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| ADLI.OB > SEC Filings for ADLI.OB > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
Forward Looking Statements
American Medical Technologies, Inc. (the "Company," "we" and "us") uses forward-looking statements in this report and may make such statements in future filings with the Securities and Exchange Commission. The Company may also make forward-looking statements in its press releases or other public shareholder communications. The Company's forward-looking statements are subject to risks and uncertainties and include information about its expectations and possible or assumed future results of operations. When the Company uses any of the words "believes", "expects", "anticipates", "estimates" or similar expressions, it is making forward-looking statements.
To the extent available, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of its forward-looking statements. While the Company believes that its forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond the Company's control or are subject to change, actual results could be materially different. Factors that might cause such a difference include, without limitation, the following: the Company's inability to generate sufficient cash flow to meet its current liabilities, the inability of the Company to find suitable new acquisitions or the expense or difficulty of integrating such acquisitions with current Company operations, adverse results in any of the Company's material lawsuits, if any, the possible failure of revenues to offset additional costs associated with its new business model, the potential lack of product acceptance, the Company's potential inability to introduce new products to the market, the potential failure of customers to meet purchase commitments, the potential loss of customer relationships, the potential failure to receive or maintain necessary regulatory approvals, the extent to which competition may negatively affect prices and sales volumes or necessitate increased sales expenses, the failure of negotiations to establish original equipment manufacturer agreements or strategic alliances and the other risks and uncertainties set forth in this report and our Annual Report on Form 10-KSB for the period ended December 31, 2007.
Other factors not currently anticipated by management may also materially and adversely affect the Company's results of operations. Except as required by applicable law, the Company does not undertake any obligation to publicly release any revisions which may be made to any forward-looking statements to reflect events or circumstances occurring after the date of this report.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect amounts reported in the accompanying consolidated financial statements and related footnotes. These estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information the Company believes to be reasonable under the circumstances. There can be no assurance that actual results will conform to the Company's estimates and assumptions, and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. The policies the Company believes to be the most sensitive to estimates and judgments are described in Item 7 of the Company's 2007 Annual Report on Form 10-KSB.
Results of Operations
The Company had revenues of $588,968 for the three month period ended September 30, 2008 compared to $784,277 for the same period in 2007, a decrease of 25%. For the three month period ended September 30, 2008, domestic revenues decreased 11% and international revenues decreased 46% compared to the same period in 2007. The decrease in revenues included a $53,000 decrease in the industrial product line due to two international sales totaling $95,000 in 2007 which were partially offset by a $57,000 international sale in 2008. Revenues for parts and repairs decreased approximately $27,000 which was related to the historical decrease in equipment sales. Spectrum revenues decreased approximately $95,000 related to economic concerns and pricing pressure from competition domestically and in the European and Latin American markets; regulatory issues which have since been resolved in the Asian markets and a traditional summer slowdown combined with and the timing of a major holiday month in the Middle Eastern markets for the three month period ended September 30, 2008, compared to the prior year's period.
The Company had revenues of $1,913,089 for the nine month period ended September 30, 2008 compared to $2,466,868 for the same period in 2007, a decrease of 22%. For the nine month period ended September 30, 2008, domestic revenues decreased 16% and international revenues decreased 35% compared to the same period in 2007. The decrease in revenues included a $181,000 decrease in revenues in the industrial product line, which was mostly attributable to $164,000 in sales to two large international customers in 2007 which was partially offset by a $57,000 international sale in 2008. For the nine month period ended September 30, 2008 the Company experienced a $244,000 decrease in Spectrum product line sales primarily due to economic concerns and pricing pressure from competition domestically and in the European and Latin American markets; regulatory issues which have since been resolved in the Asian markets and a traditional summer slowdown combined with the timing of a major holiday month in the Middle Eastern markets. Revenues for parts and repairs decreased $122,000 for the nine month period ended September 30, 2008, compared to the prior year's period, which was related to the historical decrease in equipment sales. Additionally, the period in 2007 included $94,000 in sales of inventory previously included in the inventory reserve. The decreases in revenues were partially offset by a $17,800 increase in PAC product line revenues, a $27,700 increase in KCP product line revenues and a $40,900 increase in DirectCrown product line that was added in April 2007.
The Company anticipates a continued decrease in the sale of parts and repairs and an increase in revenues for DirectCrown and other recently added brokered product lines moving forward. The Company is actively pursuing new international distributors for its Spectrum tooth whitening product line and anticipates an increase in revenues moving forward assuming such distributors can be secured.
Additionally, royalties were $5,944 and $18,500 for the three and nine month periods ended September 30, 2008 compared to $8,593 and $14,656 for the same periods in 2007, a decrease of 31% for the three month period ended September 30, 2008, and an increase of 26% for the nine month period ended September 30, 2008, compared to the same periods in 2007, respectively.
Gross profit as a percentage of revenues was 64% and 68% for the three and nine month periods ended September 30, 2008 compared to 32% and 53% for the same periods in 2007. The increase in gross profit as a percentage of revenue for the three and nine month periods ended September 30, 2008 was primarily attributable to the addition of $240,000 in the inventory reserve in 2007. This increase was partially offset by the sale of $94,000 in inventory previously included in the reserve in 2007. The Company anticipates gross profit to continue to increase as additional inventory included in the inventory valuation allowance is used or sold and with the continued growth in revenues from brokered product lines, of which there can be no assurance.
Gross profit was $378,792 for the three months ended September 30, 2008, compared to $251,269 for the same period in 2007, an increase of $127,523 or 51% from the prior period. Gross profit was $1,294,939 for the nine months ended September 30, 2008, compared to $1,316,592 for the nine months ended September 30, 2007, a decrease of $21,653 or 2% from the prior period.
Selling, general and administrative expenses were $468,567 and $1,629,887 for the three and nine month periods ended September 30, 2008 compared to $768,950 and $2,210,921 for the same periods in 2007, a decrease of 39% and 26% respectively. Payroll expense decreased $97,000 for the nine month period ended September 30, 2008 primarily due to changes in personnel and employee option expenses incurred in 2007, respectively, compared to the same period in 2007. Occupancy expenses decreased $34,400 and $46,900 for the three and nine month periods ended September 30, 2008, respectively, compared to the same periods in 2007, due to the termination of the lease between Bear Street Associates and the Company.
General office expenses decreased $20,100 and $30,100 for the three and nine month periods ended September 30, 2008, respectively, compared to the same periods in 2007, primarily due to a decrease in computer and travel expenses. Marketing expenses decreased $10,200 and $22,400 for the three and nine month periods ended September 30, 2008, respectively, when compared to the same periods in 2007. This decrease was primarily attributable to limited international marketing travel in 2008 and decreases in advertising expenses in 2008 compared to the same periods in 2007. The decreases were partially offset by increases of $10,500 and $30,000 in promotional expenses for the three and nine month periods ended September 30, 2008, respectively, compared to the same periods in 2007. Other professional fees decreased $232,500 and $311,100 for the three and nine month periods ended September 30, 2008 compared to the same periods in 2007. These decreases were primarily attributable to a decrease in legal expense and consulting fees during the nine months ended September 30, 2008. Legal expenses in 2007 included settlement of litigation and new product negotiations. The Company is diligently working to continue to reduce selling, general and administrative expenses.
The Company had no research and development expenses in the three and nine month periods ended September 30, 2008 compared to $0 and $10,846, respectively, for the same periods in 2007. The Company does not anticipate the development of new product lines for manufacturing.
Other income was $4,738 and $263,747 for the three and nine month periods ended September 30, 2008, respectively, compared to $36,805 and $139,005 for the same periods in 2007. The increase in other income for the nine month period ended September 30, 2008 compared to the prior year's period was primarily attributable to the recognition of $503,202 of deferred gain on the sale of the Company's building which was partially offset by a $250,000 early lease termination fee. Additionally, other income for the three and nine month periods ended September 30, 2008 included a decrease in fees received for consulting services and the termination of a sublease in June 2008. The Company does not expect additional fees for consulting services for the remainder of 2008.
The Company had a change in fair value of warrant subject to registration rights of a loss of $24,613 for the three months ended September 30, 2008, compared to a gain of $174,931 for the three months ended September 30, 2007, a $199,544 or 114% decrease from the prior period.
The Company had a change in fair value of warrant subject to registration rights of a gain of $150,285, compared to a loss of $349,322 for the nine months ended September 30, 2007, a $499,607 or 143% increase from the prior period.
The Company had net loss of $117,160 for the three months ended September 30, 2008, compared to a net loss of $316,415 for the three months ended September 30, 2007, a decrease in net loss of $199,255 or 63% from the prior period. The decrease in net loss was mainly due to the 60% decrease in cost of sales and the 39% decrease in selling, general and administrative expenses offset by the 25% decrease in sales and the 114% decrease in change in fair value of warrant subject to registration rights.
The Company had net income of $56,823 for the nine months ended September 30, 2008, compared to net loss of $1,064,082 for the nine months ended September 30, 2007, a decrease in net loss of $1,120,905 or 105% from the prior period. The decrease in net loss was mainly due to the 45% decrease in cost of sales and the 26% decrease in selling, general and administrative expenses, offset by the 23% decrease in sales and 143% decrease in change in fair value of warrant subject to registration rights.
Liquidity and Capital Resources
The Company had total assets of $1,575,024 as of September 30, 2008, consisting of cash and cash equivalents of $51,710. restricted certificate of deposit of $323,143, accounts receivable less allowance for doubtful accounts of $127,660, inventories net of $142,790 and prepaid expenses and other current assets of $138,675; property and equipment, net of $63,935; and intangible assets, net of $727,111.
The Company had total current liabilities of $1,889,108 as of September 30, 2008, which included line of credit of $630,000 (as described below), Bear Street Note of $175,000 (as described below), accounts payable of $618,121, compensation and employee benefits of $53,865, accrued restructuring costs of $65,892, warrants subject to registration rights of $299,125, and other accrued liabilities of $47,106.
The Company had total long-term liabilities of $48,656 as of September 30,2008, which represented deferred revenues.
The Company had negative working capital of $1,105,130 and total accumulated deficit of $44,654,011 as of September 30, 2008.
The Company's operating activities used $90,443 for the nine month period ended September 30, 2008.
The Company's investing activities used $4,396 for the nine month period ended September 30, 2008.
The Company's financing activities provided $130,000 for the nine month period ended September 30, 2008 in funds received from the Company's line of credit with Compass Bank.
On December 21, 2006, the Company entered into a secured line of credit agreement with Texas State Bank. The funds available under the line of credit were $600,000. The Company invested $300,000 with funds drawn against the line of credit in a Certificate of Deposit with a term of one year as collateral for the loan. Interest on the line of credit is set at the prime rate plus 1%. The principal on the loan was payable in one payment on December 20, 2007, with interest on the outstanding amount payable monthly. In February 2007, Texas State Bank increased the line of credit to $800,000 using the Company's accounts receivable and inventory as additional collateral. The terms of the original line of credit remained the same with the exception of the payment date being extended to February 2008. In January 2008, the Company renewed the secured line of credit agreement. The terms of the original line of credit remained the same with the exception of the payment date which was extended to January 2009. The interest rate on the line of credit was 6.0% as of September 30, 2008. The balance outstanding was $630,000 at September 30, 2008. In August 2008, Texas State Bank became part of Compass Bank.
On April 11, 2006, the Company entered into a licensing agreement with Discus Dental Holdings, Inc. ("Discus") and its wholly owned subsidiary, Spectrum Dental, Inc. ("Spectrum Dental"), a leading provider of professional tooth whitening products under the brand names of "Contrastpm", "Contrastpmplus" and "Contrastam", under which AMT became the exclusive distributor of the Spectrum Dental product line, which provided approximately $933,000 in additional revenue in 2006. The Sepulveda Group, LLC is affiliated with Discus. In full payment for the license, the Company issued Discus a warrant to purchase 2,500,000 shares of common stock at $0.20 per share.
The fair value of the warrants issued to Discus is estimated at the end of each period using the Black-Scholes option pricing model with the following assumptions used on September 30, 2008: risk free interest rate of 2.98%; dividend yield of 0%; volatility factors of 240%, the expected market price of the Company's common shares over the estimated life of the warrant of 6.5 years. The calculated fair value of the warrant as of December 31, 2007 was $449,412. The calculated fair value of the warrant on the grant date was $549,530 which the Company capitalized as an intangible asset and is recognizing as a licensing fee over the vesting period of five years.
On April 1, 2007, the Company entered into a License Agreement with CrownBeav
LLC, an Oregon limited liability company, under which the Company became the
nonexclusive distributor for the United States and Canada and the exclusive
distributor for the rest of the world of its DirectCrown brand of temporary
crown and bridge material. The license agreement is for a term of ten years
with automatic renewals for additional five year terms, contains minimum
requirements for sale of the products by the Company, and may be terminated
(i) for cause upon 60 days notice, (ii) upon the Company's failure to comply
with applicable securities laws, (iii) upon the occurrence of certain other
customary events of default. In full consideration, the Company granted to
CrownBeav a five year option to purchase (the "Option") 1,000,000 shares of
common stock at $0.20 per share. The shares subject to the Option will vest two
years from the Effective Date of the agreement. The option agreement includes a
guaranteed trading price of $0.40 per share for the 30-day period prior to
vesting. Additional option shares will be granted for the difference if the
market price of the shares is below $0.40 during the 30-day period.
The Black-Scholes option pricing model was used to determine the fair value of the options issued to CrownBeav with the following assumptions: risk free interest rate of 4.54%; dividend yield of 0%; volatility factors of 139%, the expected market price of the Company's common shares over the estimated life of the option of 3.5 years. The resulting fair value of the call option was $341,726. The option grant vests on April 1, 2009. The option agreement includes a guaranteed trading price of $0.40 per share for the 30-day period prior to vesting. Additional option shares will be granted for the difference if the market price is below $0.40 during the 30-day period. The Black-Scholes option pricing model was used to determine the fair value of the option guarantee issued to CrownBeav with the following assumptions: risk free interest rate of 4.60%; dividend yield of 0%; volatility factors of 100%, the expected market price of the Company's common shares over the guarantee period of 2 years. The resulting fair value of the put option was $185,000. The $526,726 fair market value of the option (combination of call and put) was capitalized as an intangible asset and is being recognized as a licensing fee over the 10 year period of the license.
On October 24, 2007, the Company entered into a one year Authorized Detailer Agreement with Sheervision, Inc. ("Sheervision"), a Delaware corporation, under which the Company became an authorized broker and detailer of Sheervision's Firefly Infinity LED Headlight and all related accessories. The agreement will be renewed for an additional one or two year period in 2008. The Company was appointed as an exclusive authorized detailer in certain international markets and as a non-exclusive authorized detailer in Sheervision's retained territory, excluding the United States of America. In consideration of the Company's efforts to develop and retain an international dealer network, Sheervision will pay the Company a monthly management fee during the first four months of the agreement and a commission for all products sold in the AMT managed territory during the agreement period.
On March 20, 2008 the Company entered into a three year Authorized Detailer Agreement with Dent'NCo, a French company, under which the Company became an authorized broker and detailer of Dent'NCo's Flexiwhite Tooth Whitening Light and related accessories. The Company was appointed as an exclusive authorized detailer in certain international markets. In consideration of the Company's efforts to develop and retain an international dealer network, Dent'NCo will pay the Company monthly commission for all products sold in the AMT managed territory during the agreement period.
On May 9, 2008, the building at 5655 Bear Lane, Corpus Christi, Texas was sold by Bear Street Associates LLC ("Bear Street" formerly Sepulveda Group) and the lease between Bear Street and AMT was terminated. In consideration of the early lease termination, AMT entered into an agreement to pay $250,000 over a 10 month period beginning in June 2008 (the "Bear Street Note"). The Company fully recognized the deferred gain on the 2006 sale of the building and the lease termination fee in other income in the quarter ended June 30, 2008. The recognized gain offset by the lease termination fee is recorded in other income. The Company entered into a three year lease agreement with WTF Properties LLC effective May 9, 2008 and will continue to occupy a portion of the building. The amount of the Bear Street Note was $175,000 as of September 30, 2008.
The Company has suffered recurring losses from operations, and its total liabilities exceed its total assets. This raises substantial doubt about the Company's ability to continue as a going concern. The Company's ability to generate positive operational cash flow is dependent upon increasing revenues through the sales of existing product lines and the expansion related to the representation of additional lines of dental products. While the Company has identified additional product lines and has ongoing dialogs with dental product manufacturers, there can be no assurance that the Company will be successful in finalizing the contract for representation of these products or that the Company will be successful in generating positive operational cash flow.
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