10-Q 1 d10q.txt DECEMBER 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____ to____. Commission File Number 0-24248 AMERICAN TECHNOLOGY CORPORATION (Exact name of registrant as specified in its charter) Delaware 87-03261799 (State or other jurisdiction of (I.R.S. Empl. Ident. No.) incorporation or organization) 13114 Evening Creek Drive South, San Diego, California 92128 (Address of principal executive offices) (Zip Code) (858) 679-2114 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $0.00001 par value 14,272,996 (Class) (Outstanding at February 8, 2002) AMERICAN TECHNOLOGY CORPORATION INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Balance Sheets as of December 31, 2001 (unaudited) and September 30, 2001 3 Statements of Operations for the three months ended December 31, 2001 and 2000 (unaudited) 4 Statements of Cash Flows for the three months ended December 31, 2001 and 2000 (unaudited) 5 Notes to Interim Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 PART II. OTHER INFORMATION 14 Item 1. Legal Proceedings 14 Item 2. Changes in Securities and Use of Proceeds 14 Item 3. Defaults upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 2
American Technology Corporation BALANCE SHEETS (unaudited) December 31, September 30, 2001 2001 ======================================================================================================== ASSETS Current Assets: Cash $1,512,485 $1,354,072 Trade accounts receivable, less allowance of $20,191 for doubtful accounts each period 94,269 117,584 Inventories [note 5] 156,437 197,013 Prepaid expenses and other 38,158 67,160 -------------------------------------------------------------------------------------------------------- Total current assets 1,801,349 1,735,829 ======================================================================================================== Equipment, net 462,211 516,208 Patents, net of accumulated amortization of $93,471 and $74,584 851,648 848,783 Purchased technology, net of accumulated amortization of of $631,243 and $526,036 [note 6] 631,257 736,464 -------------------------------------------------------------------------------------------------------- Total assets $3,746,465 $3,837,284 ======================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $364,406 $321,775 Accrued liabilities: Payroll and related 121,749 159,311 Deferred revenue 219,444 248,611 Other 29,612 114,092 12% Convertible Promissory Note, net of $1,620,000 and $800,000 for 405,000 - for debt discount [note 7] Accrued interest 59,556 - -------------------------------------------------------------------------------------------------------- Total current liabilities 1,199,767 843,789 ======================================================================================================== Commitments and contingencies [notes 6 and 8] Stockholders' equity [note 8]: Preferred stock, $0.00001 par value; 5,000,000 shares authorized Series B Preferred stock 250,000 shares designated: 0 and 168,860 issued and outstanding, respectively - 2 Series C Preferred stock 300,000 shares designated: 10,000 issued and outstanding. - - Common stock, $0.00001 par value; 20,000,000 shares authorized 14,272,522 and 13,704,139 shares issued and outstanding 143 137 Additional paid-in capital 24,175,608 22,913,268 Accumulated deficit (21,629,053) (19,919,912) -------------------------------------------------------------------------------------------------------- Total stockholders' equity 2,546,698 2,993,495 -------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $3,746,465 $3,837,284 ========================================================================================================
See accompanying summary of accounting policies and notes to financial statements 3 American Technology Corporation STATEMENTS OF OPERATIONS (Unaudited)
For the three months ended December 31, 2001 2000 =========================================================================================== Revenues: Product sales $ 224,954 $ 159,416 Contract and license 31,667 33,306 ------------------------------------------------------------------------------------------- Total revenues 256,621 192,722 ------------------------------------------------------------------------------------------- Cost of revenues 116,459 175,110 ------------------------------------------------------------------------------------------- Gross profit 140,162 17,612 ------------------------------------------------------------------------------------------- Operating expenses: Selling, general and administrative 492,656 611,195 Research and development 893,937 863,920 ------------------------------------------------------------------------------------------- Total operating expenses 1,386,593 1,475,115 ------------------------------------------------------------------------------------------- Loss from operations (1,246,431) (1,457,503) ------------------------------------------------------------------------------------------- Other income (expense): Interest income 2,646 63,923 Interest expense (464,556) - Other (800) - ------------------------------------------------------------------------------------------- Total other income (expense) (462,710) 63,923 ------------------------------------------------------------------------------------------- Net loss $(1,709,141) $(1,393,580) =========================================================================================== Net loss available to common stockholders (note 3) $(1,729,097) $(1,432,190) =========================================================================================== Net loss per share of common stock - basic and diluted $(0.12) $(0.11) =========================================================================================== Average weighted number of common shares outstanding 13,880,862 13,287,642 ===========================================================================================
See accompanying summary of accounting policies and notes to financial statements 4
American Technology Corporation STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended December 31, 2001 2000 ======================================================================================================== Increase (Decrease) in Cash Operating Activities: Net loss $(1,709,141) $(1,393,580) Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization 180,750 140,992 Options issued for services 33,744 - Stock issued for services 3,600 34,381 Amortization of debt discount 405,000 - Changes in assets and liabilities: Trade accounts receivable 23,315 165,071 Inventories 40,576 (2,938) Prepaid expenses and other 29,002 12,217 Accounts payable 42,631 23,151 Accrued liabilities (91,653) (56,842) -------------------------------------------------------------------------------------------------------- Net cash used in operating activities (1,042,176) (1,077,548) -------------------------------------------------------------------------------------------------------- Investing Activities: Purchase of equipment (7,659) (39,567) Patent costs paid (16,752) (58,520) -------------------------------------------------------------------------------------------------------- Net cash used in investing activities (24,411) (98,087) -------------------------------------------------------------------------------------------------------- Financing Activities: Proceeds from issuance of convertible promissory notes 1,225,000 - -------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,225,000 - -------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 158,413 (1,175,635) Cash, beginning of period 1,354,072 4,645,615 -------------------------------------------------------------------------------------------------------- Cash, end of period $1,512,485 $3,469,980 ======================================================================================================== Supplemental disclosure of noncash investing and financing activities: Issuance of stock warrants in connection with convertible debt $624,750 - Increase in additional paid in capital for the beneficial conversion feature of convertible debt $600,250 - Common stock issued on conversion of Series B Preferred Stock $2,102,412 -
See accompanying summary of accounting policies and notes to financial statements 5 AMERICAN TECHNOLOGY CORPORATION NOTES TO INTERIM FINANCIAL STATEMENTS (Unaudited) 1. OPERATIONS American Technology Corporation (the "Company"), a Delaware corporation, is engaged in design, development and commercialization of sound, acoustics and other technologies and the sales and marketing of portable consumer products. 2. STATEMENT PRESENTATION The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation of the results for interim periods. Operating results for the three month periods are not necessarily indicative of the results that may be expected for the year. The interim financial statements and notes thereto should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended September 30, 2001. 3. NET LOSS PER SHARE The Company applies Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 provides for the calculation of "Basic" and "Diluted" earnings per share ("EPS"). Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity. The Company's net losses for the periods presented cause the inclusion of potential common stock instruments outstanding to be antidilutive and, therefore, in accordance with SFAS No. 128, the Company is not required to present a diluted EPS. Convertible preferred stock, convertible promissory notes, stock options and warrants convertible or exercisable into approximately 3,735,957 shares of common stock were outstanding at December 31, 2001 and stock options, warrants, preferred stock and debt convertible or exercisable into approximately 2,648,505 shares of common stock were outstanding as of December 31, 2000. These securities were not included in the computation of diluted EPS because of the net losses but could potentially dilute EPS in future periods. The provisions of the Company's Series B Preferred Stock provide for an accretion in the conversion value (similar to a dividend) of 6% or $0.60 per share per annum. The Series C Preferred Stock provides for an accretion in the conversion value of 6% or $1.20 per share per annum. The accrued accretion of the Series B and Series C Preferred Stock for the three months ended December 31, 2001 was $19,956 and $38,610, respectively, which increases the net loss available to common stockholders. Net loss available to common stockholders is computed as follows: Three months ended December 31 2001 2000 ----------- ----------- Net Loss $(1,709,141) $(1,393,580) Accretion on Series B and Series C Preferred Stock at stated rate (19,956) (38,610) ----------- ----------- Net loss available to common stockholders $(1,729,097) $(1,432,190) =========== =========== 4. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141 Business Combinations (SFAS 141) and No. 142; Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interest method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142 that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires among other things, that companies no longer amortize goodwill but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill reassess the useful lives of other existing recognized intangible assets and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company has not entered into any business combinations and has no recorded goodwill. The Company is assessing, but has not yet determined how the adoption of SFAS 142 will impact its financial position and results of operations. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part 6 AMERICAN TECHNOLOGY CORPORATION NOTES TO INTERIM FINANCIAL STATEMENTS (Unaudited) 4. RECENT ACCOUNTING PRONOUNCEMENTS (cont'd) of the carrying amount of the long-lived asset. SFAS No. 143 is effective for the Company, for the fiscal year ending September 30, 2003. The Company believes the adoption of this statement will have no material impact on its financial statements. In October 2001, the SFAS issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lives Assets". SFAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value, less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, is to be applied prospectively. The Company has not yet determined what effect, if any, SFAS 144 will have on its financial statements once implemented. 5. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventories consist of the following: December 31, 2001 September 30, 2001 Finished goods $124,153 $137,890 Raw materials 52,284 79,123 Reserve for obsolete inventory (20,000) (20,000) -------- -------- $156,437 $197,013 ======== ======== 6. PURCHASED TECHNOLOGY In April 2000, the Company acquired all rights to certain loudspeaker technology owned by David Graebener ("Graebener"), Stephen M. Williams ("Williams") and Hucon Limited, a Washington corporation ("Hucon"). The purchase price consisted of $300,000 cash plus 200,000 shares of common stock. The 200,000 shares of common stock were issued in June 2000 and were valued at $962,500. The Company will pay up to an additional 159,843 shares of common stock to Williams and Graebener contingent upon the achievement of certain performance milestones relating to gross revenues received by the Company from the purchased technology, any shares not earned within four years will be cancelled. These contingent shares will be recorded as compensation expense when earned. The Company agreed to employ Mr. Williams and Mr. Graebener for a term of three years subject to certain terms and conditions. 7. CONVERTIBLE PROMISSORY NOTES On September 28, 2001 the Company sold for cash in a private offering an aggregate of $800,000 of unsecured 12% Convertible Subordinated Promissory Notes due December 31, 2002 ("Notes") to accredited investors. On October 12, 2001 the Company completed the sale of an additional $1,225,000 of the Notes to accredited investors. The principal and interest amount of each Note may at the election of the Note holder be converted one or more times into fully paid and nonassessable shares of common stock, at a price of $2.00 per share. The Notes may be called by the Company for conversion if the market price exceeds $5.00 per share for five days and certain conditions are met. Each purchaser was granted a warrant to purchase one common share of the Company at $2.00 per share until September 30, 2006 ("Warrant") for each $2.00 of Notes (aggregate Warrants exercisable into 1,012,500 shares). As of December 31, 2001 the Notes would have been convertible into 1,042,279 shares of common stock. The notes and warrants have antidilution rights reducing the conversion and exercise price for certain issuances of equity securities by the Company at an effective price below the applicable conversion or exercise price. In connection with the Notes and Warrants, the Company has recorded $2,025,000 as the value of the beneficial conversion feature of the Notes and the value of the Warrants. These warrants were valued using the Black-Scholes model and the value was reflected as a discount to the debt. This debt discount will be amortized as non-cash interest expense over the term of the Notes. As of December 31, 2001, $405,000 was amortized as interest expense. 8. STOCKHOLDERS' EQUITY The Company has 10,000 shares of Series C Preferred Stock outstanding convertible into 38,528 shares of Common stock as of December 31, 2001. The dollar amount of Series C Preferred Stock, increased by $1.20 per share accretion per annum and other adjustments, is convertible one or more times into fully paid shares of common stock at a conversion price which is the lower of (i) $8.00 per share or (ii) 92% of the average of the five days closing bid market price prior to conversion, but in no event less than $5.75 per share. The shares of Series C Preferred Stock may be called by the Company for conversion if the market price of the common stock exceeds $20.00 per share for ten days and certain conditions are met. The Series C Preferred Stock is subject to automatic conversion on March 31, 2003. 7 8. STOCKHOLDERS' EQUITY (cont'd) The following table summarizes changes in equity components from transactions during the three months ended December 31, 2001:
Additional Series B Additional Preferred Stock Common Stock Paid-In Accumulated Shares Amount Shares Amount Capital Deficit =================================================================================================================== Balance as of October 1, 2001 168,860 $2 13,704,139 $137 $22,913,268 $(19,919,912) Issuance of Common Stock: For compensation and services - - 1,425 - 3,600 - Options issued for services - - - - 33,744 - Debt discount on promissory notes - - - - 1,225,000 - Conversion of Series B preferred stock and cumulative dividends (168,860) (2) 566,958 6 (4) - Net loss - - - - - (1,709,141) ------------------------------------------------------------------------------------------------------------------- Balance as of December 31, 2001 - $- 14,272,522 $143 $24,175,608 $(21,629,053) ===================================================================================================================
The following table summarizes information about stock option activity during the first quarter ended December 31, 2001: Weighted Average Shares Exercise Price --------- -------------- Outstanding October 1, 2001 1,338,200 $5.17 Granted 110,000 $2.50 Canceled/expired (280,550) $9.04 --------- Outstanding December 31, 2001 1,167,650 $3.99 ========= ===== Exercisable at December 31, 2001 652,706 $4.33 ========= ===== Options outstanding are exercisable at prices ranging from $2.50 to $9.03 and expire over the period from 2001 to 2006 with an average life of 3.34 years. At December 31, 2001, the Company had warrants outstanding, exercisable into the following number of common shares: Number Exercise Price Expiration Date ------- -------------- --------------- 50,000 $16.00 May 12, 2003 50,000 $10.00 January 5, 2004 375,000 $11.00 March 31, 2005 1,012,500 $2.00 September 30, 2006 --------- 1,487,500 ========= On October 2001, the Company granted 110,000 stock options to a consultant in conjunction with related development and manufacturing agreements. Options to purchase 65,000 shares of common stock vest depending on the consultant's completion of various project milestones as well as the Company's acceptance of the specified work. The Company estimates the period required to complete the specified milestones each reporting period and records consulting expense based on the current market price of the Company's stock and the estimated percentage of the work completed. Consulting expense will be adjusted each reporting period until vesting occurs. The Company has recorded consulting expense of $8,468 for the Black Scholes value of 10,000 options to be vested March 2002. Options to purchase 45,000 shares of common stock vest based on the consultant meeting certain performance criteria. As a result, the Company will record consulting expense at each vesting date. The Company has recorded consulting expense of $25,276 for the Black Scholes value of 15,000 options vested during the three month period ended December 31, 2001. 9. INCOME TAXES At December 31, 2001, a valuation allowance has been provided to offset the net deferred tax asset as management has determined that it is more likely than not that the deferred tax asset will not be realized. The Company has for federal income tax purposes net operating loss carryforwards of approximately $17,600,000, which expire through 2021 of which certain amounts are subject to limitations under the Internal Revenue Code of 1986, as amended. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO OUR FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "BUSINESS RISKS." ALSO SEE OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2001. Overview We are focused on commercializing our proprietary HyperSonic, NeoPlanar, PureBass and Stratified Field sound technologies. Our HyperSonic Sound technology employs a laser-like beam to project sound to any listening environment. Our NeoPlanar technology is a thin film magnetic speaker that uses unique films and materials, which we believe results in superior sound quality and volume for any given size with low distortion. PureBass is an extended range woofer designed to complement our high performance Stratified Field and NeoPlanar technologies. PureBass employs unique cabinet construction and vent configurations along with multiple acoustic filters, which we believe produces improved performance. Our Stratified Field technology features a thin form factor, in a variety of shapes and sizes, producing high-fidelity, low distortion sound reproduction. Our strategy is to commercialize these technologies through OEMs primarily through licensing or supply agreements. We believe our NeoPlanar, PureBass and Stratified Field technologies meet OEM requirements. These technologies have been licensed to OEMs and are being transferred to production. We expect product royalties to commence in fiscal 2002 from these technologies. We are also completing second generation electronic packages and ultrasonic emitters that can be supplied to OEMs to be incorporated into end-user products. We expect that these components will be supplied to HSS licensees in fiscal 2002 for use in HSS products. We are in the early stage of licensing of our sound technologies and have not generated significant revenues from such technologies to date. When we license an audio technology, we typically receive a flat fee up-front, with the balance of payments based upon a percentage of net revenues of the products in which our technology is incorporated. Revenues from up-front license fees are recognized ratably over the specified term of the particular license. Contract fees are recorded as services are performed. Our various technologies are high risk in nature. Unanticipated technical obstacles can arise at any time and disrupt licensing activities or OEM product sales or result in lengthy and costly delays. There can be no assurance commercially viable sound products being developed by OEMs will meet with market acceptance or that such products will perform on a cost-effective basis. Our future is largely dependent upon the success of our sound technologies. We invest significant funds in research and development and on patent applications related to our proprietary technologies. There can be no assurance our technologies will achieve market acceptance sufficient to sustain operations or achieve future profits. See "Business Risks" below. To date substantially all of our revenues have been derived from the sale of portable consumer products. We have sourced a total of 16 products targeted for niche markets at retail prices ranging from $11.99 to $29.99. Sourcing is on both an exclusive and nonexclusive basis and for different market territories on a product by product basis. Our market focus is in North America. We inventory finished goods as well as provide direct factory shipment to certain customers. There can be no assurance that our line of products can be marketed successfully. We have also produced high-end NeoPlanar speakers for sale to the marine market and expect to target other high-end sales to selected niche markets. Demand for our portable consumer and speaker products is subject to significant month to month variability resulting from seasonal demand fluctuations and the limited number of customers and market penetration achieved by us to date. Further, sales have been concentrated with a few customers. We are also reliant on outside manufacturers to supply our products or components and there can be no assurance of future supply. The markets for our products and future products and technologies are subject to rapidly changing customer tastes and a high level of competition. Demographic trends in society, marketing and advertising expenditures, and product positioning in retail outlets, technological developments, seasonal variations and general economic conditions influence demand for our products. Because these factors can change rapidly, customer demand can also shift quickly. We may not be able to respond to changes in customer demand because of the time required to change or introduce products, production limitations and because of limited financial resources. Results of Operations Total revenues for the three month period ended December 31, 2001 and 2000 were $256,621 and $192,722, respectively. Product sales for the three months ended December 31, 2001 were $224,954 a 41% increase from the comparable three month total of $159,416 for the prior year. Contract and license revenues for the quarters ended December 31, 2001 and 2000 were $31,667 and $33,306, respectively. Consumer product sales are subject to significant month to month and quarter to quarter variability based on the timing of orders, new accounts, lost accounts and other factors. At December 31, 2001 and 2000 we had $219,444 and $19,444, respectively, collected and recorded 9 as unrecognized revenue for existing contracts and licenses. We recognize upfront fees and advance revenues over the term of the license agreements At December 31, 2001, we had open purchase orders for approximately $36,000 of product, of which approximately $23,205 has been received as customer deposits. The product is expected to be shipped in the next four months. There was no material backlog at December 31, 2000. Anticipated shipments are subject to change due to a variety of factors, many outside our control. Our customers may modify or cancel orders and delay or change schedules. Shipments may also be delayed due to production delay, component shortages and other production related issues. Cost of revenues for the three months ended December 31, 2001 was $116,459 resulting in a gross profit of $140,162 or 55%. This compares to a gross profit of $17,612 or 9% for the comparable period of the prior year. The profit for the period ending December 31, 2001 can be attributed to the increase in margins for new products introduced in the retail radio division accompanied with higher margins for our acoustic technologies. Gross profit percentage is highly dependent on sales prices, volumes, purchasing costs and overhead allocations. Selling, general and administrative expenses for the three months ended December 31, 2001 and 2000 were $492,656 and $611,195, respectively. The $118,539 decrease resulted from a reduction of $113,663 in personnel and related costs and a $5,809 reduction in legal costs. We may expend additional resources on marketing HSS, PMT and other technologies in future quarters, which may increase selling, general and administrative expenses. Research and development expenses for the three months ended December 31, 2001 were $893,937 compared to $863,920 for the comparable three months of the prior year. The $30,017 increase resulted from the issuance of options for services. Research and development expenses vary quarter by quarter due to the timing of projects, the availability of funds for research and development and the timing and extent of use of outside consulting, design and development firms. We expect fiscal 2002 research and development costs to increase over than the prior year due to increased staffing and the use of outside design and consultants. We recorded in selling, general and administrative expenses $3,600 for the three months ended December 31, 2001 for services paid through the issuance of 1,425 shares of common stock. Included in selling, general and administrative expense for the quarter ended December 31, 2000 is $34,381, which is the result of services paid through the issuance of 10,000 shares of common stock. We experienced a loss from operations of $1,246,431 during the three months ended December 31, 2001, compared to a loss from operations of $1,457,503 for the comparable three months ended December 31, 2000. The $211,072 decrease is primarily due to the decrease in selling, general and administrative expenses and an increase in retail sales for the first quarter of fiscal 2002. The net loss available to common stockholders for the three months ended December 31, 2001 and 2000 of $1,729,097 and $1,432,190, respectively, included $19,956 and $38,610 of accretion on the Series B and Series C Preferred Stock, respectively. These amounts are included in net loss available to common stockholders. We have federal net loss carryforwards of approximately $17,600,000 for federal tax purposes expiring through 2021. The amount and timing of the utilization of our net loss carryforwards may be limited under Section 382 of the Internal Revenue Code. A valuation allowance has been recorded to offset the related net deferred tax asset as management was unable to determine that it is more likely than not that the deferred tax asset will be realized. Future operations are subject to significant variability as a result of licensing activities, product sales and margins, timing of new product offerings, the success and timing of new technology exploitation, decisions regarding future research and development and variability in other expenditures. Liquidity and Capital Resources Since we recommenced operations in January 1992, we have had significant negative cash flow from operating activities. During the three months ended December 31, 2001, the Company experienced a net loss of $1,709,141. A total of $1,042,176 of cash was used in operating activities through a $91,653 decrease in accrued liabilities. Operating cash was provided by a $40,576 decrease in inventory, a $23,315 decrease in accounts receivable, an increase of $42,631 in accounts payable and a $29,002 decrease in prepaid expenses. At December 31, 2001, we had gross accounts receivable of $114,460 as compared to $137,775 at September 30, 2001. This represented approximately 135 days of sales. Receivables can vary dramatically due to quarterly and seasonal variations in sales and timing of shipments to and receipts from large customers, many of which demand extended terms of 90-120 days. For the three months ended December 31, 2001, the Company used approximately $7,659 for the purchase of laboratory and computer equipment and made a $16,752 investment in patents and new patent applications. We anticipate significant investments in patents in fiscal 2002. We cannot currently estimate the dollar amounts of these patent investments. 10 At December 31, 2001, we had working capital of $601,582 compared to working capital of $892,040 at September 30, 2001. We have financed our operations primarily through the sale of preferred stock, exercise of stock options, issuances of convertible notes, proceeds from the sale of investment securities and margins from consumer product sales. At December 31, 2001, we had cash of $1,512,485. As a result of the sale of the $1,225,000 of convertible notes during the first quarter, our cash position increased by approximately $158,400 from September 30, 2001. Based on our cash position assuming (a) currently planned expenditures and level of operations, (b) continuation of sales to existing retail customers and (c) royalty revenue against existing license agreements, we believe we have sufficient capital resources for the next twelve months. However, there can be no guarantee that the funds required during the next twelve months or thereafter can be generated from operations or that such required funds will be available from the aforementioned or other potential sources. The lack of sufficient funds from operations or additional capital could force us to curtail or scale back operations and would therefore have an adverse effect on our business. Other than cash and cash equivalents, we have no unused sources of liquidity at this time. We expect to incur additional operating losses as a result of expenditures for research and development and marketing costs for our sound and other products and technologies. The timing and amounts of these expenditures and the extent of our operating losses will depend on many factors, some of which are beyond our control. We anticipate that the commercialization of our technologies may require increased operating costs, however we cannot currently estimate the amounts of these costs. New Accounting Pronouncements A number of new pronouncements have been issued for future implementation as discussed in the footnotes to the Company's interim financial statements (see page 6, Note 4). As discussed in the notes to the interim financial statements, the implementation of these new pronouncements is not expected to have a material effect on the Company's financial statements. Business Risks You should consider each of the following factors as well as the other information in this Quarterly Report in evaluating our business and our prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the following risks actually occur, our business and financial results could be harmed. In that case the trading price of our common stock could decline. You should also refer to the other information set forth in this Quarterly Report and in our Annual Report of Form 10-K for the fiscal year ended September 30, 2001, including our financial statements and the related notes. We have a history of net losses. We expect to continue to incur net losses and we may not achieve or maintain profitability. We have incurred significant operating losses and anticipate continued losses in fiscal 2002. At December 31, 2001 we had an accumulated deficit of $21,629,053. We need to generate additional revenue to be profitable in future periods. Failure to achieve profitability, or maintain profitability if achieved may have a material adverse effect on our stock price. We are an early stage company introducing new technologies. If commercially successful products do not result from our efforts, we may be unprofitable or forced to cease operations. Our HSS, NeoPlanar, PureBass and SFT technologies have only recently been introduced to market and are still being improved. Commercially viable sound technology systems may not be successfully and timely produced by OEMs due to the inherent risks of technology development, new product introduction, limitations on financing, competition, obsolescence, loss of key technical personnel and other factors. We have not generated significant revenues from our sound technology to date, and we cannot guarantee significant revenues in the future. The development and introduction of our sound technology has taken longer than anticipated by management and could be subject to additional delays. Even if products employing our sound technology are introduced, they may not achieve market acceptance. Our various sound projects are high risk in nature, and unanticipated technical obstacles can arise at any time and result in lengthy and costly delays or result in a determination that further exploitation is unfeasible. If we do not successfully exploit our technology, our financial condition and results of operations and business prospects would be adversely effected. Our quarterly and annual revenues are subject to fluctuations caused by many factors, any of which could result in our failure to achieve our revenue expectations. Our quarterly and annual revenues from portable consumer products have varied significantly in the past and are likely to continue to vary in the future due to a number of factors. Our revenues from licensing our sound reproduction technologies are also expected to vary significantly due to a number of factors. Many of these factors are beyond our control. Any one or more of the factors listed below or other factors could cause us to fail to achieve our revenue expectations. These factors include: o our ability to develop, introduce, produce in volume quantities and market successfully new or enhanced portable consumer products; o our ability to develop and license to OEMs our sound reproduction technologies; o changes in the relative volume of sales of various products with sometimes significantly different margins or royalties; o market acceptance of and changes in demand for our portable consumer products and products of our licensees; o gains or losses of significant customers, distributors or strategic relationships; 11 o unpredictable volume and timing of customer orders; o the availability, pricing and timeliness of delivery of components for our products and OEM products; o fluctuations in the availability of manufacturing capacity or manufacturing yields and related manufacturing costs; o the timing of new technological advances, product announcements or introductions by us, by our licensees and by our competitors; o product obsolescence and the management of product transitions and inventory; o production delays; o decreases in the average selling prices of products; o seasonal fluctuations in sales; o general consumer electronics industry conditions, including changes in demand and associated effects on inventory and inventory practices; o the conditions of other industries, such as military and commercial industries, into which our technologies may be licensed; and o general economic conditions that could affect the timing of customer orders and capital spending and result in order cancellations or rescheduling. Some or all of these factors could adversely affect demand for our portable consumer products and for OEM products incorporating our sound reproduction technologies, and therefore adversely affect our future operating results. Most of our operating expenses are relatively fixed in the short term. We may be unable to rapidly adjust spending to compensate for any unexpected sales or license revenue shortfalls, which could harm our quarterly operating results. Because the lead times of firm orders are typically short in the consumer electronics industry, we do not have the ability to predict future operating results with any certainty. Because of the above factors, you should not rely on period-to-period comparisons of results of operations as an indication of future performance. Our expenses may vary from period to period, which could affect quarterly results and our stock price. If we incur additional expenses in a quarter in which we do not experience increased revenue, our results of operations would be adversely affected and we may incur larger losses than anticipated for that quarter. Factors that could cause our expenses to fluctuate from period to period include: o the timing and extent of our research and development efforts; o the extent of marketing and sales efforts necessary to promote our technologies; and o the timing of personnel hiring. The demand for our portable consumer products has historically been weaker in certain quarters, which makes it difficult to compare our quarterly results. Due to industry seasonality, demand for consumer electronic products is strongest during the fourth quarter of each year and is generally slower in the period from March through July. Because the consumer products market experiences substantial seasonal fluctuations, with more sales occurring toward the end of the year, our quarterly results will be difficult to compare so long as portable consumer products remains our principal revenue source. Sound reproduction markets are subject to rapid technological change, so our success will depend heavily on our ability to develop and introduce new technologies. Technology and standards in the sound reproduction markets evolve rapidly, making timely and cost-effective product innovation essential to success in the marketplace. The introduction of products with improved technologies or features may render our technologies obsolete and unmarketable. If we cannot develop products in a timely manner in response to industry changes, or if our technologies do not perform well, our business and financial condition will be adversely affected. The life cycles of our technologies are difficult to estimate, particularly those such as HyperSonic sound for which there is no established market. As a result, our technologies, even if successful, may become obsolete before we recoup our investment. Our HSS technology is subject to government regulation, which could lead to unanticipated expense or litigation. Our HyperSonic Sound technology emits ultrasonic vibrations, and as such is regulated by the Food and Drug Administration. In the event of certain unanticipated defects in an HSS product, a licensee or we may be required to comply with FDA requirements to remedy the defect and/or notify consumers of the problem. This could lead to unanticipated expense, and possible product liability litigation against a licensee or us. Any regulatory impediment to full commercialization of our HSS technology, or any of our other technologies, could adversely affect our results of operation. For a further discussion of the regulation of our HSS technology, see Part I, Item 1 of our Annual Report on Form 10-K, under the heading "Government Regulation." Many potential competitors who have greater resources and experience than we do may develop products and technologies that make ours obsolete. Technological competition from other and longer established electronic and loudspeaker manufacturers are significant and expected to increase. Most of the companies with which we expect to compete have substantially greater capital resources, research and development staffs, marketing and distribution program and facilities, many of them have substantially greater experience in the production and marketing of products. 12 In addition, one or more of our competitors may have developed or may succeed in developing technologies and products that are more effective than any of ours, rendering our technology and products obsolete or noncompetitive. Commercialization of our sound technologies depends on collaborations with other companies. If we are not able to find collaborators and strategic alliance relationships in the future, we may not be able to develop our sound technologies and products. As we do not have the production, marketing and selling resources to commercialize our products on our own our strategy is to establish business relationships with leading participants in various segments of the electronics and sound reproduction markets to assist us in producing, marketing and selling consumer electronic products and products that include our sound technologies. Our success will therefore depend on our ability to enter into strategic arrangements with new partners on commercially reasonable terms. If we fail to enter into such strategic arrangements with third parties, our financial condition, results of operations, cash flows and business prospects will be adversely effected. Any future relationships may require us to share control over our development, manufacturing and marketing programs or to relinquish rights to certain versions of our sound and other technologies. Any inability to adequately protect our proprietary technologies could harm our competitive position. We are heavily dependent on patent protection to secure the economic value of our technologies. We have both issued and pending patents on our sound reproduction technologies and we are considering additional patent applications. Patents may not be issued from some or all of our pending applications. Claims allowed from existing or pending patents may not be of sufficient scope or strength to protect the economic value of our technologies. Issued patents may be challenged or invalidated. Further, we may not receive patents in all countries where our products can be sold or licensed. Our competitors may also be able to design around our patents. The electronics industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in significant and often protracted and expensive litigation. There is currently no pending intellectual property litigation against us. Third parties may charge that our technologies or products infringe their patents or proprietary rights. Problems with patents or other rights could potentially increase the cost of our products, or delay or preclude our new product development and commercialization. If infringement claims against us are deemed valid, we may be forced to obtain licenses, which might not be available on acceptable terms or at all. Litigation could be costly and time-consuming but may be necessary to protect our future patent and/or technology license positions, or to defend against infringement claims. A successful challenge to our sound technology could have a materially adverse effect on our business prospects. Our retail products and sound component production are dependent on outside contractors and suppliers. Disruptions in supply could adversely affect us. Product sales have accounted for substantially all of our revenues. However, we are dependent on contract suppliers for our finished consumer electronics products. We source products from a variety of suppliers. The loss of a supply of a high selling product could have a material adverse effect on our operations. Disruption of our supply could cause additional costs and delays and could also have an adverse impact on our operations. The manufacturers of our consumer electronic products are also dependent upon the availability of electronic components. Any significant delays in obtaining components could have a material adverse effect on our financial condition and results of operations. We have developed component supply arrangements for film and components for our Neoplanar and HSS sound technologies. These are generally sole supplier arrangements and the loss or a disruption of supply could have a material adverse effect on our ability to introduce these technologies, or once introduced in volume, could disrupt future revenues adversely affecting financial condition and results of operations. Two customers represented a significant amount of our business in the last fiscal year. We do not know if we will receive further orders from them. ASI and Vulcan Northwest Inc. accounted for 23% and 11% of total revenues for the fiscal year ended September 30, 2001. Neither ASI nor Vulcan have committed to purchase any further products from us. During the quarter ended December 31, 2001, Vulcan and ASI accounted for 42% and 0% of total revenues, respectively. We cannot provide any assurances that any of our current customers will continue at current or historical levels or that we will be able to obtain orders from new customers. If our key employees do not continue to work for us, our business will be harmed because competition for replacements is intense. Our performance is substantially dependent on the performance of our executive officers and key technical employees. We are dependent on our ability to retain and motivate high quality personnel, especially highly skilled technical personnel. Our future success and growth also depend on our continuing ability to identify, hire, train and retain other highly qualified technical, managerial and sales personnel. Competition for such personnel is intense, there can be no assurance that we will be able to attract, assimilate or retain other highly qualified technical, managerial or sales personnel in the future. The inability to attract and retain the necessary technical, managerial or sales personnel could have a material adverse effect upon our business, operating results or financial condition. We may issue preferred stock in the future, and the terms of the preferred stock may reduce the value of your common stock. We are authorized to issue up to 5,000,000 shares of preferred stock in one or more series. Our board of directors may determine the terms of future preferred stock without further action by our stockholders. If we issue additional preferred stock, it could affect your rights or reduce the value of your common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with or sell our assets to 13 a third party. These terms may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, and sinking fund provisions. Our certificate of incorporation, bylaws and Delaware law contain provisions that could discourage a third party from acquiring us and, consequently, decrease the market value of your investment. Some provisions of our amended certificate of incorporation and bylaws and Delaware law could delay or prevent a change in control or changes in our management that a stockholder might consider favorable. If a change of control or change in management is delayed or prevented, the market price of our common stock could decline. Conversion of all of or part of our outstanding convertible preferred stock and debt or the exercise of outstanding warrants will cause immediate and possibly significant dilution in the net tangible book value of your shares. If the holders of our outstanding convertible preferred stock, convertible debt or warrants decide to convert or exercise all or part of their securities, you will experience immediate and possibly significant dilution in the net tangible book value of your shares. The market price of our common stock could also decline upon the resale of the common stock obtained upon conversion of our preferred stock or convertible debt or upon exercise of warrants. Our stock price is volatile and may continue to be volatile in the future. Our common stock trades on the NASDAQ Small Cap Market. The market price of our common stock has fluctuated significantly to date. In the future, the market price of our common stock could be subject to significant fluctuations due to general market conditions and in response to quarter-to-quarter variations in (i) our anticipated or actual operating results; (ii) developments concerning our sound reproduction technologies; (iii) technological innovations or setbacks by us or our competitors; (iv) conditions in the consumer electronics market; (v) announcements of merger or acquisition transactions; and (vi) other events or factors and general economic and market conditions. The stock market in recent years has experienced extreme price and volume fluctuations that have effected the market price of many technology companies, and that have often been unrelated or disproportionate to the operating performance of companies. Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk represents the risk of loss that may impact our financial position, results of operations or cash due to adverse changes in market prices, including interest rate risk and other relevant market rate or price risks. We are exposed to some market risk through interest rates, related to our investment of our current cash of $1,512,485. We do not consider this risk to be material, and we manage the risk by continuing to evaluate the best investment rates available for short-term high quality investments. We have no activities in long-term indebtedness and our other investments are insignificant. At the present time we do not have any significant foreign sales or foreign currency transactions. PART II. OTHER INFORMATION Item 1. Legal Proceedings From time to time we are involved in routine litigation incidental to the conduct of our business. There are currently no material pending legal proceedings to which we are a party or to which any of our property is subject. Item 2. Changes in Securities During the quarter ended December 31, 2001, we sold for cash in a private offering an aggregate of $1,225,000 of unsecured 12% Convertible Subordinated Promissory Notes due December 31, 2002 to accredited investors. We sold $800,000 of the identical notes during the quarter ended September 30, 2001. The principal and interest amount of each note may at the election of the note holder be converted one or more times into fully paid and nonassessable shares of our common stock, at a price of $2.00 per share. We may call the notes for conversion if the market price exceeds $5.00 per share for five days and certain conditions are met. Each purchaser was granted a warrant to purchase one common share at $2.00 per share until September 30, 2006 for each $2.00 of notes purchased (aggregate warrants exercisable into 1,012,500 shares including notes sold in prior quarter). We are not required to register the stock underlying the notes or warrants, but the holders have certain piggyback registration rights. The securities have antidilution rights reducing the conversion and exercise price for certain issuances of equity securities at an effective price below the applicable conversion or exercise price of the notes and warrants. The securities were offered and sold without registration under the Securities Act of 1933, in reliance upon the exemption provided by Section 4(2) and/or Regulation D. The securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act. We sold securities without an underwriter, but we paid $45,000 in finder's fees for the introduction of investors. 14 Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 4.1 Form of 12% Convertible Subordinated Promissory Note due December 31, 2002 aggregating $2,025,000 granted to accredited investors (individual notes differ as to holder, amount and issuance date) filed as Exhibit 4.11 on Form 8-K dated October 12, 2001. 4.2 Form of Stock Purchase Warrant exercisable until September 30, 2006 granted to accredited investors for an aggregate of 1,012,500 common shares (individual warrants differ as to holder, number of shares and issuance date) filed as Exhibit 4.12 on Form 8-K dated October 12, 2001. (b) Reports on Form 8-K We filed a report on Form 8-K on October 12, 2001 disclosing in item 5 the sale of convertible promissory notes. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN TECHNOLOGY CORPORATION Date: February 14, 2002 By: /s/ RENEE WARDEN ------------------ Renee Warden, Chief Accounting Officer, Treasurer and Corporate Secretary (Principal Financial and Accounting Officer and duly authorized to sign on behalf of the Registrant) 16