-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JHWFaH1h4M/bmqMfuctedj+t0fZEQYbmniFiAAQcRTQYQmZMtSRIjMfAv+SGrMRd ArGsZGQu5HGoEAadBfjJvg== 0000936392-99-000170.txt : 19990215 0000936392-99-000170.hdr.sgml : 19990215 ACCESSION NUMBER: 0000936392-99-000170 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN TECHNOLOGY CORP /DE/ CENTRAL INDEX KEY: 0000924383 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651] IRS NUMBER: 870361799 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24248 FILM NUMBER: 99536725 BUSINESS ADDRESS: STREET 1: 13114 EVENING CREEK DRIVE SOUTH CITY: SAN DIEGO STATE: CA ZIP: 92128 BUSINESS PHONE: 6196792114 10-Q 1 FORM 10-Q 1 ================================================================================ 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 December 31, 1998 Commission File Number 0-24248 AMERICAN TECHNOLOGY CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 87-0361799 (State or other jurisdiction of (I.R.S. Empl. Ident. No.) incorporation or organization) 13114 Evening Creek Drive South, San Diego, California 92128 (Address of principal executive offices) (Zip Code)
(619) 679-2114 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $0.00001 par value 11,398,568 - -------------------------------- ---------- (Class) (Outstanding at February 10, 1999)
================================================================================ 1 2 AMERICAN TECHNOLOGY CORPORATION INDEX
Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Balance Sheets as of December 31, 1998 (unaudited) and September 30, 1998 3 Statements of Operations for the three months ended December 31, 1998 and 1997 (unaudited) 4 Statements of Cash Flows for the three months ended December 31, 1998 and 1997 (unaudited) 5 Notes to Interim Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 12 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 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14
2 3 PART I -- FINANCIAL INFORMATION Item 1. Financial Statements AMERICAN TECHNOLOGY CORPORATION BALANCE SHEET (Unaudited)
December 31, September 30, 1998 1998 ------------ ------------- ASSETS CURRENT ASSETS: Cash $ 2,320,613 $ 1,034,577 Investment securities available for sale (note 6) 14,419 14,645 Trade accounts receivable, less allowance of $5,367 and $17,000 for doubtful accounts, respectively 101,666 71,737 Inventories (note 5) 111,959 87,292 Prepaid expenses and other 48,357 58,470 ----------- ----------- Total current assets 2,597,014 1,266,721 ----------- ----------- Equipment, net 156,435 169,367 Patents 299,375 245,919 Other 1,044 1,738 ----------- ----------- Total assets $ 3,053,868 $ 1,683,745 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 261,872 $ 202,042 Accrued liabilities 46,282 78,791 ----------- ----------- Total current liabilities 308,154 280,833 ----------- ----------- Commitments and contingencies STOCKHOLDERS' EQUITY Series B Preferred stock, $0.00001 par value; 5,000,000 shares authorized: 201,600 shares issued and outstanding at December 31, 1998 (note 7) 2 -- Common stock, $0.00001 par value; 20,000,000 shares authorized: 11,374,314 and 11,356,014 shares issued and outstanding, respectively 114 114 Additional paid-in capital 12,818,269 10,180,265 Notes receivable (27,895) (27,895) Accumulated deficit (10,058,992) (8,764,013) Net unrealized gain on securities available for sale (note 6) 14,216 14,441 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 2,745,714 1,402,912 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,053,868 $ 1,683,745 =========== ===========
See accompanying summary of accounting policies and notes to financial statements. 3 4 AMERICAN TECHNOLOGY CORPORATION STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended December 31, 1998 1997 ------------------------------- Net sales $ 164,457 $ 60,884 Cost of products sold 119,470 101,165 ----------- ----------- Gross profit (loss) 44,987 (40,281) ----------- ----------- OPERATING EXPENSES: Selling, general and administrative 517,044 458,237 Research and development 238,341 192,096 Non-cash compensation expense 110,683 25,648 ----------- ----------- Total operating expenses 866,068 675,981 ----------- ----------- Loss from operations (821,081) (716,262) ----------- ----------- OTHER INCOME (EXPENSE): Interest income 8,368 48,554 Interest expense -- non-cash -- (5,388) Other (231) 15,000 ----------- ----------- Total other income (expense) 8,137 58,166 ----------- ----------- NET LOSS $ (812,944) $ (658,096) =========== =========== Net loss available to common stockholders (note 3) $(1,294,979) $ (658,096) =========== =========== Net loss per share of common stock - basic and diluted $ (0.11) $(0.07) =========== =========== Average weighted number of common shares outstanding 11,363,724 10,078,545 =========== ===========
See accompanying summary of accounting policies and notes to financial statements. 4 5 AMERICAN TECHNOLOGY CORPORATION STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended December 31, 1998 1997 ------------------------------- INCREASE (DECREASE) IN CASH OPERATING ACTIVITIES: Net loss $ (812,944) $ (658,096) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 26,244 30,822 Common stock issued for services and compensation 33,683 25,648 Stock options granted for services 77,000 -- Non-cash accrued interest on long term debt -- 872 Changes in assets and liabilities: Trade accounts receivable (29,929) 63,497 Inventories (24,667) 59,434 Prepaid expenses and other 10,113 (19,866) Accounts payable 59,830 73,103 Accrued liabilities (32,508) -- ---------- ---------- Net cash used in operating activities (693,178) (424,586) ---------- ---------- INVESTING ACTIVITIES: Purchase of property and equipment (12,618) (12,442) Patent costs paid (53,456) (48,776) ---------- ---------- Net cash used in investing activities (66,074) (61,218) ---------- ---------- FINANCING ACTIVITIES: Proceeds from issuance of preferred stock, net 2,000,000 -- Proceeds from exercise of stock options 45,288 -- ---------- ---------- Net cash provided by financing activities 2,045,288 -- ---------- ---------- Net increase (decrease) in cash 1,286,036 (485,804) Cash, beginning of period 1,034,577 3,338,458 ---------- ---------- Cash, end of period $2,320,613 $2,852,654 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Non-cash financing activities: Convertible notes exchanged for common stock -- $ 25,000 Interest paid by issuance of common stock -- $ 872
See accompanying summary of accounting policies and notes to financial statements. 5 6 AMERICAN TECHNOLOGY CORPORATION NOTES TO INTERIM FINANCIAL STATEMENTS (Unaudited) 1. OPERATIONS American Technology Corporation (the "Company" or "ATC") is engaged in the design, development and commercialization of sound, acoustics and other technologies and the sales and marketing of consumer electronic products. ATC's primary business is the marketing of two proprietary sound reproduction technologies, (i) SFT(TM), Stratified Field Technology and (ii) HSS(TM), HyperSonic Sound technology. 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 statement of the results for interim periods. Operating results for the three month periods are not necessarily indicative of the results that may be expected for the year. The interim financial statements and notes thereto should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended September 30, 1998. 3. NET LOSS PER SHARE The Company has implemented 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 2,365,000 shares of common stock were outstanding at December 31, 1998 and stock options, warrants, preferred stock and debt convertible or exercisable into approximately 3,030,000 shares of common stock were outstanding as of December 31, 1997. 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 first quarter of fiscal 1999 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 (see Note 7). The Company calculated the fair value of the warrants at $480,000. In future periods the net loss available to common stockholders will also be reduced by the amortization of an additional $20,000 deemed dividend computed from the discount provision included in the Series B Preferred Stock which will be amortized to the earliest period at which the discount can be utilized (May 31, 1999). Such imputed dividends are not contractual obligations of the Company to pay such imputed dividends. The provisions of the Series B Preferred Stock also provide for an accretion in the conversion value (similar to a dividend) of 6% or $0.60 per share per annum. The accrued accretion at December 31, 1998 was $2,035 which also increases the net loss available to common stockholders. Net loss available to common stockholders is computed as follows:
Three Months Ended December 31, 1998 1997 ---- ---- Net loss $ (812,944) $(658,096) Imputed deemed dividend on warrants issued with Series B Preferred Stock (480,000) -- Accretion on Series B Preferred Stock at stated rate (2,035) -- ----------- --------- Net loss available to common stockholders $(1,294,979) $(658,096) =========== =========
4. RECENT ACCOUNTING PRONOUNCEMENTS Effective October 1, 1998, the Company adopted the Financial Accounting Standards Board SFAS No. 130, "Reporting Comprehensive Income". This statement established standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The adoption of this statement had no material impact on the Company's financial condition or results of operation as of December 31, 1998 and for the three month periods ended December 31, 1998 and 1997. Total comprehensive income did not differ materially from the Company's net loss for the three months ended December 31, 1998 or 1997. 6 7 AMERICAN TECHNOLOGY CORPORATION NOTES TO INTERIM FINANCIAL STATEMENTS (Unaudited) 4. RECENT ACCOUNTING PRONOUNCEMENTS (cont'd) The Company has also adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which supersedes Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS 131 establishes standards for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Quarterly disclosures are not required in this first year of adoption. Management believes that SFAS 131 will not have a significant impact on the Company's disclosure of segment information in the future. The Financial Accounting Standards Board ("FASB") has issued SFAS No. 132, "Employers' Disclosure about Pensions and Other Post-retirement Benefits" and SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 132 standardizes the disclosure requirements for pensions and other post-retirement benefits and requires additional information on change in the benefit obligations and fair values of plan assets that will facilitate financial analysis. SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair market value. Gains or losses resulting from changes in the values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. SFAS No. 132 is effective for years beginning after December 15, 1997, and requires comparative information for earlier years to be restated, unless such information is not readily available. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management believes that the adoption of SFAS No. 132 and SFAS No. 133 will have no material effect on its 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 December 31, 1998: Finished goods $ 93,932 Work in process 4,296 Raw materials 13,731 -------- $111,959 ========
6. INVESTMENT SECURITIES The Company's investment securities consist of 225,300 shares of e.Digital Corporation ("EDIG") common stock, an affiliated corporation. These securities are reported at fair value as a current asset with unrealized gains and losses reported as a net amount as a separate component of stockholders' equity. At December 31, 1998 the Company's market value of available for sale securities consisted of: Gross Estimated Unrealized Fair Cost Gains Value ---- ---------- --------- Common Stock $203 $14,216 $14,419
7. STOCKHOLDERS' EQUITY During December 1998, the Company issued 201,600 shares of Series B Preferred Stock, par value $0.00001 ("Preferred Stock") for cash at $10.00 per share for gross proceeds of $2,016,000. 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 Preferred Stock may not be exercised at less than $5.00 per share until after May 31, 1999. 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. 7 8 AMERICAN TECHNOLOGY CORPORATION NOTES TO INTERIM FINANCIAL STATEMENTS (Unaudited) 7. STOCKHOLDERS' EQUITY (cont'd) In connection with the sale of Preferred Stock the Company issued warrants to purchase 201,600 shares of Common Stock at $6.00 per share until November 30, 2001. At December 31, 1998 the Preferred Stock would have been convertible into 403,607 shares of Common Stock. In January 1999 the Company issued an additional 48,400 shares of Preferred Stock for gross proceeds of $484,000 and issued warrants to purchase 48,400 shares of Common Stock on the same terms as above. The following table summarizes changes in equity components from transactions during the three months ended December 31, 1998:
Additional Common Stock Series B Preferred Paid-In Accumulated Shares Amount Shares Amount Capital Deficit ---------- ------ ------- ------ ----------- ----------- Balance October 1, 1998 11,356,014 $114 -- -- $10,180,265 $(8,764,013) Stock issued on exercised options 11,000 -- -- -- 45,288 -- Issuance of Series B Preferred Stock net of $16,000 in offering costs -- -- 201,600 2 1,999,998 -- Deemed dividends on 201,600 warrants issued with Series B Preferred Stock -- -- -- -- 480,000 (480,000) Accrued 6% accretion on Series B Preferred Stock -- -- -- -- 2,035 (2,035) Valued assigned to 30,000 stock options granted for services -- -- -- -- 77,000 -- Issuance of Common Stock for compensation and services 7,300 -- -- -- 33,683 -- Net loss -- -- -- -- -- (812,944) ---------- ---- ------- -- ----------- ------------ Balance December 31, 1998 11,374,314 $114 201,600 $2 $12,818,269 $(10,058,992) ========== ==== ======= == =========== ============
The following table summarizes information about stock option activity during the period ended December 31, 1998:
Weighted Average Shares Exercise Price --------- ---------------- Outstanding October 1, 1998 1,338,100 $4.51 Granted 30,000 $4.06 Canceled/expired (2,500) $4.19 Exercised (11,000) $4.12 --------- Outstanding December 31, 1998 1,354,600 $4.41 ========= Exercisable at December 31, 1998 969,068 $3.22 =========
The following table summarizes information about stock options outstanding at December 31, 1998:
Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices at 12/31/98 Life Price at 12/31/98 Price ----------- ----------- ----------- -------- ----------- -------- $0.50-$0.55 480,000 2.15 $ 0.52 480,000 $ 0.52 $3.59-$4.48 301,500 3.04 3.62 176,168 3.48 $4.98-$5.90 210,000 1.71 5.81 207,500 5.82 $7.81 63,100 2.30 7.81 47,900 7.81 $8.50 250,000 3.78 8.50 32,500 8.47 16.00 50,000 3.76 16.00 25,000 16.00 ----- ------ --------- ---- ------ ------- ------ $0.50-$16.00 1,354,600 2.79 $ 4.41 969,068 $ 3.22 ===== ====== ========= ==== ====== ======= ======
8 9 AMERICAN TECHNOLOGY CORPORATION NOTES TO INTERIM FINANCIAL STATEMENTS (Unaudited) 7. STOCKHOLDERS' EQUITY (cont'd) At December 31, 1998, the Company had warrants outstanding, exercisable into the following number of common shares:
Number Exercise Price Expiration Date ------ -------------- --------------- 60,000 $ 5.00 February 5, 2000 47,500 $ 5.00 March 1, 2000 172,500 $ 7.50 August 1, 2000 25,000 $16.00 June 18, 2000 201,600 $ 6.00 November 30, 2001 50,000 $16.00 May 12, 2003 50,000 $10.00 January 5, 2004 ------- 606,600 =======
8. INCOME TAXES At December 31, 1998, 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 $7,200,000 which expire through 2018 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 THE COMPANY'S 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 THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED SEPTEMBER 30, 1998. OVERVIEW ATC is focusing on completing development and commercializing its proprietary Stratified Field Technology ("SFT") and HyperSonic Sound ("HSS") sound reproduction technologies. SFT features a thin form factor, in a variety of shapes and sizes, producing high fidelity, low distortion sound reproduction. HSS technology employs a laser-like beam to project sound to any listening environment. ATC's strategy is commercialize the technologies through OEMs by entering into licensing or contract supply agreements. There can be no assurance ATC will be successful in commercially exploiting the SFT or HSS technology. The HSS technology has not been developed to the point of commercialization, and SFT has only recently been licensed for the first time. There can be no assurance that commercially viable systems can be completed due to the inherent risks of new technology development, limitations on financing, competition, obsolescence, loss of key technical personnel and other factors beyond ATC's control. ATC has not generated any significant revenues from its SFT or HSS technology to date. ATC's 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 can be no assurance of timely completion of commercially viable SFT and/or HSS products or that, if available, such products will perform on a cost-effective basis, or that, they will achieve market acceptance. The future of ATC is largely dependent upon the success of the SFT and/or HSS technology, other technologies or the development of new technologies. ATC invests significant funds in research and development and on patent applications related to its proprietary technologies. There can be no assurance ATC's technologies will achieve market acceptance sufficient to sustain ATC or achieve profitable operations. See "Business Risks" below. 9 10 To date substantially all of ATC's revenues have been derived from the sale of portable consumer electronic products. ATC has sourced a total of eleven products (including FM and solar radios) targeted for niche markets at retail prices ranging from $9.99 to $51.99. Sourcing is on both an exclusive and nonexclusive basis and for different market territories on a product by product basis. ATC's market focus is in North America. ATC intends to inventory finished goods as well as provide direct factory shipment to certain customers. There can be no assurance that the line of products can be marketed successfully. Demand for ATC's portable consumer electronic products is subject to significant month to month variability resulting from seasonal demand fluctuations and the limited number of customers and market penetration achieved to date by ATC. Further, sales have been concentrated with a few customers. ATC is also reliant on outside manufacturers to supply the products that it sells and markets and there can be no assurance of future supply. The markets for ATC's products and future products and technologies are subject to rapidly changing customer tastes and a high level of competition. Demand for ATC's products is influenced by demographic trends in society, marketing and advertising expenditures, and product positioning in retail outlets, technological developments, seasonal variations and general economic conditions. Because these factors can change rapidly, customer demand can also shift quickly. ATC may not be able to respond to changes in customer demand because of the time required to change or introduce products, production limitations and because of limited financial resources. RESULTS OF OPERATIONS Total revenues for the three months ended December 31, 1998 were $164,457, a 170% increase from the first three months of the prior year. Substantially all revenues in both periods were from electronic products. First quarter fiscal 1999 product sales consist of the new line of sourced products manufactured by others only recently introduced by the Company. There can be no assurance that the new product line can be successfully marketed in any significant volume. 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. The Company's sales are further affected by a variety of factors including seasonal requirements of customers. Cost of sales for the three months ended December 31, 1998 were $119,470 resulting in a gross profit of $44,987 or 27%. This compares to a gross loss of $40,281 or 66% for the comparable period of the prior year. The first quarter fiscal 1999 gross profit is the result of the new product line. The prior year's first quarter gross loss resulted from the phasing out of the previous FM and AM Sounds product line and included special close-out pricing to reduce inventory levels. Gross profit percentage is highly dependent on sales prices, volumes, purchasing costs and overhead allocations. Selling, general and administrative expenses increased from $458,237 for the three months ended December 31, 1997 to $517,044 for the three months ended December 31, 1998. The $58,807 increase included a $57,816 increase in personnel costs primarily associated with the addition of senior executives and SFT/HSS technology marketing personnel. Management anticipates that selling, general and administrative costs will continue at higher levels in fiscal 1999 due to the additions of senior executive and marketing personnel, an expanded facility and related operations. Management may expend additional resources on marketing SFT and HSS technology in the current year, which will increase selling, general and administrative expenses. Research and development costs for the three months ended December 31, 1998 were $238,341 compared to $192,096 for the comparable three months of the prior year. The $46,245 increase resulted primarily from an increase in SFT and HSS technology development activities and related personnel and component costs. 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. ATC expects fiscal 1999 research and development costs to remain at comparable levels to fiscal 1998 or at higher levels should the Company increase staffing or expand the use of outside design and consultants. The Company recorded non-cash compensation expense of $110,683 for the three months ended December 31, 1998 compared to $25,648 for the comparable prior period. Non-cash compensation expense for the current period included the $77,000 value attributable to stock options granted to consultants on 30,000 shares of Common Stock and $33,683 of services paid through the issuance of 7,300 shares of Common Stock. As a result of the above factors, the Company experienced a loss from operations of $821,081 during the three months ended December 31, 1998, compared to a loss from operations of $716,262 for the comparable three months ended December 31, 1997. The net loss for the first fiscal quarter of 1999 was $812,944 compared to $658,096 for the prior year's first quarter. The increase in the operating losses resulted primarily from the increases in research and 10 11 development costs, increases in selling, general and administrative costs associated with the SFT and HSS technology and the non-cash compensation expense. The Company has federal net loss carryforwards of approximately $7,200,000 for federal tax purposes expiring through 2018. The amount and timing of the utilization of the Company's 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 the Company recommenced operations in January 1992, the Company has had significant negative cash flow from operating activities. During the three months ended December 31, 1998, the net loss of $812,944 included non-cash expenses of $136,927 resulting in an adjusted net cash loss of $676,017. In addition to this amount of $676,017, $29,929 cash was used in operating activities through an increase in accounts receivable, an increase in inventories of $24,667, and a reduction of $32,508 in accrued liabilities, as adjusted. Operating cash was provided by a $10,113 reduction in prepaid expenses and other and a $59,830 increase in accounts payable. At December 31, 1998, the Company had accounts receivable of $101,666 as compared to $71,737 at September 30, 1998. This represented approximately 56 days of sales for the first quarter. The increase in receivables is a direct result of the increase in product sales in the first quarter. Receivables can vary dramatically due to quarterly and seasonal variations in sales and timing of shipments to and receipts from large customers many of which demand extended terms of 90-120 days. For the three months ended December 31, 1998, the Company used approximately $12,618 for the purchase of laboratory equipment and made a $53,456 investment in patents and new patent applications. The Company estimates a significant level of investments in patents in fiscal 1999 and requirements for additional equipment for developing SFT, HSS and other technologies. Dollar amounts of these patent investments and equipment additions are not currently estimable by management. At December 31, 1998, the Company had working capital of $2,288,859 and at September 30, 1998, the Company had working capital of $985,888. Included in working capital is the unrealized holding gain in the shares held by ATC in e.Digial Corporation ("EDIG"). At December 30, 1998 and 1997, ATC owned 225,300 shares of EDIG with a market value of $14,419 and $18,024, respectively. This investment is carried on the balance sheet as a current asset of ATC at market value. Since the Company's reorganization in January 1992 and through December 31, 1998, ATC has financed its operation primarily through the sale of common and preferred equity, exercise of stock options, issuances of convertible notes and proceeds from the sale of shares of EDIG. During December 1998, ATC sold 201,600 shares of Series B Preferred Stock providing net proceeds to the Company of $2,000,000. In January 1999 the Company sold an additional 48,400 Preferred Shares for gross proceeds of $484,000. Other than cash of $2,230,613 at December 31, 1998, the proceeds of the January Series B Preferred Stock sales and the EDIG shares, ATC has no other material unused sources of liquidity at this time. ATC expects to incur additional operating losses as a result of continued product sales and as a result of expenditures for research and development and marketing costs for the SFT and the HSS technology and other products and technologies. The timing and amounts of ATC's expenditures and the extent of operating losses will depend on many factors, some of which are beyond ATC's control. ATC anticipates that the commercialization of SFT and the HSS technology may require increased operating costs, however the amounts are not currently estimable by management. ATC believes it has sufficient financial resources for the next twelve months of operations given existing cash resources and assuming the current level of operations and cash expenditures. Management believes product sales, licensing and other operations may also contribute financial resources during the next twelve months, but there can be no assurance thereof. The level of expenditures during the next twelve months could also exceed prior levels or management's estimates and the variances could be material. Management's estimates are subject to significant variability and change due to management decisions regarding technologies, operations and the result of outside factors. The long-term success of ATC is dependent upon achieving a level of revenues adequate to support ATC's capital and operating requirements. The failure to raise additional funds, if required, could have a material adverse effect on ATC and could force ATC to reduce or curtail operations. 11 12 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 COMPLIANCE The Company is aware of the issues associated with the programming code in existing computer systems as the Year 2000 approaches. 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. The Year 2000 problem is pervasive and complex as the computer operation of virtually every company will be affected in some way. The Company, like most owners of computer software, will be required to modify significant potions of its software so that it will function properly in the Year 2000. Preliminary estimates of the total costs to be incurred by ATC to resolve this problem range from $10,000 to $20,000. Maintenance or modification costs will be expensed as incurred, while the costs of new software will be capitalized and amortized over the software's useful life. Since the Company mainly uses third party "off-the-shelf" software, it does not anticipate a problem in resolving the Year 2000 problem in a timely manner. ATC is currently taking steps to ensure that its computer systems and services will continue to operate on and after January 1, 2000. However, there can be no assurance that Year 2000 problems will not occur with respect to ATC's computer systems. Furthermore, the Year 2000 problem may impact other entities with which ATC transacts business, and ATC cannot predict the effect of the Year 2000 problem on such entities or the resulting effect on ATC. For such externally maintained systems, the Company has begun to work with venders to ensure that each such system is currently Year 2000 compliant or will be Year 2000 compliant during 1998 or 1999. The cost to be incurred by the Company related to externally maintained systems is expected to be minimal. Because of the many uncertainties associated with Year 2000 issues, and because the Company's assessment of externally maintained systems is necessarily based on information provided by third party vendors and suppliers, there can be no assurance that the Company's assessment is correct. As a result, if preventative and/or corrective actions by ATC and those ATC does business with are not made in a timely manner, the Year 2000 issue could have a material adverse effect on ATC's business, financial condition, results of operations and cash flows. ATC has not yet developed a contingency plan to operate in the event that any noncompliant critical systems are not remedied by January 1, 2000, but ATC intends to develop such a plan by March 31, 1999. BUSINESS RISKS This report contains a number of forward-looking statements, which reflect the Company's 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 the Company's Annual Report on Form 10-KSB for the year ended September 30, 1998 and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. The Company undertakes 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 the financial position, results of operations or cash flows of the Company due to adverse changes in market prices, including interest rate risk and other relevant market rate or price risks. The Company is exposed to some market risk through interest rates, related to its investment of its current cash and cash equivalents of approximately $2.3 million. The risk is not considered material and the Company manages such risk by continuing to evaluate the best investment rates available for short-term high quality investments. The Company has no activities in long-term indebtedness and its other investments are insignificant. 12 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time the Company is involved in routine litigation incidental to the conduct of its business. There are currently no material pending legal proceedings to which the Company is a party or to which any of its property is subject. ITEM 2. CHANGES IN SECURITIES (a) None (b) None (c) The following is a description of the equity securities sold by the Company during the first fiscal quarter ended December 31, 1998 that were not registered under the Securities Act: In December 1998 the Company sold in a private offering for cash at $10.00 per share a total of 201,600 shares of Series B Preferred Stock, par value $.00001 ("Preferred Stock") to a limited number of investors ("Preferred Shareholders") for an aggregate of $2,016,000. The dollar amount of Preferred Stock, increased by $.60 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) $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 Preferred Stock may not be exercised at less than $5.00 per share until after May 31, 1999. 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 shall be subject to automatic conversion on November 30, 2001. Each purchaser was granted a warrant to purchase 1,000 common shares of the Company at $6.00 per share, subject to certain future adjustments, until November 30, 2001 ("Warrant") for each 1,000 shares of Preferred Stock (aggregate Warrants exercisable into 201,600 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 Preferred 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 on the common stock obtained on conversion of the Preferred Stock and the Warrants. No underwriter was employed in the offering. Net proceeds from the sale of the Preferred Stock of approximately $2,000,000 is intended primarily for working capital to continue the Company's efforts to exploit its SFT and HSS technology and other technologies. In January 1999 the Company sold an additional 48,400 shares of Preferred Stock and issued warrants on an additional 48,400 shares on the same terms. Gross proceeds were $484,000. ITEM 3. DEFAULTS UPON SENIOR SECURITIES NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE ITEM 5. OTHER INFORMATION NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27 Financial Data Schedule 13 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN TECHNOLOGY CORPORATION Date: February 12, 1999 By: /s/ ROBERT PUTNAM ------------------------------------ Robert Putnam, Vice President, Treasurer and Director (Principal Financial and Accounting Officer and duly authorized to sign on behalf of the Registrant) 14 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED INTERIM STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998. 3-MOS SEP-30-1999 OCT-01-1998 DEC-31-1998 2,320,613 14,419 107,033 5,367 111,959 2,597,014 554,747 398,312 3,053,868 308,154 0 0 2 114 2,745,598 3,053,868 164,457 164,457 119,470 119,470 866,068 0 0 (812,944) 0 (812,944) 0 0 0 (812,944) (.11) (.11)
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