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 September 30, 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.
--------------------------
(Exact name of registrant as specified in its charter)
Georgia 34-1621925
- ------------------------------------ -----------------------
(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 25,522,121 shares of Common Stock outstanding as of October 19, 2001.
AER ENERGY RESOURCES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
INDEX
Page
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Balance Sheets - September 30, 2001 and December 31, 2000. 3
Condensed Statements of Operations - Three Months Ended September 30, 4
2001 and 2000, Nine Months Ended September 30, 2001 and
2000, and Period From July 17, 1989 (Date of Inception) to
September 30, 2001.
Condensed Statements of Cash Flows - Nine Months Ended September 30, 5
2001 and 2000, and Period From July 17, 1989 (Date of Inception)
to September 30, 2001.
Notes to Condensed Financial Statements. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 11
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 227,617 $ 781,314
Accounts receivable 3,265 --
Inventories 104,625 76,752
Prepaid expenses and other current assets 260,568 59,402
------------ ------------
Total current assets 596,075 917,468
Equipment and improvements 3,450,940 3,419,463
Less accumulated depreciation (3,213,927) (3,096,045)
------------ ------------
237,013 323,418
Other assets 10,591 10,791
------------ ------------
TOTAL ASSETS $ 843,679 $ 1,251,677
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 196,567 $ 60,910
Deferred revenue -- 287,500
Other accrued expenses 97,892 158,940
Revolving credit note 500,000 --
Convertible notes payable, net of discount of $40,028 209,972 --
------------ ------------
Total current liabilities 1,004,431 507,350
Redeemable convertible preferred stock, no par value, in series:
Series A: authorized - 425,000 shares; 404,500 shares issued and
outstanding at September 30, 2001 and December 31, 2000; liquidation
preference and redemption price of $4,321,070 as of September 30, 2001
(including $276,070 undeclared dividends) 2,029,119 3,386,419
Series B: authorized - 250,000 shares; 102,250 shares issued and
outstanding at September 30, 2001; liquidation preference and
redemption price of $1,063,175 as of September 30, 2001 (including
$40,675 undeclared dividends) 687,839 --
Series C: authorized - 250,000 shares; 102,250 shares issued and
outstanding at September 30, 2001; liquidation preference and
redemption price of $1,045,508 as of September 30, 2001 (including
$23,008 undeclared dividends) 80,439 --
------------ ------------
Total liabilities and redeemable convertible preferred stock 3,801,828 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; 25,522,121 shares issued and outstanding
at September 30, 2001 and 24,850,263 shares issued and
outstanding December 31, 2000 70,148,578 67,212,754
Unearned stock compensation (5,651) (31,861)
Deficit accumulated during the development stage (73,101,076) (69,822,985)
------------ ------------
Total stockholders' deficit (2,958,149) (2,642,092)
------------ ------------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK, AND STOCKHOLDERS' DEFICIT $ 843,679 $ 1,251,677
============ ============
See notes to condensed financial statements.
3
AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
PERIOD FROM
JULY 17,1989
(DATE OF
THREE MONTHS ENDED NINE MONTHS ENDED INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000 2001
------------ ------------ ------------ ------------ ------------
License fees and research and development revenues $ 71,875 $ 107,813 $ 287,500 $ 323,438 $ 3,015,720
Product sales -- -- -- -- 338,174
Cost of product sales -- -- -- -- (6,758,985)
------------ ------------ ------------ ------------ ------------
Gross margin on product sales -- -- -- -- (6,420,811)
------------ ------------ ------------ ------------ ------------
71,875 107,813 287,500 323,438 (3,405,091)
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Research and development
- related party -- -- -- -- 1,145,913
- other 747,708 923,916 2,270,997 2,704,022 43,850,310
Marketing, general and administrative
- related party -- -- -- -- 1,388,695
- other 360,516 393,126 1,161,354 1,275,889 26,467,016
------------ ------------ ------------ ------------ ------------
Total costs and expenses 1,108,224 1,317,042 3,432,351 3,979,911 72,851,934
------------ ------------ ------------ ------------ ------------
Operating loss (1,036,349) (1,209,229) (3,144,851) (3,656,473) (76,257,025)
Interest income 2,526 7,659 11,155 45,534 4,122,513
Interest expense (96,986) -- (142,548) -- (142,548)
Interest expense - related parties (1,847) (110,441) (1,847) (221,166) (487,458)
------------ ------------ ------------ ------------ ------------
Net loss (1,132,656) (1,312,011) (3,278,091) (3,832,105) (72,764,518)
------------ ------------ ------------ ------------ ------------
Accretion of redeemable preferred stock (158,991) (1,441) (264,343) (1,441) (298,217)
Redeemable preferred stock dividends (102,771) (3,034) (268,460) (3,034) (339,753)
------------ ------------ ------------ ------------ ------------
Net loss attributable to common stock $ (1,394,418) $ (1,316,486) $ (3,810,894) $ (3,836,580) $(73,402,488)
============ ============ ============ ============ ============
Net loss per share (basic and diluted) $ (0.05) $ (0.05) $ (0.15) $ (0.15) $ (4.21)
============ ============ ============ ============ ============
Weighted average shares outstanding (basic and diluted) 25,518,860 24,850,263 25,229,566 24,850,263 17,424,562
See notes to condensed financial statements.
4
AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
PERIOD FROM
JULY 17,1989
(DATE OF
NINE MONTHS ENDED INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001
----------- ----------- ------------
OPERATING ACTIVITIES:
Net loss $(3,278,091) $(3,832,105) $(72,764,518)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 117,882 238,096 4,261,364
Amortization of unearned stock compensation 26,210 26,210 798,265
Amortization of discount on promissory notes 81,659 88,889 170,548
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 (444,996) (279,439) 90,874
----------- ----------- ------------
Net cash used in operating activities (3,497,336) (3,758,349) (67,543,348)
INVESTING ACTIVITIES:
Purchases of equipment and improvements (31,477) (19,498) (4,204,144)
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 (31,477) (19,498) (4,331,089)
FINANCING ACTIVITIES:
Proceeds from revolving credit note to related parties 500,000 -- 5,930,000
Issuance of convertible debentures, net of issuance costs -- -- 9,834,500
Proceeds from convertible notes payable 261,113 261,113
Proceeds from convertible notes payable to related parties -- 2,000,000 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 254,211 -- 51,133,766
Issuance of redeemable convertible preferred stock, net of
issuance costs 1,959,792 1,937,500 3,889,692
----------- ----------- ------------
Net cash provided by financing activities 2,975,116 3,937,500 72,102,054
----------- ----------- ------------
(Decrease) increase in cash and cash equivalents (553,697) 159,653 227,617
Cash and cash equivalents at beginning of period 781,314 1,761,268 --
----------- ----------- ------------
Cash and cash equivalents at end of period $ 227,617 $ 1,920,921 $ 227,617
=========== =========== ============
Supplemental disclosure of non-cash financing activities:
Conversion of the $2.0 million promissory notes payable to
related parties, net of unamortized discount, to redeemable
convertible preferred stock $ -- $ 1,727,308 $ 1,727,308
=========== =========== ============
Upon the resignation of one member of the Company's Board of Directors,
12,000 non-vested shares of common stock, issued under the 1993
Non-Employee Directors' Restricted Stock Award Plan, were forfeited and
returned to authorized
and unissued shares $ -- $ -- $ 12,756
=========== =========== ============
See notes to condensed financial statements.
5
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
and nine month periods ended September 30, 2001 are not necessarily indicative
of the results that may be expected for the year ended December 31, 2001 or any
interim period.
2. RECLASSIFICATION
Due to the accounting for the beneficial conversion options included in
the Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred
Stock (collectively "Preferred Stock"), in accordance with EITF 00-27,
Application of EITF Issue No. 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" to
Certain Convertible Instruments ("EITF 00-27"), the Preferred Stock and common
stock balances have been reclassified from balances previously reported as of
March 31, 2001 and June 30, 2001 as follows:
March 31, 2001 June 30, 2001
As Reported As Adjusted As Reported As Adjusted
----------- ----------- ----------- -----------
Series A Preferred Stock $ 3,487,110 $ 3,390,496 $ 3,598,318 $ 3,166,800
Series B Preferred Stock $ 728,014 $ 646,599 $ 759,743 $ 644,345
Series C Preferred Stock $ - $ - $ 385,720 $ 6,362
Common Stock $ 67,364,989 $ 67,543,018 $ 68,202,194 $ 69,128,468
The Company has accreted the discounts on Preferred Stock attributable
to the beneficial conversion features similar to preferred stock dividends
totaling $158,991 in the quarter ended September 30, 2001. Included in this
amount were immaterial amounts relating to the quarters ended March 31, 2001,
and June 30, 2001. There was no impact on the loss per share attributable to
common stock for the quarters ended March 31, 2001 or June 30, 2001. See further
discussion of Preferred Stock in Note 4 of Notes to Condensed Financial
Statements.
6
3. 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
September 30, 2001 and December 31, 2000 of $104,625 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 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 its
agreements with Duracell Inc. and Rayovac Corporation, 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
nine-month periods ended September 30, 2001 or 2000.
4. PREFERRED STOCK AND WARRANT TRANSACTIONS
In accordance with the terms of the Series A Preferred Stock issued
September 27, 2000, the initial conversion price of $0.851 is subject to
adjustment upon the issuance of common stock (or equivalents) at less than the
current conversion price (as defined by the agreement). As a result of the
issuance of Series B Preferred on February 27, 2001 discussed below, the
transaction in April 2001 discussed in Note 5, and the issuance of Series C
Preferred on June 1, 2001 discussed below, the conversion price was adjusted
from $0.851 to $0.744. In accordance with EITF 00-27, the number of shares that
would be received upon conversion based on the adjusted conversion price is
compared to the number that would have been received prior to the adjustment.
The excess number of shares multiplied by the fair market value on the
commitment date (September 27, 2000) equals the
7
intrinsic value that results from the adjustment, or the beneficial conversion
option. This value is allocated from the original proceeds upon adjustment
resulting in a discount on the preferred stock. The discount is then accreted
over the remaining period until the mandatory redemption date (September 27,
2005). As a result of the adjustments above, a total discount of the Series A
Preferred Stock of approximately $0.43 million was recorded on the various dates
of adjustment. The discount will be accreted from the dates of adjustment to the
redemption date of the preferred stock and will result in a reduction of
earnings available to common shareholders.
Additionally, the initial conversion price shall be subject to further
adjustment upon the first anniversary of the original issue date based on the
underlying common stock price. As a result of the decrease in the stock price,
as of September 27, 2001, the conversion price of Series A Preferred Stock was
reduced to $0.554, in accordance with the terms of the Series A Preferred Stock
agreement. This adjustment resulted in an additional beneficial conversion
discount, similar to that discussed above, of approximately $1.28 million. The
resulting discount will be accreted over the remaining period until the
mandatory redemption date (September 27, 2005).
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 Company's Chairman of the Board).
The Series B Preferred may be converted, at the option of the holder, to common
stock of the Company at any time at an initial 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.
This warrant is exercisable for five years and entitles the holder to
purchase up to 776,699 shares 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 is being 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.
As a result of the allocation of a portion of the proceeds to the
Series B Warrants, the effective conversion price of the Series B Preferred is
less than the fair market value of common stock on February 27, 2001, resulting
in a beneficial conversion option of approximately $0.08
8
million. The resulting discount will be accreted over the remaining period until
the mandatory redemption date (February 27, 2006).
Similar to the terms of Series A Preferred Stock discussed above, the
terms of the Series B Preferred Stock issued February 27, 2001, provide that the
initial conversion price of $0.515 is subject to adjustment upon the issuance of
common stock (or equivalents) at less than the current conversion price (as
defined by the agreement). As a result of the issuance of the transaction in
April 2001 discussed in Note 5, and the issuance of Series C Preferred on June
1, 2001 discussed below, the conversion price was adjusted from $0.515 to
$0.494. In accordance with EITF 00-27, the number of shares that would be
received upon conversion based on the adjusted conversion price is compared to
the number that would have been received prior to the adjustment. The excess
number of shares multiplied by the fair market value on the commitment date
(February 27, 2001) equals the intrinsic value that results from the adjustment,
or the beneficial conversion option. This value is allocated from the original
proceeds upon adjustment resulting in a discount on the preferred stock. The
discount is then accreted over the remaining period until the mandatory
redemption date (February 27, 2006). As a result of the adjustments above, a
total discount on the Series B Preferred Stock of approximately $0.20 million
was recorded on the various dates of adjustment.
On June 1, 2001, the Company issued 102,250 shares of Series C
Convertible Preferred Stock ("Series C Preferred") and a warrant to purchase up
to 982,891 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, FW AER
II, L.P. The Series C Preferred may be converted, at the option of the holder,
to common stock of the Company at any time at a conversion price of $0.407 per
share, subject to various possible adjustments. The Company may redeem the
Series C Preferred at a price equal to $10.00 per share plus all accrued and
unpaid dividends; and it must be redeemed in June 2006, unless previously
converted. Dividends accrue at the rate of 6.75% per annum, are cumulative and
compound annually.
This warrant is exercisable for five years and entitles the holder to
purchase up to 982,891 shares of common stock at an exercise price of $0.425 per
share, subject to various possible adjustments. The fair value for this warrant
of $0.61 million, or $0.62 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 is being accreted to the Series C Preferred on a straight-line basis
through the mandatory redemption date so that at such redemption date, the
carrying amount of the Series C Preferred will equal the mandatory redemption
value.
Similar to the discussion of Series B Preferred above, as a result of
the allocation of a portion of the proceeds to the Series C Warrants, the
effective conversion price of the Series C Preferred is less than the fair
market value of common stock on June 1, 2001, resulting in a beneficial
conversion option of approximately $0.38 million. The resulting discount will be
accreted over the remaining period until the mandatory redemption date (June 1,
2006).
5. NOTE PAYABLE, COMMON STOCK, AND WARRANT TRANSACTION
In April 2001, the Company signed a License and Development Agreement
with Rayovac Corporation (the "Agreement"). Under the Agreement the Company is
licensing its zinc-air battery technology to Rayovac and performing design and
development work for Rayovac.
9
Rayovac will own the technology developed under the Agreement and the Company
will have rights to utilize that technology.
In connection with the Agreement, the Company issued to Rayovac 656,858
shares of Company common stock and a warrant to purchase up to 218,953 shares of
common stock for a total purchase price, net of transaction fees, of $0.27
million. The warrant is exercisable for four years and entitles the holder to
purchase up to 218,953 shares of common stock at an exercise price of $0.4567
per share, subject to various possible adjustments. The fair value for this
warrant of $0.74 million, or $0.34 per share, was estimated at the date of grant
using the Black-Scholes valuation model. Rayovac has certain rights to purchase
additional shares of common stock and warrants as of the Phase III Notice Date,
anticipated to be early 2002.
Additionally, the Company issued a $250,000 non-interest bearing note
payable. The note converts to the number of shares of common stock equal to
$250,000 divided by the lesser of the average closing price for the thirty days
prior to the conversion or $1.50. The principal on the note is payable in cash
only upon the occurrence of specified events of default. The note will convert
to common stock upon the Phase III Notice Date, anticipated to be early 2002.
While the note has no stated interest rate, an interest rate of 15% was used to
discount the note by $0.03 million and will be amortized to interest expense
over its expected life. Based upon the rate at which the note becomes
convertible, an additional discount of $0.07 million was recorded in accordance
with Emerging Issues Task Force Topic No. 00-27, which will also be amortized to
interest expense.
6. REVOLVING CREDIT TRANSACTION
In September 2001, the Company received $500,000 under a $1,000,000
revolving credit loan note issued to Elmwood Partners II. Interest on the unpaid
balance is accruing at the prime rate plus 1% point. The principal and interest
are payable no later than December 31, 2001 and will automatically convert to
convertible preferred stock and warrants to purchase common stock if the Company
issues additional preferred stock in 2001. The remaining $500,000 was borrowed
in October 2001.
7. 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.
10
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 revenue
recognized under this agreement ceased in the third quarter of 2001.
In April 2001, the Company entered into the Agreement with Rayovac to
explore the feasibility of certain products and to license AER Energy's
proprietary technology and patents to Rayovac. The Agreement includes both a
development program and a stock purchase. The development program consists of
three phases, with all three phases currently expected to be completed in the
first quarter of 2002. Under the Agreement, the Company will not be required to
incur more than $250,000 of its own expenses, although it may choose to do so.
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 September 30, 2001 and 2000
The Company generated $0.07, and $0.11 million of license fees and
research and development revenues under the TLAS Agreement with Duracell during
the three months ended September 30, 2001 and 2000, respectively.
11
Research and development expenses decreased 19% to $0.75 million for
the three months ended September 30, 2001 from $0.92 million for the same period
in 2000. This decrease resulted primarily from reduced travel, tooling,
supplies, and direct materials expenses.
Marketing, general and administrative expenses decreased 8% to $0.36
million for the three months ended September 30, 2001 from $0.39 million for the
same period in 2000. This decrease resulted primarily from lower personnel,
travel, and investor relation expenses, offset by increased sample sales.
Nine Months Ended September 30, 2001 and 2000
The Company generated $0.29 and $0.32 million of license fees and
research and development revenues under the TLAS Agreement with Duracell during
the nine months ended September 30, 2001 and 2000, respectively.
Research and development expenses decreased 16% to $2.27 million for
the nine months ended September 30, 2001 from $2.70 million for the same period
in 2000. This decrease resulted primarily from reduced travel, tooling,
supplies, and materials expenses.
Marketing, general and administrative expenses decreased 9% to $1.16
million for the nine months ended September 30, 2001 from $1.28 million for the
same period in 2000. This decrease resulted primarily from decreased personnel
and legal expenses.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
As of September 30, 2001, the Company had cash and cash equivalents of
$0.23 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 September 2001, the Company received $0.50 million in cash under the
revolving credit loan note from Elmwood Partners II. The remaining $0.50 million
was borrowed in October 2001.
Net cash and cash equivalents used in operating activities decreased to
$3.50 million for the nine months ended September 30, 2001 from $3.76 million
for the same period in 2000 due primarily to the decrease in net loss offset by
the net increase in operating assets and liabilities, primarily prepaid
insurance.
Net cash and cash equivalents provided by financing activities for the
nine months ended September 30, 2001 was $2.98 million, arising from the
revolving credit loan, the issuance of a note payable to Rayovac, and the
issuance of redeemable convertible preferred stock and common stock. See further
discussion in Notes 4 and 5 of Notes to Condensed Financial Statements. Net cash
provided by financing activities for the same period in 2000 was $3.94 million,
arising from notes payable to related parties and issuance of preferred stock.
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The Company currently anticipates that its existing cash and cash
equivalents balance, along with the funds available under the two revolving
credit notes from Elmwood Partners II, will fund operations and continue
technology development at the current level of activity through the fourth
quarter of 2001. The Company will need to raise additional funds through
additional debt or equity. There can be no assurance that additional 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 those described in "Forward Looking
Statements" below 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 important factors, the risks and
uncertainties which could cause actual results to differ materially from those
anticipated, which include but are not limited to the following: the ability of
the Company to achieve development goals, the ability of the Company to
commercialize its battery technology, the ability of the Company to license its
technology, development of competing battery technologies, the ability of the
Company to protect its proprietary rights to its technology, improvements in
conventional battery technologies, the demand for and acceptance of the
Company's products in the marketplace, the ability to obtain commitments from
battery manufacturers and OEMs, the impact of any future governmental
regulations, the impact of pricing or material costs, the 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. All forward
looking statements contained in this report are intended to be subject to the
safe harbor 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".
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In September 2001 the Company borrowed $0.50 million under a $1.00
million revolving credit loan note issued to Elmwood Partners II. The note will
automatically convert to convertible preferred stock and warrants to purchase
common stock if the Company issues additional preferred stock in 2001. The note
will convert at the price for which such preferred stock and warrants are sold
to third parties.
The issuance of this note 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. At the time of issuance, Elmwood
Partners II was an accredited investor as defined under Regulation D. No general
solicitation or advertising was used in connection with this issuance and an
appropriate legend was placed on the note stating that it was not registered
under the Securities Act.
This note is a debt obligation of the Company and is therefore superior
to the Company's common stock as to payment 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
10.8 Revolving Credit Loan Note of AER Energy Resources,
Inc., dated August 28, 2001 between Elmwood Partners
II and AER Energy Resources, Inc.
(B) REPORTS ON FORM 8-K:
The registrant did not file any reports on Form 8-K during the
three months ended September 30, 2001.
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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: November 13, 2001 By: /s/ David W. Dorheim
-------------------------------------------
David W. Dorheim, President and
Chief Executive Officer
Date: November 13, 2001 By: /s/ J.T. Moore
-------------------------------------------
J.T. Moore, Vice President,
Chief Financial Officer, Secretary
and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
AER Energy is a trademark of AER Energy Resources, Inc.
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