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 December 31, 2001
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 0-24248
AMERICAN TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 87-03261799
(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
13114 Evening Creek Drive South, San Diego, California 92128
(Address of principal executive offices) (Zip Code)
(858) 679-2114
(Registrant's telephone number, including area code)
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 ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $0.00001 par value 14,272,996
(Class) (Outstanding at February 8, 2002)
AMERICAN TECHNOLOGY CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of December 31, 2001 (unaudited)
and September 30, 2001 3
Statements of Operations for the three months ended
December 31, 2001 and 2000 (unaudited) 4
Statements of Cash Flows for the three months ended
December 31, 2001 and 2000 (unaudited) 5
Notes to Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
American Technology Corporation
BALANCE SHEETS
(unaudited)
December 31, September 30,
2001 2001
========================================================================================================
ASSETS
Current Assets:
Cash $1,512,485 $1,354,072
Trade accounts receivable, less allowance of
$20,191 for doubtful accounts each period 94,269 117,584
Inventories [note 5] 156,437 197,013
Prepaid expenses and other 38,158 67,160
- --------------------------------------------------------------------------------------------------------
Total current assets 1,801,349 1,735,829
========================================================================================================
Equipment, net 462,211 516,208
Patents, net of accumulated amortization of $93,471 and $74,584 851,648 848,783
Purchased technology, net of accumulated amortization of
of $631,243 and $526,036 [note 6] 631,257 736,464
- --------------------------------------------------------------------------------------------------------
Total assets $3,746,465 $3,837,284
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $364,406 $321,775
Accrued liabilities:
Payroll and related 121,749 159,311
Deferred revenue 219,444 248,611
Other 29,612 114,092
12% Convertible Promissory Note, net of $1,620,000 and $800,000 for 405,000 -
for debt discount [note 7]
Accrued interest 59,556 -
- --------------------------------------------------------------------------------------------------------
Total current liabilities 1,199,767 843,789
========================================================================================================
Commitments and contingencies [notes 6 and 8]
Stockholders' equity [note 8]:
Preferred stock, $0.00001 par value; 5,000,000 shares authorized
Series B Preferred stock 250,000 shares designated: 0 and 168,860
issued and outstanding, respectively - 2
Series C Preferred stock 300,000 shares designated: 10,000
issued and outstanding. - -
Common stock, $0.00001 par value; 20,000,000 shares authorized
14,272,522 and 13,704,139 shares issued and outstanding 143 137
Additional paid-in capital 24,175,608 22,913,268
Accumulated deficit (21,629,053) (19,919,912)
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,546,698 2,993,495
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,746,465 $3,837,284
========================================================================================================
See accompanying summary of accounting policies and notes to financial
statements
3
American Technology Corporation
STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
December 31,
2001 2000
===========================================================================================
Revenues:
Product sales $ 224,954 $ 159,416
Contract and license 31,667 33,306
- -------------------------------------------------------------------------------------------
Total revenues 256,621 192,722
- -------------------------------------------------------------------------------------------
Cost of revenues 116,459 175,110
- -------------------------------------------------------------------------------------------
Gross profit 140,162 17,612
- -------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 492,656 611,195
Research and development 893,937 863,920
- -------------------------------------------------------------------------------------------
Total operating expenses 1,386,593 1,475,115
- -------------------------------------------------------------------------------------------
Loss from operations (1,246,431) (1,457,503)
- -------------------------------------------------------------------------------------------
Other income (expense):
Interest income 2,646 63,923
Interest expense (464,556) -
Other (800) -
- -------------------------------------------------------------------------------------------
Total other income (expense) (462,710) 63,923
- -------------------------------------------------------------------------------------------
Net loss $(1,709,141) $(1,393,580)
===========================================================================================
Net loss available to common stockholders (note 3) $(1,729,097) $(1,432,190)
===========================================================================================
Net loss per share of common stock - basic and diluted $(0.12) $(0.11)
===========================================================================================
Average weighted number of common shares outstanding 13,880,862 13,287,642
===========================================================================================
See accompanying summary of accounting policies and notes to financial
statements
4
American Technology Corporation
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended December 31,
2001 2000
========================================================================================================
Increase (Decrease) in Cash
Operating Activities:
Net loss $(1,709,141) $(1,393,580)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 180,750 140,992
Options issued for services 33,744 -
Stock issued for services 3,600 34,381
Amortization of debt discount 405,000 -
Changes in assets and liabilities:
Trade accounts receivable 23,315 165,071
Inventories 40,576 (2,938)
Prepaid expenses and other 29,002 12,217
Accounts payable 42,631 23,151
Accrued liabilities (91,653) (56,842)
- --------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,042,176) (1,077,548)
- --------------------------------------------------------------------------------------------------------
Investing Activities:
Purchase of equipment (7,659) (39,567)
Patent costs paid (16,752) (58,520)
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (24,411) (98,087)
- --------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of convertible promissory notes 1,225,000 -
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,225,000 -
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 158,413 (1,175,635)
Cash, beginning of period 1,354,072 4,645,615
- --------------------------------------------------------------------------------------------------------
Cash, end of period $1,512,485 $3,469,980
========================================================================================================
Supplemental disclosure of noncash investing and financing activities:
Issuance of stock warrants in connection with convertible debt $624,750 -
Increase in additional paid in capital for the beneficial conversion
feature of convertible debt $600,250 -
Common stock issued on conversion of Series B Preferred Stock $2,102,412 -
See accompanying summary of accounting policies and notes to financial
statements
5
AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
1. OPERATIONS
American Technology Corporation (the "Company"), a Delaware corporation, is
engaged in design, development and commercialization of sound, acoustics and
other technologies and the sales and marketing of portable consumer products.
2. STATEMENT PRESENTATION
The accompanying unaudited interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. In the opinion of management, the
interim financial statements reflect all adjustments of a normal recurring
nature necessary for a fair presentation of the results for interim periods.
Operating results for the three month periods are not necessarily indicative of
the results that may be expected for the year. The interim financial statements
and notes thereto should be read in conjunction with the Company's audited
financial statements and notes thereto for the year ended September 30, 2001.
3. NET LOSS PER SHARE
The Company applies Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." SFAS No. 128 provides for the calculation of "Basic"
and "Diluted" earnings per share ("EPS"). Basic EPS includes no dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution of securities that could share in the earnings of an
entity. The Company's net losses for the periods presented cause the inclusion
of potential common stock instruments outstanding to be antidilutive and,
therefore, in accordance with SFAS No. 128, the Company is not required to
present a diluted EPS. Convertible preferred stock, convertible promissory
notes, stock options and warrants convertible or exercisable into approximately
3,735,957 shares of common stock were outstanding at December 31, 2001 and stock
options, warrants, preferred stock and debt convertible or exercisable into
approximately 2,648,505 shares of common stock were outstanding as of December
31, 2000. These securities were not included in the computation of diluted EPS
because of the net losses but could potentially dilute EPS in future periods.
The provisions of the Company's Series B Preferred Stock provide for an
accretion in the conversion value (similar to a dividend) of 6% or $0.60 per
share per annum. The Series C Preferred Stock provides for an accretion in the
conversion value of 6% or $1.20 per share per annum. The accrued accretion of
the Series B and Series C Preferred Stock for the three months ended December
31, 2001 was $19,956 and $38,610, respectively, which increases the net loss
available to common stockholders. Net loss available to common stockholders is
computed as follows:
Three months ended December 31
2001 2000
----------- -----------
Net Loss $(1,709,141) $(1,393,580)
Accretion on Series B and Series C Preferred
Stock at stated rate (19,956) (38,610)
----------- -----------
Net loss available to common stockholders $(1,729,097) $(1,432,190)
=========== ===========
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141 Business Combinations (SFAS 141) and No. 142; Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142 that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires among other things, that companies no longer amortize goodwill
but instead test goodwill for impairment at least annually. In addition, SFAS
142 requires that the Company identify reporting units for the purposes of
assessing potential future impairments of goodwill reassess the useful lives of
other existing recognized intangible assets and cease amortization of intangible
assets with an indefinite useful life. An intangible asset with an indefinite
useful life should be tested for impairment in accordance with the guidance in
SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized at that
date regardless of when those assets were initially recognized. SFAS 142
requires the Company to complete a transitional goodwill impairment test six
months from the date of adoption. The Company is also required to reassess the
useful lives of other intangible assets within the first interim quarter after
adoption of SFAS 142. The Company has not entered into any business combinations
and has no recorded goodwill. The Company is assessing, but has not yet
determined how the adoption of SFAS 142 will impact its financial position and
results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part
6
AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
4. RECENT ACCOUNTING PRONOUNCEMENTS (cont'd)
of the carrying amount of the long-lived asset. SFAS No. 143 is effective for
the Company, for the fiscal year ending September 30, 2003. The Company believes
the adoption of this statement will have no material impact on its financial
statements.
In October 2001, the SFAS issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lives Assets". SFAS 144 requires that those long-lived assets
be measured at the lower of carrying amount or fair value, less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively. The
Company has not yet determined what effect, if any, SFAS 144 will have on its
financial statements once implemented.
5. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method. Inventories consist of the following:
December 31, 2001 September 30, 2001
Finished goods $124,153 $137,890
Raw materials 52,284 79,123
Reserve for obsolete inventory (20,000) (20,000)
-------- --------
$156,437 $197,013
======== ========
6. PURCHASED TECHNOLOGY
In April 2000, the Company acquired all rights to certain loudspeaker technology
owned by David Graebener ("Graebener"), Stephen M. Williams ("Williams") and
Hucon Limited, a Washington corporation ("Hucon"). The purchase price consisted
of $300,000 cash plus 200,000 shares of common stock. The 200,000 shares of
common stock were issued in June 2000 and were valued at $962,500. The Company
will pay up to an additional 159,843 shares of common stock to Williams and
Graebener contingent upon the achievement of certain performance milestones
relating to gross revenues received by the Company from the purchased
technology, any shares not earned within four years will be cancelled. These
contingent shares will be recorded as compensation expense when earned. The
Company agreed to employ Mr. Williams and Mr. Graebener for a term of three
years subject to certain terms and conditions.
7. CONVERTIBLE PROMISSORY NOTES
On September 28, 2001 the Company sold for cash in a private offering an
aggregate of $800,000 of unsecured 12% Convertible Subordinated Promissory Notes
due December 31, 2002 ("Notes") to accredited investors. On October 12, 2001 the
Company completed the sale of an additional $1,225,000 of the Notes to
accredited investors. The principal and interest amount of each Note may at the
election of the Note holder be converted one or more times into fully paid and
nonassessable shares of common stock, at a price of $2.00 per share. The Notes
may be called by the Company for conversion if the market price exceeds $5.00
per share for five days and certain conditions are met. Each purchaser was
granted a warrant to purchase one common share of the Company at $2.00 per share
until September 30, 2006 ("Warrant") for each $2.00 of Notes (aggregate Warrants
exercisable into 1,012,500 shares). As of December 31, 2001 the Notes would have
been convertible into 1,042,279 shares of common stock.
The notes and warrants have antidilution rights reducing the conversion and
exercise price for certain issuances of equity securities by the Company at an
effective price below the applicable conversion or exercise price. In connection
with the Notes and Warrants, the Company has recorded $2,025,000 as the value of
the beneficial conversion feature of the Notes and the value of the Warrants.
These warrants were valued using the Black-Scholes model and the value was
reflected as a discount to the debt. This debt discount will be amortized as
non-cash interest expense over the term of the Notes. As of December 31, 2001,
$405,000 was amortized as interest expense.
8. STOCKHOLDERS' EQUITY
The Company has 10,000 shares of Series C Preferred Stock outstanding
convertible into 38,528 shares of Common stock as of December 31, 2001. The
dollar amount of Series C Preferred Stock, increased by $1.20 per share
accretion per annum and other adjustments, is convertible one or more times into
fully paid shares of common stock at a conversion price which is the lower of
(i) $8.00 per share or (ii) 92% of the average of the five days closing bid
market price prior to conversion, but in no event less than $5.75 per share. The
shares of Series C Preferred Stock may be called by the Company for conversion
if the market price of the common stock exceeds $20.00 per share for ten days
and certain conditions are met. The Series C Preferred Stock is subject to
automatic conversion on March 31, 2003.
7
8. STOCKHOLDERS' EQUITY (cont'd)
The following table summarizes changes in equity components from transactions
during the three months ended December 31, 2001:
Additional
Series B Additional
Preferred Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit
===================================================================================================================
Balance as of October 1, 2001 168,860 $2 13,704,139 $137 $22,913,268 $(19,919,912)
Issuance of Common Stock:
For compensation and services - - 1,425 - 3,600 -
Options issued for services - - - - 33,744 -
Debt discount on promissory notes - - - - 1,225,000 -
Conversion of Series B preferred stock
and cumulative dividends (168,860) (2) 566,958 6 (4) -
Net loss - - - - - (1,709,141)
- -------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2001 - $- 14,272,522 $143 $24,175,608 $(21,629,053)
===================================================================================================================
The following table summarizes information about stock option activity during
the first quarter ended December 31, 2001:
Weighted Average
Shares Exercise Price
--------- --------------
Outstanding October 1, 2001 1,338,200 $5.17
Granted 110,000 $2.50
Canceled/expired (280,550) $9.04
---------
Outstanding December 31, 2001 1,167,650 $3.99
========= =====
Exercisable at December 31, 2001 652,706 $4.33
========= =====
Options outstanding are exercisable at prices ranging from $2.50 to $9.03 and
expire over the period from 2001 to 2006 with an average life of 3.34 years.
At December 31, 2001, the Company had warrants outstanding, exercisable into the
following number of common shares:
Number Exercise Price Expiration Date
------- -------------- ---------------
50,000 $16.00 May 12, 2003
50,000 $10.00 January 5, 2004
375,000 $11.00 March 31, 2005
1,012,500 $2.00 September 30, 2006
---------
1,487,500
=========
On October 2001, the Company granted 110,000 stock options to a consultant in
conjunction with related development and manufacturing agreements. Options to
purchase 65,000 shares of common stock vest depending on the consultant's
completion of various project milestones as well as the Company's acceptance of
the specified work. The Company estimates the period required to complete the
specified milestones each reporting period and records consulting expense based
on the current market price of the Company's stock and the estimated percentage
of the work completed. Consulting expense will be adjusted each reporting period
until vesting occurs. The Company has recorded consulting expense of $8,468 for
the Black Scholes value of 10,000 options to be vested March 2002. Options to
purchase 45,000 shares of common stock vest based on the consultant meeting
certain performance criteria. As a result, the Company will record consulting
expense at each vesting date. The Company has recorded consulting expense of
$25,276 for the Black Scholes value of 15,000 options vested during the three
month period ended December 31, 2001.
9. INCOME TAXES
At December 31, 2001, a valuation allowance has been provided to offset the net
deferred tax asset as management has determined that it is more likely than not
that the deferred tax asset will not be realized. The Company has for federal
income tax purposes net operating loss carryforwards of approximately
$17,600,000, which expire through 2021 of which certain amounts are subject to
limitations under the Internal Revenue Code of 1986, as amended.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO OUR
FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF
FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "BUSINESS
RISKS." ALSO SEE OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30,
2001.
Overview
We are focused on commercializing our proprietary HyperSonic, NeoPlanar,
PureBass and Stratified Field sound technologies. Our HyperSonic Sound
technology employs a laser-like beam to project sound to any listening
environment. Our NeoPlanar technology is a thin film magnetic speaker that uses
unique films and materials, which we believe results in superior sound quality
and volume for any given size with low distortion. PureBass is an extended range
woofer designed to complement our high performance Stratified Field and
NeoPlanar technologies. PureBass employs unique cabinet construction and vent
configurations along with multiple acoustic filters, which we believe produces
improved performance. Our Stratified Field technology features a thin form
factor, in a variety of shapes and sizes, producing high-fidelity, low
distortion sound reproduction. Our strategy is to commercialize these
technologies through OEMs primarily through licensing or supply agreements.
We believe our NeoPlanar, PureBass and Stratified Field technologies meet OEM
requirements. These technologies have been licensed to OEMs and are being
transferred to production. We expect product royalties to commence in fiscal
2002 from these technologies. We are also completing second generation
electronic packages and ultrasonic emitters that can be supplied to OEMs to be
incorporated into end-user products. We expect that these components will be
supplied to HSS licensees in fiscal 2002 for use in HSS products. We are in the
early stage of licensing of our sound technologies and have not generated
significant revenues from such technologies to date.
When we license an audio technology, we typically receive a flat fee up-front,
with the balance of payments based upon a percentage of net revenues of the
products in which our technology is incorporated. Revenues from up-front license
fees are recognized ratably over the specified term of the particular license.
Contract fees are recorded as services are performed.
Our various technologies are high risk in nature. Unanticipated technical
obstacles can arise at any time and disrupt licensing activities or OEM product
sales or result in lengthy and costly delays. There can be no assurance
commercially viable sound products being developed by OEMs will meet with market
acceptance or that such products will perform on a cost-effective basis.
Our future is largely dependent upon the success of our sound technologies. We
invest significant funds in research and development and on patent applications
related to our proprietary technologies. There can be no assurance our
technologies will achieve market acceptance sufficient to sustain operations or
achieve future profits. See "Business Risks" below.
To date substantially all of our revenues have been derived from the sale of
portable consumer products. We have sourced a total of 16 products targeted for
niche markets at retail prices ranging from $11.99 to $29.99. Sourcing is on
both an exclusive and nonexclusive basis and for different market territories on
a product by product basis. Our market focus is in North America. We inventory
finished goods as well as provide direct factory shipment to certain customers.
There can be no assurance that our line of products can be marketed
successfully. We have also produced high-end NeoPlanar speakers for sale to the
marine market and expect to target other high-end sales to selected niche
markets.
Demand for our portable consumer and speaker products is subject to significant
month to month variability resulting from seasonal demand fluctuations and the
limited number of customers and market penetration achieved by us to date.
Further, sales have been concentrated with a few customers. We are also reliant
on outside manufacturers to supply our products or components and there can be
no assurance of future supply. The markets for our products and future products
and technologies are subject to rapidly changing customer tastes and a high
level of competition. Demographic trends in society, marketing and advertising
expenditures, and product positioning in retail outlets, technological
developments, seasonal variations and general economic conditions influence
demand for our products. Because these factors can change rapidly, customer
demand can also shift quickly. We may not be able to respond to changes in
customer demand because of the time required to change or introduce products,
production limitations and because of limited financial resources.
Results of Operations
Total revenues for the three month period ended December 31, 2001 and 2000 were
$256,621 and $192,722, respectively. Product sales for the three months ended
December 31, 2001 were $224,954 a 41% increase from the comparable three month
total of $159,416 for the prior year. Contract and license revenues for the
quarters ended December 31, 2001 and 2000 were $31,667 and $33,306,
respectively. Consumer product sales are subject to significant month to month
and quarter to quarter variability based on the timing of orders, new accounts,
lost accounts and other factors. At December 31, 2001 and 2000 we had $219,444
and $19,444, respectively, collected and recorded
9
as unrecognized revenue for existing contracts and licenses. We recognize
upfront fees and advance revenues over the term of the license agreements
At December 31, 2001, we had open purchase orders for approximately $36,000 of
product, of which approximately $23,205 has been received as customer deposits.
The product is expected to be shipped in the next four months. There was no
material backlog at December 31, 2000. Anticipated shipments are subject to
change due to a variety of factors, many outside our control. Our customers may
modify or cancel orders and delay or change schedules. Shipments may also be
delayed due to production delay, component shortages and other production
related issues.
Cost of revenues for the three months ended December 31, 2001 was $116,459
resulting in a gross profit of $140,162 or 55%. This compares to a gross profit
of $17,612 or 9% for the comparable period of the prior year. The profit for the
period ending December 31, 2001 can be attributed to the increase in margins for
new products introduced in the retail radio division accompanied with higher
margins for our acoustic technologies. Gross profit percentage is highly
dependent on sales prices, volumes, purchasing costs and overhead allocations.
Selling, general and administrative expenses for the three months ended December
31, 2001 and 2000 were $492,656 and $611,195, respectively. The $118,539
decrease resulted from a reduction of $113,663 in personnel and related costs
and a $5,809 reduction in legal costs. We may expend additional resources on
marketing HSS, PMT and other technologies in future quarters, which may increase
selling, general and administrative expenses.
Research and development expenses for the three months ended December 31, 2001
were $893,937 compared to $863,920 for the comparable three months of the prior
year. The $30,017 increase resulted from the issuance of options for services.
Research and development expenses vary quarter by quarter due to the timing of
projects, the availability of funds for research and development and the timing
and extent of use of outside consulting, design and development firms. We expect
fiscal 2002 research and development costs to increase over than the prior year
due to increased staffing and the use of outside design and consultants.
We recorded in selling, general and administrative expenses $3,600 for the three
months ended December 31, 2001 for services paid through the issuance of 1,425
shares of common stock. Included in selling, general and administrative expense
for the quarter ended December 31, 2000 is $34,381, which is the result of
services paid through the issuance of 10,000 shares of common stock.
We experienced a loss from operations of $1,246,431 during the three months
ended December 31, 2001, compared to a loss from operations of $1,457,503 for
the comparable three months ended December 31, 2000. The $211,072 decrease is
primarily due to the decrease in selling, general and administrative expenses
and an increase in retail sales for the first quarter of fiscal 2002.
The net loss available to common stockholders for the three months ended
December 31, 2001 and 2000 of $1,729,097 and $1,432,190, respectively, included
$19,956 and $38,610 of accretion on the Series B and Series C Preferred Stock,
respectively. These amounts are included in net loss available to common
stockholders.
We have federal net loss carryforwards of approximately $17,600,000 for federal
tax purposes expiring through 2021. The amount and timing of the utilization of
our net loss carryforwards may be limited under Section 382 of the Internal
Revenue Code. A valuation allowance has been recorded to offset the related net
deferred tax asset as management was unable to determine that it is more likely
than not that the deferred tax asset will be realized.
Future operations are subject to significant variability as a result of
licensing activities, product sales and margins, timing of new product
offerings, the success and timing of new technology exploitation, decisions
regarding future research and development and variability in other expenditures.
Liquidity and Capital Resources
Since we recommenced operations in January 1992, we have had significant
negative cash flow from operating activities. During the three months ended
December 31, 2001, the Company experienced a net loss of $1,709,141. A total of
$1,042,176 of cash was used in operating activities through a $91,653 decrease
in accrued liabilities. Operating cash was provided by a $40,576 decrease in
inventory, a $23,315 decrease in accounts receivable, an increase of $42,631 in
accounts payable and a $29,002 decrease in prepaid expenses.
At December 31, 2001, we had gross accounts receivable of $114,460 as compared
to $137,775 at September 30, 2001. This represented approximately 135 days of
sales. Receivables can vary dramatically due to quarterly and seasonal
variations in sales and timing of shipments to and receipts from large
customers, many of which demand extended terms of 90-120 days.
For the three months ended December 31, 2001, the Company used approximately
$7,659 for the purchase of laboratory and computer equipment and made a $16,752
investment in patents and new patent applications. We anticipate significant
investments in patents in fiscal 2002. We cannot currently estimate the dollar
amounts of these patent investments.
10
At December 31, 2001, we had working capital of $601,582 compared to working
capital of $892,040 at September 30, 2001.
We have financed our operations primarily through the sale of preferred stock,
exercise of stock options, issuances of convertible notes, proceeds from the
sale of investment securities and margins from consumer product sales. At
December 31, 2001, we had cash of $1,512,485. As a result of the sale of the
$1,225,000 of convertible notes during the first quarter, our cash position
increased by approximately $158,400 from September 30, 2001. Based on our cash
position assuming (a) currently planned expenditures and level of operations,
(b) continuation of sales to existing retail customers and (c) royalty revenue
against existing license agreements, we believe we have sufficient capital
resources for the next twelve months. However, there can be no guarantee that
the funds required during the next twelve months or thereafter can be generated
from operations or that such required funds will be available from the
aforementioned or other potential sources. The lack of sufficient funds from
operations or additional capital could force us to curtail or scale back
operations and would therefore have an adverse effect on our business. Other
than cash and cash equivalents, we have no unused sources of liquidity at this
time. We expect to incur additional operating losses as a result of expenditures
for research and development and marketing costs for our sound and other
products and technologies. The timing and amounts of these expenditures and the
extent of our operating losses will depend on many factors, some of which are
beyond our control. We anticipate that the commercialization of our technologies
may require increased operating costs, however we cannot currently estimate the
amounts of these costs.
New Accounting Pronouncements
A number of new pronouncements have been issued for future implementation as
discussed in the footnotes to the Company's interim financial statements (see
page 6, Note 4). As discussed in the notes to the interim financial statements,
the implementation of these new pronouncements is not expected to have a
material effect on the Company's financial statements.
Business Risks
You should consider each of the following factors as well as the other
information in this Quarterly Report in evaluating our business and our
prospects. The risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to us or that we
currently consider immaterial may also impair our business operations. If any of
the following risks actually occur, our business and financial results could be
harmed. In that case the trading price of our common stock could decline. You
should also refer to the other information set forth in this Quarterly Report
and in our Annual Report of Form 10-K for the fiscal year ended September 30,
2001, including our financial statements and the related notes.
We have a history of net losses. We expect to continue to incur net losses and
we may not achieve or maintain profitability. We have incurred significant
operating losses and anticipate continued losses in fiscal 2002. At December 31,
2001 we had an accumulated deficit of $21,629,053. We need to generate
additional revenue to be profitable in future periods. Failure to achieve
profitability, or maintain profitability if achieved may have a material adverse
effect on our stock price.
We are an early stage company introducing new technologies. If commercially
successful products do not result from our efforts, we may be unprofitable or
forced to cease operations. Our HSS, NeoPlanar, PureBass and SFT technologies
have only recently been introduced to market and are still being improved.
Commercially viable sound technology systems may not be successfully and timely
produced by OEMs due to the inherent risks of technology development, new
product introduction, limitations on financing, competition, obsolescence, loss
of key technical personnel and other factors. We have not generated significant
revenues from our sound technology to date, and we cannot guarantee significant
revenues in the future. The development and introduction of our sound technology
has taken longer than anticipated by management and could be subject to
additional delays. Even if products employing our sound technology are
introduced, they may not achieve market acceptance. Our various sound projects
are high risk in nature, and unanticipated technical obstacles can arise at any
time and result in lengthy and costly delays or result in a determination that
further exploitation is unfeasible. If we do not successfully exploit our
technology, our financial condition and results of operations and business
prospects would be adversely effected.
Our quarterly and annual revenues are subject to fluctuations caused by many
factors, any of which could result in our failure to achieve our revenue
expectations. Our quarterly and annual revenues from portable consumer products
have varied significantly in the past and are likely to continue to vary in the
future due to a number of factors. Our revenues from licensing our sound
reproduction technologies are also expected to vary significantly due to a
number of factors. Many of these factors are beyond our control. Any one or more
of the factors listed below or other factors could cause us to fail to achieve
our revenue expectations. These factors include:
o our ability to develop, introduce, produce in volume quantities and market
successfully new or enhanced portable consumer products;
o our ability to develop and license to OEMs our sound reproduction
technologies;
o changes in the relative volume of sales of various products with sometimes
significantly different margins or royalties;
o market acceptance of and changes in demand for our portable consumer
products and products of our licensees;
o gains or losses of significant customers, distributors or strategic
relationships;
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o unpredictable volume and timing of customer orders;
o the availability, pricing and timeliness of delivery of components for our
products and OEM products;
o fluctuations in the availability of manufacturing capacity or
manufacturing yields and related manufacturing costs;
o the timing of new technological advances, product announcements or
introductions by us, by our licensees and by our competitors;
o product obsolescence and the management of product transitions and
inventory;
o production delays;
o decreases in the average selling prices of products;
o seasonal fluctuations in sales;
o general consumer electronics industry conditions, including changes in
demand and associated effects on inventory and inventory practices;
o the conditions of other industries, such as military and commercial
industries, into which our technologies may be licensed; and
o general economic conditions that could affect the timing of customer
orders and capital spending and result in order cancellations or
rescheduling.
Some or all of these factors could adversely affect demand for our portable
consumer products and for OEM products incorporating our sound reproduction
technologies, and therefore adversely affect our future operating results.
Most of our operating expenses are relatively fixed in the short term. We may be
unable to rapidly adjust spending to compensate for any unexpected sales or
license revenue shortfalls, which could harm our quarterly operating results.
Because the lead times of firm orders are typically short in the consumer
electronics industry, we do not have the ability to predict future operating
results with any certainty.
Because of the above factors, you should not rely on period-to-period
comparisons of results of operations as an indication of future performance.
Our expenses may vary from period to period, which could affect quarterly
results and our stock price. If we incur additional expenses in a quarter in
which we do not experience increased revenue, our results of operations would be
adversely affected and we may incur larger losses than anticipated for that
quarter. Factors that could cause our expenses to fluctuate from period to
period include:
o the timing and extent of our research and development efforts;
o the extent of marketing and sales efforts necessary to promote our
technologies; and
o the timing of personnel hiring.
The demand for our portable consumer products has historically been weaker in
certain quarters, which makes it difficult to compare our quarterly results. Due
to industry seasonality, demand for consumer electronic products is strongest
during the fourth quarter of each year and is generally slower in the period
from March through July. Because the consumer products market experiences
substantial seasonal fluctuations, with more sales occurring toward the end of
the year, our quarterly results will be difficult to compare so long as portable
consumer products remains our principal revenue source.
Sound reproduction markets are subject to rapid technological change, so our
success will depend heavily on our ability to develop and introduce new
technologies. Technology and standards in the sound reproduction markets evolve
rapidly, making timely and cost-effective product innovation essential to
success in the marketplace. The introduction of products with improved
technologies or features may render our technologies obsolete and unmarketable.
If we cannot develop products in a timely manner in response to industry
changes, or if our technologies do not perform well, our business and financial
condition will be adversely affected. The life cycles of our technologies are
difficult to estimate, particularly those such as HyperSonic sound for which
there is no established market. As a result, our technologies, even if
successful, may become obsolete before we recoup our investment.
Our HSS technology is subject to government regulation, which could lead to
unanticipated expense or litigation. Our HyperSonic Sound technology emits
ultrasonic vibrations, and as such is regulated by the Food and Drug
Administration. In the event of certain unanticipated defects in an HSS product,
a licensee or we may be required to comply with FDA requirements to remedy the
defect and/or notify consumers of the problem. This could lead to unanticipated
expense, and possible product liability litigation against a licensee or us. Any
regulatory impediment to full commercialization of our HSS technology, or any of
our other technologies, could adversely affect our results of operation. For a
further discussion of the regulation of our HSS technology, see Part I, Item 1
of our Annual Report on Form 10-K, under the heading "Government Regulation."
Many potential competitors who have greater resources and experience than we do
may develop products and technologies that make ours obsolete. Technological
competition from other and longer established electronic and loudspeaker
manufacturers are significant and expected to increase. Most of the companies
with which we expect to compete have substantially greater capital resources,
research and development staffs, marketing and distribution program and
facilities, many of them have substantially greater experience in the production
and marketing of products.
12
In addition, one or more of our competitors may have developed or may succeed in
developing technologies and products that are more effective than any of ours,
rendering our technology and products obsolete or noncompetitive.
Commercialization of our sound technologies depends on collaborations with other
companies. If we are not able to find collaborators and strategic alliance
relationships in the future, we may not be able to develop our sound
technologies and products. As we do not have the production, marketing and
selling resources to commercialize our products on our own our strategy is to
establish business relationships with leading participants in various segments
of the electronics and sound reproduction markets to assist us in producing,
marketing and selling consumer electronic products and products that include our
sound technologies.
Our success will therefore depend on our ability to enter into strategic
arrangements with new partners on commercially reasonable terms. If we fail to
enter into such strategic arrangements with third parties, our financial
condition, results of operations, cash flows and business prospects will be
adversely effected. Any future relationships may require us to share control
over our development, manufacturing and marketing programs or to relinquish
rights to certain versions of our sound and other technologies.
Any inability to adequately protect our proprietary technologies could harm our
competitive position. We are heavily dependent on patent protection to secure
the economic value of our technologies. We have both issued and pending patents
on our sound reproduction technologies and we are considering additional patent
applications. Patents may not be issued from some or all of our pending
applications. Claims allowed from existing or pending patents may not be of
sufficient scope or strength to protect the economic value of our technologies.
Issued patents may be challenged or invalidated. Further, we may not receive
patents in all countries where our products can be sold or licensed. Our
competitors may also be able to design around our patents. The electronics
industry is characterized by vigorous protection and pursuit of intellectual
property rights or positions, which have resulted in significant and often
protracted and expensive litigation. There is currently no pending intellectual
property litigation against us. Third parties may charge that our technologies
or products infringe their patents or proprietary rights. Problems with patents
or other rights could potentially increase the cost of our products, or delay or
preclude our new product development and commercialization. If infringement
claims against us are deemed valid, we may be forced to obtain licenses, which
might not be available on acceptable terms or at all. Litigation could be costly
and time-consuming but may be necessary to protect our future patent and/or
technology license positions, or to defend against infringement claims. A
successful challenge to our sound technology could have a materially adverse
effect on our business prospects.
Our retail products and sound component production are dependent on outside
contractors and suppliers. Disruptions in supply could adversely affect us.
Product sales have accounted for substantially all of our revenues. However, we
are dependent on contract suppliers for our finished consumer electronics
products. We source products from a variety of suppliers. The loss of a supply
of a high selling product could have a material adverse effect on our
operations. Disruption of our supply could cause additional costs and delays and
could also have an adverse impact on our operations. The manufacturers of our
consumer electronic products are also dependent upon the availability of
electronic components. Any significant delays in obtaining components could have
a material adverse effect on our financial condition and results of operations.
We have developed component supply arrangements for film and components for our
Neoplanar and HSS sound technologies. These are generally sole supplier
arrangements and the loss or a disruption of supply could have a material
adverse effect on our ability to introduce these technologies, or once
introduced in volume, could disrupt future revenues adversely affecting
financial condition and results of operations.
Two customers represented a significant amount of our business in the last
fiscal year. We do not know if we will receive further orders from them. ASI and
Vulcan Northwest Inc. accounted for 23% and 11% of total revenues for the fiscal
year ended September 30, 2001. Neither ASI nor Vulcan have committed to purchase
any further products from us. During the quarter ended December 31, 2001, Vulcan
and ASI accounted for 42% and 0% of total revenues, respectively. We cannot
provide any assurances that any of our current customers will continue at
current or historical levels or that we will be able to obtain orders from new
customers.
If our key employees do not continue to work for us, our business will be harmed
because competition for replacements is intense. Our performance is
substantially dependent on the performance of our executive officers and key
technical employees. We are dependent on our ability to retain and motivate high
quality personnel, especially highly skilled technical personnel. Our future
success and growth also depend on our continuing ability to identify, hire,
train and retain other highly qualified technical, managerial and sales
personnel. Competition for such personnel is intense, there can be no assurance
that we will be able to attract, assimilate or retain other highly qualified
technical, managerial or sales personnel in the future. The inability to attract
and retain the necessary technical, managerial or sales personnel could have a
material adverse effect upon our business, operating results or financial
condition.
We may issue preferred stock in the future, and the terms of the preferred stock
may reduce the value of your common stock. We are authorized to issue up to
5,000,000 shares of preferred stock in one or more series. Our board of
directors may determine the terms of future preferred stock without further
action by our stockholders. If we issue additional preferred stock, it could
affect your rights or reduce the value of your common stock. In particular,
specific rights granted to future holders of preferred stock could be used to
restrict our ability to merge with or sell our assets to
13
a third party. These terms may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and sinking fund
provisions.
Our certificate of incorporation, bylaws and Delaware law contain provisions
that could discourage a third party from acquiring us and, consequently,
decrease the market value of your investment. Some provisions of our amended
certificate of incorporation and bylaws and Delaware law could delay or prevent
a change in control or changes in our management that a stockholder might
consider favorable. If a change of control or change in management is delayed or
prevented, the market price of our common stock could decline.
Conversion of all of or part of our outstanding convertible preferred stock and
debt or the exercise of outstanding warrants will cause immediate and possibly
significant dilution in the net tangible book value of your shares. If the
holders of our outstanding convertible preferred stock, convertible debt or
warrants decide to convert or exercise all or part of their securities, you will
experience immediate and possibly significant dilution in the net tangible book
value of your shares. The market price of our common stock could also decline
upon the resale of the common stock obtained upon conversion of our preferred
stock or convertible debt or upon exercise of warrants.
Our stock price is volatile and may continue to be volatile in the future. Our
common stock trades on the NASDAQ Small Cap Market. The market price of our
common stock has fluctuated significantly to date. In the future, the market
price of our common stock could be subject to significant fluctuations due to
general market conditions and in response to quarter-to-quarter variations in
(i) our anticipated or actual operating results; (ii) developments concerning
our sound reproduction technologies; (iii) technological innovations or setbacks
by us or our competitors; (iv) conditions in the consumer electronics market;
(v) announcements of merger or acquisition transactions; and (vi) other events
or factors and general economic and market conditions. The stock market in
recent years has experienced extreme price and volume fluctuations that have
effected the market price of many technology companies, and that have often been
unrelated or disproportionate to the operating performance of companies.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position,
results of operations or cash due to adverse changes in market prices, including
interest rate risk and other relevant market rate or price risks.
We are exposed to some market risk through interest rates, related to our
investment of our current cash of $1,512,485. We do not consider this risk to be
material, and we manage the risk by continuing to evaluate the best investment
rates available for short-term high quality investments.
We have no activities in long-term indebtedness and our other investments are
insignificant. At the present time we do not have any significant foreign sales
or foreign currency transactions.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we are involved in routine litigation incidental to the
conduct of our business. There are currently no material pending legal
proceedings to which we are a party or to which any of our property is subject.
Item 2. Changes in Securities
During the quarter ended December 31, 2001, we sold for cash in a private
offering an aggregate of $1,225,000 of unsecured 12% Convertible Subordinated
Promissory Notes due December 31, 2002 to accredited investors. We sold $800,000
of the identical notes during the quarter ended September 30, 2001. The
principal and interest amount of each note may at the election of the note
holder be converted one or more times into fully paid and nonassessable shares
of our common stock, at a price of $2.00 per share. We may call the notes for
conversion if the market price exceeds $5.00 per share for five days and certain
conditions are met.
Each purchaser was granted a warrant to purchase one common share at $2.00 per
share until September 30, 2006 for each $2.00 of notes purchased (aggregate
warrants exercisable into 1,012,500 shares including notes sold in prior
quarter).
We are not required to register the stock underlying the notes or warrants, but
the holders have certain piggyback registration rights. The securities have
antidilution rights reducing the conversion and exercise price for certain
issuances of equity securities at an effective price below the applicable
conversion or exercise price of the notes and warrants.
The securities were offered and sold without registration under the Securities
Act of 1933, in reliance upon the exemption provided by Section 4(2) and/or
Regulation D. The securities may not be offered or sold in the United States
absent registration or an applicable exemption from the registration
requirements of the Securities Act. We sold securities without an underwriter,
but we paid $45,000 in finder's fees for the introduction of investors.
14
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 Form of 12% Convertible Subordinated Promissory Note due December 31, 2002
aggregating $2,025,000 granted to accredited investors (individual notes differ
as to holder, amount and issuance date) filed as Exhibit 4.11 on Form 8-K dated
October 12, 2001.
4.2 Form of Stock Purchase Warrant exercisable until September 30, 2006
granted to accredited investors for an aggregate of 1,012,500 common shares
(individual warrants differ as to holder, number of shares and issuance date)
filed as Exhibit 4.12 on Form 8-K dated October 12, 2001.
(b) Reports on Form 8-K
We filed a report on Form 8-K on October 12, 2001 disclosing in item 5 the
sale of convertible promissory notes.
15
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.
AMERICAN TECHNOLOGY CORPORATION
Date: February 14, 2002 By: /s/ RENEE WARDEN
------------------
Renee Warden, Chief Accounting
Officer, Treasurer and Corporate Secretary
(Principal Financial and
Accounting Officer and duly
authorized to sign on behalf
of the Registrant)
16