1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/ x / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
--------------------
COMMISSION FILE NUMBER: 0-18267
- ---------------------------------
Noise Cancellation Technologies, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-2501025
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1025 West Nursery Road, Linthicum, Maryland 21090
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(410) 636-8700
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
x Yes No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
95,857,074 shares outstanding as of May 8, 1996
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS
ENDED MARCH 31,
-------------------------------------
1995 1996
---------- --------------
REVENUES:
Technology licensing fees $2,600 $355
Product sales, net 379 135
Engineering and development services 956 191
----------- -------------
Total revenues $3,935 $681
----------- -------------
COSTS AND EXPENSES:
Costs of sales $333 $178
Costs of engineering and development services 1,070 131
Selling, general and administrative 1,397 970
Research and development 1,349 1,601
Equity in net loss of unconsolidated affiliates - 80
Interest (income) expense 5 (4)
----------- -------------
Total costs and expenses $4,154 $2,956
----------- -------------
NET (LOSS) $(219) $(2,275)
=========== =============
Weighted average number of common
shares outstanding 86,160 93,328
=========== =============
NET LOSS PER COMMON SHARE $ - $ (.02)
=========== =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (NOTE 1)
(UNAUDITED) (IN THOUSANDS OF DOLLARS)
DECEMBER 31, MARCH 31,
ASSETS 1995 1996
------------- -------------
Current assets:
Cash and cash equivalents (Note 1) $ 1,831 $ 627
Accounts receivable:
Trade :
Joint ventures and affiliates 241 91
Other 189 647
Unbilled 260 83
Allowance for doubtful accounts (119) (85)
------------- -------------
Total accounts receivable $ 571 $ 736
Inventories, net of reserves (Note 2) 1,701 1,633
Other current assets 225 156
------------- -------------
Total current assets $ 4,328 $ 3,152
Property and equipment, net 2,897 2,752
Patent rights and other intangibles, net 2,194 2,093
Other assets 164 63
------------- -------------
$ 9,583 $ 8,060
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,836 $ 1,923
Accrued expenses 571 542
Accrued payroll, taxes and related expenses 144 162
Customers' advances 43 10
------------- -------------
Total current liabilities $ 2,594 $ 2,637
------------- -------------
Long term obligations $ 105 $ 105
Commitments and contingencies (Note 4)
------------- -------------
Total other liabilities $ 105 $ 105
------------- -------------
STOCKHOLDERS' EQUITY (NOTE 3)
Common stock, $.01 par value, 100,000,000 shares authorized; issued
and outstanding 92,828,407 and 94,828,407 shares, respectively $ 928 $ 948
Additional paid-in-capital 78,667 79,335
Accumulated deficit (72,848) (75,123)
Cumulative translation adjustment 150 158
Common stock subscriptions receivable (13) -
------------- -------------
Total stockholders' equity $ 6,884 $ 5,318
------------- -------------
$ 9,583 $ 8,060
============= =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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NOISE CANCELLATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
(UNAUDITED)
(THOUSANDS OF DOLLARS)
THREE MONTHS
ENDED MARCH 31,
-------------------------------------
1995 1996
---------------- -----------------
Cash flows from operating activities:
Net loss $ (219) $ (2,275)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization 303 232
Common stock issued as consideration for:
Compensation 3 -
Provision for doubtful accounts 73 45
Equity in net loss of unconsolidated affiliates - 80
Unrealized foreign currency (gain) loss 121 127
Loss on disposition of fixed assets 30 -
Changes in operating assets and liabilities:
(Increase) in accounts receivable (2,190) (213)
Decrease in inventories 252 193
Decrease in other assets 117 89
Increase in accounts payable and accrued expenses 147 62
(Decrease) in other liabilities (375) (16)
---------------- -----------------
Net cash (used in) operating activities $ (1,738) $ (1,676)
---------------- -----------------
Cash flows from investing activities:
Capital expenditures $ (17) $ (229)
Acquisition of patent rights (210) -
---------------- -----------------
Net cash (used in) investing activities $ (227) $ (229)
---------------- -----------------
Cash flows from financing activities:
Proceeds from:
Sale of common stock $ - $ 688
Stock subscription receivable - 13
Exercise of stock purchase warrants and options 105 -
---------------- -----------------
Net cash provided by financing activities $ 105 $ 701
---------------- -----------------
Net increase (decrease) in cash and cash equivalents $ (1,860) $ (1,204)
Cash and cash equivalents - beginning of period 2,423 1,831
---------------- -----------------
Cash and cash equivalents - end of period $ 563 $ 627
================ =================
Cash paid for interest $ 7 $ -
================ =================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
NOISE CANCELLATION TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals and certain adjustments to
reserves and allowances) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31, 1996,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K, as amended, for the year ended December 31, 1995.
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $75.1 million on a
cumulative basis through March 31, 1996. These losses, which include the costs
for development of products for commercial use, have been funded primarily from
the sale of common stock, including the exercise of warrants or options to
purchase common stock, and by technology licensing fees and engineering and
development funds received from joint venture and other strategic partners.
Agreements with joint venture and other strategic partners generally require
that a portion of the initial cash flows, if any, generated by the ventures or
alliances be paid on a preferential basis to the Company's co-venturers until
the technology licensing fees and engineering and development funds provided to
the venture or the Company are recovered.
Cash, cash equivalents and short-term investments amount to $0.6
million at March 31, 1996, decreasing from $1.8 million at December 31, 1995.
Management does not believe that available funds are sufficient to sustain the
Company for the next twelve months. Management believes that available cash
and cash anticipated from the exercise of warrants and options, the funding
derived from forecasted technology licensing fees, royalties and product sales
and engineering and development revenue, the operating cost savings from the
reduction in employees and reduced capital expenditures should be sufficient to
sustain the Company's anticipated future level of operations into 1997.
However, the period during 1997 through which it can be sustained is dependent
upon the level of realization of funding from technology licensing fees and
royalties and product sales and engineering and development revenue and the
achievement of the operating cost savings from the events described above, all
of which are presently uncertain.
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There can be no assurance that additional funding will be provided by
technology licensing fees, royalties and product sales and engineering and
development revenue. In that event, the Company would have to further and
substantially cut back its level of operations in order to conserve cash.
These reductions could have an adverse effect on the Company's relations with
its strategic partners and customers. Uncertainty exists with respect to the
adequacy of current funds to support the Company's activities until positive
cash flow from operations can be achieved, and with respect to the availability
of financing from other sources to fund any cash deficiencies.
On March 28, 1996, the Company sold 2,000,000 shares of its common
stock in a private placement that provided net proceeds to the Company of $0.7
million.
On April 10, 1996, the Company sold an additional 1,000,000 shares, in
the aggregate, of its common stock in a private placement that provided net
proceeds to the Company of $0.3 million. Contemporaneously, the Company sold
secured convertible term notes in the aggregate principal amount of $1.2
million to those institutional investors and granted them each an option to
purchase an aggregate of $3.45 million of additional shares of the Company's
common stock. The per share conversion price under the notes and the exercise
price under the options are equal to the price received by the Company for the
sale of such 1,000,000 shares subject to certain adjustments. The conversion
of the notes and the exercise of the options are both subject to stockholder
approval of an appropriate amendment to the Company's Certificate of
Incorporation increasing its authorized capital to provide for the requisite
shares.
In conjunction with the foregoing sale of common stock and convertible
term notes, the Company also agreed to file a registration statement with the
Securities and Exchange Commission ("SEC") covering the applicable shares and
to use its best efforts to have such registration statement declared effective
by the SEC as soon as practicable. The relevant agreements provide for
significant monetary penalties in the event such registration statement is not
declared effective within 90 days of the filing date and in the event its
effectiveness is suspended for other than brief permissible periods. The
agreements also prohibit the Company from concluding any further financing
arrangements which involve the sale of equity or an equity feature without the
investors' consent for a period of one year.
The total cash received to date by the Company from the above two
transactions amounts to $2.2 million.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates continuity of
operations, realization of assets and satisfaction of liabilities in the
ordinary course of business. The propriety of using the going concern basis is
dependent upon, among other things, the achievement of future profitable
operations and the ability to generate sufficient cash from operations, public
and private financings and other funding sources to meet its obligations. The
uncertainties described above raise substantial doubt at March 31, 1996, about
the Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments relating to the
recoverability of the carrying amount of
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recorded assets or the amount of liabilities that might result from the outcome
of these uncertainties.
2. INVENTORIES:
Inventories comprise the following:
(Thousands of dollars) DECEMBER 31, MARCH 31,
1995 1996
------------ ------------
Components $716 $796
8
Finished Goods 1,340 1,205
------------ ------------
Gross Inventory $2,056 $2,001
Reserve for Obsolete & Slow Moving Inventory (355) (368)
------------ ------------
Inventory, Net of Reserves $1,701 $1,633
============ ============
3. STOCKHOLDERS EQUITY:
The changes in stockholders' equity during the three months ended
March 31, 1996, were as follows:
(In thousands) Net
Balance at Sale of Stock Net (loss) Balance at
December 31, Common Subscription for the Translation March 31,
1995 Stock Receivable Period Adjustment 1996
------------ ------- ------------ ---------- ----------- ----------
Common Stock:
Shares 92,828 2,000 -- -- -- 94,828
Amount $928 $20 $ -- $ -- $ -- $948
Additional
Paid-in Capital 78,667 668 -- -- -- 79,335
Accumulated
Deficit (72,848) -- -- (2,275) -- (75,123)
Cumulative
Translation
Adjustment 150 -- -- -- 8 158
Stock
Subscription
Receivable (13) -- 13 -- -- --
4. LITIGATION:
On or about June 15, 1995, Guido Valerio filed suit against the
Company in the Tribunal of Milan, Milan, Italy. The suit requests the Court to
award judgment in favor of Mr. Valerio as follows: (i) establish and declare
that a proposed independent sales representation agreement submitted to Mr.
Valerio by the Company and signed by Mr. Valerio but not executed by the
Company was made and entered into between Mr. Valerio and the Company on June
30, 1992; (ii) declare that the Company is guilty of breach of contract and
that the purported agreement was terminated by unilateral and illegitimate
withdrawal by the Company; (iii) order the Company to pay Mr. Valerio $30,000
for certain amounts alleged to be owing to Mr. Valerio by the Company; (iv)
order the Company to pay commissions to which Mr. Valerio would have been
entitled if the
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Company had followed up on certain alleged contacts made by Mr. Valerio for an
amount to be assessed by technicians and accountants from the Court Advisory
Service; (v) order the Company to pay damages for the harm and losses sustained
by Mr. Valerio in terms of loss of earnings and failure to receive due payment
in an amount such as shall be determined following preliminary investigations
and the assessment to be made by experts and accountants from the Court
Advisory Service and in any event no less than 3 billion Lira ($18.9 million);
and (vi) order the Company to pay damages for the harm done to Mr. Valerio's
image for an amount such as the judge shall deem equitable and in case for no
less than 500 million Lira ($3.1 million). The Company retained an Italian law
firm as special litigation counsel to the Company in its defense of this suit.
On March 6, 1996, the Company, through its Italian counsel, filed a brief of
reply with the Tribunal of Milan setting forth the Company's position that: (i)
the Civil Tribunal of Milan is not the proper venue for the suit, (ii) Mr.
Valerio's claim is groundless since the parties never entered into an
agreement, and (iii) because Mr. Valerio is not enrolled in the official
Register of Agents, under applicable Italian law Mr. Valerio is not entitled
to any compensation for his alleged activities. A preliminary hearing before
the Tribunal has been scheduled for May 30, 1996. Management is of the opinion
that the lawsuit is without merit and will contest it vigorously. In the
opinion of management, after consultation with outside counsel, resolution of
this suit should not have a material adverse effect on the Company's financial
position or operations. However, in the event that the lawsuit does result in
a substantial final judgement against the Company, said judgement could have a
severe material effect on quarterly or annual operating results.
5. COMMON STOCK OPTIONS:
On January 22, 1996, the Company granted to certain employees and
consultants options to purchase the Company's common stock at the then fair
market value of such stock. Certain of the grants were made in connection with
offers of employment and under the terms of consulting contracts. Other grants
were made in lieu of cash bonuses for 1995, and in two instances in lieu of
additional cash compensation for 1996.
The option grants involved options to purchase a total of 1,901,500
shares of the Company's common stock. Options to purchase 1,425,000 were
granted to officers of the Company. Options to purchase 276,500 are
exercisable from the date of grant until their date of expiration. The
remaining options to purchase 1,625,000 shares are not exercisable until the
date on which the requisite corporate action to increase the authorized capital
of the Company and reserve the required number of shares of common stock for
issuance upon the exercise has been completed.
The fair market value of the Company's common stock on January 22,
1996 was $0.6563 per share, the closing price of the Company's common stock on
the NASDAQ National Market System.
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6. SUBSEQUENT EVENT
On April 10, 1996, the Company sold an additional 1,000,000 shares, in
the aggregate, of its common stock in a private placement with three
institutional investors that provided net proceeds to the Company of $0.3
million. Contemporaneously, the Company sold secured convertible term notes in
the aggregate principal amount of $1.2 million to those institutional investors
and granted them each an option to purchase an aggregate of $3.45 million of
additional shares of the Company's common stock. The per share conversion
price under the notes and the exercise price under the options are equal to the
price received by the Company for the sale of such 1,000,000 shares subject to
certain adjustments. The conversion of the notes and the exercise of the
options are both subject to stockholder approval of an appropriate amendment to
the Company's Certificate of Incorporation increasing its authorized capital to
provide for the requisite shares.
In conjunction with the foregoing sale of common stock and convertible
term notes, the Company also agreed to file a registration statement with the
Securities and Exchange Commission ("SEC") covering the applicable shares and
to use its best efforts to have such registration statement declared effective
by the SEC as soon as practicable. The relevant agreements provide for
significant monetary penalties in the event such registration statement is not
declared effective within 90 days of the filing date and in the event its
effectiveness is suspended for other than brief permissible periods. The
agreements also prohibit the Company from concluding any further financing
arrangements which involve the sale of equity or an equity feature without the
investors' consent for a period of one year.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
GENERAL BUSINESS ENVIRONMENT
The Company is in transition from a firm focused principally on
research and development of new technology to a firm focused on the
commercialization of its technology through technology licensing fees,
royalties and product sales. In prior years, the Company derived the majority
of its revenues from engineering and development funding provided by
established companies willing to assist the Company in the development of its
active noise and vibration control technology, and from technology licensing
fees paid by such companies. The Company's strategy generally has been to
obtain technology licensing fees when initiating joint ventures and alliances
with new strategic partners. Revenues from product sales were limited to sales
of specialty products and prototypes. During the first three months of 1996,
the Company received approximately 28% of its operating revenues from
engineering and development funding. Since 1991, excluding quarter to quarter
variations, revenues from product sales have been increasing and management
expects that technology licensing fees, royalties and product sales will become
the principal source of the Company's revenue as the commercialization of its
technology proceeds.
The Company has shifted its focus to technology licensing fees,
royalties and products that represent near term revenue generation. This is
reflected in the fact that 52% of the Company's total revenue in the first
quarter of 1996 represents technology licensing fees. There can be no assurance
that additional technology licensing fees, will continue at that level.
Note 1 to the accompanying Condensed Consolidated Financial Statements
and the liquidity and capital resources section which follows describe the
current status of the Company's available cash balances and the uncertainties
which exist that raise substantial doubt as to the Company's ability to
continue as a going concern.
As distribution channels are established and as product sales and
market acceptance and awareness of the commercial applications of active noise
and vibration control build, revenues from technology licensing fees, royalties
and product sales are forecast to fund an increasing share of the Company's
requirements. The funding from these sources, if realized, will reduce the
Company's dependence on engineering and development funding.
From the Company's inception through March 31, 1996, its operating
revenues, including technology licensing fees and royalties, product sales and
engineering and
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development services, have consisted of approximately 22% product sales, 51%
engineering and development services and 27% technology licensing fees.
The Company has entered into a number of alliances and strategic
relationships with established firms for the integration of its technology into
products. The speed with which the Company can achieve the commercialization
of its technology depends in large part upon the time taken by these firms and
their customers for product testing, and their assessment of how best to
integrate the technology into their products and into their manufacturing
operations. While the Company works with these firms on product testing and
integration, it is not always able to influence how quickly this process can be
completed. The sluggish worldwide economy over the past four years has slowed
the adoption and market acceptance of many new technologies.
The Company continues to sell and ship ProActiveTM and NoisebusterTM
headsets in 1996. The Company is now selling products through three of its
alliances: Walker is manufacturing and selling industrial silencers; Siemens
is buying and contracting with the Company to install quieting headsets for
patient use in Siemens' MRI machines; and Ultra is installing production model
aircraft cabin quieting systems in turboprop aircraft. The Company is entitled
to receive royalties from Walker on its sales of industrial silencers, direct
product sales revenue from Siemens' purchase of headsets and commencing in
1998, royalties from Ultra on its sale of aircraft cabin quieting systems.
Management believes these activities help demonstrate the range of commercial
potential for the Company's technology and will contribute to the Company's
transition from engineering and development to technology licensing fees,
royalties and product sales.
Product revenues for the three months ended March 31, 1995 and 1996
were:
PRODUCT REVENUES
(Thousands of dollars) Three Months Ended March 31,
-----------------------------------------------------
Amount As a % of Total
-------------------- -------------------------
Product 1995 1996 1995 1996
- ------------------------------- -------- ------- -------- ---------
Headsets 371 130 97.9% 97.0%
Other 11 5 2.9 3.7
Fan Quieting Products - (1) - (0.7)
Industrial Silencers (3) - (0.8) -
------- -------- ------ ------
Total $379 $134 100.0% 100.0%
======= ======== ====== ======
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The Company has continued to make substantial investments in its
technology and intellectual property and has incurred development costs for
engineering prototypes, pre-production models and field testing of several
products. Management believes that the Company's investment in its technology
has resulted in the expansion of its intellectual property portfolio and
improvement in the functionality, speed and cost of components and products.
On March 28, 1996, the Company sold 2,000,000 shares of its common
stock in a private placement that provided net proceeds to the Company of $0.7
million.
On April 10, 1996, the Company sold an additional 1,000,000 shares, in
the aggregate, of its common stock in a private placement with three
institutional investors that provided net proceeds to the Company of $0.35
million. Contemporaneously, the Company sold secured convertible term notes in
the aggregate principal amount of $1.2 million to those institutional investors
and granted them each an option to purchase an aggregate of $3.45 million of
additional shares of the Company's common stock. The per share conversion
price under the notes and the exercise price under the options are equal to
$0.35 per share subject to certain adjustments. The conversion of the notes
and the exercise of the options are both subject to stockholder approval of an
appropriate amendment to the Company's Certificate of Incorporation increasing
its authorized capital to provide for the requisite shares. In conjunction
with the foregoing sale of common stock and convertible term notes, the Company
also agreed to file a registration statement with the Securities and Exchange
Commission ("SEC") covering the applicable shares and to use its best efforts
to have such registration statement declared effective by the SEC as soon as
practicable. The relevant agreements provide for significant monetary
penalties in the event such registration statement is not declared effective
within 90 days of the filing date and in the event its effectiveness is
suspended for other than brief permissible periods. The agreements also
prohibit the Company from concluding any further financing arrangements which
involve the sale of equity or an equity feature without the investors' consent
for a period of one year.
The total cash received to date by the Company from the above two
transactions amounts to $2.2 million. (Refer to Notes 1. and 6. - "Notes to
the Condensed Consolidated Financial Statements.")
Management believes that the funding provided by increased product
sales, technology licensing fees, royalties, and cost savings, if realized,
coupled with the additional capital referred to above, some of which is
dependent upon shareholder approval of an amendment to the Company's
Certificate of Incorporation, should enable the Company to continue operations
into 1997. If the Company is not able to increase technology licensing fees,
royalties and product sales, or generate additional capital, it will have to
further cut its level of operations substantially in order to conserve cash.
(Refer to "Liquidity and Capital Resources" below and to Note 1. - "Notes to
the Condensed Consolidated Financial Statements" for a further discussion
relating to continuity of operations.)
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RESULTS OF OPERATIONS
Total revenues for the first three months of 1996 decreased by 83% to
$681,000 from $3,934,000 when compared with the same period in 1995.
Product sales decreased 64% to $135,000 reflecting decreased revenue
from NoiseBuster(TM) sales due to reductions in average price and units sold,
and a decrease in industrial silencer sales in connection with the transfer of
that business to Walker. Engineering and development services decreased by 80%
to $ 191,000, primarily due to the elimination of funding from Ultra for
aircraft cabin quieting in connection with the transfer of that business to
Ultra in the first quarter of 1995, a decrease in the amount of muffler
development funding from Walker in connection with the transfer of that
business to Walker in the fourth quarter of 1995 and staff reductions.
Technology licensing fees in the first quarter of 1996 decreased by
86% or $2,245,000, primarily because the $2.6 million licensing fee from
Ultra was recognized by the Company in the first quarter of 1995.
Cost of product sales decreased by 46% to $178,000 and the product
margin decreased to (32)% from 12% during the same period in 1995, primarily
due to a lower price and margin on the NoiseBuster(TM) and product returns.
Cost of engineering and development services decreased 88% to $131,000 due to
decreased contract revenue. The gross margin on engineering and development
services increased to 31% from (12)% during the same period in 1995, primarily
due to cost overruns on several contracts in 1995.
Selling, general and administrative expenses for the first quarter
decreased by 31% to $970,000 from $1,397,000 for the same period in 1995,
primarily due to continued cost savings from the revised business plan. Of
this decrease, $291,000 was directly attributable to salaries and related
expenses. Office and occupancy expenses increased by $13,000 or 16%. Travel
and entertainment increased by $53,000 or 77%, reflecting increased sales
activity.
Research and development expenditures for the first quarter of 1996
increased by 19% to $1,601,000 from $1,349,000 for the same period in 1995,
primarily due to increased emphasis on short term development.
In the first quarter of 1996, interest (income) expense increased to
$(4,000) from $5,000 for the same period of 1995 reflecting the decrease in
1995 of available investible funds.
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Under most of the Company's joint venture agreements, the Company is
not required to fund any capital requirements of these joint ventures beyond
its initial capital contribution. In accordance with U.S. generally accepted
accounting principles, when the Company's share of cumulative losses equals its
investment and the Company has no obligation or intention to fund such
additional losses, the Company suspends applying the equity method of
accounting for its investment. The Company will not be able to record any
equity in income with respect to an entity until its share of future profits is
sufficient to recover any cumulative losses that have not previously been
recorded.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial losses from operations since its
inception, which have been recurring and amounted to $75.1 million on a
cumulative basis through March 31, 1996. These losses, which include the costs
for development of products for commercial use, have been funded primarily from
the sale of common stock, including the exercise of warrants or options to
purchase common stock, and by technology licensing fees and engineering and
development funds received from joint venture and other strategic partners.
Agreements with joint venture and other strategic partners generally require
that a portion of the initial cash flows, if any, generated by the ventures or
alliances be paid on a preferential basis to the Company's co-venturers until
the license fees and engineering and development funds provided to the venture
or the Company are recovered.
In January 1996, the Company adopted a plan that management believes
should generate sufficient funds for the Company to continue its operations
into 1997. Under this plan, as amended, the Company needs to generate
approximately $17 million to fund its operations for 1996. The Company
believes that it can generate these funds from operations in 1996, although
there is no certainty that the Company will achieve this goal. Included in
such amount is approximately $8.9 million in sales of new products and
approximately $9.0 million of technology licensing fees and royalties.
Success in generating technology licensing fees, royalties and
product sales are significant and critical to the Company's ability to overcome
its present financial difficulties. The Company cannot predict whether it will
be successful in obtaining market acceptance of its new products or in
completing its current negotiations with respect to licenses and royalty
revenues. If, during the course of 1996, management of the Company determines
that it will be unable to meet or exceed the plan discussed above, the Company
will consider fund raising alternatives. The Company's ability to raise
additional capital through sales of common stock will be severely limited until
the Company's stockholders approve an amendment to the Company's Certificate of
Incorporation authorizing additional capital stock and the termination of the
one year restriction on further equity financing undertaken by the Company in
connection with the sale of common stock and convertible term notes to three
institutional investors described above. The Company will monitor its
performance against the plan on a monthly basis and, if necessary, reduce its
level of operations accordingly. The Company believes that the plan discussed
above constitutes a viable plan for the continuation of the Company's business
into 1997.
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There can be no assurance that additional funding will be provided by
technology licensing fees, royalties, product sales, engineering and
development revenue or additional capital. In that event, the Company would
have to further cut back its level of operations substantially in order to
conserve cash. These reductions could have an adverse effect on the Company's
relations with its strategic partners and customers. The uncertainty with
respect to the adequacy of current funds to support the Company's activities
until positive cash flow from operations can be achieved, and with respect to
the availability of financing from other sources to fund any cash deficiencies,
raises substantial doubt about the Company's ability to continue as a going
concern. Further discussion of these uncertainties is presented in Note 1. -
"Notes to the Condensed Consolidated Financial Statements".
Because the Company did not meet its revenue targets for the first
quarter of 1996, it entered into two recent transactions, which provide
additional funding as follows:
On March 28, 1996, the Company sold 2,000,000 shares of its common
stock in a private placement that provided net proceeds to the Company of $0.7
million.
On April 10, 1996, the Company sold an additional 1,000,000 shares, in
the aggregate, of its common stock in a private placement with three
institutional investors that provided net proceeds to the Company of $0.3
million. Contemporaneously, the Company sold secured convertible term notes in
the aggregate principal amount of $1.2 million to those institutional investors
and granted them each an option to purchase an aggregate of $3.45 million of
additional shares of the Company's common stock. The per share conversion
price under the notes and the exercise price under the options are equal to the
price received by the Company for the sale of such 1,000,000 shares subject to
certain adjustments. The conversion of the notes and the exercise of the
options are both subject to stockholder approval of an appropriate amendment to
the Company's Certificate of Incorporation increasing its authorized capital to
provide for the requisite shares.
In conjunction with the foregoing sale of common stock and convertible
term notes, the Company also agreed to file a registration statement with the
Securities and Exchange Commission ("SEC") covering the applicable shares and
to use its best efforts to have such registration statement declared effective
by the SEC as soon as practicable. The relevant agreements provide for
significant monetary penalties in the event such registration statement is not
declared effective within 90 days of the filing date and in the event its
effectiveness is suspended for other than brief permissible periods. The
agreements also prohibit the Company from concluding any further financing
arrangements which involve the sale of equity or an equity feature without the
investors' consent for a period of one year.
The total cash received to date by the Company from the above two
transactions amounts to $2.2 million. (Refer to "Liquidity and Capital
Resources" above and Notes 1. and 6. - "Notes to the Condensed Consolidated
Financial Statements" above.)
17
The Company believes that the level of financial resources available
to it is an essential competitive factor. The Company plans to ask its
shareholders to approve the amendment of the Company's Certificate of
Incorporation to increase the number of shares of Common Stock authorized
thereunder from 100,000,000 shares to 140,000,000 shares.
At March 31, 1996, cash and short-term investments were $0.6 million.
Additionally, the Company received $1.5 million in April, 1996 from the
previously described sale of common stock and convertible term notes. The
available resources were invested in interest bearing money market accounts.
The Company's investment objective is preservation of capital while earning a
moderate rate of return.
The Company's working capital decreased to $0.5 million at March 31,
1996, from $1.7 million at December 31, 1995. This decrease of $1.2 million
was used primarily to fund the net loss of $2.3 million reported for the
period.
During the first quarter of 1996, the net cash used in operating
activities was $1.7 million. $1.7 million was also used in operating
activities during the first quarter of 1995.
Net inventory declined during the first quarter of 1996 by $68,000 due
primarily to sales of the NoiseBuster(TM), ProActive(TM) and MRI headsets.
The Company's available cash balances at March 31, 1996 are lower than
anticipated at the end of 1995 primarily due to lower product sales than
forecasted and delays in certain other technology licensing agreements.
The net cash used in investing activities amounted to $0.2 million
during the period. The net cash provided by financing activities amounted to
$0.7 million primarily from the private placement of common stock in March of
1996..
The Company has no lines of credit with banks or other lending
institutions and therefore has no unused borrowing capacity.
CAPITAL EXPENDITURES
The Company intends to continue its business strategy of working with
supply, manufacturing, distribution and marketing partners to commercialize its
technology. The benefits of this strategy include: (i) dependable sources of
controllers, integrated circuits and other system components from supply
partners, which leverages on their purchasing power, provides important cost
savings and accesses the most advanced technologies; (ii) utilization of the
existing manufacturing capacity of the Company's allies, enabling the Company
to integrate its active technology into products with limited capital
investment in production facilities and manufacturing personnel; and (iii)
access to well-established channels of distribution and marketing capability of
leaders in several market segments.
18
The Company's strategic agreements have enabled the Company to focus
on developing product applications for its technology and limit the Company's
capital requirements.
There were no material commitments for capital expenditures as of
March 31, 1996, and no material commitments are anticipated in the near future.
PART III - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
For discussion of legal proceedings, see Note 4 - "Notes to the
Condensed Consolidated Financial Statements" which is incorporated by reference
herein.
ITEM 6 - EXHIBITS
(a) Exhibits.
Exhibit No. Description
----------- -----------
11 Computation of Net (Loss) Per Share
27 Financial Data Schedule
19
NOISE CANCELLATION TECHNOLOGIES, INC.
SIGNATURE
Pursuant to the requirement 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.
NOISE CANCELLATION TECHNOLOGIES, INC.
By: /s/ Michael J. Parrella
-----------------------
Michael J. Parrella
President
By: /s/ Stephen J. Fogarty
----------------------
Senior Vice President and
Chief Financial Officer
Dated: May 15, 1996