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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, 1999
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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.
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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
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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 24,862,263 shares of Common Stock outstanding as of May 11, 1999.
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AER ENERGY RESOURCES, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Balance Sheets - March 31, 1999 and December 31, 1998. 3
Condensed Statements of Operations - Three Months Ended March 31, 4
1999 and 1998, and Period From July 17, 1989 (Date of Inception)
to March 31, 1999.
Condensed Statements of Cash Flows - Three Months Ended March 31, 5
1999 and 1998 and Period From July 17, 1989 (Date of Inception)
to March 31, 1999.
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 7
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
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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,
1999 1998
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 977,202 $ 4,249,868
Short-term investments 3,256,117 --
Inventories, net 56,430 52,729
Prepaid expenses and other current assets 101,673 51,414
------------ ------------
Total current assets 4,391,422 4,354,011
Equipment and improvements 3,984,499 3,970,689
Less accumulated depreciation (3,120,641) (3,006,211)
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863,858 964,478
Other assets 16,841 16,841
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TOTAL ASSETS $ 5,272,121 $ 5,335,330
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 86,019 $ 79,089
Accrued royalties - related party 34,993 30,000
Deferred revenue 431,250 50,000
Other accrued expenses 189,608 125,901
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Total current liabilities 741,870 284,990
Long-term liabilities - Deferred revenue 610,938 --
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 -
24,862,263 shares at March 31, 1999 and December 31, 1998 66,593,140 66,593,140
Unearned stock compensation (106,306) (115,840)
Deficit accumulated during the development stage (62,567,521) (61,426,960)
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Total stockholders' equity 3,919,313 5,050,340
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,272,121 $ 5,335,330
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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,
1999 1998 1999
----------- ----------- ------------
License fees and research and development revenues $ 482,813 $ -- $ 832,813
Product sales -- -- 339,810
Cost of product sales -- -- (6,760,390)
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Gross margin on product sales -- -- (6,420,580)
----------- ----------- ------------
482,813 -- (5,587,767)
----------- ----------- ------------
Costs and expenses:
Research and development
- related party -- -- 1,145,913
- other 1,009,503 1,503,914 35,326,927
Marketing, general and administrative
- related party 25,000 25,000 1,363,695
- other 644,310 706,482 22,485,793
----------- ----------- ------------
Total costs and expenses 1,678,813 2,235,396 60,322,328
----------- ----------- ------------
Operating loss (1,196,000) (2,235,396) (65,910,095)
Interest income 55,439 127,864 3,943,577
Interest expense
- related parties -- -- (264,445)
----------- ----------- ------------
Net loss $(1,140,561) $(2,107,532) $(62,230,963)
=========== =========== ============
Basic and diluted loss per share $ (0.05) $ (0.09) $ (4.02)
=========== =========== ============
Weighted average shares outstanding (basic and diluted) 24,862,263 24,798,976 15,483,221
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,
1999 1998 1999
------------ ------------ ------------
OPERATING ACTIVITIES:
Net loss $ (1,140,561) $ (2,107,532) $(62,230,963)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 114,430 119,139 3,530,232
Amortization of unearned stock compensation 9,534 30,345 710,366
Grant of compensatory stock options -- -- 14,063
Forgiveness of promissory notes -- -- 69,875
Loss on disposal of equipment -- -- 67,270
Deferred rental expense -- 165 --
Accretion of discount on short-term investments
and marketable securities (31,969) -- (219,376)
Net changes in operating assets and liabilities 1,013,858 (78,059) 1,353,329
------------ ------------ ------------
Net cash used in operating activities (34,708) (2,035,942) (56,705,204)
INVESTING ACTIVITIES:
Purchases of equipment and improvements (13,810) (6,531) (4,087,687)
Purchases of short-term investments and marketable securities (3,224,148) -- (14,736,444)
Purchase of license agreement -- -- (250,000)
Proceeds from short-term investments and marketable securities -- -- 11,700,000
Changes in other assets -- -- (140,501)
------------ ------------ ------------
Net cash used in investing activities (3,237,958) (6,531) (7,514,632)
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
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(Decrease) increase in cash and cash equivalents (3,272,666) (2,030,461) 977,202
Cash and cash equivalents at beginning of period 4,249,868 10,206,870 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 977,202 $ 8,176,409 $ 977,202
============ ============ ============
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 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, 1998. Operating results
for the three month period ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1999 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.
Short-term Investments
The Company's short-term investments consist of highly liquid
commercial paper with initial maturities of less than one year and are stated at
amortized 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, 1999 and December 31, 1998 of $56,430 and $52,729, respectively, consist
entirely of raw materials.
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Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles 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 change in focus during 1998. Such
estimates contemplate the Company entering into agreements, similar to its 1998
agreement with Duracell Inc., throughout the remaining life of the Company's
fixed assets. If the Company is unable to enter into such agreements or if it is
unable to perform as anticipated, a writedown of such 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, 1999 or 1998.
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. The
Company's operations, until recently, were focused primarily on developing and
improving its 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, but sales from products
have been minimal.
In 1998, the Company changed its focus to research and product
development of zinc-air technology and commercialization of primary (disposable)
rather than rechargeable batteries through alliances with large established
battery and original equipment manufacturers ("OEMs"). This change allows AER
Energy 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 is 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 has ceased marketing its rechargeable
battery products and canceled all related outstanding orders.
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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 zinc-air
technology. Under the TLAS Agreement, Duracell agrees to license the rights to
the Company's currently existing patents. In addition, Duracell is funding
certain joint product development projects with the Company. Duracell will own
technology developed under the projects it funds, and the Company will have
rights to utilize the technology. Duracell also has options to obtain certain
other license rights.
Throughout 1999, the Company plans to work with Duracell under the TLAS
Agreement, 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, 1999 and 1998
The Company generated $0.48 million of license fees and research and
development revenues under the TLAS Agreement with Duracell during the first
three months ended March 31, 1999. There was no revenue during the same period
in 1998.
Research and development expenses decreased 33% to $1.01 million for
the three months ended March 31, 1999 from $1.50 million for the same period in
1998. This decrease resulted primarily from reduced personnel-related expenses
due to approximately 43% fewer employees than the same period in 1998.
Marketing, general and administrative expenses decreased 8% to $0.67
million for the three months ended March 31, 1999 from $0.73 million for the
same period in 1998. This decrease resulted from lower personnel-related
expenses due to employee reductions and decreases in trade show activities from
the same period in 1998.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
As of March 31, 1999, the Company had cash and cash equivalents of
$0.98 million and short-term investments of $3.26 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.
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Net cash used in operating activities decreased to $0.03 million for
the three months ended March 31, 1999 from $2.04 million for the same period in
1998 due primarily to the nearly $1 million decrease in net loss from 1998 and
the license fees received from Duracell under the TLAS Agreement.
For the three months ended March 31, 1999, net cash used in investing
activities increased to $3.24 million from $0.01 million for the same period in
1998. This increase is due to the purchase of $3.22 million of short-term
commercial paper.
No cash was provided by financing activities during the three months
ended March 31, 1999. Financing activities provided $0.01 million to the Company
for the three months ended March 31, 1998 due primarily to the proceeds received
from the exercise of stock options.
The Company currently anticipates that its existing cash and short-term
investment balances, along with cash to be received during the remainder of 1999
under the TLAS Agreement, will fund operations and continue technology
development at the current level of activity through the end of 1999 and into
early 2000. However, it may be necessary for the Company to increase its
research and product development expenses as it continues to work to improve its
primary zinc-air technology and to explore markets for that technology. It may
also be necessary for the Company to expend greater than expected funds on its
facilities to produce prototypes of its primary zinc-air battery products. The
Company will eventually need cash beyond its current level, and depending on the
Company's results of operations, the Company may find it necessary to obtain
additional equity 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 develop its zinc-air batteries. Future
equipment additions could exceed current Company estimates.
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 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.
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On March 30, 1999, the common stock of the Company ceased trading on
the Nasdaq SmallCap Market, moving to over-the-counter stock trading on the OTC
Bulletin Board.
YEAR 2000 DISCLOSURE
The "Year 2000" issue is the result of some computer programs being
written using two digits instead of four digits to define an applicable year.
Time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000 which could potentially result in miscalculations or system
failure. The Year 2000 issue is believed to affect all companies and
organizations, including the Company. The Company has been assessing its
exposure to the Year 2000 issue by reviewing all internal business, network and
testing systems and by identifying key areas of exposure related to outside
third parties.
The Company has determined that its major operational and accounting
programs that control its purchasing, inventory, billing, accounts payable and
general accounting systems are designed to be Year 2000 compliant, and the
Company has received outside certification of this compliance. In addition to
its operational programs, the Company has several software programs that test
product performance and quality. These programs have been tested internally as
Year 2000 compliant, and the Company does not anticipate any material
modifications. The Company did determine that its network server was not Year
2000 compliant and has already ordered and received the required upgrades that
will be installed internally. Most of the Company's user workstations are Year
2000 compliant with the remaining scheduled to be upgraded by July 31, 1999 at a
total cost of approximately $4,000 to $5,000.
Currently the Company has no critical interfacing systems to third
parties. It is very difficult to predict the Year 2000 impact on third parties
with which the Company has business transactions, and while the Company does not
anticipate any significant problems, there can be no assurance that problems
will not occur or not have a material adverse effect on the Company.
Management is continuing to examine the Year 2000 issues as they
potentially impact the Company and is developing contingency plans as necessary.
While the Company believes that the cost of completing the assessment and
contingency plans will not be material and the risks to the Company with respect
to Year 2000 issues are manageable, the Company cannot at this time fully assess
the potential impact.
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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, ability of the Company to implement
its new strategy, 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 and
all of its short-term investments 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
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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, 1999.
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, 1999 By: /s/ David W. Dorheim
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David W. Dorheim, President and
Chief Executive Officer
Date: May 11, 1999 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)
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