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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 JUNE 30, 1996
------------------------------------------
COMMISSION FILE NUMBER: 0-18267
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Noise Cancellation Technologies, Inc.
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(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, Suite 120, Linthicum, Maryland 21090
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
96,044,609 shares outstanding as of August 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 thousand except share amounts)
Three Months Six Mouths
Ended June 30, Ended June 30,
---------------------------------------------------------
1995 1996 1995 1996
-------------- ------------- ------------ -----------
REVENUES:
Technology licensing fees $625 $713 $3,225 $1,068
Product sales, net 309 559 688 692
Engineering and development services 491 32 1,447 224
-------------- ------------- ------------ -----------
Total revenues $1,425 $1,304 $5,360 $1,984
-------------- ------------- ------------ -----------
COSTS AND EXPENSES:
Costs of sales $262 $395 $595 $574
Costs of engineering and development services 497 37 1,567 168
Selling, general and administrative 1,921 1,356 3,318 2,325
Research and development 1,016 1,160 2,365 2,761
Equity in net loss of unconsolidated affiliates - - - 80
Interest (income) expense (20) 29 (15) 24
-------------- ------------- ------------- -----------
Total costs and expenses $3,676 $2,977 $7,830 $5,932
-------------- ------------- ------------- -----------
NET (LOSS) $(2,251) $(1,673) $(2,470) $(3,948)
============== ============= ============ ===========
Weighted average number of common
shares outstanding 86,288 95,696 86,215 94,468
============== ============= ============ ===========
NET LOSS PER COMMON SHARE $(.03) $(.02) $(.03) $(.04)
============== ============= ============ ===========
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, June 30,
ASSETS 1995 1996
------------ -------------
Current assets:
Cash and cash equivalents (Note 1) $ 1,831 $ 899
Accounts receivable:
Trade:
Joint ventures and affiliates 241 90
Other 189 538
Unbilled 260 106
Allowance for doubtful accounts (119) (90)
------------ ------------
Total accounts receivable $ 571 $ 644
Inventories, net of reserves (Note 2) 1,701 1,298
Other current assets 225 106
------------ ------------
Total current assets $ 4,328 $ 2,947
Property and equipment, net 2,897 2,649
Patent rights and other intangibles, net 2,194 1,992
Other assets 164 50
------------ ------------
$ 9,583 $ 7,638
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes Payable $ - $ 1,200
Accounts payable 1,836 1,482
Accrued expenses 571 730
Accrued payroll, taxes and related expenses 144 123
Customers' advances 43 -
------------ ------------
Total current liabilities $ 2,594 $ 3,535
------------ ------------
Long term obligations $ 105 $ 75
Commitments and contingencies (Note 4)
------------ ------------
Total other liabilities $ 105 $ 75
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STOCKHOLDERS' EQUITY (Note 3)
Common stock, $.01 par value, 100,000,000 shares authorized; issued
and outstanding 92,828,407 and 96,034,609 shares, respectively $ 928 $ 960
Additional paid-in-capital 78,667 79,735
Accumulated deficit (72,848) (76,796)
Cumulative translation adjustment 150 142
Common stock subscriptions receivable (13) (13)
------------ ------------
Total stockholders' equity $ 6,884 $ 4,028
------------ ------------
$ 9,583 $ 7,638
============ ============
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)
Six Months
Ended June 30,
--------------------------------
1995 1996
------------- ------------
Cash flows from operating activities:
Net loss $ (2,470) $ (3,949)
Adjustments to reconcile net lots to net cash (used in) operating activities:
Depreciation and amortization 599 481
Common stock issued as consideration for:
Compensation 7 6
Rent 191 -
Common stock retired as consideration for:
Employee expenses - (5)
Provision fur doubtful accounts 86 46
Equity in net loss of unconsolidated affiliates - 80
Unrealized foreign currency (gain) loss 9 (46)
Loss on disposition of fixed assets 30 -
Changes in operating mutts and liabilities:
(Increase) decrease in accounts receivable 338 (120)
Decrease in inventories 24 513
Decrease in other assets 99 -
Increase (decrease) in accounts payable and accrued expenses 577 (208)
(Decrease) in other liabilities (656) -
----------- -----------
Net cash (used in) operating activities $ (1,166) $ (3,097)
----------- -----------
Cash flows from investing activities:
Capital expenditures (25) $ (104)
Acquisition of patent rights (210) -
----------- -----------
Net cash (used in) investing activities $ (235) $ (104)
----------- -----------
Cash flows from financing activities:
Proceeds from:
Notes (net) $ - $ 1,170
Sale of common stock - 995
Exercise of stock purchase warrants and options 108 104
----------- -----------
Net cash provided by financing activities $ 108 $ 2,269
----------- -----------
Net increase (decrease) in cash and cash equivalents $ (1,293) $ (932)
Cash and cash equivalents - beginning of period 2,423 1,831
----------- -----------
Cash and cash equivalents - end of period $ 1,130 $ 899
=========== ===========
Cash paid for interest $ 7 $ 2
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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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 six-month period ended June 30, 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 $76.8 million on a
cumulative basis through June 30, 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 $0.9 million at
June 30, 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 April 10, 1996, the Company sold 1,000,000 shares, in the aggregate, of
its common stock to three institutional investors 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 were to be equal to the price received by the
Company for the sale of the 1,000,000 shares subject to certain adjustments.
The conversion of the notes and the exercise of the options were 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. On July 17, 1996, the Company's stockholders authorized
an increase in the Company's authorized capital to 140,000,000 shares.
On August 13, 1996 the three institutional investors converted their secured,
convertible term notes and exercised their options in full. As a result, the
Company issued 13,403,130 shares, in the aggregate, of its common stock to such
investors, received $3.45 million in cash, and effected the repayment of the
notes.
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 on or before November 14, 1996. The agreements also
prohibit the Company from concluding any further financing arrangements which
involve the sale of equity or debt with an equity feature without the
investors' consent for a period six months from the date of the investors'
purchase of such 1,000,000 shares, following which the investors continue to
have a right of first refusal for an additional six months with respect to such
financing.
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,
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public and private financings and other funding sources to meet its
obligations. The uncertainties described above raise substantial doubt at June
30, 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 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, JUNE 30,
1995 1996
----------- -----------
Components $716 $705
Finished Goods 1,340 1,044
----------- -----------
Gross Inventory $2,056 $1,749
Reserve for Obsolete & Slow Moving Inventory (355) (451)
------------ ------------
Inventory, Net of Reserves $1,701 $1,298
============ ============
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3. STOCKHOLDERS EQUITY:
The changes in stockholders' equity during the six months ended June 30,
1996, were as follows:
(IN THOUSANDS) NET EXERCISE OF
BALANCE AT SALE OF WARRANTS STOCK NET (LOSS) BALANCE AT
DECEMBER 31, COMMON AND SUBSCRIPTION FOR THE TRANSLATION JUNE 30,
1995 STOCK OPTIONS RECEIVABLE PERIOD ADJUSTMENT 1996
---- ----- ------- ---------- ------ ---------- ----
Common Stock:
Shares 92,828 3,002 204 -- -- -- 96,034
Amount $928 $30 $2 $-- $-- $-- $960
Additional
Paid-in Capital 78,667 966 102 -- -- -- 79,735
Accumulated
Deficit (72,848) -- -- -- (3,948) -- (76,796)
Cumulative
Translation
Adjustment 150 -- -- -- -- (8) 142
Stock
Subscription
Receivable (13) -- (13) 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 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
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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 was held on May 30, 1996, and pretrial discovery is scheduled to
take place over the next few months. 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. Such action was completed on July 17, 1996.
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.
6. SUBSEQUENT EVENTS
On April 10, 1996, the Company sold 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
three 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.
On August 13, 1996, the three institutional investors converted their secured
convertible term notes and exercised their options in full. As a result, the
Company issued 13,403,130 shares, in the aggregate, of its common stock to such
investors, received $3.45 million in cash and effected the repayment of the
notes.. The per share conversion price under the notes and the exercise price
under the options were equal to the price received by the Company for the sale
of such 1,000,000 shares.
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The conversion of the notes and the exercise of the options were 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. On July 17, 1996, the Company's stockholders authorized
an increase in the Company's authorized capital to 140,000,000 shares.
On August 13, 1996, the three institutional investors converted their secured
convertible term notes and exercised their options in full. As a result, the
Company issued 13,403,130 shares, in the aggregate, of its common stock to such
investors, received $3.45 million in cash and effected the repayment of the
notes.
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 on or before November 14, 1996. The agreements also
prohibit the Company from concluding any further financing arrangements which
involve the sale of equity or debt with an equity feature without the
investors' consent for a period six months from the date of the investors'
purchase of such 1,000,000 shares, following which the investors continue to
have a right of first refusal for an additional six months with respect to such
financing.
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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 six months of 1996, the Company received
approximately 11% 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 53% of the Company's total revenue in the first half 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 June 30, 1996, its operating revenues,
including technology licensing fees and royalties, product sales and
engineering and development services, have consisted of approximately 22%
product sales, 50% engineering and development services and 28% technology
licensing fees.
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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 six months ended June 30, 1995 and 1996 were:
PRODUCT REVENUES
(Thousands of dollars) Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- --------------------------------------
Amount As a % of Total Amount As a % of Total
------------------ ------------------- ----------------- ------------------
Product 1995 1996 1995 1996 1995 1996 1995 1996
- -------------------------------------------- --------- ------- -------- --------- ------- -------- --------- -------
Headsets $296 $537 95.7% 96.2% $667 $667 97.0% 96.4%
Other 5 21 1.6% 3.8% 16 25 2.3% 3.6%
Fan Quieting Products 2 - 0.7% - 2 - 0.3% -
Industrial Silencers 6 - 1.9% - 3 - 0.4% -
--------- ------- -------- ------- ---------
Total $309 $558 100.0% 100.0% $688 $692 100.0% 100.0%
========= ======= ======== ======= ======= ======== ========= =======
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.
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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 were 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 through June 30, 1996 by the Company from the above
two transactions amounted to $2.2 million. (Refer to Notes 1. and 6. - "Notes
to the Condensed Consolidated Financial Statements.")
On July 17, 1996, the stockholders of the Company approved the amendments
referred to above. On August 13, 1996, the three institutional investors
converted their secured convertible term notes and exercised their options in
full. The total number of shares of common stock issued the investors referred
to above on August 13, 1996 amounted to 13,403,130, of which 9,857,142 were
issued upon the exercise of the option and 3,545,988 were issued to correct the
notes and pay the accrued interest on the notes. Both the option exercise
price and the note conversion price were at $0.35 per share. The Company
received $3.45 million from these transaction on August 13, 1996. . (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, 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 six months of 1996 decreased by 67% to
$1,984,000 from $5,359,000 when compared with the same period in 1995.
Product sales increased 1% to $692,000 reflecting increased headset sales and
a decrease in industrial silencer sales in connection with the transfer of that
business to Walker. Engineering and development services decreased by 85% to $
224,000, 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 half of 1996 decreased by 67% or
$2,157,000, 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 3% to $574,000 and the product margin
increased to 17% from 13% during the same period in 1995. Cost of engineering
and development services decreased 89% to $168,000 due to decreased contract
revenue. The gross margin on engineering and development services increased to
25% from (8)% during the same period in 1995, primarily due to more profitable
contracts in 1996.
Selling, general and administrative expenses for the first six months
decreased by 30% to $2,325,000 from $3,318,000 for the same period in 1995,
primarily due to continued cost savings from the revised business plan. Of
this decrease, $427,000 was directly attributable to salaries and related
expenses. Office and occupancy expenses increased by $9,000 or 5%. Travel and
entertainment increased by $57,000 or 36%, reflecting increased sales activity.
Research and development expenditures for the first half of 1996 increased by
17% to $2,761,000 from $2,365,000 for the same period in 1995, primarily due
to increased emphasis on short term development.
In the first six months of 1996, interest (income) expense increased to
$24,000 from ($15,000) for the same period of 1995 reflecting the interest
expense on the note payable previously discussed.
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
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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 $76.8 million on a
cumulative basis through June 30, 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, coupled with additional cash
funding, 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 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.
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
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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 and second
quarters 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 through June 30, 1996 by the Company from the above
two transactions amounted to $2.2 million. (Refer to Notes 1. and 6. - "Notes
to the Condensed Consolidated Financial Statements.")
The Company believes that the level of financial resources available to it is
an essential competitive factor. The Company asked 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.
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On July 17, 1996, the stockholders of the Company approved the amendments
referred to above. On August 13, 1996, the three institutional investors
converted their secured convertible term notes and exercised their options in
full. The total number of shares of common stock issued the investors referred
to above on August 13, 1996 amounted to 13,403,130, of which 9,857,142 were
issued upon the exercise of the option and 3,545,988 were issued to correct the
notes and pay the accrued interest on the notes. Both the option exercise
price and the note conversion price were at $0.35 per share. The Company
received $3.45 million from these transaction on August 13, 1996. . (Refer to
Notes 1. and 6. - "Notes to the Condensed Consolidated Financial Statements.")
At June 30, 1996, cash and short-term investments were $0.9 million.
Additionally, the Company received $3.45 million on August 13, 1996 from the
previously described exercise by three institutional investors of options to
purchase shares of the Company's common stock. 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 $(0.6) million at June, 1996, from
$1.7 million at December 31, 1995. This decrease of $2.3 million was used
primarily to fund the net loss of $3.9 million reported for the period. On
August 13, 1996, the secured convertible term notes in the aggregate principal
amount of $1.2 million together with accrued interest therein were convertible
at the option of the three institutional investors to common stock of the
Company as described above.
During the first six months of 1996, the net cash used in operating
activities was $3.1 million, compared to $1.2 million used in operating
activities during the first half of 1995.
Net inventory declined during the first six months of 1996 by $0.4 million
due primarily to sales of the NoiseBusterTM, ProActiveTM and MRI headsets.
The Company's available cash balances at June 30, 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 $0.1 million during the
period. The net cash provided by financing activities amounted to $2.3
million primarily from the private placements of common stock and the sale of
secured convertible term notes described above.
The Company has no lines of credit with banks or other lending institutions
and therefore has no unused borrowing capacity.
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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.
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 June 30,
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
EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
10(a) Securities Purchase Agreement dated April 8, 1996, by and
among the Company and Kingdon Associates, L.P., Kingdon
Partners, L.P. and M. Kingdon Offshore NV, together with
Exhibit A-1 thereto, Form of Secured Convertible Note and
Exhibit A-2 thereto, Registration Rights Agreement.
10(b) Security Agreement dated April 8, 1996, between the
Company and Kingdon Associates, L.P., Kingdon Partners,
L.P. and M. Kingdon Offshore NV, dated August 13, 1996.
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10(c) Notices of Exercise of Options to Purchase Common Stock
by Kingdon Associates, L.P., Kingdon Partners, L.P., and
M. Kingdon Offshore, NV, dated August 13, 1996.
10(d) Notices of Conversion of Secured Convertible Notes by
Kingdon Associates, L.P., Kingdon Partners, L.P. and M.
Kingdon Offshore NV, dated August 13, 1996.
11 Computation of Net (Loss) Per Share
27 Financial Data Schedule
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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
- ----------------------------------
Stephen J. Fogarty
Senior Vice President and
Chief Financial Officer
Dated: August 15, 1996
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