1
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, 1998
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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 _________________________
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 24,802,263 shares of Common Stock outstanding as of April 30, 1998.
2
AER ENERGY RESOURCES, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- ------- --------------------------------
Condensed Balance Sheets - March 31, 1998 and December 31, 1997. 3
Condensed Statements of Operations - Three Months Ended March 31, 4
1998 and 1997, and Period From July 17, 1989 (Date of Inception)
to March 31, 1998.
Condensed Statements of Cash Flows - Three Months Ended March 31, 5
1998 and 1997 and Period From July 17, 1989 (Date of Inception)
to March 31, 1998.
Notes to Condensed Financial Statements - March 31, 1998. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 8
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
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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,
1998 1997
------------ ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ............................................. $ 8,176,409 $ 10,206,870
Trade accounts receivable ............................................. -- 116
Inventories ........................................................... 257,719 291,278
Prepaid expenses ...................................................... 145,955 149,474
------------ ------------
Total current assets ..................................................... 8,580,083 10,647,738
Equipment and improvements:
Machinery and equipment ............................................... 3,214,134 3,207,603
Office equipment ...................................................... 469,537 469,537
Leasehold improvements ................................................ 254,766 254,766
------------ ------------
3,938,437 3,931,906
Less accumulated depreciation ......................................... 2,658,159 2,539,020
------------ ------------
1,280,278 1,392,886
Other assets ............................................................. 16,841 16,841
------------ ------------
Total assets ............................................................. $ 9,877,202 $ 12,057,465
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 132,925 $ 219,230
Accrued royalties - related party ..................................... 35,000 30,000
Other accrued expenses ................................................ 209,098 243,046
------------ ------------
Total current liabilities ................................................ 377,023 492,276
Deferred rental expense .................................................. 2,277 2,112
Stockholders' equity:
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; issued and outstanding - 24,802,263
shares at March 31, 1998 and 24,791,013 shares at
December 31, 1997 ................................................ 66,529,360 66,519,348
Notes receivable from common stock sales .............................. (33,938) (35,938)
Unearned stock compensation ........................................... (94,537) (124,882)
Deficit accumulated during the development stage ...................... (56,902,983) (54,795,451)
------------ ------------
Total stockholders' equity ............................................... 9,497,902 11,563,077
------------ ------------
Total liabilities and stockholders' equity .......................... $ 9,877,202 $ 12,057,465
============ ============
Note: The condensed balance sheet at December 31, 1997 has been derived from the
audited financial statements of AER Energy Resources, Inc. at that date but does
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
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 MARCH 31, INCEPTION) TO
-------------------------------- MARCH 31,
1998 1997 1998
------------- ------------ -------------
Revenues ............................. $ -- $ 12,315 $ 338,174
Cost of sales ........................ -- 293,825 6,758,985
------------ ------------ -------------
Gross margin ......................... -- (281,510) (6,420,811)
Costs and expenses:
Research and development
- related party ................... -- -- 1,145,913
- other ........................... 1,503,914 1,194,392 31,074,657
Marketing, general and
administrative
- related party ................... 25,000 24,507 1,263,764
- other ........................... 706,482 749,194 20,034,519
------------ ------------ -------------
Total costs and expenses ............. 2,235,396 1,968,093 53,518,853
------------ ------------ -------------
Operating loss ....................... (2,235,396) (2,249,603) (59,939,664)
Interest income ...................... 127,864 244,349 3,637,684
Interest expense
- related parties ................... -- -- (264,445)
------------ ------------ -------------
Net loss ............................. $ (2,107,532) $ (2,005,254) $ (56,566,425)
============ ============ =============
Net loss per share (basic and diluted) $ (0.09) $ (0.08) $ (3.93)
============ ============ =============
Weighted average shares
outstanding (basic and diluted) .... 24,798,976 24,349,268 14,402,899
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 MARCH 31, INCEPTION) TO
------------------------------- MARCH 31,
1998 1997 1998
------------ ------------ -------------
OPERATING ACTIVITIES:
Net loss ................................................ $ (2,107,532) $ (2,005,254) $ (56,566,425)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ......................... 119,139 134,335 3,067,750
Amortization of unearned stock compensation ........... 30,345 23,827 658,355
Grant of compensatory stock options ................... -- -- 14,063
Forgiveness of promissory notes ....................... -- -- 35,937
Loss on disposal of equipment ......................... -- -- 67,270
Deferred rental expense ............................... 165 (291) 2,277
Accretion of discount on marketable securities ........ -- -- (187,407)
Changes in operating assets and liabilities:
Trade accounts receivable ........................... 116 (1,867) --
Inventories ......................................... 33,559 (40,982) (257,719)
Prepaid expenses and other current assets ........... 3,519 (48,331) (146,265)
Accounts payable .................................... (86,305) 8,212 132,925
Accrued royalties payable-related party ............. 5,000 5,000 35,000
Other current liabilities ........................... (33,948) (13,107) 368,032
------------ ------------ -------------
Net cash used in operating activities ................... (2,035,942) (1,938,458) (52,776,207)
INVESTING ACTIVITIES:
Purchases of equipment and improvements ................. (6,531) (113,468) (4,041,625)
Purchase of marketable securities ....................... -- -- (11,512,296)
Purchase of license agreement ........................... -- -- (250,000)
Proceeds from marketable securities ..................... -- -- 11,700,000
Changes in other assets ................................. -- -- (140,501)
------------ ------------ -------------
Net cash used in investing activities ................... (6,531) (113,468) (4,244,422)
FINANCING ACTIVITIES:
Proceeds from revolving credit note to related parties .. -- -- 5,430,000
Issuance of convertible debentures, net of issuance costs -- -- 9,834,500
Payments on notes payable to related parties ............ -- -- (1,150,000)
Payments received on promissory notes ................... 2,000 -- 59,425
Issuance of common stock upon exercise of stock options . 10,012 -- 143,558
Issuance of common stock, net of issuance costs ......... -- -- 50,879,555
------------ ------------ -------------
Net cash provided by financing activities ............... 12,012 -- 65,197,038
------------ ------------ -------------
(Decrease) increase in cash and cash equivalents ........ (2,030,461) (2,051,926) 8,176,409
Cash and cash equivalents at beginning of period ........ 10,206,870 18,728,427 --
------------ ------------ -------------
Cash and cash equivalents at end of period .............. $ 8,176,409 $ 16,676,501 $ 8,176,409
============ ============ =============
See notes to condensed financial statements.
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AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed 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 Article 10 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) 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, 1997. Operating results for the three month period ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998 or any interim period.
2. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
AER Energy Resources, Inc. was incorporated on July 17, 1989 and since
inception has engaged in the development and commercialization of high energy
density, rechargeable zinc-air batteries. The Company's operations to date have
primarily been focused on developing and updating the technology, setting up the
manufacturing process, testing and selling zinc-air batteries, recruiting
personnel and similar activities. The Company began selling its first product in
August 1994. Sales from August 1994 through March 31, 1998 have been minimal.
Until significant product sales occur, the Company is considered to be a
development stage company for financial reporting purposes.
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.
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Inventories
The Company's inventories have been valued at the lower of cost or
market, using the first in, first out method. Inventories are summarized below.
MARCH 31, DECEMBER 31,
1998 1997
--------------- ---------------
Raw material $ 237,737 $ 233,997
Work in progress 19,982 34,818
Finished goods -- 22,463
--------------- ---------------
$ 257,719 $ 291,278
=============== ===============
Use of 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 fixed assets. Nonetheless, it is reasonably possible that the estimate of
undiscounted cash flows may change in the near term resulting in the need to
write-down those assets to fair value. No write-offs of obsolete equipment were
recorded in either of the three-month periods ended March 31, 1997 or 1998.
Impact of Recently Issued Accounting Standards
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share". Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Since its inception, the Company has been a development stage company
primarily engaged in developing rechargeable zinc-air battery technology,
establishing the manufacturing process, defining and developing market
opportunities, testing and selling rechargeable zinc-air batteries and
recruiting and training personnel. Starting in 1994, with the sale of the
Company's first battery product, a portion of the research and development
effort became focused on the manufacturing process and the production of both
prototype batteries and batteries for sale to customers. Much of the Company's
marketing focus over the last few years has been to seek a commitment from one
or more original equipment manufacturers (OEMs) of portable notebook computers
to design a product that is electrically and mechanically compatible with an AER
Energy rechargeable zinc-air battery. Management now believes that the Company
will need to improve its current technology before it will be in a position to
obtain such a commitment from a notebook computer OEM, due in large part to the
growth in the power demands of notebook computers. As a result, in 1997, the
Company began focusing more of its marketing attention to additional portable
electronic products that could benefit from the key attributes of AER Energy's
zinc-air technology but that require less power than notebook computers. During
1997, the Company sold its AER Energy PowerSlice Pro(TM) rechargeable zinc-air
accessory battery for use with two such products: satellite telephones and data
acquisition devices. The Company has also been working on developing a patent
portfolio covering its zinc-air battery technology, and as of March 31, 1998,
the Company had 28 U.S. and six foreign patents. The Company is exploring the
potential opportunities arising from its patent portfolio including, but not
limited to, the licensing or sublicensing of aspects of its technology. In
particular, the Company is exploring options pertaining to its patented
Diffusion Air Manager, a simplified method of isolating the cells in zinc-air
batteries from exposure to air during periods when the battery is in storage or
not in use. The Company believes its Diffusion Air Manager has possible
applications to both primary and rechargeable zinc-air batteries.
During 1997, the Company marketed two rechargeable zinc-air battery
products: the AER Energy PowerSlice LX(TM) and the PowerSlice Pro. The Company
discontinued sales of the PowerSlice LX in November 1997. The Company shipped
the PowerSlice Pro for use as an accessory power source with the OmniQuestTM
satellite telephone system manufactured by Mitsubishi Electric Corporation. The
battery was supplied to customers by Alegna, Inc. under private label as the
PowerLink(TM). During 1997, Bartizan Data Systems LLC selected the PowerSlice
Pro for use with its Expo! The Database Builder(TM), a remote data acquisition
device used at tradeshows to scan attendee badges and compile information used
to contact potential customers. Although the Company has orders for deliveries
of its PowerSlice Pro battery for these two applications, the opportunity to
release shipments against these orders has been adversely affected by the timing
of the OEMs' product introductions and the difficulty of debugging the
PowerSlice Pro battery design. The Company made no shipments against these
orders during the quarter ended March 31, 1998.
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The Company has incurred cumulative losses of $56.6 million since
inception to March 31, 1998 and expects to continue to incur operating losses
beyond the end of 1998.
The Company was formed to develop and commercialize rechargeable
zinc-air batteries for portable electronic products using technology licensed
from Dreisbach Electromotive, Inc. ("DEMI"). DEMI was formed in 1982 to conduct
research and development on electric vehicles and battery systems utilizing,
among others, zinc-air technology. DEMI's zinc-air development programs included
applications for electric vehicles and portable products. The Company has
licensed, through DEMI (the "DEMI License"), the rights to use certain DEMI
technology including zinc-air, in non-motor vehicle applications, while DEMI has
retained the rights to zinc-air technology for motor vehicle applications and to
its other battery technologies for motor vehicle applications and batteries
producing over 500 watts continuous power output. Effective October 15, 1993,
the DEMI License was amended so that, under certain circumstances, some or all
of the royalties due under the DEMI License are payable to the shareholders of
DEMI rather than to DEMI.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
The Company did not generate any revenue from battery sales during the
three months ended March 31, 1998 as compared to $12,000 for the three months
ended March 31, 1997.
During the three months ended March 31, 1998, most of the manufacturing
effort was spent on the production of various prototype cells and batteries and
the debugging of the PowerSlice Pro battery. For this reason, manufacturing
costs were allocated to research and development for the three-month period
ended March 31, 1998. Cost of sales for the three months ended March 31, 1997
was $294,000. The high cost of sales in 1997 was primarily due to manufacturing
inefficiencies and high material costs resulting from low production volumes.
Research and development expenses increased to $1,504,000 for the three
months ended March 31, 1998 from $1,194,000 for the same period in 1997. This
increase resulted primarily from a $255,000 increase in the allocation of
manufacturing costs to research and development in the three months ended March
31, 1998 compared to the same period in 1997. This allocation is based on the
level of manufacturing effort spent on the production and testing of prototype
or experimental zinc-air cells and batteries and the debugging of the PowerSlice
Pro battery versus the manufacturing effort spent on the production of
commercial batteries. The Company also experienced a $90,000 increase in legal
costs related to patent activity and a $24,000 increase in travel costs. These
increases were partially offset by a $55,000 decrease in material, design and
tooling costs during the three months ended March 31, 1998 as compared to the
same period in 1997.
Marketing, general and administrative expenses decreased to $731,000
for the three months ended March 31, 1998 from $774,000 for the same period in
1997. The Company experienced a $70,000 decrease in personnel-related expenses,
a $16,000 decrease in professional fees and an $11,000 decrease in property
taxes for the three months ended March 31, 1998 as compared to the same period
in 1997. These decreases were partially offset by a
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$27,000 increase in marketing and advertising expense, a $20,000 increase in
facility costs and a $15,000 increase in the write-off of inventory. The Company
also experienced a $7,000 increase in the compensation expense due to the
amortization of unearned stock compensation associated with the award of shares
to non-employee directors under the Company's 1993 Non-Employee Director's
Restricted Stock Award Plan for the three months ended March 31, 1998 as
compared to the same period in 1997.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
As of March 31, 1998, the Company had cash and cash equivalents of $8.2
million. The Company anticipates using these funds as needed to fund capital
equipment purchases, research and development efforts, sales and marketing
activities, production of zinc-air battery products, working capital and general
corporate purposes as determined by management. In the interim, the Company
invests the net proceeds in government securities and other short-term,
investment grade, interest bearing investments.
Net cash used in operating activities increased to $2.0 million for the
three months ended March 31, 1998 from $1.9 million for the same period in 1997,
primarily due to the increases in the costs and expenses described in "Results
of Operations".
For the three months ended March 31, 1998, the Company used net cash of
$7,000 for equipment purchases as compared to $113,000 for the same period in
1997.
Financing activities provided $12,000 to the Company for the three
months ended March 31, 1998. No cash was provided by financing activities during
the three months ended March 31, 1997.
Pursuant to the DEMI License, the Company has agreed to pay DEMI
royalties of 4% of net sales, subject to certain minimum amounts and to possible
increases or decreases to a maximum of 4% and a minimum of 2%, as specified in
the DEMI License. The applicable percentage of royalties is currently 4% of net
sales. The Company recorded royalty expense of $25,000 in both of the
three-month periods ended March 31, 1998 and 1997. Minimum royalty expenses are
included in marketing, general and administrative expenses in the statements of
operations. Actual royalties due as a percentage of sales under the DEMI License
are recorded in cost of sales. As of March 31, 1998 and December 31, 1997,
$35,000 and $30,000, respectively, of these royalty payments remained unpaid.
The future minimum royalty payments specified by the DEMI License consist of the
following:
Year Ending December 31,
1998...............................................$ 100,000
1999...............................................$ 50,000
The Company currently anticipates that its existing cash balances will
fund operations and continue technology development at the current level of
activity through the end of 1998. However, it may be necessary for the Company
to increase its research and development expenses as it continues to work to
improve its zinc-air technology and to explore markets for its
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zinc-air batteries. It may also be necessary for the Company to expend greater
than anticipated funds on its manufacturing facilities or otherwise. The Company
will continue to need working capital beyond its current levels, and depending
on the Company's results of operations, the Company may find it necessary to
obtain additional working capital on an accelerated basis or in amounts greater
than currently anticipated. There can be no assurance that additional equity or
debt financing will be available when needed or on terms acceptable to the
Company. To date, both costs and development times have substantially exceeded
the Company's forecasts. The Company has also encountered greater difficulty in
commercializing its technology than originally expected. In addition, the
battery business is a chemical processing business, and as such, the Company
will require specialized equipment to manufacture its zinc-air batteries. Future
equipment additions could exceed current Company estimates in cost, complexity
and development time.
The market price of the Company's common stock has fluctuated
significantly since it began to be publicly traded on July 1, 1993 and may
continue to be highly volatile. Factors such as delays by the Company in
achieving development goals, inability of the Company to commercialize or
manufacture its products, inability of the Company to reach agreements with
OEMs, fluctuation in the Company's operating results, changes in earning
estimates by analysts, the addition or deletion of analyst coverage,
announcements of technological innovations or new products by the Company or its
competitors, perceived changes in the markets for various OEM applications
incorporating the Company's products, the announcement or termination of
relationships with OEMs and general market conditions 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.
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,
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 OEMs, ability of the Company to
ramp up production to meet anticipated sales, 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.
AER Energy, AER Energy PowerSlice LX and AER Energy PowerSlice Pro are
trademarks of AER Energy Resources, Inc.; PowerLink is a trademark of Alegna,
Inc.; OmniQuest is a trademark of Mitsubishi Electronics America, Inc.; Expo!
The Database Builder is a trademark of Bartizan Data Systems LLC.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
EX-27 - Financial Data Schedule (for SEC use only).
(B) REPORTS ON FORM 8-K:
The registrant did not file any reports on Form 8-K during the three
months ended March 31, 1998.
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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: May 11, 1998 By: /s/ David W. Dorheim
------------------------------
David W. Dorheim, President and
Chief Executive Officer
Date: May 11, 1998 By: /s/ M. Beth Donley
----------------------------
M. Beth Donley, Vice President,
Chief Financial Officer, Secretary
and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
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