferred stock into series and to fix and determine the relative rights and preferences of the preferred stock, such as the designation of series and the number of shares constituting such series, dividend rights, redemption and sinking fund provisions, liquidation and dissolution preferences, conversion or exchange rights and voting rights, if any. Issuance of preferred stock by the board of directors could result in such shares having dividend and or liquidation preferences senior to the rights of the holders of common stock and could dilute the voting rights of the holders of common stock.
The following is a summary of the terms of the preferred stock series outstanding during the three fiscal years ended September 30, 2003.
Preferred
Series | | Issuance
Date | | Aggregate
Purchase Price | | Number of
Shares
Authorized/
Issued | | Terms | |
| |
| |
| |
| |
| |
6% Series B issued at $10.00 per share | | December 1998 and January 1999 | | $ | 2,500,000 | | 250,000/250,000 | | Purchase price plus 6% accretion convertible at lower of $5.00 per share or 92% of market but not less than $3.50 per share. Callable at market price of $12.00 per share. Automatic conversion to common stock on November 30, 2001. | |
6% Series C issued at $20.00 per share | | March 2000 | | $ | 6,000,000 | | 300,000/300,000 | | Purchase price plus 6% accretion convertible at lower of $8.00 per share or 92% of market but not less than $5.75 per share. Callable at market price of $20.00 per share. Automatic conversion to common stock on March 31, 2003. | |
6% Series D issued at $10.00 per share | | May 2002 | | $ | 2,354,000 | | 250,000/235,400 | | Purchase price plus 6% accretion convertible at lower of $4.50 per share or 90% of market but not less than $2.00 per share, subject to antidilution adjustment. Callable at market price of $9.50 per share. Automatic conversion to common stock on June 30, 2006. | |
6% Series E issued at $10.00 per share | | March 2003 | | $ | 3,432,500 | | 350,000/343,250 | | Purchase price plus 6% accretion convertible at lower of $3.25 per share or 90% of market but not less than $2.00 per share, subject to antidilution adjustment. Callable at market price of $9.50 per share. Automatic conversion to common stock on December 31, 2006. | |
F-16
TABLE OF CONTENTS
American Technology Corporation
Notes to the Financial Statements |
|
The above preferred shares were sold for cash except that $1,000,000 of the Series E Stock purchase price resulted from the conversion of Senior Notes. In connection with the Series C Stock financing, the Company issued a warrant to purchase 75,000 shares of common stock at $11.00 per share until March 31, 2005 as a placement fee. The value assigned to the warrant issued as a placement fee was $468,783.
At September 30, 2003 all of the Series B and Series C Stock had been converted into common stock. At September 30, 2003 the remaining 50,000 shares of Series D Stock would have been convertible into 120,556 shares of common stock and the remaining 263,250 shares of Series E Stock would have been convertible into 838,890 shares of common stock.
The Company granted warrants with each issuance of preferred stock. The cash proceeds of the preferred 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 and the value of the warrants is recorded as a deemed dividend and accreted over the conversion period of the preferred stock. The following table summarizes values assigned as a deemed dividend for the value of the warrants and the beneficial conversion feature on each preferred stock issuance.
| | | | | | | | | | Deemed Dividend | |
| | | | | | | | | | |
| |
Preferred
Series | | Issuance
Date | | Number
Of Warrants | | Warrant
Exercise
Price | | Warrant
Expiration
Date | | Value
Assigned
To
Warrants | | Value Of
Beneficial
Conversion
Discount | |
| |
| |
| |
| |
| |
| |
| |
6% Series B | | December 1998
and January 1999 | | 250,000 | | $ | 6.00 | | 11/30/01 | | $ | 595,000 | | $ | 656,000 | |
6% Series C | | March 2000 | | 300,000 | | $ | 11.00 | | 3/31/03 | | $ | 1,478,000 | | $ | 2,509,000 | |
6% Series D | | May 2002 | | 517,880 | | $ | 3.01 | | 3/31/07 | | $ | 1,029,519 | | $ | 994,310 | |
6% Series E | | March 2003 | | 514,875 | | $ | 3.25 | | 12/31/07 | | $ | 755,500 | | $ | 2,677,000 | |
The Series D warrants were originally exercisable at $4.50 per common share and valued at $871,000. The Series E financing resulted in a repricing of the Series D Warrants to $3.01 per common share and an additional $158,519 was assigned to the warrant value. The Series D Warrants 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 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.
F-17
TABLE OF CONTENTS
American Technology Corporation
Notes to the Financial Statements |
|
The following table summarizes information about the deemed dividend activity commencing in May 2002. Other than 6% per annum accretion on Series B and C there was no deemed dividend for fiscal 2001.
| | Number | | | |
| | |
| | | |
| | Series D
Preferred
Shares | | Series D
Warrants | | Series E
Preferred
Shares | | Series E
Warrants | | Balance
of
Deemed
Dividend | |
| | |
| |
| |
| |
| |
| |
Series D Issued in May 2002 | | 235,400 | | 517,880 | | — | | — | | $ | 1,865,310 | |
Fiscal 2002 accretion | | — | | — | | — | | — | | | (195,936 | ) |
| | |
| |
| |
| |
| |
|
| |
Balance September 30, 2002 | | 235,400 | | 517,880 | | | | | | | 1,669,374 | |
Series E Issued in February 2003 | | — | | — | | 343,250 | | 514,875 | | | 3,432,500 | |
Deemed dividend on preferred stock converted | | (185,400 | ) | — | | (80,000 | ) | — | | | (1,324,224 | ) |
Additional deemed dividend on D warrant repricing | | | | | | | | | | | 158,519 | |
Deemed dividend on warrants exercised | | | | (22,000 | ) | | | (120,000 | ) | | (215,904 | ) |
Accretion on outstanding Series D and E Stock | | | | | | | | | | | (681,442 | ) |
| | |
| |
| |
| |
| |
|
| |
Balance September 30, 2003 | | 50,000 | | 495,880 | | 263,250 | | 394,875 | | $ | 3,038,823 | |
| | |
| |
| |
| |
| |
|
| |
| | | | | | | | | | | | |
Total deemed dividend accretion Fiscal 2003 | | | | | | | | | | $ | (2,221,570 | ) |
| | | | | | | | | | |
|
| |
Stock Purchase Warrants
A summary of the status of outstanding stock purchase warrants outstanding as of September 30, 2001, 2002 and 2003 and the changes during the years then ended is presented below:
| | Number | | Average
Purchase
Price | |
| | |
| |
| |
Shares purchasable under outstanding warrants at October 1, 2000 | | 715,000 | | $ | 9.60 | |
Stock purchase warrants issued | | 400,000 | | $ | 2.00 | |
Stock purchase warrants exercised | | — | | | | |
Stock purchase warrants expired | | — | | | | |
| | |
| | | | |
Shares purchasable under outstanding warrants at September 30, 2001 | | 1,115,000 | | $ | 6.87 | |
Stock purchase warrants issued | | 1,230,380 | | $ | 3.26 | |
Stock purchase warrants exercised | | — | | | | |
Stock purchase warrants expired | | (240,000 | ) | $ | 6.00 | |
| | |
| | | | |
Shares purchasable under outstanding warrants at September 30, 2002 | | 2,105,380 | | $ | 4.85 | |
Stock purchase warrants issued | | 1,019,422 | | $ | 4.83 | |
Stock purchase warrants exercised | | (347,000 | ) | $ | 2.60 | |
Stock purchase warrants expired | | (350,000 | ) | $ | 11.71 | |
| | |
| | | | |
Shares purchasable under outstanding warrants at September 30, 2003 | | 2,427,802 | | $ | 3.85 | |
| | |
| | | | |
F-18
TABLE OF CONTENTS
American Technology Corporation
Notes to the Financial Statements |
|
At September 30, 2003, the following stock purchase warrants were outstanding arising from offerings and other transactions, each exercisable into one common share:
Number | | Exercise
Price | | Expiration
Date |
| |
| |
|
| | | | | |
50,000 | | $ | 10.00 | | January 5, 2004 |
75,000 | | $ | 11.00 | | March 31, 2005 |
837,500 | | $ | 2.00 | | September 30, 2006 |
495,880 | | $ | 3.01 | | March 31, 2007 |
454,547 | | $ | 6.75 | | July 10, 2007 |
100,000 | | $ | 4.25 | | September 30, 2007 |
364,875 | | $ | 3.25 | | December 31, 2007 |
50,000 | | $ | 3.63 | | April 8, 2007 |
| | | | | |
2,427,802 | | | | | |
| | | | | |
The $3.01 warrants, the $3.25 warrants and the $6.75 warrants contain certain antidilution rights if the Company sells securities for less than the exercise price.
7. BENEFIT PLANS
2002 Stock Option Plan
The Company has a Stock Option Plan, expiring September 30, 2012, reserving the issuance of 2,350,000 shares of common stock (“2002 Plan”). The options issued under the 2002 Plan may, in the discretion of the Board, be either Incentive Stock Options or Nonstatutory Stock Options. The 2002 Plan provides for grants to employees, directors or consultants, in the discretion of the Board of Directors, of options to purchase common stock of the Company at a price not less than the fair market value of the shares on the date of grant. In the case of a significant stockholder, the option price of shares will not be less than 110 percent of the fair market value of the shares on the date of grant. Any options granted under the 2002 Plan must be exercised within ten years of the date they were granted (five years in the case of a significant stockholder).
As of September 30, 2003, there were options outstanding covering 892,974 shares of common stock under the 2002 Plan. Shares subject to options under the 1997 Stock Option Plan or the 2002 Plan that expire, are cancelled or terminated without being exercised, become available for future grants under the 2002 Plan. Accordingly, there were 719,025 shares available for future option grants under the 2002 Plan at September 30, 2003.
1997 Employee Stock Compensation Plan (“ESC)
Effective March 10, 1997, the Company adopted the 1997 Employee Stock Compensation Plan (“ESC Plan”), which expired March 9, 2002, as amended. The plan was amended on February 22, 2000 reserving for issuance of an aggregate of 650,000 shares of common stock. The Plan provided for compensation awards of the Company’s common stock to non-executive employees (as defined), at the discretion of the ESC Plan committee.
During fiscal year ended 2002, the Company issued 24,129 shares of common stock under the ESC Plan and recorded general and administrative expense of $94,920 for awards valued at the estimated fair market value ranging from $2.29 to $4.12 per common share. For fiscal year ended 2001, the Company issued 36,093 shares of common stock under the ESC Plan recording general and administrative expense of $136,020 for awards valued at an estimated fair market value ranging from $2.50 to $4.79 per common share.
F-19
TABLE OF CONTENTS
American Technology Corporation
Notes to the Financial Statements |
|
1997 Stock Option Plan
The Company’s 1997 Stock Option Plan (“1997 Plan”) reserved for issuance 1,000,000 shares of the Company’s common stock. The Board terminated the 1997 Plan with respect to new grants on August 1, 2002. The 1997 Plan remains in effect for grants prior to that date. Any options granted under the 1997 Plan must be exercised within ten years of the date they were granted (five years in the case of a significant stockholder). As of September 30, 2003, there were options outstanding covering 541,800 shares of common stock under this Plan.
Other Stock Options
During the fiscal year ended September 30, 2002, the Company granted to two employees an aggregate of 200,000 stock options exercisable at $4.50 per share until April 25, 2006. For the fiscal year ended September 30, 2001, the Company granted to the Board of Directors an aggregate of 140,000 stock options exercisable at $3.62 per share until November 2005. As of September 30, 2003 there were options remaining outstanding covering 202,500 shares of common stock.
Non-Cash Compensation Expense
During the fiscal year ended September 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. For the fiscal year ended September 30, 2002, the Company recorded non-cash compensation expense of $115,199 for the granting of 55,000 options under its stock options plans to non-employees. For fiscal 2001, the Company recorded non-cash compensation expense of $20,924, for the granting of 20,000 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 under the 1997 Plan in conjunction with related development and manufacturing agreements. Options to purchase 65,000 shares of common stock vest depending on project milestones. The Company estimated the period required to complete the specified milestones each reporting period and recorded consulting expense based on the market price of the Company’s stock and the estimated percentage of the work completed. Consulting expense was adjusted each reporting period until vesting occurs. The Company recorded consulting expense of $87,179 for the Black Scholes value of 30,000 milestone options vested in fiscal 2002 and consulting expense of $47,782 for the Black Scholes value of 10,000 milestone options vested in fiscal 2003. Options to purchase 45,000 shares of common stock vest based on the consultant meeting certain performance criteria. The Company records consulting expense at each vesting date. The Company also recorded consulting expense of $96,655 for the Black Scholes value of 45,000 performance options vested during the year ended September 30, 2002.
On September 30, 2002 the Company granted a warrant exercisable for 100,000 common shares at $4.25 per share to a consultant for consulting services. The Company recorded non-cash consulting expense of $218,803 for the value of these warrants.
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.
F-20
TABLE OF CONTENTS
American Technology Corporation
Notes to the Financial Statements |
|
Stock Option Summary Information
A summary of the status of the Company’s stock option plans as of September 30, 2003, 2002 and 2001 and the changes during the years ended on those dates is presented below:
| | Number | | Weighted
Average |
| | |
| |
|
Fiscal 2001: | | | | | |
Outstanding October 1, 2000 | | 1,153,833 | | $ | 5.20 |
Granted | | 660,000 | | $ | 3.21 |
Canceled/expired | | (160,633 | ) | $ | 6.09 |
Exercised | | (315,000 | ) | $ | 0.71 |
| | |
| |
|
|
Outstanding September 30, 2001 | | 1,338,200 | | $ | 2.23 |
| | |
| |
|
|
Exercisable at September 30, 2001 | | 809,450 | | $ | 2.18 |
| | |
| |
|
|
| | | | | |
Weighted average fair value of options granted during the year | | | | $ | 1.67 |
| | | | |
|
|
| | | | | |
Fiscal 2002: | | | | | |
Outstanding October 1, 2001 | | 1,338,200 | | $ | 2.23 |
Granted | | 510,000 | | $ | 3.97 |
Canceled/expired | | (382,775 | ) | $ | 8.17 |
Exercised | | (6,250 | ) | $ | 3.00 |
| | |
| |
|
|
Outstanding September 30, 2002 | | 1,459,175 | | $ | 3.97 |
| | |
| |
|
|
Exercisable at September 30, 2002 | | 1,090,575 | | $ | 3.93 |
| | |
| |
|
|
| | | | | |
Weighted average fair value of options granted during the year | | | | $ | 1.37 |
| | | | |
|
|
| | | | | |
Fiscal 2003: | | | | | |
Outstanding October 1, 2002 | | 1,459,175 | | $ | 3.97 |
Granted | | 979,000 | | $ | 3.96 |
Canceled/expired | | (416,950 | ) | $ | 3.86 |
Exercised | | (408,951 | ) | $ | 3.95 |
| | |
| |
|
|
Outstanding September 30, 2003 | | 1,612,274 | | $ | 4.00 |
| | |
| |
|
|
Exercisable at September 30, 2003 | | 998,722 | | $ | 3.79 |
| | |
| |
|
|
| | | | | |
Weighted average fair value of options granted during the year | | | | $ | 1.78 |
| | | | |
|
|
The following table summarizes information about stock options outstanding at September 30, 2003:
Range of
Exercise
Price | | Number
Outstanding | | Weighted Average
Remaining
Contractual
Life | | Weighted
Average
Exercise
Price | | Number
Exercisable | | Weighted
Average
Exercise
Prices | |
| |
| |
| |
| |
| |
| |
$2.50 - $3.62 | | 1,078,874 | | 3.31 | | $ | 3.17 | | 697,696 | | $ | 3.11 | |
$4.00 - $4.50 | | 173,500 | | 2.94 | | $ | 4.43 | | 128,438 | | $ | 4.40 | |
$5.00 - $6.38 | | 246,600 | | 2.72 | | $ | 5.62 | | 134,288 | | $ | 5.34 | |
$7.25 - $9.03 | | 113,300 | | 3.53 | | $ | 7.70 | | 38,300 | | $ | 8.58 | |
| |
| |
| |
|
| |
| |
|
| |
$2.50 - $9.03 | | 1,612,274 | | 3.20 | | $ | 4.00 | | 998,722 | | $ | 3.79 | |
| |
| |
| |
|
| |
| |
|
| |
Employee Benefit - 401K Plan
On January 1, 1998, the Company established a 401(k) plan covering its employees. The plan originated service effectively in June 1998. Matching contributions are made on behalf of all participants at the discretion of the Board of Directors. During the fiscal years ended September 30, 2003, 2002 and 2001, the Company made matching contributions of approximately $18,675, $20,151 and $18,539 respectively.
F-21
TABLE OF CONTENTS
American Technology Corporation
Notes to the Financial Statements |
|
8. COMMITMENTS AND CONTINGENCIES
Facility Leases
The Company’s executive offices, research and development and operational facilities in San Diego, California, were occupied under a lease which expired in July 2003. The Company continues to occupy this space on a month to month basis. The Company is in the process of negotiating an amendment of its lease agreement to extend the term through July 2006. The Company occupies approximately 23,500 square feet of office, laboratory, production and warehouse space in these premises with aggregate monthly payments of approximately $16,000, exclusive of utilities and costs. This monthly rent is expected to increase to approximately $28,200 per month upon execution of the lease amendment.
The Company rents on a monthly basis office space utilized for development and production of its NeoPlanar technology in Carson City, Nevada. The Company occupies approximately 2,200 square feet with a monthly payment of $1,210 excluding utilities.
The Company’s east coast office for its Government Group is located in Topsham, Maine. The Company has a one year lease expiring in August 2004 for 600 square feet of office space with a monthly payment of $919.
Facility rent expense recorded by the Company for the years ended September 30, 2003, 2002 and 2001 was $194,025, $185,742 and $178,457, respectively.
Operating Leases
The Company has one automobile lease obligation with a term of 39 months. The lease will expire as of May 2006. The Company has one business equipment lease with a term of 60 months expiring as of September 2007. These leases are reported as operating leases within the financial statements. The obligations under these leases are as follows:
Year ending September 30: | | | | |
|
2004 | | $ | 16,600 | |
2005 | | $ | 16,600 | |
2006 | | $ | 11,276 | |
2007 | | $ | 5,952 | |
| | |
|
| |
Employment Agreements
The Company has employment agreements with one executive officer and two key employees. The executive officer agreement’s original term has expired and is on a month to month basis. The two key employee agreements expire in September 2004 and 2006. The minimum annual salaries under the two agreements with remaining terms is $232,000 per year in the aggregate. One agreement provides for up to nine months severance for certain terminations.
Litigation
In September 2003, the Company filed a complaint against eSOUNDideas, Inc., in the Superior Court of California, County of San Diego, alleging breach of contract and seeking a declaratory judgement to the effect that a License, Purchase and Marketing Agreement dated September 28, 2000 (the “ESI License Agreement”) with eSOUNDideas, a California partnership, was properly terminated in May 2003. The principals of eSOUNDideas are Greg O. Endsley and Douglas J. Paschall. The principals also founded a corporation, eSOUNDideas, Inc., which purported to assume the contractual obligations of eSOUNDideas. The Company amended the complaint in November 2003 to include eSOUNDideas (the general partnership), Mr. Endsley and Mr. Paschall as defendants. For convenience, the following discussion refers to eSOUNDideas and eSOUNDideas, Inc. collectively as “ESI.” In November 2003, the Company filed complaints in the Superior Court of California, County of San Diego, against Mr. Endsley and Paschall seeking declaratory judgments that options granted to each of Mr. Endsley and Mr. Paschall in April 2001 were terminated in October 2002.
The ESI License Agreement formerly appointed ESI as an exclusive distributor of HSS products specifically targeted to the point of sale/purchase, kiosk and display, and the event, trade show and exhibit markets in North America for five years. In June 2002, the Company and ESI purported to enter into an amendment to the ESI License Agreement, extending the term to ten years commencing on the first delivery of a commercial HSS product to an end user, and eliminating minimum purchase requirements for the first three years. The Company believes the amendment was invalid as it was given in consideration for a large order from ESI which was later withdrawn by ESI due to a dispute over the payment and delivery terms of such order. In May 2003, the Company gave notice to ESI of termination of the ESI License Agreement. The Company based its termination on its belief that ESI had failed to fulfill certain covenants contained in the ESI License Agreement related to efforts and resources required to maximize the distribution and sales of HSS products in its product categories. Under the terms of the ESI License Agreement, the termination was effective immediately, but ESI had sixty days to cure conditions giving rise to termination and reinstate the agreement. ESI did not tender a cure within such sixty day period.
F-22
TABLE OF CONTENTS
American Technology Corporation
Notes to the Financial Statements |
|
The defendants in these cases have filed a cross-complaint against the Company alleging breach of contract in connection with the ESI License Agreement and the stock options granted to Mr. Endsley and Mr. Paschall, breach of the implied covenant of good faith and fair dealing, intentional interference with contract, negligent interference with contract, intentional interference with prospective economic advantage, negligent interference with prospective economic advantage, defamation, fraud, and violation of California Business and Professions Code §17200. The defendants seek actual and punitive damages in unstated amounts and other relief.
The Company intends to vigorously pursue its complaints against the defendants in these cases, and to vigorously challenge the defendants’ cross-complaint.
Related to the Company’s April 2000 purchase of the NeoPlanar speaker technology, the Company has been in dispute with a predecessor owner of the technology regarding a minimum film royalty for 2002 of approximately $228,000. The Company agreed to arbitrate the dispute in front of a single arbitrator in Seattle, Washington. The technology purchase agreement required a minimum royalty in 2002 to maintain exclusive film supply. The Company believes the minimum royalty for 2002 was not due and film exclusivity was terminated. In September 2003 the Company accrued $292,500 as the estimated cost to settle this matter and to buyout all future per unit film royalties. In December 2003 the Company reached a non-binding agreement to settle this matter for a payment of $25,000 and the issuance of 50,000 shares of common stock. However, the definitive documentation for this settlement is still under negotiation and the dispute may not therefore settle on the foregoing terms.
In August 2003 the Company reached an agreement and in September 2003 the Company settled litigation related to the termination of an outside contract manufacturer, Horizon Sports Technologies, Inc. d/b/a HST. As part of the settlement the Company acquired raw materials and equipment for production valued at approximately $145,000. The Company paid settlement costs of $313,000 and recorded additional settlement costs for the $585,000 value assigned to 100,000 shares of common stock issued to HST. As part of the settlement, HST also entered into a nonexclusive royalty-bearing license to manufacture and sell speakers based on the Company’s Stratified Field technology and PureBass subwoofer technology and the Company transferred to HST tooling valued at approximately $43,000.
The Company may at times be involved in litigation in the ordinary course of business. Except as set forth above, there are no pending material legal proceedings to which the Company is a party or to which any of its property is subject.
Royalties
The Company is obligated to pay a $2.50 per unit royalty on one electronic component for its HSS product. The Company is also obligated to pay an officer and director a 2% royalty on net sales from certain of its technologies, of which only HSS is a current offering of the Company. The royalty obligation continues until at least March 1, 2007, and for any longer period during which the Company sells products or licenses technologies subject to any patent assigned to it by the officer/director. No royalties were paid under this agreement in the fiscal years ended September 30, 2003 or 2002, as such royalties were waived by the officer/director. The Company may owe royalties in future periods based on actual sales or technology revenues.
9. WARRANTY LIABILITIES
Details of the estimated warranty liability are as follows:
Fiscal Year Ending September 30: | | 2003 | | 2002 | |
| |
| |
| |
Beginning balance | | $ | 6,313 | | $ | 6,313 | |
Warranty provision | | | 313,187 | | | — | |
Warranty payments | | | — | | | — | |
| | |
|
| |
|
| |
Ending balance | | $ | 319,500 | | $ | 6,313 | |
| | |
|
| |
|
| |
Due to performance failures of some of the Company’s first generation of HSS speaker systems resulting primarily from failure of an emitter component, the Company expects to replace emitters on approximately 700 Generation I HSS units. At September 30, 2003 a total of $275,000 of the warranty reserve was scheduled for this replacement program.
F-23
TABLE OF CONTENTS
American Technology Corporation
Notes to the Financial Statements |
|
10. EQUIPMENT UNDER CAPITAL LEASE
On October 1, 2001, the Company entered into a capital lease obligation for the purchase of a phone system. The lease expires September 11, 2006 and bears interest at 10.1%, with monthly principal and interest payments of $1,067. Future minimum lease payments and the present value of the minimum lease payments under the noncancelable lease obligation as of September 30, 2003 are as follows:
Year ending September 30: | | | |
| |
2004 | | $ | 12,806 | |
2005 | | | 12,806 | |
2006 | | | 12,806 | |
| | |
|
| |
Total: | | $ | 38,418 | |
| | |
|
| |
Total future minimum lease payments | | $ | 38,418 | |
Less amounts representing interest | | | (5,406 | ) |
| | |
|
| |
Present value of minimum lease payments | | | 33,012 | |
Less current maturities | | | (9,915 | ) |
| | |
|
| |
Total long-term obligations | | $ | 23,097 | |
| | |
|
| |
At September 30, 2003, property and equipment includes equipment under capital lease obligations with a total cost of $50,041 and accumulated amortization of $20,016.
11. MAJOR CUSTOMERS
For the fiscal year ended September 30, 2003, revenues from one individual customer accounted for 24% of total revenue. No other customer accounted for more than 10% of revenue. For the fiscal year ended September 30, 2002, revenues from three individual customers accounted for 19%, 12% and 11% of total revenue. For the fiscal year ended September 30, 2001, revenues from two individual customers accounted for 23% and 10% of total revenue.
12. SUPPLIER AGREEMENTS
During fiscal 2001 and 2002, the Company had relationships with a number of high quality, low-cost foreign manufacturers who provided the Company with a diverse line of consumer electronic products. In fiscal 2003 the Company reduced its marketing emphasis on portable consumer products in order to focus financial, personnel and facility resources on sound technologies.
The Company is reliant on one supplier for film for its HSS product and is making efforts to obtain alternative suppliers to reduce its reliance thereon. The Company could be materially impacted if it loses its current film supplier and is unable to find an alternative supplier.
13. RELATED PARTY TRANSACTIONS
In September 2001, a family trust for which Mr. Elwood G. Norris, Chairman of the Company serves as trustee purchased $250,000 in principal amount of the Company’s 12% Convertible Subordinated Promissory Notes, and in connection with such purchase, received a warrant to purchase 125,000 shares of Common Stock. The purchase by such trust was on the same terms as those offered to the other purchasers in the same financing. In November 2002, the Company and a majority of the holders of such notes agreed to extend the maturity date of the notes, including the note held by Mr. Norris’ trust, from December 31, 2002 to December 31, 2003.
On April 19, 2002, the Company offered to shareholders and employees the opportunity to purchase limited edition NeoPlanar Speaker Systems with Purebass Subwoofers. During fiscal 2002 a total of 45 systems were sold for cash receipts of $44,077.
F-24
TABLE OF CONTENTS
American Technology Corporation
Notes to the Financial Statements |
|
14. BUSINESS SEGMENT DATA
The Company is engaged in design, development and commercialization of sound, acoustic and other technologies. In the fourth quarter of fiscal 2003 the Company organized operations into two segments by the end-user markets they serve. The Company’s reportable segments are strategic business units that sell the Company’s products to distinct distribution channels. The Business Products and Licensing Group (Business Group) licenses and markets HSS, NeoPlanar and Purebass speakers to companies that employ audio in consumer, commercial and professional applications. The Government and Force Protection Systems Group (Government Group) markets LRAD, NeoPlanar and HSS products to government and military customers and to the expanding force protection market. The segments are managed separately because each segment requires different selling and marketing strategies as the class of customers within each segment is different.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company does not allocate operating expenses or assets between its two reportable segments. Accordingly the measure of profit for each reportable segment is based on gross profit. Although the segments became separately managed only in the last quarter of fiscal 2003, the Company has segmented historical operations for comparable customers for comparison.
Years Ended September 30, | | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
Revenues: | | | | | | | | | | |
Business Group | | $ | 861,091 | | $ | 922,542 | | $ | 855,342 | |
Government Group | | | 454,335 | | | 88,210 | | | — | |
| | |
|
| |
|
| |
|
| |
| | $ | 1,315,426 | | $ | 1,010,752 | | $ | 855,342 | |
| | |
|
| |
|
| |
|
| |
Gross Profit (Loss): | | | | | | | | | | |
Business Group | | $ | (501,748 | ) | $ | 256,779 | | $ | 277,066 | |
Government Group | | | 273,097 | | | 70,129 | | | — | |
| | |
|
| |
|
| |
|
| |
| | $ | (228,651 | ) | $ | 326,908 | | $ | 277,066 | |
| | |
|
| |
|
| |
|
| |
The following table summarizes revenues by geographic region. Revenues are attributed to countries based on location of customer. There were no material foreign sales in fiscal 2002 and 2001.
Year Ended September 30, | | 2003 | |
| |
| |
Revenues: | | | | |
United States | | $ | 1,167,120 | |
Other | | | 148,306 | |
| | |
|
| |
| | $ | 1,315,426 | |
| | |
|
| |
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Year ended September 30, | | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| Supplemental Information: | | | | | | | | | | |
| Cash paid for interest | | $ | 111,886 | | $ | 12,265 | | $ | — | |
| Cash paid for taxes | | $ | 2,467 | | $ | 800 | | $ | 800 | |
Non-cash financing activities: | | | | | | | | | | |
Senior notes applied to warrant exercise | | $ | 681,845 | | | — | | | — | |
Senior notes applied to purchase of Series E stock | | $ | 1,000,000 | | | — | | | — | |
Issuance of stock warrants in connection with convertible debt | | | — | | $ | 624,750 | | $ | 384,000 | |
Purchase of computer equipment with capital lease | | | — | | $ | 50,041 | | | — | |
12% subordinated notes and interest converted to common stock | | $ | 2,435,032 | | | — | | | — | |
Sale of equipment for accounts payable | | $ | 117,000 | | | — | | | — | |
Common stock issued on conversion of Series B stock | | | — | | $ | 2,101,413 | | $ | 274,186 | |
Common stock issued on conversion of Series C stock | | $ | 236,498 | | | — | | | — | |
Common stock issued on conversion of Series D stock | | $ | 1,935,559 | | | — | | | — | |
Common stock issued on conversion of Series E stock | | $ | 823,208 | | | — | | | — | |
F-25
TABLE OF CONTENTS
American Technology Corporation
Notes to the Financial Statements |
|
16. SUMMARIZED QUARTERLY RESULTS (unaudited)
The following table presents unaudited operating results for each quarter within the two most recent years. The Company believes that all necessary adjustments consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the following quarterly results when read in conjunction with the financial statements included elsewhere in this report. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full fiscal year.
Fiscal 2003 | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | |
| |
| |
| |
| |
| |
Revenues | | $ | 423,299 | | $ | 237,942 | | $ | 313,612 | | $ | 340,573 | |
Gross Profit (Loss) (1) | | | 101,664 | | | (112,842 | ) | | 127,511 | | | (344,984 | ) |
Net loss | | | ($1,731,645 | ) | | ($1,854,306 | ) | | ($2,382,652 | ) | | ($2,258,410 | ) |
Loss per Share (2) | | | ($0.13 | ) | | ($0.18 | ) | | ($0.19 | ) | | ($0.12 | ) |
Fiscal 2002 | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | |
| |
| |
| |
| |
| |
Revenues | | $ | 256,621 | | $ | 199,433 | | $ | 235,691 | | $ | 319,007 | |
Gross Profit (Loss) (1) | | | 140,162 | | | 77,048 | | | 76,693 | | | 33,005 | |
Net loss | | | ($1,709,141 | ) | | ($1,975,483 | ) | | ($2,152,066 | ) | | ($2,383,442 | ) |
Loss per Share (2) | | | ($0.12 | ) | | ($0.14 | ) | | ($0.16 | ) | | ($0.18 | ) |
| (1) | Gross profit is calculated by subtracting cost of revenues from total revenues. |
| (2) | Earnings per share are computed independently for each quarter and the full year based upon respective average shares outstanding. Therefore, the sum of the quarterly net earnings per share amounts may not equal the annual amounts reported. |
F-26
TABLE OF CONTENTS
American Technology Corporation
Schedule II - Valuation and Qualifying Accounts |
|
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Description | | Balance at
Beginning
Of period | | Charged to
Cost and
Expenses | | Deductions | | Balance
At end of
Period | |
| |
| |
| |
| |
| |
Year ended September 30, 2003 | | $ | 20,191 | | 4,809 | | — | | $ | 25,000 | |
| | | | | | | | | | | |
Year ended September 30, 2002 | | $ | 20,191 | | — | | — | | $ | 20,191 | |
| | | | | | | | | | | |
Year ended September 30, 2001 | | $ | 20,000 | | 4,139 | | 3,948 | | $ | 20,191 | |
RESERVE FOR OBSOLESCENCE
Description | | Balance at
Beginning
Of period | | Charged to
Cost | | Deductions | | Balance
At end of
Period | |
| |
| |
| |
| |
| |
Year ended September 30, 2003 | | $ | 20,000 | | — | | — | | $ | 20,000 | |
| | | | | | | | | | | |
Year ended September 30, 2002 | | $ | 20,000 | | — | | — | | $ | 20,000 | |
| | | | | | | | | | | |
Year ended September 30, 2001 | | $ | 20,000 | | — | | — | | $ | 20,000 | |
WARRANTY RESERVE
Description | | Balance at
Beginning
Of period | | Charged to
Cost and
Expenses | | Deductions | | Balance
At end of
Period | |
| |
| |
| |
| |
| |
Year ended September 30, 2003 | | $ | 6,313 | | 313,187 | | — | | $ | 319,500 | |
| | | | | | | | | | | |
Year ended September 30, 2002 | | $ | 6,313 | | — | | — | | $ | 6,313 | |
| | | | | | | | | | | |
Year ended September 30, 2001 | | $ | 6,313 | | — | | — | | $ | 6,313 | |
F-27
