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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-21926
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AER ENERGY RESOURCES, INC.
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(Exact name of registrant as specified in its charter)
Georgia 34-1621925
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4600 Highlands Parkway, Suite G, Smyrna, Georgia 30082
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(Address of principal executive offices) (Zip Code)
(770) 433-2127
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(Registrant's telephone number, including area code)
Not Applicable
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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.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
There were 24,850,263 shares of Common Stock outstanding as of May 7, 2001.
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AER ENERGY RESOURCES, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
Page
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Balance Sheets - March 31, 2001 and December 31, 2000. 3
Condensed Statements of Operations - Three Months Ended March 31,
2001 and 2000, and Period From July 17, 1989 (Date of Inception)
to March 31, 2001. 4
Condensed Statements of Cash Flows - Three Months Ended March 31,
2001 and 2000, and Period From July 17, 1989 (Date of Inception)
to March 31, 2001. 5
Notes to Condensed Financial Statements. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 10
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 600,455 $ 781,314
Trade accounts receivable 3,580 --
Inventories 88,084 76,752
Prepaid expenses and other current assets 78,721 59,402
------------ ------------
Total current assets 770,840 917,468
Equipment and improvements 3,426,367 3,419,463
Less accumulated depreciation (3,143,721) (3,096,045)
------------ ------------
282,646 323,418
Other assets 10,591 10,791
------------ ------------
TOTAL ASSETS $ 1,064,077 $ 1,251,677
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 109,531 $ 60,910
Deferred revenue 179,688 287,500
Other accrued expenses 121,315 158,940
------------ ------------
Total current liabilities 410,534 507,350
Redeemable convertible preferred stock, no par value, in series:
Series A: authorized - 425,000 shares; 404,500 shares issued and
outstanding at March 31, 2001 and December 31, 2000; liquidation
preference and redemption price of $4,184,552 as of March 31, 2000
(including $139,552 undeclared dividends) 3,487,110 3,386,419
Series B: authorized - 250,000 shares; 102,250 shares issued and
outstanding at March 31, 2001; liquidation preference and
redemption price of $1,028,663 as of March 31, 2001 (including
$6,163 undeclared dividends) 728,014 --
------------ ------------
Total liabilities and redeemable convertible preferred stock 4,625,658 3,893,769
Stockholders' deficit:
Preferred stock, no par value:
Authorized - 10,000,000 shares; no shares issued and outstanding -- --
Common stock, no par value:
Authorized - 100,000,000 shares; 24,850,263 shares issued and
outstanding at March 31, 2001 and December 31, 2000 67,364,989 67,212,754
Unearned stock compensation (23,124) (31,861)
Deficit accumulated during the development stage (70,903,446) (69,822,985)
------------ ------------
Total stockholders' deficit (3,561,581) (2,642,092)
------------ ------------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK, AND STOCKHOLDERS' DEFICIT $ 1,064,077 $ 1,251,677
============ ============
See notes to condensed financial statements.
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AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
PERIOD FROM
JULY 17,1989
(DATE OF
THREE MONTHS ENDED INCEPTION) TO
MARCH 31, MARCH 31,
2001 2000 2001
------------ ------------ ------------
License fees and research and development revenues $ 107,813 $ 107,814 $ 2,836,033
Product sales -- -- 338,174
Cost of product sales -- -- (6,758,985)
------------ ------------ ------------
Gross margin on product sales -- -- (6,420,811)
------------ ------------ ------------
107,813 107,814 (3,584,778)
------------ ------------ ------------
Costs and expenses:
Research and development
- related party -- -- 1,145,913
- other 777,547 921,768 42,356,860
Marketing, general and administrative
- related party -- -- 1,388,695
- other 413,986 458,676 25,719,648
------------ ------------ ------------
Total costs and expenses 1,191,533 1,380,444 70,611,116
------------ ------------ ------------
Operating loss (1,083,720) (1,272,630) (74,195,894)
Interest income 3,259 13,437 4,114,617
Interest expense - related parties -- -- (485,611)
------------ ------------ ------------
Net loss (1,080,461) (1,259,193) (70,566,888)
------------ ------------ ------------
Accretion of redeemable preferred stock (37,421) -- (71,295)
Redeemable preferred stock dividends (74,422) -- (145,715)
------------ ------------ ------------
Net loss attributable to common stock $ (1,192,304) $ (1,259,193) $(70,783,898)
============ ============ ============
Net loss per share (basic and diluted) $ (0.05) $ (0.05) $ (4.14)
============ ============ ============
Weighted average shares outstanding (basic and diluted) 24,850,263 24,850,263 17,082,388
See notes to condensed financial statements.
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AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
PERIOD FROM
JULY 17,1989
(DATE OF
THREE MONTHS ENDED INCEPTION) TO
MARCH 31, MARCH 31,
2001 2000 2001
----------- ----------- -------------
OPERATING ACTIVITIES:
Net loss $(1,080,461) $(1,259,193) $(70,566,888)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 47,676 87,557 4,191,158
Amortization of unearned stock compensation 8,737 8,736 780,792
Amortization of discount on promissory notes -- -- 88,889
Grant of compensatory stock options -- -- 14,063
Forgiveness of promissory notes -- -- 69,875
Loss on disposal of equipment -- -- 79,440
Accretion of discount on short-term investments
and marketable securities -- -- (263,259)
Net changes in operating assets and liabilities (130,848) (128,926) 405,022
----------- ----------- ------------
Net cash used in operating activities (1,154,896) (1,291,826) (65,200,908)
INVESTING ACTIVITIES:
Purchases of equipment and improvements (6,904) (5,233) (4,179,571)
Purchases of short-term investments and marketable securities -- -- (14,736,444)
Purchase of license agreement -- -- (250,000)
Proceeds from sales/maturities of short-term investments and
marketable securities -- -- 15,000,000
Changes in other assets -- -- (140,501)
----------- ----------- ------------
Net cash used in investing activities (6,904) (5,233) (4,306,516)
FINANCING ACTIVITIES:
Proceeds from revolving credit note to related parties -- -- 5,430,000
Issuance of convertible debentures, net of issuance costs -- -- 9,834,500
Proceeds from convertible notes payable to related parties -- -- 2,000,000
Payments on notes payable to related parties -- -- (1,150,000)
Payments received on promissory notes -- -- 59,425
Issuance of common stock upon exercise of stock options -- -- 143,558
Issuance of common stock, net of issuance costs -- -- 50,879,555
Issuance of redeemable convertible preferred stock, net of
issuance costs 980,941 -- 2,910,841
----------- ----------- ------------
Net cash provided by financing activities 980,941 -- 70,107,879
----------- ----------- ------------
(Decrease) increase in cash and cash equivalents (180,859) (1,297,059) 600,455
Cash and cash equivalents at beginning of period 781,314 1,761,268 --
----------- ----------- ------------
Cash and cash equivalents at end of period $ 600,455 $ 464,209 $ 600,455
=========== =========== ============
See notes to condensed financial statements.
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AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of AER Energy
Resources, Inc. (the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. These financial statements should be read in
conjunction with the Company's audited financial statements included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 2000. Operating results for the three
month period ended March 31, 2001 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2001 or any interim period.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, bank deposits and highly
liquid investments with maturities of three months or less when purchased and
are stated at cost, which approximates market.
Inventories
The Company's inventories are valued at the lower of cost or market,
using the first in, first out (FIFO) method. The inventories balances at March
31, 2001 and December 31, 2000 of $88,084 and $76,752, respectively, consist
entirely of raw materials.
Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
In accordance with FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
the Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those
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assets are less than the carrying amounts of those assets. Based on the
Company's estimate of future undiscounted cash flows, the Company expects to
recover the carrying amounts of its remaining fixed assets. The Company's
estimates of future undiscounted cash flows have taken into consideration its
current research and development operations and contemplate the Company entering
into license agreements and research and development agreements, similar, or
somewhat similar, to the 1998 agreement with Duracell Inc., throughout the
remaining useful lives of the Company's fixed assets. If the Company is unable
to enter into such agreements, a write down of long-lived assets to fair value
may be required. No write-offs of obsolete equipment were recorded in either of
the three-month periods ended March 31, 2001 or 2000.
3. PREFERRED STOCK AND WARRANT TRANSACTION
On February 27, 2001, the Company issued 102,250 shares of Series B
Convertible Preferred Stock ("Series B Preferred") and a warrant to purchase up
to 776,699 shares of common stock for a total purchase price, net of transaction
fees, of $0.98 million to one of the major shareholders of the Company, Elmwood
Partners II (affiliated with Jon Lindseth). The Series B Preferred may be
converted, at the option of the holder, to common stock of the Company at any
time at a conversion price of $0.515 per share, subject to various possible
adjustments. The Company may redeem the Series B Preferred at a price equal to
$10.00 per share plus all accrued and unpaid dividends; and it must be redeemed
in February 2006, unless previously converted. Dividends accrue at the rate of
6.75% per annum, are cumulative and compound annually.
The warrant is exercisable for five years and entitles the holder to
purchase one share of common stock at an exercise price of $0.5376 per share,
subject to various possible adjustments. The fair value for this warrant of
$0.26 million, or $0.34 per share, was estimated at the date of grant using a
Black-Scholes valuation model. The warrant value has been allocated to common
stock and will be accreted to the Series B Preferred on a straight-line basis
through the mandatory redemption date so that at such redemption date, the
carrying amount of the Series B Preferred will equal the mandatory redemption
value.
4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has adopted FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" effective January 1, 2001. There
has been no impact on the Company's results of operations and financial
position.
5. SUBSEQUENT EVENT
In April 2001, the Company signed a License and Development Agreement
with Rayovac Corporation. Under this agreement the Company is licensing its
zinc-air battery technology to Rayovac and performing design and development
work for Rayovac. Rayovac will own the technology developed for it and the
Company will have rights to utilize that technology. Rayovac purchased 656,858
shares of Company common stock for $250,000, and was issued warrants to purchase
an additional 218,953 shares at $0.4567 per share, subject to various possible
adjustments. Additionally, Rayovac paid $250,000 for a $250,000 promissory note
which converts to common stock. Principal on the note is payable in cash only
upon the occurrence of specified events of default.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company was incorporated in 1989 and has been engaged in the
development and commercialization of high energy density zinc-air batteries.
Until 1998, the Company's operations were focused primarily on developing and
improving its technology, setting up the manufacturing process, testing and
selling rechargeable zinc-air batteries, recruiting personnel, and similar
activities. In 1998, the Company changed its strategy to research and product
development of zinc-air technology with its focus in primary (disposable)
batteries, rather than rechargeable batteries, and plans to commercialize the
technology through alliances with battery and original equipment manufacturers
("OEMs"). This change allows the Company to capitalize on the capability of its
patented Diffusion Air Manager technology and opportunities in hand-held
electronic products like camcorders, cellular telephones, cordless telephones,
digital cameras, and hand-held computers. The Diffusion Air Manager can extend
zinc-air battery storage life by isolating the cells in zinc-air batteries from
exposure to air during periods when the battery is in storage or not in use.
In September 1998, the Company announced its Technology Licenses and
Services ("TLAS") Agreement with Duracell Inc., a subsidiary of The Gillette
Company, making Duracell the first licensee of the Company's primary
(non-rechargeable) zinc-air technology. Under the terms of the TLAS Agreement,
Duracell agreed to license the rights to the Company's then existing patents. In
addition, Duracell agreed to fund certain joint product development projects
with the Company during 1999. Duracell owns technology developed under the
projects it funds, and the Company has rights to utilize the technology.
Duracell also has options to obtain certain other license rights. The current
revenue of $0.11 million per quarter being recognized under this agreement will
cease in the third quarter of 2001. In April 2001, the Company signed a License
and Development Agreement with Rayovac Corporation.
Throughout 2001, the Company will continue to seek additional license
agreements for its patented zinc-air technology with other companies, and focus
on the development of prototype primary zinc-air batteries that utilize
Diffusion Air Manager technology.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2001 and 2000
The Company generated $0.11 million of license fees and research and
development revenues under the TLAS Agreement with Duracell during both the
first three months ended March 31, 2001 and 2000.
Research and development expenses decreased 16% to $0.78 million for
the three months ended March 31, 2001 from $0.92 million for the same period in
2000. This decrease resulted primarily from reduced travel, legal, patent,
depreciation, and materials expenses.
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Marketing, general and administrative expenses decreased 10% to $0.41
million for the three months ended March 31, 2001 from $0.46 million for the
same period in 2000. This decrease resulted primarily from increased sample
sales and decreased travel, marketing, and investor relations, offset by
increases in legal and insurance costs.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
As of March 31, 2001, the Company had cash and cash equivalents of
$0.60 million. The Company anticipates using these funds as needed to fund
capital equipment purchases, research and product development efforts, marketing
and licensing activities, production of prototype zinc-air battery products,
development of alliances with battery manufacturers and OEMs, working capital
and general corporate purposes as determined by management.
In February 2001, the Company received $0.98 million in cash, net of
issuance costs, pursuant to the issuance of 102,250 shares of redeemable
convertible preferred stock to AER's major shareholder, Elmwood Partners II
(affiliated with Jon Lindseth). The preferred stock may be converted to common
stock of the Company at a conversion price of $0.515 per share, subject to
various possible adjustments, at any time at the option of the holder. The
Company may redeem the preferred stock at a price equal to $10.00 per share plus
all accrued and unpaid dividends at any time and it must be redeemed in February
2006, unless previously converted. Dividends accrue at the rate of 6.75% per
annum, are cumulative and compound annually. A warrant to purchase a total of
776,699 shares of AER Energy common stock at $0.5376 per share, subject to
various possible adjustments, was also issued to the investor. The warrant
expires in February 2006.
Net cash and cash equivalents used in operating, investing, and
financing activities decreased 86% to $0.2 million for the three months ended
March 31, 2001 from $1.3 million for the same period in 2000 due primarily to
the issuance of redeemable convertible preferred stock.
The Company currently anticipates that its existing cash and cash
equivalents balance will fund operations and continue technology development at
the current level of activity into the second quarter of 2001. The Company will
need to raise additional funds through additional license agreements, research
and development contracts, debt or equity. There can be no assurance that
additional license agreements or research and development contracts or equity or
debt financing will be available when needed or on terms acceptable to the
Company.
The market price of the Company's common stock has fluctuated
significantly since it began to be publicly traded in July 1993 and may continue
to be highly volatile. Factors such as the ability of the Company to achieve
development goals, ability of the Company to commercialize its battery
technology, ability of the Company to license its technology, development of
competing battery technologies, ability of the Company to protect its
proprietary rights to its technology, improvements in conventional battery
technologies, demand for and acceptance of the Company's products in the
marketplace, ability to obtain commitments from battery companies and OEMs,
impact of any future governmental regulations, impact of pricing
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or material costs, ability of the Company to raise additional funds, general
market conditions and other factors affecting the Company's business that are
beyond the Company's control may cause significant fluctuations in the market
price of the Company's common stock. The market prices of the stock of many high
technology companies have fluctuated substantially, often unrelated to the
operating or research and development performance of the specific companies.
Such market fluctuations could adversely affect the market price for the
Company's common stock.
FORWARD LOOKING STATEMENTS
This report contains statements which, to the extent that they are not
recitations of historical fact, may constitute "forward looking statements"
within the meaning of applicable federal securities laws and are based on the
Company's current expectations and assumptions. These expectations and
assumptions are subject to a number of risks and uncertainties which could cause
actual results to differ materially from those anticipated, which include but
are not limited to the following: ability of the Company to achieve development
goals, ability of the Company to commercialize its battery technology, ability
of the Company to license its technology, development of competing battery
technologies, ability of the Company to protect its proprietary rights to its
technology, improvements in conventional battery technologies, demand for and
acceptance of the Company's products in the marketplace, ability to obtain
commitments from battery manufacturers and OEMs, impact of any future
governmental regulations, impact of pricing or material costs, ability of the
Company to raise additional funds and other factors affecting the Company's
business that are beyond the Company's control. All forward looking statements
contained in this report are intended to be subject to the safe harbor
protection provided by applicable federal securities laws.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has invested a portion of its cash and cash equivalents in
highly liquid financial instruments. The Company has historically held, and
plans in the future to hold, all such instruments until maturity. If the
instruments were, for some reason not anticipated, redeemed earlier than their
maturity, there might be a gain or loss on the transaction. The Company has no
transactions which qualify for treatment under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities".
AER Energy is a trademark of AER Energy Resources, Inc.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 27, 2001 the Company issued 102,250 shares of Series B
Convertible Preferred Stock ("Series B Preferred") and a warrant to purchase up
to 776,699 shares of common stock for a total purchase price, net of transaction
fees, of $0.98 million to one of the major shareholders of the Company, Elmwood
Partners II (affiliated with Jon Lindseth). The Series B Preferred may be
converted, at the option of the holder, to common stock of the Company at any
time at a conversion price of $0.515 per share, subject to various possible
adjustments. The Company may redeem the Series B Preferred at a price equal to
$10.00 per share plus all accrued and unpaid dividends; and it must be redeemed
in February 2006, unless previously converted. Dividends accrue at the rate of
6.75% per annum, are cumulative and compound annually. The warrant is
exercisable for five years and entitles the holder to purchase one share of
common stock at an exercise price of $0.5376 per share, subject to various
possible adjustments.
The issuance of the Series B Preferred and warrant was exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2), including Rule 506 of Regulation D promulgated thereunder. The purchaser
of the Series B Preferred and warrant was an accredited investor under
Regulation D.
The Series B Preferred ranks ahead of the Company's common stock and on
a parity with the Company's Series A Preferred Stock as to payment of dividends
and amounts upon liquidation, dissolution or winding-up, and therefore could
adversely affect the holders of common stock with respect to such payments.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
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3.1 Articles of Incorporation of the Company, as
amended(1)
10.1 Securities Purchase Agreement dated as of February
27, 2001 by and between Elmwood Partners II and AER
Energy Resources, Inc.
10.2 Warrant to Purchase Common Stock of AER Energy
Resources, Inc. dated February 27, 2001 between
Elmwood Partners II and AER Energy Resources,
Inc.
10.3 License and Development Agreement dated as of April
6, 2001 between Rayovac Corporation and AER
Energy Resources, Inc.
10.4 Warrant to Purchase Common Stock of AER Energy
Resources, Inc. dated as of April 27, 2001 between
Rayovac Corporation and AER Energy Resources,
Inc.
10.5 Convertible Subordinated Promissory Note dated as of
April 27, 2001 between Rayovac Corporation and
AER Energy Resources, Inc.
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(1) Filed on March 30, 2001 as an Exhibit to the Registrant's Annual Report on
Form 10-K (File No. 0-21926) for the year ended December 31, 2000 and
incorporated herein by reference.
(B) REPORTS ON FORM 8-K:
The registrant did not file any reports on Form 8-K during the
three months ended March 31, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AER ENERGY RESOURCES, INC.
Date: May 7, 2001 By: /s/ David W. Dorheim
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David W. Dorheim, President and
Chief Executive Officer
Date: May 7, 2001 By: /s/ J.T. Moore
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J.T. Moore, Vice President,
Chief Financial Officer, Secretary
and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)