10-Q 1 e10-q.txt AER ENERGY RESOURCES, INC 1 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 June 30, 2000 ------------------------------------------------- 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 0-21926 --------------------------------------------------------- AER ENERGY RESOURCES, INC. (Exact name of registrant as specified in its charter) Georgia 34-1621925 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4600 Highlands Parkway, Suite G, Smyrna, Georgia 30082 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (770) 433-2127 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. There were 24,850,263 shares of Common Stock outstanding as of August 11, 2000. 2 AER ENERGY RESOURCES, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000 INDEX

2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) AER ENERGY RESOURCES, INC. (a Development Stage Company) CONDENSED BALANCE SHEETS

See notes to condensed financial statements. 3 4 AER ENERGY RESOURCES, INC. (a Development Stage Company) CONDENSED STATEMENTS OF OPERATIONS (Unaudited)

See notes to condensed financial statements. 4 5 AER ENERGY RESOURCES, INC. (a Development Stage Company) CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

See notes to condensed financial statements. 5 6 AER ENERGY RESOURCES, INC. (A Development Stage Company) NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed financial statements of AER Energy Resources, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the Company's audited financial statements included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1999. Operating results for the three and six month periods ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000 or any interim period. 2. SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents Cash and cash equivalents consist of cash, bank deposits and highly liquid investments with maturities of three months or less when purchased and are stated at cost, which approximates market. Inventories The Company's inventories are valued at the lower of cost or market, using the first in, first out (FIFO) method. The inventories balances at June 30, 2000 and December 31, 1999 of $78,147 and $82,198, respectively, consist entirely of raw materials. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. In accordance with FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Based on the Company's estimate of future undiscounted cash flows, the Company expects to recover the carrying amounts of its 6 7 remaining fixed assets. The Company's estimates of future undiscounted cash flows have taken into consideration its current research and development operations and contemplate the Company entering into license agreements and research and development agreements, similar, or somewhat similar, to the 1998 agreement with Duracell Inc., throughout the remaining life of the Company's fixed assets. If the Company is unable to enter into such agreements, a writedown of long-lived assets to fair value may be required. No write-offs of obsolete equipment were recorded in either of the six-month periods ended June 30, 2000 or 1999. 3. LOANS AND WARRANTS TRANSACTION On April 3, 2000, the Company received two $1.0 million loans from each of The Kindt-Collins Company and Keystone, Inc., two major shareholders of the Company. The Company is required to make quarterly interest payments at prime plus four percent. The $2.0 million principal is due in March 2002. If the Company consummates an equity issuance during the term of the loans, the lenders may convert the loans in whole or in part into equity at the same price at which the equity is being issued by the Company. Each lender was issued warrants to purchase 112,994 shares of the Company's common stock at an exercise price of $1.77 per share. The warrants expire in March 2005. The fair value for these warrants was estimated at the date of grant using a Black-Scholes valuation model. The estimated fair value of the warrants of $1.60 per share is recorded as a discount to the $2.0 million principal of the loans and amortized to interest expense on a straight-line basis over the term of the loans. 4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101") which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. SAB 101 is required to be adopted in the fourth quarter of 2000 with retroactive application to the beginning of the year. SAB 101 allows companies to report any changes in revenue recognition related to adopting its provisions as an accounting change at the time of implementation in accordance with APB Opinion No. 20, "Accounting Changes." The adoption of SAB 101 is not expected to have a material impact on the Company's financial position or results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company was incorporated in 1989 and has been engaged in the development and commercialization of high energy density zinc-air batteries. Until 1998, the Company's operations were focused primarily on developing and improving its technology, setting up the manufacturing process, testing and selling rechargeable zinc-air batteries, recruiting personnel, and similar activities. In 1998, the Company changed its strategy to research and product development of zinc-air technology with its focus in primary (disposable) batteries, rather than rechargeable batteries, and plans to commercialize the technology through alliances with battery and original 7 8 equipment manufacturers ("OEMs"). This change allows the Company to capitalize on the capability of its patented Diffusion Air Manager technology and opportunities in hand-held electronic products like camcorders, cellular telephones, cordless telephones, digital cameras, and hand-held computers. The Diffusion Air Manager can extend zinc-air battery storage life by isolating the cells in zinc-air batteries from exposure to air during periods when the battery is in storage or not in use. In September 1998, the Company announced its Technology Licenses and Services ("TLAS") Agreement with Duracell Inc., a subsidiary of The Gillette Company, making Duracell the first licensee of the Company's primary (non-rechargeable) zinc-air technology. Under the terms of the TLAS Agreement, Duracell agrees to license the rights to the Company's then existing patents. In addition, Duracell funded certain joint product development projects with the Company during 1999. Duracell owns technology developed under the projects it funds, and the Company has rights to utilize the technology. Duracell also has options to obtain certain other license rights. Throughout 2000, the Company will continue to seek additional license agreements for its patented zinc-air technology with other companies, and focus on the development of prototype primary zinc-air batteries that utilize Diffusion Air Manager technology. RESULTS OF OPERATIONS Three Months Ended June 30, 2000 and 1999 The Company earned $0.11 million of license fees and $0.50 million of license fees and research and development revenues primarily related to the TLAS Agreement with Duracell during the three months ended June 30, 2000 and 1999, respectively. Research and development expenses decreased 12% to $0.86 million for the three months ended June 30, 2000 from $0.98 million for the same period in 1999. This decrease resulted primarily from reduced materials and tooling expenses due to the elimination of research and development work for Duracell in 2000, lower personnel-related expenses, and reduced depreciation expense. Marketing, general and administrative expenses decreased 11% to $0.42 million for the three months ended June 30, 2000 from $0.47 million for the same period in 1999. This decrease resulted primarily from the completion in 1999 of minimum royalty payments to the licensor of certain technology to the Company and lower personnel-related expenses. Six Months Ended June 30, 2000 and 1999 The Company earned $0.22 million of license fees and $0.98 million of license fees and research and development revenues primarily related to the TLAS Agreement with Duracell during the six months ended June 30, 2000 and 1999, respectively. 8 9 Research and development expenses decreased 11% to $1.78 million for the six months ended June 30, 2000 from $1.99 million for the same period in 1999. This decrease resulted primarily from reduced personnel-related expenses due to fewer employees than the same period in 1999, reduced production materials expenses due to the elimination of research and development work for Duracell in 2000, and lower depreciation expense. Marketing, general and administrative expenses decreased 23% to $0.88 million for the six months ended June 30, 2000 from $1.14 million for the same period in 1999. This decrease resulted primarily from the completion in 1999 of minimum royalty payments to the licensor of certain technology to the Company, reduced personnel-related expenses, reduced legal and accounting professional fees, and lower investor relations expenses. LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION As of June 30, 2000, the Company had cash and cash equivalents of $1.29 million. The Company anticipates using these funds as needed to fund capital equipment purchases, research and product development efforts, marketing and licensing activities, production of prototype zinc-air battery products, development of alliances with battery manufacturers and OEMs, working capital and general corporate purposes as determined by management. In April 2000, the Company received $2.0 million in cash pursuant to two $1.0 million loans from two major shareholders of the Company. The Company is required to make quarterly interest payments at prime plus four percent. The principal is due in March 2002. Each lender was issued warrants to purchase 112,994 shares of the Company's common stock at an exercise price of $1.77 per share. The warrants expire in March 2005. Net cash used in operating activities increased to $2.46 million for the six months ended June 30, 2000 from $1.00 million for the same period in 1999 due primarily to the increase in the net loss and the net decrease in operating assets and liabilities for the six months ended June 30, 2000. For the six months ended June 30, 2000, net cash used in investing activities of $0.01 million related to purchases of capital equipment and improvements. Net cash used in investing activities of $2.18 million for the same period in 1999 related to investment activities in high-grade, short-term commercial paper. Net cash provided by financing activities for the six months ended June 30, 2000 arises from the issuance of $2.00 million in notes payable to related parties in April 2000. No cash was provided by financing activities during the six months ended June 30, 1999. The Company currently anticipates that its existing cash and cash equivalents balance will fund operations and continue technology development at the current level of activity through the end of the third quarter of 2000. The Company will need to raise additional funds through additional license agreements, research and development contracts, debt or equity. There can be no assurance that additional license agreements or research and development contracts or equity or debt financing will be available when needed or on terms acceptable to the Company. 9 10 The market price of the Company's common stock has fluctuated significantly since it began to be publicly traded in July 1993 and may continue to be highly volatile. Factors such as the ability of the Company to achieve development goals, ability of the Company to commercialize its battery technology, ability of the Company to license its 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 companies and OEMs, impact of any future governmental regulations, impact of pricing or material costs, ability of the Company to raise additional funds, general market conditions and other factors affecting the Company's business that are beyond the Company's control 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. FORWARD LOOKING STATEMENTS 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, ability of the Company to license its 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, 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. All forward looking statements contained in this report are intended to be subject to the safe harbor protection provided by applicable federal securities laws. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has invested a portion of its cash and cash equivalents in highly liquid financial instruments. The Company has historically held, and plans in the future to hold, all such instruments until maturity. If the instruments were, for some reason not anticipated, redeemed earlier than their maturity, there might be a gain or loss on the transaction. The Company has no transactions that qualify for treatment under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". 10 11 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On April 3, 2000, the Company received two $1.0 million loans from each of The Kindt-Collins Company and Keystone, Inc., two major shareholders of the Company. Pursuant to two $1.0 million promissory notes, the Company is required to make quarterly interest payments at prime plus four percent. The $2.0 million principal is due in March 2002. If the Company consummates an equity issuance during the term of the loans, the lenders may convert the loans in whole or in part into equity at the same price at which the equity is being issued by the Company. Each lender was issued warrants to purchase 112,994 shares of the Company's common stock at an exercise price of $1.77 per share. The warrants are exercisable immediately and expire in March 2005. The issuance of the notes and warrants were exempt from registration under the Securities Exchange Act of 1933, as amended, pursuant to Section 4(2), including Rule 506 of Regulation D promulgated thereunder. Both recipients of the notes and warrants were accredited investors under Regulation D. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's 2000 Annual Meeting of Shareholders was held on April 12, 2000. The Company's shareholders voted to elect all six nominees to the Company's Board of Directors. The following table shows the number of votes cast for each nominee and the number of votes withheld as to each nominee. There were no abstentions or broker non-votes as to any nominee, and there were no nominees other than those named in the Company's proxy statement (who are set forth below).

AER Energy is a trademark of AER Energy Resources, Inc. 11 12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS:

(B) REPORTS ON FORM 8-K: The registrant did not file any reports on Form 8-K during the three months ended June 30, 2000. 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. AER ENERGY RESOURCES, INC. Date: August 11, 2000 By: /s/ David W. Dorheim ---------------------------------------- David W. Dorheim, President and Chief Executive Officer Date: August 11, 2000 By: /s/ J.T. Moore --------------------------------------- J.T. Moore, Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer) 12

AER ENERGY RESOURCES INC /GA 10-Q