Got to pat myself on the back. Everything I prophesied back in May
is coming true. Self gratification not so good when your broke
though.
Here's the latest from AERN's brilliant management. They finally admit they lost the war and are looking to sell the patents.
Anyone out there still care?
September 4, 1998
AER ENERGY RESOURCES INC /GA (AERN)
Quarterly Report (SEC form 10-Q)
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Since its inception, the Company has been a development stage company primarily engaged in developing rechargeable zinc-air battery technology, establishing the manufacturing process, and defining and developing market opportunities. Recently the Company started to shift much of its development efforts into primary (nonrechargeable) zinc-air technology in order to capitalize on the capability of its patented Diffusion Air Manager technology and possible opportunities in hand-held electronic products like camcorders and cellular telephones. The Diffusion Air Manager is a simplified method of isolating the cells in zinc-air batteries from exposure to air during periods when the battery is in storage or not in use. The Company believes the Diffusion Air Manager has potential uses in both primary
and rechargeable zinc-air batteries. The Company is developing prototype primary zinc-air batteries for certain hand-held portable electronic products in order to demonstrate the performance of the Diffusion Air Manager to potential customers and development partners. These prototype batteries use a primary zinc-air cell that is 70% smaller than the Company's latest rechargeable zinc-air cells. The Company has ceased marketing its rechargeable battery product, and for the remainder of 1998, the Company plans to focus on the development of prototype primary zinc-air batteries while maintaining a smaller research and development effort in rechargeable zinc-air technology.
As of June 30, 1998, the Company has developed a portfolio of 28 U.S. and seven foreign patents. During 1998, the Company began concentrating its marketing efforts on potential opportunities arising from this patent portfolio including the licensing or sublicensing of certain aspects of its zinc-air technology to battery manufacturers and original equipment manufacturers (OEMs). In particular, the Company is exploring licensing options pertaining to its patented Diffusion Air Manager.
The Company was formed to develop and commercialize zinc-air batteries for portable electronic products using technology licensed from Dreisbach Electromotive, Inc. ("DEMI"). DEMI was formed in 1982 to conduct research and development on electric vehicles and battery systems utilizing, among others, zinc-air technology. DEMI's zinc-air development programs included applications for electric vehicles and portable products. Through DEMI (the "DEMI License"), the Company has licensed the rights to use certain DEMI technology including zinc-air, in non-motor vehicle applications. DEMI has retained the rights to zinc-air technology for motor vehicle applications and to its other battery technologies for motor vehicle applications and batteries producing over 500 watts continuous power output. In 1993, the DEMI License was amended so that, under certain circumstances, some or all of the royalties due under the DEMI License are payable
to the shareholders of DEMI rather than to DEMI.
The Company has incurred cumulative losses of $58.1 million since inception to June 30, 1998 and expects to continue to incur operating losses beyond the end of
1998.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997
The Company generated net revenues of $2,000 for the three months ended June 30, 1998, compared to $11,000 for the three months ended June 30, 1997.
During the three months ended June 30, 1998, most of the manufacturing effort was spent on the production of various prototype cells. For this reason, a significant portion of manufacturing costs were llocated to research and development for the three-month period ended June 30, 1998. Cost of sales for the three months ended June 30, 1998 was $1,000 compared to $679,000 for the same period in 1997. The high cost of sales in 1997 was primarily due to manufacturing inefficiencies and high material costs resulting from low production volumes.
Research and development expenses increased to $1,156,000 for the three months ended June 30, 1998 from $1,030,000 for the same period in 1997. This increase resulted primarily from a $365,000 increase in the allocation of manufacturing costs to research and development. This allocation is based on the level of manufacturing effort spent on the production and testing of prototype or experimental zinc-air cells versus the production of commercial batteries. The Company
also experienced an $80,000 increase in legal costs related to patent activity. These increases were partially offset by a $163,000 decrease in personnel-related costs and a $126,000 decrease in material, design and tooling costs.
Marketing, general, and administrative expenses decreased to $517,000 for the quarter ended June 30, 1998 from $731,000 for the same period in 1997. The Company experienced a $62,000 decrease in professional fees, a $45,000 decrease in advertising and marketing costs, a $37,000 decrease in the write-off of inventory, and an $27,000 decrease in personnel-related costs.
Six Months Ended June 30, 1998 and 1997
The Company generated net revenues of $2,000 for the six months ended June 30, 1998 as compared to $24,000 for the six months ended June 30, 1997.
During the six months ended June 30, 1998, most of the manufacturing effort was spent on the production of various prototype cells. For this reason, a significant portion of manufacturing costs were allocated to research and development for the six months ended June 30, 1998. Cost of sales for the six months ended June 30, 1998 was $1,000 compared to $973,000 for the same period in 1997. The high cost of sales in 1997 was primarily due to manufacturing inefficiencies and high material costs resulting from low production volumes.
Research and development expenses increased to $2,660,000 for the six months ended June 30, 1998 from $2,224,000 for the same period in 1997. This increase resulted primarily from a $620,000 increase in the allocation of manufacturing costs to research and development. The Company also experienced a $170,000 increase in legal costs
related to patent activity. These increases were partially offset by a $181,000 decrease in material, design and tooling costs and a $172,000 decrease in personnel-related costs.
Marketing, general and administrative expenses decreased to $1,249,000 for the six months ended June 30, 1998 from $1,504,000 for the same period in 1997. The Company experienced a $99,000 decrease in personnel-related costs, a $78,000 decrease in professional fees and a $22,000 decrease in write-off of inventory. The Company also experienced a $15,000 decrease in advertising and marketing costs and a $15,000 decrease in warranty expense.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
As of June 30, 1998, the Company had cash and cash equivalents of $6.7 million. The Company anticipates using these funds as needed to fund capital equipment purchases, research and development efforts, sales and marketing activities, production of commercial and prototype zinc-air battery products, development of relationships with potential customers and development partners, working capital and general corporate purposes as determined by management. In the interim, the
Company invests any excess funds in government securities and other short-term, investment grade, interest-bearing instruments.
Net cash used in operating activities decreased to $3.4 million for the six months ended June 30, 1998 from $3.9 million for the same period in 1997, primarily due to the decreases in costs and expenses discussed above in "Results of Operations".
For the six months ended June 30, 1998, the Company used net cash of $24,000 for equipment purchases as compared to $211,000 for equipment purchases for the same period in 1997.
Pursuant to the DEMI License, the Company has agreed to pay DEMI royalties of 4% of net sales, subject to certain minimum amounts and to possible increases or decreases to a maximum of 4% and a minimum of 2%, as specified in the DEMI License. The applicable percentage of royalties is currently 4% of net sales. The Company recorded royalty expense for the six months ended June 30, 1998 and 1997 of $50,000. Minimum royalty expenses are included in marketing, general
and administrative expenses in the statements of operations. Actual royalties due as a percentage of sales under the DEMI License are recorded in cost of sales. As of June 30, 1998 and December 31, 1997, $40,000 and $30,000, respectively, of these royalty payments remained unpaid. The Company's obligation to pay royalties to DEMI expires as of July 19, 2004. The future minimum royalty payments specified by the DEMI License consist of the following:
Year Ending December 31,
1998..................................$100,000
1999..................................$ 50,000
As a result of some computer programs being written using two digits instead of four digits to define an applicable year, time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000 which could potentially result in miscalculations or system failure. The Company has been assessing its exposure to this "Year 2000 Issue" and has determined that all of its operational programs controlling its purchasing, inventory, billing and accounting systems have been designed to be year 2000 compliant. In addition to its operational programs, the Company has several programs that test product performance and quality. These programs are currently being reviewed for year 2000 compliance. The Company does not anticipate that required modifications to these test programs, if any, would be material in cost or time. Currently the Company has no critical interfacing systems to third parties. However, there is no guarantee that systems of other companies with which the Company has business transactions will be timely converted and would not have an adverse effect on the Company.
The Company currently anticipates that its existing cash balances will fund operations and continue technology development at the current level of activity through the first quarter of 1999. However, it may be necessary for the Company to increase its research and development expenses as it continues to work to improve its zinc-air technology and to explore markets for its zinc-air batteries. It may also be necessary for the Company to expend greater than anticipated funds on its manufacturing facilities or otherwise. The Company will continue to need working capital beyond its current levels, and depending on the Company's results of operations, the Company may find it necessary to obtain additional working capital on an accelerated basis or in amounts greater than currently anticipated. There
can be no assurance that additional equity or debt financing will be available when needed or on terms acceptable to the Company. To date, both costs and development times have substantially exceeded the Company's forecasts. The Company has also encountered greater difficulty in commercializing its technology than originally expected. In addition, the battery business is a chemical processing business, and as such, the Company will require specialized equipment to
manufacture its zinc-air batteries. Future equipment additions could exceed current Company estimates in cost, complexity and development time.
The market price of the Company's common stock has fluctuated significantly since it began to be publicly traded on July 1, 1993 and may continue to be highly volatile. Factors such as delays by the Company in achieving development goals, inability of the Company to commercialize or manufacture its products, inability of the Company to reach agreements with battery manufacturers and OEMs, fluctuation in the Company's operating results, changes in earning estimates by analysts, the addition or deletion of analyst coverage, announcements of technological innovations or new products by the Company or its competitors, perceived changes in the markets for various OEM applications incorporating the Company's products, the announcement or termination of relationships with battery manufacturers and
OEMs and general market conditions may cause significant fluctuations in the market price of the Company's common stock. The market prices of the stock of many high technology companies have fluctuated substantially, often unrelated to the operating or research and development performance of the specific companies.
Such market fluctuations could adversely affect the market price for the Company's common stock.
The Nasdaq Stock Market has requirements for continued listing on the National Market, including a requirement that the minimum bid price per share of the stock of each listed company not fall below $1.00 for any 30-consecutive business day period. The minimum bid price per share of the Company's common stock recently has been below $1.00. If the minimum bid price per share of the Company's common stock were to continue below $1.00, no assurance can be given that
the Company will be able to continue to list its common stock on the Nasdaq Stock Market's National Market.
This report contains statements which to the extent that they are not recitations of historical fact, may constitute "forward looking statements" within the meaning of applicable federal securities laws and are based on the Company's current expectations and assumptions. These expectations and assumptions are subject to a number of risks and uncertainties which could cause actual results to differ materially from those anticipated, which include but are not limited to the following: ability of the Company to achieve development goals, ability of the Company to commercialize its battery technology, development of competing battery technologies, ability of the Company to protect its proprietary rights to its technology, improvements in conventional battery technologies, demand for and acceptance of the
Company's products in the marketplace, ability to obtain commitments from battery manufacturers and OEMs, ability of the Company to ramp up production to meet anticipated sales, impact of any future governmental regulations, impact of pricing or material costs, ability of the Company to raise additional funds and other factors affecting the Company's business that are beyond the Company's control.
AER Energy is a trademark of AER Energy Resources, Inc.
|
