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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 June 30, 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
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(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 August 4, 2000)
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AMERICAN TECHNOLOGY CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of June 30, 2000 (unaudited)
and September 30, 1999 ................................... 3
Statements of Operations for the three and nine months ended
June 30, 2000 and 1999 (unaudited) ....................... 4
Statements of Comprehensive Loss for the three and nine
months ended June 30, 2000 and 1999 (unaudited) .......... 5
Statements of Cash Flows for the nine months ended
June 30, 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 ............................ 13
Item 4. Submission of Matters to a Vote of Security Holders ........ 13
Item 5. Other Information .......................................... 14
Item 6. Exhibits and Reports on Form 8-K ........................... 14
SIGNATURES ................................................................... 15
2
AMERICAN TECHNOLOGY CORPORATION
BALANCE SHEETS
June 30, September 30,
2000 1999
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash .......................................................................... $ 5,898,362 $ 590,236
Investment securities available for sale (note 7) ............................. -- 299,648
Trade accounts receivable, less allowance of $20,000 and $8,000
for doubtful accounts, respectively ....................................... 138,519 158,533
Inventories (note 5) .......................................................... 228,139 287,321
Prepaid expenses and other .................................................... 11,377 204,581
------------ ------------
Total current assets ............................................................ 6,276,397 1,540,319
------------ ------------
Equipment, net ................................................................ 157,804 133,047
Patents, net .................................................................. 588,072 487,670
Purchased technology, net (note 6) ............................................ 1,402,500 --
------------ ------------
Total assets .................................................................... $ 8,424,773 $ 2,161,036
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .............................................................. $ 271,928 $ 333,754
Accrued liabilities:
Payroll and related ........................................................... 45,897 94,695
Other ......................................................................... 46,380 15,395
------------ ------------
Total current liabilities ....................................................... 364,205 443,844
------------ ------------
Commitments and contingencies
Stockholders' Equity (note 8)
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
12,064,714 and 11,464,213 shares issued and outstanding, respectively ...... 121 115
Additional paid-in capital .................................................... 21,632,338 13,251,171
Notes receivable .............................................................. (27,895) (27,895)
Accumulated deficit ........................................................... (13,544,001) (11,805,647)
Accumulated other comprehensive income (note 7) ............................... -- 299,445
------------ ------------
Total stockholders' equity ...................................................... 8,060,568 1,717,192
------------ ------------
Total liabilities and stockholders' equity ...................................... $ 8,424,773 $ 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 June 30, Nine Months Ended June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenues:
Product sales ...................................... $ 261,119 $ 320,250 $ 1,006,527 $ 601,105
Contract and license ............................... 78,955 -- 134,727 --
------------ ------------ ------------ ------------
Total revenues ....................................... 340,074 320,250 1,141,254 601,105
------------ ------------ ------------ ------------
Cost of revenues ..................................... 164,931 187,702 776,195 400,977
------------ ------------ ------------ ------------
Gross profit ......................................... 175,143 132,548 365,059 200,128
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative ................ 663,735 466,425 1,880,746 1,607,132
Research and development ........................... 431,221 283,705 1,338,750 782,167
------------ ------------ ------------ ------------
Total operating expenses ............................. 1,094,956 750,130 3,219,496 2,389,299
------------ ------------ ------------ ------------
Loss from operations ................................. (919,813) (617,582) (2,854,437) (2,189,171)
------------ ------------ ------------ ------------
Other income (expense):
Interest income .................................... 95,338 14,469 128,826 48,904
Gain on sale of investment securities (note 7)...... -- -- 988,112 --
Other .............................................. -- (866) (855) (1,097)
------------ ------------ ------------ ------------
Total other income (expense) ......................... 95,338 13,603 1,116,083 47,807
============ ============ ============ ============
Net loss ............................................. $ (824,475) $ (603,979) $ (1,738,354) $ (2,141,364)
============ ============ ============ ============
Net loss available to common stockholders (note 3) ... $ (943,308) $ (671,479) $ (4,449,194) $ (2,870,962)
============ ============ ============ ============
Net loss per share of common stock - basic and diluted $ (0.08) $ (0.06) $ (0.38) $ (0.25)
============ ============ ============ ============
Average weighted number of common shares outstanding . 11,902,024 11,416,579 11,702,266 11,392,750
============ ============ ============ ============
See accompanying summary of accounting policies and
notes to financial statements.
4
AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
Three Months Ended June 30, Nine Months Ended June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net Loss ............................ $ (824,475) $ (603,979) $(1,738,354) $(2,141,364)
Unrealized holding gain on securities
available for sale ............... -- 514,810 -- 537,340
----------- ----------- ----------- -----------
Comprehensive loss .................. $ (824,475) $ (89,169) $(1,738,354) $(1,604,024)
=========== =========== =========== ===========
See accompanying summary of accounting policies and
notes to financial statements.
5
AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended June 30,
2000 1999
----------- -----------
Increase (Decrease) in Cash
Operating Activities:
Net loss ........................................................... $(1,738,354) $(2,141,364)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization .................................. 89,900 84,168
Allowance for doubtful accounts ................................ 12,000 --
Common stock issued for services and compensation .............. 81,110 108,205
Stock options granted for services ............................. -- 77,000
Gain on sales of investment securities ......................... (988,112) --
Changes in assets and liabilities:
Trade accounts receivable ..................................... 8,014 (138,608)
Inventories ................................................... 59,182 (179,126)
Prepaid expenses and other .................................... 193,204 (33,301)
Accounts payable .............................................. (61,826) 56,017
Accrued liabilities ........................................... (17,813) 13,179
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Net cash used in operating activities .............................. (2,362,695) (2,153,830)
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Investing Activities:
Purchase of equipment .............................................. (99,270) (40,979)
Patent costs paid .................................................. (115,788) (159,975)
Deposit on technology purchase ..................................... (440,000) --
Proceeds from sales of investment securities ....................... 988,314 --
----------- -----------
Net cash provided by (used in) investing activities ................ 333,256 (200,954)
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Financing Activities:
Proceeds from issuance of preferred stock, net ..................... 5,925,000 2,480,000
Proceeds from exercise of common stock warrants .................... 972,500 --
Proceeds from exercise of stock options ............................ 440,065 169,090
----------- -----------
Net cash provided by financing activities .......................... 7,337,565 2,649,090
----------- -----------
Net increase in cash ............................................... 5,308,126 294,306
Cash, beginning of period .......................................... 590,236 1,034,577
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Cash, end of period ................................................ $ 5,898,362 $ 1,328,883
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Supplemental disclosure of noncash investing and financing
activities:
Common stock issued for the purchase of technology .............. 962,500 --
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 nine 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 3,600,865 shares of common stock
were outstanding at June 30, 2000 and stock options, warrants, preferred stock
and debt convertible or exercisable into approximately 2,608,299 shares of
common stock were outstanding as of June 30, 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
nine months ended June 30, 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 8). 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 $60,000 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 June 30, 2000 was
$97,042 and $104,548, respectively, which increases the net loss available to
common stockholders. Net loss available to common stockholders is computed as
follows:
Three months ended Nine months ended
June 30 June 30
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net Loss ...................................... $ (824,475) $ (603,979) $(1,738,354) $(2,141,364)
Imputed deemed dividend on warrants
issued with Preferred Stock ................. -- -- (1,478,000) (595,000)
Accretion on Series B Preferred
Stock at stated rate ......................... (28,760) (37,500) (97,042) (74,598)
Accretion on Series C Preferred Stock
at stated rate .............................. (90,073) -- (104,548) --
Series B and Series C Preferred Stock imputed
deemed dividend based on discount at issuance -- (30,000) (1,031,250) (60,000)
----------- ----------- ----------- -----------
Net loss available to common stockholders ..... $ (943,308) $ (671,479) $(4,449,194) $(2,870,962)
=========== =========== =========== ===========
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 all fiscal
quarters of all 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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements of all public registrants. The provisions of SAB 101 are
effective for transactions beginning in the Company's fiscal year 2001. The
Company has not completed its assessment of the impact of SAB 101 and has not
determined its effect, if any, on its future reported results of operations.
In March 2000, the FASB issued Emerging Issues Task Force Issue No. 00-2,
"Accounting for Web Site Development Costs" ("EITF 00-2"), which is effective
for all such costs incurred for fiscal quarters beginning after June 30, 2000.
This Issue establishes accounting and reporting standards for costs incurred to
develop a web site based on the nature of each cost. Currently, as the Company
has no web site development costs, the adoption of EITF 00-2 would have no
impact on the Company's financial condition or results of operations. To the
extent the Company begins to enter into such transactions in the future, the
Company will adopt the Issue's disclosure requirements in the quarterly and
annual financial statements for the year ending September 30, 2000.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), which is
effective July 1, 2000, except that certain conclusions in this Interpretation
which cover specific events that occur after either December 15, 1998 or January
12, 2000 are recognized on a prospective basis from July 1, 2000. This
Interpretation clarifies the application of APB Opinion 25 for certain issues
related to stock issued to employees. The Company believes its existing stock
based compensation policies and procedures are in compliance with FIN 44 and
therefore, the adoption of FIN 44 will have no material impact on the Company's
financial condition, results of operations or cash flows.
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
June 30, 2000:
Finished goods ............... $ 155,662
Raw materials ................ 92,477
Reserve for obsolete inventory (20,000)
---------
$ 228,139
=========
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 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 subject to certain
terms and conditions.
7. INVESTMENT SECURITIES
During the nine months ended June 30, 2000, the Company received $988,270 from
the sale of 225,000 shares of e.Digital Corporation ("EDIG") common stock, an
affiliated corporation. At June 30, 2000 the Company no longer holds available
for sale investment securities.
8
AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
8. STOCKHOLDERS' EQUITY
At June 30, 2000, the Company had 192,260 shares of Series B Preferred Stock,
par value $0.00001 ("Series B Stock") issued and outstanding. The dollar amount
of Series B 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 Series B
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 Series B Stock is subject to automatic conversion on November 30, 2001.
At June 30, 2000 the Series B Stock would have been convertible into 419,264
shares of Common Stock. In connection with the Series B stock the Company issued
warrants to purchase 250,000 shares of Common Stock at $6.00 per share until
November 30, 2001.There were 240,000 warrants outstanding as of June 30, 2000.
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,
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 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 June 30, 2000, the Series C Stock
would have been convertible into 763,068 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.
The following table summarizes changes in equity components from transactions
during the nine months ended June 30, 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 --
Purchase of technology ............. -- -- 200,000 2 962,498 --
For compensation and services ...... -- -- 8,233 -- 81,110 --
Upon exercise of warrants .......... -- -- 147,500 2 972,498 --
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 ............................. -- -- -- -- -- (1,738,354)
------- ------------ ---------- ------------ ------------ ------------
Balance as of June 30, 2000 .......... 492,260 $ 5 12,064,714 $ 121 $ 21,632,338 $(13,544,001)
The following table summarizes information about stock option activity during
the third quarter ended June 30, 2000:
Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding October 1, 1999 .................. 1,582,300 $ 5.16
Granted .................................... 133,600 $ 7.84
Canceled/expired ........................... (6,267) $ 5.72
Exercised .................................. (88,600) $ 4.97
---------
Outstanding June 30, 2000 .................... 1,621,033 $ 5.32
Exercisable at June 30, 2000 ................. 1,092,949 $ 4.03
=========
9
AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
8. STOCKHOLDERS' EQUITY (CONT'D)
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 June 30, 2000, the Company had warrants outstanding, exercisable into the
following number of common shares:
Number Exercise Price Expiration Date
------ -------------- ---------------
82,500 $ 7.50 August 1, 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 June 30, 2003
75,000 $ 11.00 June 30, 2005
-------
797,500
=======
9. INCOME TAXES
At June 30, 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.
----------
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,
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 ("Original Equipment Manufacturer") 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 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
10
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 these products can be
successfully marketed in any significant volume.
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 nine months ended June 30, 2000 were $1,141,254, a 90%
increase from the nine months of the prior year. Revenues for the three month
period ending June 30, 2000 and 1999 were $340,074 and $320,250, respectively.
Retail revenue increased due to our expanding presence in the market place.
Contract and service revenue for the third quarter ending June 30, 2000 was
$134,727. For the three month period ending June 30, 2000 revenue earned from
contracts and licenses was $78,955. The Company had no contract and license
revenue for fiscal year 1999. 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 nine months ended June 30, 2000 were $776,195 resulting in
a gross profit of $365,059 or 32%. This compares to a gross profit of $200,128
or 33% for the comparable period of the prior year. Cost of sales for the three
months ended June 30, 2000 were $164,931 with a gross profit of $175,143. The
fiscal 2000 third quarter gross profit increase was generated in part from the
sale of closeout inventory marked down in a prior period. Gross profit
percentage is highly dependent on sales prices, volumes, purchasing costs and
overhead allocations.
Selling, general and administrative expenses were $1,880,746 for the nine months
ended June 30, 2000, compared to $1,607,132 for comparable period of the prior
year. Selling, general and administrative expenses for the three months ended
June 30, 2000 and 1999 were $663,735 and $466,425, respectively. The $273,614
increase resulted from a $127,721 increase in legal costs, a $72,874 increase in
travel and related costs and a $33,500 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 nine months ended June 30, 2000, were
$1,338,750 compared to $782,167 for the comparable nine months of the prior
year. The $556,583 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 third fiscal quarter ended
June 30, 2000 were $431,221, a $147,516 increase from the prior year period.
This increase was primarily due to increased research and development personnel
on staff during the current year.
11
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 2001 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 in selling, general and administrative expenses a non-cash
compensation expense of $185,205 for the nine months ended June 30, 1999.The
$185,205 of non-cash compensation expense for fiscal year 1999 included the
$77,000 value attributable to stock options granted to consultants on 30,000
shares of Common Stock and $108,205 of services paid through the issuance of
21,158 shares of Common Stock. Included in selling, general and administrative
expense for the nine months ended June 30, 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 $2,854,437 during the nine months ended
June 30, 2000, compared to a loss from operations of $2,189,171 for the
comparable nine months ended June 30, 1999. The $665,266 increase is primarily
due to increase in research and development expenditures. The net loss from
operations for the three months ended June 30, 2000 was $919,813 compared to
$617,582 for the second quarter of the prior year.
The net loss available to common stockholders for the three and nine months
ended June 30, 2000 of $943,308 and $4,449,194, respectively, included $97,042
and $104,548 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 computed from a discount provision in the Series B
Preferred Stock of $60,000 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. These 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 nine months ended June
30, 2000, the Company experienced a net loss of $1,738,354. In addition to this
amount, $2,362,695 of cash was used in operating activities through a $61,826
decrease in accounts payable and a $17,813 decrease in accrued liabilities, as
adjusted. Operating cash was provided by a $59,182 decrease in inventories, a
$8,014 decrease in accounts receivable and a $193,204 decrease in prepaid
expenses.
At June 30, 2000, we had gross accounts receivable of $158,519 as compared to
$166,533 at September 30, 1999. This represented approximately 83 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 nine months ended June 30, 2000, the Company used approximately $99,270
for the purchase of laboratory and computer equipment and made a $115,788
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. During the third quarter the Company paid an additional $290,000
for the purchase of the new technology. 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 June 30, 2000, we had working capital of $5,912,192 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, issuance's of convertible notes, proceeds from the
sale of investment securities and margins from consumer product sales. At June
30, 2000, we had cash of $5,898,362. Primarily as a result of the sale of the
investment securities in January 2000 and the
12
issuance of the Series C Preferred Stock, our cash position increased by
approximately $5.3 million from September 30, 1999. 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. 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
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 8, 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
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 of $5,898,362. 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
Not applicable
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:
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1. Election of Directors:
Affirmative Votes Negative Votes Broker non-votes Abstention
----------------- -------------- ---------------- ----------
Cornelius J. Brosnan 10,508,232 -0- 83,245 -0-
Elwood G. Norris 10,578,732 -0- 12,745 -0-
Richard M. Wagner 10,577,832 -0- 13,645 -0-
David J. Carter 10,578,732 -0- 12,745 -0-
O'Connell J. Benjamin 10,513,232 -0- 78,245 -0-
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 Broker non-votes Abstention
----------------- -------------- ---------------- -----------
10,269,978 244,305 64,441 -0-
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 Broker non-votes Abstention
----------------- -------------- ---------------- -----------
10,517,479 30,295 31,050 -0-
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
2.1 Asset Purchase Agreement dated as of April 11, 2000 between the Company
and Hucon Limited, David Graegener and Stephen M. Williams filed as
Exhibits 10.1 to ATC's Form 8-K dated April 26, 2000. The schedules and
exhibits referenced in this exhibit have not been included because they
contain information that is otherwise discussed in the agreement; they
will be forwarded supplementary to the Commission upon request.
10.19 Employment agreement effective as of February 15, 2000 between the
Company and Stephen M. Williams filed as Exhibit 10.2 to the Company's
Form 8-K dated April 26, 2000.
10.20 Employment Agreement effective as of February 15, 2000 between the
Company and David Graebener filed as Exhibit 10.3 to the Company's Form
8-K dated April 26, 2000.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed two reports on Form 8-K during the third fiscal
quarter ended June 30, 2000. The report dated April 19,2000 reported an Item 5
event related to the placement of $6,000,000 of Convertible Series C Preferred
Stock. The report dated April 26, 2000 reported an Item 2 event related to the
purchase of technology.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN TECHNOLOGY CORPORATION
Date: August 14, 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)
15