-----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, NLiPbDwHVIVQOj0UgMonTyyFEY/Nbw7lRn7xby3nBwjU7UAow9pZhPDc0F08T7qU p18beGuTyHzi2vyHkqjzvg== 0000936392-99-000999.txt : 19990816 0000936392-99-000999.hdr.sgml : 19990816 ACCESSION NUMBER: 0000936392-99-000999 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99688333 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 June 30, 1999 Commission File Number 0-24248 AMERICAN TECHNOLOGY CORPORATION (Exact name of registrant as specified in its charter) Delaware 87-03261799 -------- ----------- (State or other jurisdiction of (I.R.S. Empl. Ident. No.) incorporation or organization) 13114 Evening Creek Drive South, San Diego, California 92128 ------------------------------------------------------ ----- (Address of principal executive offices) (Zip Code) (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 11,451,789 - -------------------------------- ---------- (Class) (Outstanding at August 6, 1999) 1 2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMERICAN TECHNOLOGY CORPORATION INDEX
Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Balance Sheets as of June 30, 1999 (unaudited) and September 30, 1998 3 Statements of Operations for the nine months ended June 30, 1999 and 1998 (unaudited) 4 Statements of Comprehensive Income for the nine months ended June 30, 1999 and 1998 (unaudited) 5 Statements of Cash Flows for the nine months ended June 30, 1999 and 1998 (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 14 PART II. OTHER INFORMATION 14 Item 1. Legal Proceedings 14 Item 2. Changes in Securities and Use of Proceeds 14 Item 3. Defaults upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN TECHNOLOGY CORPORATION BALANCE SHEET (Unaudited)
June 30, 1999 September 30, 1998 --------------------------------- ASSETS CURRENT ASSETS: Cash $ 1,328,883 $ 1,034,577 Investment securities available for sale (note 6) 551,985 14,645 Trade accounts receivable, less allowance of $5,996 and $17,000 for doubtful accounts 210,345 71,737 Inventories (note 5) 266,418 87,292 Prepaid expenses and other 91,771 58,470 --------------------------------- TOTAL CURRENT ASSETS 2,449,402 1,266,721 --------------------------------- Equipment, net 131,267 169,367 Patents, net 402,543 245,919 Other -- 1,738 --------------------------------- TOTAL ASSETS $ 2,983,212 $ 1,683,745 --------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 258,059 $ 202,042 Accrued liabilities 91,970 78,791 --------------------------------- TOTAL CURRENT LIABILITIES 350,029 280,833 --------------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Series B Preferred stock, $0.00001 par value; 5,000,000 shares authorized: 250,000 shares issued and outstanding at June 30, 1999 (note 7) 3 -- Common stock, $0.00001 par value; 20,000,000 shares authorized:11,420,172 and 11,356,014 shares issued and outstanding 114 114 Additional paid-in capital 13,684,154 10,180,265 Notes receivable (27,895) (27,895) Accumulated deficit (11,574,975) (8,764,013) Accumulated other comprehensive income (note 6) 551,782 14,441 --------------------------------- TOTAL STOCKHOLDERS' EQUITY 2,633,183 1,402,912 --------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,983,212 $ 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 June 30, Nine Months Ended June 30, 1999 1998 1999 1998 --------------------------------------------------------------------- NET SALES $ 320,250 $ 79,257 $ 601,105 $ 163,836 Cost of products sold 187,702 93,978 400,977 378,497 --------------------------------------------------------------------- GROSS PROFIT (LOSS) 132,548 (14,721) 200,128 (214,661) --------------------------------------------------------------------- OPERATING EXPENSES: Selling, general and administrative 441,803 442,214 1,421,927 1,420,771 Research and development 283,705 269,210 782,167 708,045 Non-cash compensation expense 24,622 427,255 185,205 464,528 --------------------------------------------------------------------- Total operating expenses 750,130 1,138,679 2,389,299 2,593,344 --------------------------------------------------------------------- Loss from operations (617,582) (1,153,400) (2,189,171) (2,808,005) --------------------------------------------------------------------- OTHER INCOME (EXPENSE): Interest income 14,469 29,334 48,904 113,946 Interest expense - non-cash -- (920,000) -- (926,555) Other (866) -- (1,097) 15,000 --------------------------------------------------------------------- Total other income (expense) 13,603 (890,666) 47,807 (797,609) --------------------------------------------------------------------- NET LOSS $ (603,979) $ (2,044,066) $ (2,141,364) $ (3,605,614) ===================================================================== NET LOSS AVAILABLE TO COMMON STOCKHOLDERS (NOTE 3) (671,479) $ (2,044,066) $ (2,870,962) $ (3,605,614) ===================================================================== NET LOSS PER SHARE OF COMMON STOCK - BASIC AND DILUTED $ (0.06) $ (0.18) $ (0.25) $ (0.34) ===================================================================== AVERAGE WEIGHTED NUMBER OF COMMON SHARES OUTSTANDING 11,416,579 11,250,244 11,392,750 10,733,524 =====================================================================
See accompanying summary of accounting policies and notes to financial statements. 4 5 AMERICAN TECHNOLOGY CORPORATION STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended June 30, Nine Months Ended June 30, 1999 1998 1999 1998 ----------------------------------------------------------------- Net loss $(603,979) $(2,044,066) $(2,141,364) $(3,605,614) Unrealized holding gain (loss) on securities available for sale 514,810 7,878 537,340 (2,456) ----------------------------------------------------------------- Comprehensive loss $ (89,169) $(2,036,188) $(1,604,024) $(3,608,070) =================================================================
See accompanying summary of accounting policies and notes to financial statements. 5 6 AMERICAN TECHNOLOGY CORPORATION STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended June 30, 1999 1998 ----------- ----------- INCREASE (DECREASE) IN CASH OPERATING ACTIVITIES: Net loss $(2,141,364) $(3,605,614) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 84,168 99,826 Warrants issued for services -- 122,000 Common stock issued for services and compensation 108,205 37,273 Stock options granted for services 77,000 180,000 Non-cash accrued interest on cashless exercise of warrants -- 920,000 Non-cash accrued interest on long term debt -- 6,555 Bonus paid on exchange for payment on note receivable -- 125,255 Write-down of inventory and loss accrual -- 160,000 Changes in assets and liabilities: Trade accounts receivable (138,608) 187,089 Inventories (179,126) (36,417) Prepaid expenses and other (33,301) (23,297) Accounts payable 56,017 110,776 Accrued liabilities 13,179 -- ----------- ----------- Net cash used in operating activities (2,153,830) (1,716,554) ----------- ----------- INVESTING ACTIVITIES: Purchase of property and equipment (40,979) (73,452) Patent costs paid (159,975) (82,255) ----------- ----------- Net cash used in investing activities (200,954) (155,707) ----------- ----------- FINANCING ACTIVITIES: Proceeds from exercise of stock warrants -- 136,250 Proceeds from issuance of preferred stock, net 2,480,000 -- Proceeds from exercise of stock options 169,090 196,343 ----------- ----------- Net cash provided by financing activities 2,649,090 332,593 ----------- ----------- Net increase (decrease) in cash 294,306 (1,539,668) Cash, beginning of period 1,034,577 3,338,458 ----------- ----------- Cash, end of period $ 1,328,883 $ 1,798,790 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Non-cash financing activities: Convertible notes exchanged for common stock -- $ 375,000 Interest paid by issuance of common stock -- $ 18,206
See accompanying summary of accounting policies and notes to financial statements. 6 7 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 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, 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 2,608,299 shares of common stock were outstanding at June 30, 1999 and stock options, warrants, preferred stock and debt convertible or exercisable into approximately 1,386,800 shares of common stock were outstanding as of June 30, 1998. 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 nine months ended June 30, 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 $595,000. The net loss available to common stockholders was also reduced by the amortization of an additional $60,000 deemed dividend computed from the discount provision included in the Series B Preferred Stock, which was amortized to the earliest period at which the discount could 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 June 30, 1999 was $74,598, which also increases the net loss available to common stockholders. Net loss available to common stockholders is computed as follows: Nine months Ended June 30,
1999 1998 ----------- ----------- Net loss $(2,141,364) $(3,605,614) Imputed deemed dividend on warrants issued with Series B Preferred Stock (595,000) -- Accretion on Series B Preferred Stock at stated rate (74,598) -- Series B Preferred Stock dividends based on imputed discount at issuance (60,000) -- ----------- ----------- Net loss available to common stockholders $(2,870,962) $(3,605,614) =========== ===========
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. 7 8 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. 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, 1999: Finished goods $243,950 Work in process 8,182 Raw materials 14,286 -------- $266,418 ========
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 June 30, 1999 the Company's market value of available for sale securities consisted of:
Gross Estimated Unrealized Fair Cost Gains Value ---- ---------- --------- Common stock $203 $551,782 $551,985
7. STOCKHOLDERS' EQUITY During December 1998 and January 1999, the Company issued 250,000 shares of Series B Preferred Stock, par value $0.00001 ("Preferred Stock") for cash at $10.00 per share for net proceeds of $2,480,000. 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 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. In connection with the sale of Preferred Stock the Company issued warrants to purchase 250,000 shares of Common Stock at $6.00 per share until November 30, 2001. At June 30, 1999 the Preferred Stock would have been convertible into 514,899 shares of Common Stock. 8 9 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 nine months ended June 30, 1999:
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 43,000 -- -- -- 169,090 -- Issuance of Series B Preferred Stock, net of $20,000 in offering costs -- -- 250,000 3 2,479,997 -- Deemed dividends on 250,000 warrants issued with Series B Preferred Stock -- -- -- -- 595,000 (595,000) Accrued 6% accretion on Series B Preferred Stock -- -- -- -- 74,598 (74,598) Valued assigned to 30,000 stock options granted for services -- -- -- -- 77,000 -- Issuance of Common Stock for compensation and services 21,158 -- -- -- 108,204 -- Net loss -- -- -- -- -- (2,141,364) ---------------------------------------------------------------------------------- Balance June 30, 1999 11,420,172 $ 114 250,000 $ 3 $ 13,684,154 $(11,574,975) ==================================================================================
The following table summarizes information about stock option activity during the period ended June 30, 1999:
Weighted Average Shares Exercise Price ------ -------------- Outstanding October 1, 1998 1,338,100 $4.51 Granted 269,300 $4.71 Canceled/expired (144,500) $6.09 Exercised (24,500) $4.12 ---------- Outstanding June 30, 1999 1,438,400 $4.31 ---------- Exercisable at June 30, 1999 1,005,434 $3.21 ==========
The following table summarizes information about stock options outstanding at June 30, 1999:
Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices at 6/30/99 Life Price at 6/30/99 Price ------ ---------- ---- ----- ---------- ----- $0.50-$0.55 480,000 1.90 $ 0.52 480,000 $ 0.52 $3.59-$4.48 289,000 2.97 3.61 213,001 3.51 $4.98-$5.90 328,300 4.01 5.08 175,433 5.16 $7.81 41,100 1.79 7.81 34,500 7.81 $8.50 250,000 3.37 8.50 77,500 8.49 $16.00 50,000 3.26 16.00 25,000 16.00 ---------------------------------------------------------------------------------------- $0.50-$16.00 1,438,400 2.93 $ 4.31 1,005,434 $ 3.21 ========================================================================================
9 10 AMERICAN TECHNOLOGY CORPORATION NOTES TO INTERIM FINANCIAL STATEMENTS (Unaudited) 7. STOCKHOLDERS' EQUITY (cont'd) At June 30, 1999, 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 250,000 $ 6.00 November 30, 2001 50,000 $16.00 May 12, 2003 50,000 $10.00 January 5, 2004 -------- 655,000 ========
8. INCOME TAXES At June 30, 1999, 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 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 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"), HyperSonic Sound ("HSS") sound reproduction technologies and its Magnified Force Woofer Technology ("MFW"). 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. The Company believes that its MFW technology is compatible with home theatre systems, while improving output performance. ATC's strategy is to 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. In addition, the Company has recently filed a new patent application on the technology of its MFW. 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 10 11 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. 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 nine months ended June 30, 1999 were $601,105, a 267% increase from the first nine months of the prior year. Substantially all revenues in both periods were from electronic products. Sales for the three months ended June 30, 1999 were $320,250 compared to $79,257 for the comparable prior period. Third quarter fiscal 1999 product sales consist of the 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 nine months ended June 30, 1999 were $400,977 resulting in a gross profit of $200,128 or 33%. This compares to a gross loss of $214,661 for the comparable period of the prior year. Cost of sales for the three months ended June 30, 1999 were $187,702 and gross profit was $132,548. The fiscal 1999 gross profit is the result of the new product line. The prior year's 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 were $1,421,927 for the nine months ended June 30, 1999 comparable to the prior year. For the three months ending June 30, 1999 expenses were $441,803 equivalent to the comparable period of the prior year. Management anticipates that selling, general and administrative costs will continue at comparable levels. However, management may expend additional resources on marketing SFT and HSS technology in the future quarters, which may increase selling, general and administrative expenses. Research and development costs for the nine months ended June 30, 1999 were $782,167 compared to $708,045 for the comparable nine months of the prior year. The $74,122 increase resulted primarily from an increase in SFT and HSS technology development activities and related personnel and component costs. Research and development costs of $283,705 in the third quarter of fiscal 1999 were comparable to the prior year $269,210 in the third fiscal quarter of fiscal 1998. 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 $185,205 for the nine months ended June 30, 1999 compared to $464,528 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 $108,205 of services paid through the issuance of 21,158 shares of Common Stock. 11 12 As a result of the above factors, the Company experienced a loss from operations of $2,189,171 during the nine months ended June 30, 1999, compared to a loss from operations of $2,808,005 for the comparable nine months ended June 30, 1998. The net loss for the nine months ended June 30, 1999 was $2,141,364 a reduction from the $3,605,614 reported for the prior year's comparable nine-month period. The net loss available to common stockholders for the nine month ended June 30, 1999 of $2,870,962 includes $595,000 of imputed dividends on the issuance of the Series B Preferred Stock, $74,598 of accretion and amortization of $60,000 related to the imputed discount at issuance. The Company has federal net loss carryforwards of approximately $7,200,000 for federal tax purposes expiring through 2019. 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 nine months ended June 30, 1999, the net loss of $2,141,364 included non-cash expenses of $269,373 resulting in an adjusted net cash loss of $1,871,991. In addition to this amount of $1,871,991; $179,126 of cash was used in operating activities through an increase in inventories and $138,608 through an increase in accounts receivable., as adjusted. Operating cash was provided by a $56,018 increase in accounts payable and a $13,179 increase in accrued liabilities At June 30, 1999, the Company had accounts receivable of $210,345 as compared to $71,737 at September 30, 1998. This represented approximately 96 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 nine months ended June 30, 1999, the Company used approximately $41,000 for the purchase of laboratory and computer equipment and made an $160,000 investment in patents and new patent applications. The Company anticipates 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 June 30, 1999, the Company had working capital of $2,099,372 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 June 30, 1999 and 1998, ATC owned 225,300 shares of EDIG with a market value of $551,985 and $26,833, 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 June 30, 1999, 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 and January 1999, ATC sold 250,000 shares of Series B Preferred Stock providing net proceeds to the Company of $2,480,000. Other than cash of $1,328,883 at June 30, 1999, 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. At the current level of expenditures and revenues ATC believes it would require approximately $500,000 of additional funding for the next twelve months of operations given existing cash resources and other resources. Management believes product sales, licensing and other operations 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 12 13 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. 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 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 which could lead to business disruptions in the U.S. and internationally. The Company has identified the following areas, which could be impacted by the Year 2000 issue. They are: Company products; internally used systems and software; products or services provided by key third parties; and the inability of licensees and prospective licensees or customers to process business transactions relating to licensing revenue and product sales. During the first calendar quarter ended March 31, 1999 the Company completed an initial review its internal systems. The review consisted of an evaluation of significant internal hardware systems and major software application programs, which are primarily, packaged third party "off-the-shelf" software programs. As a result of this review the Company has identified certain systems which require further review and probable upgrades to be Year 2000 ready, the costs of which are included in management's estimates outlined below. The Company is currently evaluating new business software applications and one major selection and evaluation criterion will be full compliance with Year 2000. The Company's licensable technology and consumer products do not have any material Year 2000 problems. In addition, the Company is in the process of assessing the compliance of its major customers, suppliers and vendors. Management believes that third-party relationships upon which the Company relies represent the greatest risk with respect to the Year 2000 issue, because the Company cannot guarantee that third parties will be able to adequately assess and address their Year 2000 compliance issues in a timely manner. As a consequence, the Company can give no assurances that issues related to Year 2000 will not have a material adverse effect on future results of operations or financial condition. During the month of June 1999, the Company implemented its Year 2000 plan. Subsequent to the third quarter ended June 30, 1999, the Company hired an IS director to address all Year 2000 issues. Management's estimated costs relating to the Company's compliance efforts is in the range of $20,000 to $30,000 consisting primarily of the newly installed Year 2000 compliant integrated accounting software program accompanied with new computers. Maintenance or modification costs will be expensed as incurred, while the costs of the new computers and software will be capitalized and amortized over the respective useful life. Should the Company not be completely successful in mitigating internal and external Year 2000 risks, the likely worst case scenario could be a system failure causing disruptions of operations, including, among other things, a temporary inability to process transactions, develop or distribute products, send invoices or engage in similar normal business activities at the Company or its vendors and suppliers. If the Company determines certain suppliers are not Year 2000 compliant, it may have to arrange for alternative sources of supply and the stockpiling of inventory in the fall of 1999 in preparation for the Year 2000. The Company cannot estimate at this time the cost or effect on the Company's financial condition of any stockpiling of inventory. The Company currently does not have any other contingency plans with respect to potential Year 2000 failures of its suppliers or customers and at the present time, after an initial evaluation, does not intend to develop one. If these failures would occur, depending upon their duration and severity, they could have a material adverse effect on the Company's business, results of operations and financial condition. The information set forth above under this caption "Year 2000 Readiness Disclosure" relates to the Company's efforts to address the Year 2000 concerns regarding the Company's (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 Act." 13 14 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 $1.8 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. 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) None 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 14 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: August 13, 1999 By: /s/ RENEE' WARDEN ---------------------- Renee' Warden, Chief Accounting Officer and Treasurer (Principal Financial and Accounting Officer and duly authorized to sign on behalf of the Registrant) 15 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED INTERIM STATEMENTS FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999. 9-MOS SEP-30-1999 OCT-01-1998 JUN-30-1999 1,328,883 551,985 216,341 5,996 266,418 2,449,402 583,108 451,841 2,983,212 350,029 0 0 3 114 2,633,066 2,983,212 601,105 601,105 400,977 400,977 2,389,299 0 0 (2,141,364) 0 (2,141,364) 0 0 0 (2,141,364) (0.25) (0.25)
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