UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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Commission File Number 0-24248
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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
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(Address of principal executive offices) (Zip Code)
(858) 679-2114
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(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 12,064,714
- -------------------------------- ----------
(Class) (Outstanding at April 26, 2000)
1
AMERICAN TECHNOLOGY CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of March 31, 2000 (unaudited)
and September 30, 1999 ....................................... 3
Statements of Operations for the three and six
months ended March 31, 2000 and 1999 (unaudited) ............. 4
Statements of Comprehensive Income for the three and
six months ended March 31, 2000 and 1999 (unaudited) ......... 5
Statements of Cash Flows for the six months ended
March 31, 2000 and 1999 (unaudited) .......................... 6
Notes to Interim Financial Statements .......................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 13
PART II. OTHER INFORMATION .................................................. 13
Item 1. Legal Proceedings .............................................. 13
Item 2. Changes in Securities and Use of Proceeds ...................... 13
Item 3. Defaults upon Senior Securities ................................ 14
Item 4. Submission of Matters to a Vote of Security Holders ............ 14
Item 5. Other Information .............................................. 15
Item 6. Exhibits and Reports on Form 8-K ............................... 15
SIGNATURES .................................................................. 16
2
AMERICAN TECHNOLOGY CORPORATION
BALANCE SHEETS
March 31, 2000 September 30, 1999
-------------- ------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash ................................................................................. $ 7,186,255 $ 590,236
Investment securities available for sale (note 6) .................................... -- 299,648
Trade accounts receivable, less allowance of $20,000 and $8,000
for doubtful accounts, respectively .............................................. 156,364 158,533
Inventories (note 5) ................................................................. 221,272 287,321
Prepaid expenses and other ........................................................... 55,835 204,581
------------ ------------
TOTAL CURRENT ASSETS ................................................................... 7,619,726 1,540,319
------------ ------------
Equipment, net ....................................................................... 110,184 133,047
Patents, net ......................................................................... 549,108 487,670
Other assets, net .................................................................... 150,000 --
------------ ------------
TOTAL ASSETS ........................................................................... $ 8,429,018 $ 2,161,036
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................................................... $ 266,919 $ 333,754
Accrued liabilities:
Payroll and related .................................................................. 142,307 94,695
Other ................................................................................ 46,249 15,395
------------ ------------
TOTAL CURRENT LIABILITIES .............................................................. 455,475 443,844
============ ============
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.00001 par value; 5,000,000 shares authorized:
Series B Preferred stock 250,000 shares designated: 192,260 and 250,000 issued
and outstanding, respectively ...................................................... 2 3
Series C Preferred stock 300,000 shares designated: 300,000 and nil issued
and outstanding, respectively ...................................................... 3 --
Common stock, $0.00001 par value; 20,000,000 shares authorized
11,863,914 and 11,464,213 shares issued and outstanding, respectively ............. 119 115
Additional paid-in capital ........................................................... 20,720,840 13,251,171
Notes receivable ..................................................................... (27,895) (27,895)
Accumulated deficit .................................................................. (12,719,526) (11,805,647)
Accumulated other comprehensive income (note 6) ...................................... -- 299,445
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ............................................................. 7,973,543 1,717,192
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................. $ 8,429,018 $ 2,161,036
============ ============
See accompanying summary of accounting policies and notes to financial
statements.
3
AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
REVENUES:
Product sales ...................................... $ 179,261 $ 116,398 $ 745,408 $ 280,855
Contract and license ............................... -- -- 55,772 --
------------ ------------ ------------ ------------
Total revenues ....................................... 179,261 116,398 801,180 280,855
------------ ------------ ------------ ------------
Cost of revenues ..................................... 217,098 93,805 611,264 213,275
------------ ------------ ------------ ------------
GROSS PROFIT (LOSS) .................................. (37,837) 22,593 189,916 67,580
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative ................ 702,472 463,080 1,217,011 980,124
Research and development ........................... 538,828 260,121 907,529 498,462
Non-cash compensation expense ...................... -- 49,900 -- 160,583
------------ ------------ ------------ ------------
Total operating expenses ............................. 1,241,300 773,101 2,124,540 1,639,169
------------ ------------ ------------ ------------
Loss from operations ................................. (1,279,137) (750,508) (1,934,624) (1,571,589)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income .................................... 29,598 26,067 33,488 34,435
Gain on sale of investment securities .............. 877,195 -- 988,112 --
Other .............................................. -- -- (855) (231)
------------ ------------ ------------ ------------
Total other income (expense) ......................... 906,793 26,067 1,020,745 34,204
------------ ------------ ------------ ------------
NET LOSS ............................................. $ (372,344) $ (724,441) $ (913,879) $ (1,537,385)
============ ============ ============ ============
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS (NOTE 3) ... $ (2,932,785) $ (904,504) $ (3,505,886) $ (2,199,483)
============ ============ ============ ============
NET LOSS PER SHARE OF COMMON STOCK - BASIC AND DILUTED $ (0.25) $ (0.08) $ (0.30) $ (0.19)
============ ============ ============ ============
AVERAGE WEIGHTED NUMBER OF COMMON SHARES OUTSTANDING . 11,702,323 11,398,149 11,602,933 11,380,836
============ ============ ============ ============
See accompanying summary of accounting policies and notes to financial
statements.
4
AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
----------- ------------ ----------- -----------
Net Loss ............................................. $ (372,344) $ (724,441) $ (913,879) $(1,537,385)
Unrealized holding gain on securities
available for sale ............................... -- 22,755 -- 36,971
----------- ----------- ----------- -----------
Comprehensive loss ................................... $ (372,344) $ (701,686) $ (913,879) $(1,500,414)
=========== =========== =========== ===========
See accompanying summary of accounting policies and notes to financial
statements.
5
AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
March 31,
2000 1999
----------- -----------
INCREASE (DECREASE) IN CASH
OPERATING ACTIVITIES:
Net loss ......................................................... $ (913,879) $(1,537,385)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization ................................ 62,312 53,290
Allowance for doubtful accounts............................... 12,000 --
Common stock issued for services and compensation ............ 81,110 83,583
Stock options granted for services ........................... -- 77,000
Gain on sales of investment securities ....................... (988,112) --
Changes in assets and liabilities:
Trade accounts receivable ................................... (9,831) 15,278
Inventories ................................................. 66,049 (53,091)
Prepaid expenses and other .................................. 148,746 12,423
Accounts payable ............................................ (66,835) 43,561
Accrued liabilities ......................................... 78,466 (38,488)
----------- -----------
Net cash used in operating activities ............................ (1,529,974) (1,343,829)
----------- -----------
INVESTING ACTIVITIES:
Purchase of equipment ............................................ (29,251) (15,777)
Patent costs paid ................................................ (71,635) (91,311)
Deposit on technology purchase ................................... (150,000) --
Proceeds from sales of investment securities ..................... 988,314 --
----------- -----------
Net cash used in investing activities ............................ 737,428 (107,088)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock, net ................... 5,925,000 2,480,000
Proceeds from exercise of common stock warrants .................. 1,023,500 --
Proceeds from exercise of stock options .......................... 440,065 161,091
----------- -----------
Net cash provided by financing activities ........................ 7,388,565 2,641,091
----------- -----------
Net increase in cash ............................................. 6,596,019 1,190,174
Cash, beginning of period ........................................ 590,236 1,034,577
----------- -----------
Cash, end of period .............................................. $ 7,186,255 $ 2,224,751
=========== ===========
See accompanying summary of accounting policies and notes to financial
statements.
6
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 generally accepted accounting principles 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
and six 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, 1999.
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, stock options and warrants
convertible or exercisable into approximately 3,045,386 shares of common stock
were outstanding at March 31, 2000 and stock options, warrants, preferred stock
and debt convertible or exercisable into approximately 2,722,800 shares of
common stock were outstanding as of March 31, 1999. These securities were not
included in the computation of diluted EPS because of the net losses but could
potentially dilute EPS in future periods.
Net loss available to common stockholders was increased during the three and six
months ended March 31, 2000 in computing net loss per share by an imputed deemed
dividend based on the value of warrants issued in connection with Series B
Preferred Stock and Series C Preferred Stock (see Note 7). The Company
calculated the fair value of the warrants at $595,000 and $1,478,000,
respectively. The net loss available to common stockholders was also reduced by
an additional deemed dividend computed from a discount provision in the Series B
Preferred Stock of $30,000 and in the Series C Preferred Stock of $1,031,250.
Such imputed deemed dividends are not included in the Company's stockholders
equity as the Company has an accumulated deficit. Amounts are included in net
loss available to common stockholders. The imputed deemed dividends are not
contractual obligations of the Company to pay such imputed dividends.
The provisions of the Company's Series B Preferred Stock provides 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 period ended March 31, 2000
was $68,282 and $14,475, respectively, which increases the net loss available to
common stockholders. Net loss available to common stockholders is computed as
follows:
Three months ended March 31 Six months ended March 31
2000 1999 2000 1999
----------- ----------- ----------- ----------
Net Loss ...................................... $ (372,344) $ (724,441) $ (913,879) $(1,537,385)
Imputed deemed dividend on warrants
issued with Preferred Stock ................. (1,478,000) (115,000) (1,478,000) (595,000)
Accretion on Series B Preferred
Stock at stated rate ......................... (36,716) (35,063) (68,282) (37,098)
Accretion on Series C Preferred Stock
at stated rate .............................. (14,475) -- (14,475) --
Series B and Series C Preferred Stock
imputed deemed dividend based on
discount at issuance......................... (1,031,250) (30,000) (1,031,250) (30,000)
----------- ----------- ----------- -----------
Net loss available to common stockholders ..... $(2,932,785) $ (904,504) $(3,505,886) $(2,199,483)
=========== =========== =========== ===========
7
AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Investments
and Hedging Activities" ("SFAS No. 133") which establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS No. 133, as extended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. The Company does not expect the adoption of SFAS
No. 133 to have a material effect on the Company's consolidated financial
statements.
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 at
March 31, 2000:
Raw materials $174,771
Finished goods 66,501
Reserve for obsolete inventory (20,000)
--------
$221,272
========
6. INVESTMENT SECURITIES
During the six months ended March 31, 2000, the Company received $988,270 from
the sale of 225,000 shares of e.Digital Corporation ("EDIG") common stock, an
affiliated corporation. At March 31, 2000 the Company no longer holds available
for sale investment securities.
7. STOCKHOLDERS' EQUITY
At March 31, 2000, the Company had 192,260 shares of Series B Preferred Stock,
par value $0.00001 ("Preferred Stock") issued and outstanding. The dollar amount
of Preferred Stock, increased by $0.60 per share accretion per annum and other
adjustments, is convertible one or more times into fully paid shares of Common
Stock of the Company at a conversion price which is the lower of (i) $5.00 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 $3.50 per share. The shares of
Preferred Stock may be called by the Company for conversion if the market price
of the Common Stock exceeds $12.00 per share for ten days and certain conditions
are met. The Preferred Stock is subject to automatic conversion on November 30,
2001. At March 31, 2000 the Preferred Stock would have been convertible into
413,512 shares of Common Stock.
On March 16, 2000 the Company issued 300,000 shares of Series C Preferred Stock,
par value $0.00001 ("Series C Stock") for cash at $20.00 per share for net
proceeds of approximately $5,925,000. The dollar amount of Series C Stock,
increases by $1.20 per share accretion per annum and other adjustments, is
convertible one or more times into fully paid shares of Common Stock of the
Company 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 Series C Stock may
not be converted at an effective price of less than $8.00 per share until August
31, 2000. The shares of Series C 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 Stock is subject to
automatic conversion on March 31, 2003. At March 31, 2000, the Series C Stock
would have been convertible into 751,850 shares of Common Stock. In connection
with the sale of Series C Stock, the Company issued warrants to the purchasers
to purchase an aggregate of 300,000 shares of Common Stock at $11.00 per share
until March 31, 2003.
In connection with the Series C Stock financing, the Company incurred placement
fees, legal and related costs of $75,000 and issued a warrant to purchase 75,000
shares of Common Stock at $11.00 per share until March 31, 2005 as a placement
fee. The value assigned to the warrant issued as a placement fee was $468,783.
8
AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
7. STOCKHOLDERS' EQUITY (cont'd)
The following table summarizes changes in equity components from transactions
during the six months ended March 31, 2000:
Additional
Preferred Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit
----------- ----------- ----------- ----------- ----------- -----------
Balance as of October 1, 1999 ............ 250,000 $ 3 11,464,213 $ 115 $13,251,171 $11,805,647
Issuance of Common Stock:
Upon exercise of stock options .......... -- -- 88,600 1 440,064 --
For compensation and services ........... -- -- 8,233 -- 81,110 --
Upon exercise of warrants ............... -- -- 146,700 2 1,023,498 --
Cashless exercise of warrants ........... -- -- 33,452 -- -- --
Conversion of Series B preferred stock ... (57,740) (1) 122,716 1 -- --
Issuance of Series C preferred stock ..... 300,000 3 -- -- 5,924,997 --
Net loss ................................. -- -- -- -- -- 913,879
----------- ----------- ----------- ----------- ----------- -----------
Balance as of March 31, 2000 ............. 492,260 $ 5 11,863,914 $ 119 $20,720,840 $12,719,526
The following table summarizes information about stock option activity during
the period ended March 31, 2000:
Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding October 1, 1999 ...... 1,582,300 $ 5.16
Granted ......................... 121,200 $ 7.81
Canceled/expired ................ (6,267) $ 5.72
Exercised ....................... (88,600) $ 4.97
---------
Outstanding March 31, 2000 ....... 1,608,633 $ 5.36
=========
Exercisable at March 31, 2000..... 1,056,724 $ 3.91
=========
Options outstanding are exercisable at prices ranging from $0.50 to $16.00 and
expire over the period from 2000 to 2005 with an average life of 2.50 years.
At March 31, 2000, the Company had warrants outstanding, exercisable into the
following number of common shares:
Number Exercise Price Expiration Date
------ -------------- -----------------
83,300 $ 7.50 August 1, 2000
25,000 $16.00 June 18, 2000
240,000 $ 6.00 November 30, 2001
50,000 $16.00 May 12, 2003
50,000 $10.00 January 5, 2004
300,000 $11.00 March 31, 2003
75,000 $11.00 March 31, 2005
-------
823,300
=======
8. INCOME TAXES
At March 31, 2000, 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
$10,500,000 which expire through 2019 of which certain amounts are subject to
limitations under the Internal Revenue Code of 1986, as amended.
9. SUBSEQUENT EVENT
On April 11, 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
Company will pay up to an additional 200,000 shares of Common Stock upon the
achievement of certain performance milestones relating to gross revenues
received by the Company from the purchased loudspeaker technology. The Company
agreed to employ Mr. Williams and Mr. Graebener for a term of three years.
9
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." SEE ALSO OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30,
1999.
OVERVIEW
We are focused on commercializing our proprietary Stratified Field Technology
and completing the development and commercializing our HyperSonic Sound
technology. Our Stratified Field technology features a thin form factor, in a
variety of shapes and sizes, producing high fidelity, low distortion sound
reproduction. Our HyperSonic Sound technology employs a laser-like beam to
project sound to any listening environment. Our strategy is to commercialize
these technologies through OEMs by entering into licensing or contract supply
agreements. There is no guarantee we will be successful in commercially
exploiting our sound technologies.
We have entered into a technology license agreement with Thomson Audio Hong
Kong, a subsidiary of Thomson Multimedia (RCA and Thomson brand names). The
license agreement authorizes Thomson Audio to manufacture and market our SFT
thin-panel technology for Audio and Home Theater Systems applications. Thomson
Audio may also serve as an OEM ("Original Equipment Manufacturer") source to
also produce transducers and speakers for our other future OEM customers who
prefer outsourcing manufacturing. There is no guarantee that customers will
successfully develop or exploit commercially viable sound products due to the
inherent risks of new technology introduction, financial limitations,
competition and other factors beyond our and their control.
We have only recently obtained our first contract on HyperSonic Sound technology
and only recently commenced marketing of this technology. The technology is
still undergoing improvements. There is no guarantee that commercially viable
systems can be produced using our technology due to the inherent risks of new
technology development and transfer, limitations on financing, competition,
obsolescence, loss of key technical personnel and other factors beyond our
control. We have not generated any significant revenues from our sound
technologies to date.
Our various development projects are high risk in nature. Unanticipated
technical obstacles can arise at any time and result in lengthy and costly
delays or result in determination that further development is unfeasible. There
is no guarantee of timely completion of commercially viable sound products by
customers or that, if completed, such products will perform on a cost-effective
basis, or achieve market acceptance.
Our future is largely dependent upon the success of our sound and other
technologies, or the development of new technologies. We invest significant
funds in research and development and on patent applications related to our
proprietary technologies. There is no guarantee 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 ten products (including
FM and solar radios) targeted for niche markets at retail prices ranging from
$3.50 to $51.99. 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. We cannot guarantee that this product can be
successfully marketed in any significant volume.
10
Demand for our portable consumer 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 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 our limited financial resources.
RESULTS OF OPERATIONS
Total revenues for the six months ended March 31, 2000 were $801,180, a 185%
increase from the six months of the prior year. Revenues for the three month
period ending March 31, 2000 and 1999 were $179,261 and $116,398, respectively.
Substantially all revenues in both periods were from retail consumer products.
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. Our sales are further affected by a variety of factors
including seasonal requirements of customers.
Cost of sales for the six months ended March 31, 2000 were $611,264 resulting in
a gross profit of $189,916 or 24%. This compares to a gross profit of $67,580 or
24% for the comparable period of the prior year. Cost of sales for the three
months ended March 31, 2000 were $217,098 with a gross loss of $37,837. The
fiscal 2000 second quarter gross loss is the result of approximately $58,000 in
mark downs on slow moving inventory. Gross profit percentage is highly dependent
on sales prices, volumes, purchasing costs and overhead allocations.
Selling, general and administrative expenses were $1,217,011 for the six months
ended March 31, 2000, compared to $980,124 for comparable period of the prior
year. Selling, general and administrative expenses for the three months ended
March 31, 2000 and 1999 were $702,472 and $463,080, respectively. The $239,392
increase resulted from $22,230 for increased insurance coverage, a $42,000
increase in personnel and related costs, a $55,000 increase in travel and
related costs and a $23,000 expense to bad debt. We may expend additional
resources on marketing SFT and HSS technologies in future quarters, which may
increase selling, general and administrative expenses.
Research and development costs for the six months ended March 31, 2000, were
$907,529 compared to $498,462 for the comparable six months of the prior year.
The $409,067 increase resulted primarily from an increase in SFT and HSS
technology development activities and related personnel and component costs.
Likewise, research and development expenses for the second fiscal quarter ended
March 31, 2000 were $538,828, a $278,707 increase from the prior year period.
This increase was primarily due to increased research and development personnel
on staff during the current year.
Research and development costs 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 2000 research and development costs to remain at higher levels than the
prior year due to increased staffing and the use of outside design and
consultants.
We recorded non-cash compensation expense of $160,583 for the six months ended
March 31, 1999. Included in Selling, general and administrative expense for the
six months ended March 31, 2000 is non-cash compensation expense of $81,110
which is the result of services paid through the issuance of 8,233 shares of
Common Stock. Non-cash compensation costs vary depending on elections regarding
the use of common stock to pay services and other factors related to warrants
and option valuations.
During the second fiscal quarter of 2000, we sold 175,000 shares of e.Digital
Corporation ("EDIG") for a gain of $988,112.
We experienced a loss from operations of $1,934,624 during the six months ended
March 31, 2000, compared to a loss from operations of $1,571,589 for the
comparable six months ended March 31, 1999. The $363,035 increase is primarily
due to increase in research and development expenditures. The net loss from
operations for the three months ended March 31, 2000 was $1,279,137 compared to
$750,508 for the second quarter of the prior year.
The net loss available to common stockholders for the three and six months ended
March 31, 2000 of $2,932,785 and $3,505,886 respectively, included $51,191 and
$82,757 of accrued accretion on the Series B and Series C Preferred Stock,
respectively. The net loss available to common stockholders was also reduced by
an additional deemed dividend
11
computed from a discount provision in the Series B Preferred Stock of $30,000
and in the Series C Preferred Stock of $1,031,250. Such imputed deemed dividends
are not included in the Company's stockholders equity as the Company has an
accumulated deficit. Amounts are included in net loss available to common
stockholders.
We have federal net loss carryforwards of approximately $10,500,000 for federal
tax purposes expiring through 2019. 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 six months ended March
31, 2000, the Company experienced a net loss of $913,879. In addition to this
amount, $1,529,974 of cash was used in operating activities through a $66,835
decrease in accounts payable and a $9,831 increase in account receivable, as
adjusted. Operating cash was provided by a $66,049 decrease in inventories and a
$148,746 decrease in prepaid expenses.
At March 31, 2000, we had gross accounts receivable of $176,364 as compared to
$166,533 at September 30, 1999. This represented approximately 88.6 days of
sales. The increase in receivables resulted from increased product sales in the
current year. 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 six months ended March 31, 2000, the Company used approximately $29,251
for the purchase of laboratory and computer equipment and made a $71,635
investment in patents and new patent applications. The Company made a deposit as
partial payment on new technology of $150,000 during the second quarter ended
March 31, 2000. The Company is required to pay an additional $150,000 for the
purchase of the new technology within seven days of the closing date of the
agreement see Note 9 to the unaudited Interim Financial Statements. We
anticipate significant investments in patents in fiscal 2000 and requirements
for additional equipment for developing SFT, HSS and other technologies. We
cannot currently estimate the dollar amounts of these patent investments and
equipment additions.
At March 31, 2000, we had working capital of $7,164,251 and at September 30,
1999, we had working capital of $1,096,475.
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 shares of EDIG and margins from consumer product sales. At March 31,
2000, we had cash of $7,186,255. Primarily as a result of the sale of our EDIG
shares in January 2000 and the issuance of the Series C preferred stock, our
cash position increased by approximately $7 million from September 30, 1999.
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
continued product sale operations and 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
The Financial Accounting Standards Board has issued a number of new
pronouncements for future implementation as discussed in the footnotes to the
Company's interim financial statements (see page 7, 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 financial
statements.
YEAR 2000 READINESS DISCLOSURE
We are aware of the issues associated with the programming code in existing
computer systems. The "Year 2000" problem is concerned with whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. To date, we have not experienced any
Year 2000 problems in our computer systems or operations. However, other
companies, including us, could experience latent Year 2000 problems.
12
The information set forth above under this caption "Year 2000 Readiness
Disclosure" relates to our efforts to address the Year 2000 concerns regarding
our (a) operations, (b) products and technologies licensed or sold to third
parties and (c) major suppliers and customers. Such statements are intended as
Year 2000 Statements and Year 2000 Readiness Disclosures and are subject to the
"Year 2000 Information Readiness and Disclosure Act."
BUSINESS RISKS
This report contains a number of forward-looking statements, which reflect our
current views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or those
anticipated. In this report, the words "anticipates," "believes," "expects,"
"intends," "future" and similar expressions identify forward-looking statements.
Readers are cautioned to consider the specific risk factors described in our
Annual Report on Form 10-K for the year ended September 30, 1999 and not to
place undue reliance on the forward-looking statements contained herein, which
speak only as of the date hereof. We undertake no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that may
arise after the date hereof.
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 and cash equivalents of approximately $7,186,000.
The risk is not considered material and we manage such 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 as of the date of this report.
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
(a) Not applicable
(b) As more particularly described below, the Company sold 300,000 shares of
Series C Preferred Stock, par value $.00001 ("Series C") in March 2000. The
Series C is entitled to a liquidation preference over the common stock
13
equal to the purchase price of the Series C increased by 6% per annum. The
Series C is also entitled to a cash dividend equal 6% of the liquidation
preference when, as and if a cash dividend is declared on the common stock.
The Series C dividend must be paid in preference and priority to a dividend
on the common stock. The liquidation preference could materially diminish
the rights of the common stockholders in the event of a liquidation, and
the dividend preference will impair the Company's ability to declare a
dividend on the common stock were it to choose to do so. At this time, the
Company does not intend to declare dividends on the common stock in the
foreseeable future.
(c) The following is a description of the equity securities sold by the Company
during the second fiscal quarter ended March 31, 2000 that were not
registered under the Securities Act:
In March 2000 the Company sold in a private offering for cash at $20.00 per
share a total of 300,000 shares of Series C to a limited number of
investors ("Preferred Shareholders") for an aggregate of $6,000,000. The
dollar amount of the Series C Stock, increased by $1.20 per share per annum
and other adjustments, at the election of the Preferred Shareholder, may be
converted one or more times into fully paid and nonassessable shares of
common stock, $.00001 par value, of the Company, at a conversion price
which is the lower of (i) $8.00 per share or (ii) 92% of the volume rated
average market price of the common stock for the five trading days prior to
conversion, but in no event less than $5.75 per share. The Series C Stock
may not be converted at less than $8.00 per share prior to August 31, 2000.
The shares of Series C Stock may be called by the Company for conversion if
the market price of the common stock exceeds $20.00 per share for ten
consecutive trading days and subject to certain conditions are met. The
Series C Stock will be subject to automatic conversion on March 31, 2003 .
Each purchaser was also granted a warrant to purchase one common share of
the Company at $11.00 per share, subject to certain future adjustments,
until March 31, 2003 ("Warrant") for each share of Preferred Stock
(aggregate Warrants exercisable into 300,000 shares). These securities were
offered and sold without registration under the Securities Act of 1933, as
amended (the "Act"), in reliance upon the exemption provided by Regulation
D thereunder and an appropriate legend was placed on the Series C Stock and
Warrants and will be placed on the shares issuable upon conversion of the
Preferred Stock or exercise of the Warrants unless registered under the Act
prior to issuance. The Company has agreed to file a registration statement
covering the common stock issuable on conversion of the Series C Stock and
exercise of the Warrants.
Net proceeds from the sale of the Series C Stock of approximately
$5,925,000 are intended primarily for working capital to continue the
Company's efforts to exploit its SFT and HSS technologies and other
technologies. There can be no guarantee that the Company will successfully
develop or exploit its various technologies.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's fiscal 2000 Annual Meeting of Stockholders held on April 11,
2000, the following individuals, constituting all of the members of the Board of
Director were elected: Cornelius J. Brosnan, Elwood G. Norris, Richard M.
Wagner, David J. Carter, O'Connell J. Benjamin.
The following proposals were approved at the Company's Annual Meeting of
Stockholders:
1. Election of Directors:
Affirmative
Votes Negative Votes Votes Withheld
---------- -------------- --------------
Cornelius J. Brosnan ... 10,508,232 -0- 83,245
Elwood G. Norris ....... 10,578,732 -0- 12,745
Richard M. Wagner ...... 10,577,832 -0- 13,645
David J. Carter ........ 10,578,732 -0- 12,745
O'Connell J. Benjamin .. 10,513,232 -0- 78,245
2. To approve amendment to the Company's 1997 Stock Option Plan to increase
the aggregate number of shares of Common Stock for issuance under the plan
by 500,000 shares.
Affirmative
Votes Negative Votes Votes Withheld
---------- -------------- --------------
10,269,978 244,305 64,441
14
3. To ratify the selection of BDO Seidman, LLP as independent auditors of the
Company for the fiscal year ended September 30, 2000.
Affirmative
Votes Negative Votes Votes Withheld
---------- -------------- --------------
10,517,479 30,295 31,050
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1.5 Corrected Certificate of Designations of Series C Preferred Stock
filed with Delaware on April 19, 2000. file as exhibit 3.1.5 to ATC's
Form 8-K dated April 19, 2000.
4.9 Form of Stock Purchase Warrant exercisable at $11.00 per share until
March 31, 2002 granted to thirty-six investors for an aggregate of
300,000 common shares.
27 Financial Data Schedule
(a) Reports on Form 8-k(b)
None
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: April 28, 2000 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