api_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) |
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| þ |
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
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|
For the quarterly period ended
July 2, 2010 |
| |
|
OR
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| |
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| o |
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
Commission file number 1-11056
ADVANCED PHOTONIX,
INC.
(Exact name
of registrant as specified in its charter)
| Delaware |
|
33-0325826 |
| (State or other jurisdiction
of |
|
(I.R.S. Employer |
| incorporation or
organization) |
|
Identification
Number) |
2925 Boardwalk, Ann Arbor, Michigan
48104
(Address of principal executive offices) (Zip Code)
Registrants’
telephone number, including area code
(734) 864-5600
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 þ
NO o
Indicate by
check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
YES o
NO o
Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o |
Accelerated filer o |
Non-accelerated
filer o |
Smaller reporting company
þ |
| (Do not check if a smaller
reporting company) |
Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
YES o
NO þ
As of
August 11, 2010, there were 25,537,032 of Class A Common Stock, $.001 par
value.
Advanced Photonix, Inc.
Form 10-Q
For the Quarter Ended July 2, 2010
Table of Contents
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Page |
| PART I |
|
FINANCIAL
INFORMATION |
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| |
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| Item 1. |
|
Financial Statements |
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Condensed Consolidated Balance
Sheets at July 2, 2010 and March 31, 2010 |
|
3 |
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Condensed Consolidated Statements of Operations for the three-month
periods ended July 2, 2010 and June 26, 2009 (unaudited) |
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4 |
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Condensed Consolidated Statements of Cash Flows for the three-month
periods ended July 2, 2010 and June 26, 2009 (unaudited) |
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5 |
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Notes to Condensed
Consolidated Financial Statements |
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6 |
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| Item 2. |
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Management’s Discussion and
Analysis of Financial Condition and Results of Operations |
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17 |
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| Item 3. |
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Quantitative and Qualitative
Disclosures About Market Risk |
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25 |
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| Item 4. |
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Controls and
Procedures |
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25 |
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| PART
II |
|
OTHER
INFORMATION |
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| Item 1 |
|
Legal
Proceedings |
|
26 |
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| Item 1A |
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Risk Factors |
|
26 |
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| Item 2 |
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Unregistered Sales of Equity
Securities and Use of Proceeds |
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26 |
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| Item 3 |
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Defaults Upon Senior
Securities |
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26 |
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| Item 5 |
|
Other
Information |
|
26 |
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| Item 6 |
|
Exhibits |
|
27–33 |
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| |
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Exhibit 3.1.3 Amended
Certificate of Incorporation of Advanced Photonix, Inc., dated August 22,
2008 |
|
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Exhibit 31.1 Section 302
Certification of Chief Executive Officer |
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Exhibit 31.2 Section 302
Certification of Chief Financial Officer |
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Exhibit 32.1 Section 906
Certification of Chief Executive Officer |
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Exhibit 32.2 Section 906
Certification of Chief Financial Officer |
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2
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated
Financial Statements
Advanced Photonix,
Inc.
Condensed Consolidated Balance
Sheets
|
|
|
July 2, 2010 |
|
March 31,
2010 |
|
|
|
(Unaudited) |
|
|
|
|
| ASSETS |
|
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash
equivalents |
|
$ |
1,431,000 |
|
|
$ |
1,762,000 |
|
| Accounts
receivable, net |
|
|
3,407,000 |
|
|
|
2,679,000 |
|
| Inventories |
|
|
3,805,000 |
|
|
|
3,656,000 |
|
| Prepaid
expenses and other current assets |
|
|
201,000 |
|
|
|
200,000 |
|
| Total current assets |
|
|
8,844,000 |
|
|
|
8,297,000 |
|
| Equipment and leasehold improvements,
net |
|
|
3,222,000 |
|
|
|
3,284,000 |
|
| Goodwill |
|
|
4,579,000 |
|
|
|
4,579,000 |
|
| Intangibles and patents,
net |
|
|
6,801,000 |
|
|
|
7,096,000 |
|
| Restricted cash |
|
|
500,000 |
|
|
|
500,000 |
|
| Other assets |
|
|
276,000 |
|
|
|
99,000 |
|
| Total Assets |
|
$ |
24,222,000 |
|
|
$ |
23,855,000 |
|
| |
| LIABILITIES AND SHAREHOLDERS’
EQUITY |
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,787,000 |
|
|
$ |
1,006,000 |
|
|
Accrued compensation |
|
|
539,000 |
|
|
|
530,000 |
|
|
Accrued interest |
|
|
66,000 |
|
|
|
640,000 |
|
|
Other accrued
expenses |
|
|
1,170,000 |
|
|
|
1,182,000 |
|
|
Current portion of long-term
debt - related parties |
|
|
1,401,000 |
|
|
|
1,401,000 |
|
|
Current portion of long-term
debt - bank term loan |
|
|
434,000 |
|
|
|
434,000 |
|
|
Current portion of long-term
debt - MEDC |
|
|
422,000 |
|
|
|
254,000 |
|
| Total current liabilities |
|
|
5,819,000 |
|
|
|
5,447,000 |
|
| Long-term debt, less current portion
- MEDC |
|
|
1,802,000 |
|
|
|
1,970,000 |
|
| Long-term debt, less current portion
- bank line of credit |
|
|
1,394,000 |
|
|
|
1,394,000 |
|
| Long-term debt, less current portion
- bank term loan |
|
|
542,000 |
|
|
|
687,000 |
|
| Total liabilities |
|
|
9,557,000 |
|
|
|
9,498,000 |
|
| |
| Commitments and
contingencies |
|
|
|
|
|
|
|
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| Shareholders' equity: |
|
|
|
|
|
|
|
|
| Class A redeemable convertible
preferred stock, $.001 par value; 780,000 shares |
|
|
|
|
|
|
|
|
| authorized; 40,000 shares
outstanding |
|
|
-- |
|
|
|
-- |
|
| Class A Common Stock, $.001 par
value, 100,000,000 authorized; July 2, 2010 – |
|
|
|
|
|
|
|
|
| 25,537,032 shares issued and
outstanding, March 31, 2010 – 24,495,669 shares issued |
|
|
|
|
|
|
|
|
| and outstanding |
|
|
26,000 |
|
|
|
24,000 |
|
| Additional paid-in capital |
|
|
50,743,000 |
|
|
|
50,164,000 |
|
| Accumulated deficit |
|
|
(36,104,000 |
) |
|
|
(35,831,000 |
) |
| Total shareholders' equity |
|
|
14,665,000 |
|
|
|
14,357,000 |
|
| Total Liabilities and Shareholders’
Equity |
|
$ |
24,222,000 |
|
|
$ |
23,855,000 |
|
See notes to condensed consolidated
financial statements.
3
Advanced Photonix,
Inc.
Condensed Consolidated Statements of
Operations
(Unaudited)
|
|
|
Three Months
Ended |
|
|
|
July 2, 2010 |
|
June 26,
2009 |
| Sales, net |
|
$ |
6,253,000 |
|
|
$ |
5,934,000 |
|
| Cost of products
sold |
|
|
3,335,000 |
|
|
|
2,937,000 |
|
| Gross profit |
|
|
2,918,000 |
|
|
|
2,997,000 |
|
| |
| Operating
expenses: |
|
|
|
|
|
|
|
|
| Research, development and
engineering |
|
|
1,288,000 |
|
|
|
1,063,000 |
|
| Sales and marketing |
|
|
473,000 |
|
|
|
451,000 |
|
| General and
administrative |
|
|
1,012,000 |
|
|
|
1,173,000 |
|
| Amortization expense |
|
|
406,000 |
|
|
|
515,000 |
|
| Wafer fabrication relocation
expenses |
|
|
-- |
|
|
|
40,000 |
|
| Total operating
expenses |
|
|
3,179,000 |
|
|
|
3,242,000 |
|
| Loss from operations |
|
|
(261,000 |
) |
|
|
(245,000 |
) |
| |
| Other income
(expense): |
|
|
|
|
|
|
|
|
| Interest income |
|
|
1,000 |
|
|
|
1,000 |
|
| Interest expense |
|
|
(50,000 |
) |
|
|
(67,000 |
) |
| Interest expense, related
parties |
|
|
(15,000 |
) |
|
|
(14,000 |
) |
| Change in fair value of
warrant liability |
|
|
54,000 |
|
|
|
39,000 |
|
| Other expense |
|
|
(2,000 |
) |
|
|
(10,000 |
) |
| |
| Net loss |
|
$ |
(273,000 |
) |
|
$ |
(296,000 |
) |
| |
| Basic and diluted loss per
share |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
| Weighted average common shares
outstanding |
|
|
|
|
|
|
|
|
| Basic and
diluted |
|
|
24,675,000 |
|
|
|
24,135,000 |
|
See notes to condensed consolidated
financial statements.
4
Advanced Photonix,
Inc.
Condensed Consolidated Statements of
Cash Flows
(Unaudited)
|
|
|
Three Months
Ended |
|
|
|
July 2, 2010 |
|
June 26,
2009 |
| Cash flows from operating
activities: |
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(273,000 |
) |
|
$
|
(296,000 |
) |
| Adjustments to reconcile net
loss to net cash provided by (used in) |
|
|
|
|
|
|
|
|
| operating activities |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
244,000 |
|
|
|
294,000 |
|
| Amortization |
|
|
406,000 |
|
|
|
515,000 |
|
|
Stock based compensation
expense |
|
|
18,000 |
|
|
|
95,000 |
|
| Change in fair value of
warrant liability |
|
|
(54,000 |
) |
|
|
(39,000 |
) |
|
Changes in operating
assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable -
net |
|
|
(728,000 |
) |
|
|
(597,000 |
) |
|
Inventories |
|
|
(149,000 |
) |
|
|
(165,000 |
) |
|
Prepaid expenses and
other assets |
|
|
(178,000 |
) |
|
|
(218,000 |
) |
|
Accounts payable and
accrued expenses |
|
|
820,000 |
|
|
|
263,000 |
|
|
Net cash provided by (used in) operating activities |
|
|
106,000 |
|
|
|
(48,000 |
) |
| |
| Cash flows from investing
activities: |
|
|
|
|
|
|
|
|
|
Capital
expenditures |
|
|
(182,000 |
) |
|
|
(81,000 |
) |
| Patent expenditures |
|
|
(111,000 |
) |
|
|
(75,000 |
) |
|
Net cash used in investing activities |
|
|
(293,000 |
) |
|
|
(156,000 |
) |
| |
| Cash flows from financing
activities: |
|
|
|
|
|
|
|
|
|
Payments on bank term
loan |
|
|
(145,000 |
) |
|
|
(108,000 |
) |
| Proceeds from exercise of
restricted stock |
|
|
1,000 |
|
|
|
-- |
|
|
Net cash used in financing activities |
|
|
(144,000 |
) |
|
|
(108,000 |
) |
| Net decrease in cash and cash
equivalents |
|
|
(331,000 |
) |
|
|
(312,000 |
) |
|
Cash and cash
equivalents at beginning of period |
|
|
1,762,000 |
|
|
|
2,072,000 |
|
| Cash and cash equivalents at
end of period |
|
$ |
1,431,000 |
|
|
$ |
1,760,000 |
|
| |
| Supplemental disclosure of
cash flow information: |
|
July 2, 2010 |
|
June 26,
2009 |
| Cash paid for income
taxes |
|
|
-- |
|
|
$ |
-- |
|
|
Cash paid for
interest |
|
$ |
76,000 |
|
|
$ |
46,000 |
|
| |
| Non-cash financing
activities: |
|
July 2, 2010 |
|
June 26,
2009 |
| Conversion of accrued MEDC
loan interest to common stock |
|
$ |
562,000 |
|
|
$ |
-- |
|
See notes to condensed consolidated
financial statements.
5
Advanced Photonix,
Inc.
Notes to Condensed Consolidated
Financial Statements
July 2, 2010
Note 1. Basis of Presentation
Business
Description
General – Advanced Photonix, Inc. ® (the
Company, we or API), was incorporated under the laws of the State of Delaware in
June 1988. The Company is engaged in the development and manufacture of
optoelectronic devices and value-added sub-systems and systems. The Company
serves a variety of global Original Equipment Manufacturers (OEMs), in a variety
of industries. The Company supports the customers from the initial concept and
design phase of the product, through testing to full-scale production. The
Company has two manufacturing facilities located in Camarillo, California and
Ann Arbor, Michigan.
The
accompanying unaudited condensed consolidated financial statements include the
accounts of the Company and the Company’s wholly owned subsidiaries, Silicon
Sensors Inc. (“SSI”) and Picometrix, LLC (“Picometrix”). The unaudited condensed
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. All material inter-company accounts and
transactions have been eliminated in consolidation. Certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, all adjustments, consisting of normal
and recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for the periods presented have been
included. Operating results for the three-month period ended July 2, 2010 are
not necessarily indicative of the results that may be expected for the balance
of the fiscal year ending March 31, 2011.
These
unaudited condensed consolidated financial statements should be read in
conjunction with Management’s Discussion and Analysis and the audited financial
statements and notes thereto included in the Company’s Annual Report on Form
10-K for the fiscal year ended March 31, 2010, filed with the U.S. Securities
and Exchange Commission (“SEC”) on June 29, 2010.
Note 2. Recent Pronouncements and
Accounting Changes
In April
2010, the FASB issued new guidance concerning revenue recognition related to
research and development projects. It clarifies that revenue can be recognized
when a milestone is achieved if the milestone meets all criteria to be
considered substantive. This guidance is effective for fiscal years beginning on
or after June 15, 2010. The guidance will be reviewed to determine if this
change will have a material impact on the Company’s future financial
statements.
Note 3. Share-Based Compensation
The Company
has five stock equity plans: The 1990 Incentive Stock Option and Non-Qualified
Stock Option Plan, the 1991 Directors’ Stock Option Plan (The Directors’ Plan),
the 1997 Employee Stock Option Plan, the 2000 Stock Option Plan and the 2007
Equity Incentive Plan. As of July 2, 2010, under all of our plans, there were
7,200,000 shares authorized for issuance, with 1,665,610 shares remaining
available for future grant.
6
Non-director options typically vest at the rate of 25% per year over four
years and are exercisable up to ten years from the date of issuance. Options
granted under the Directors’ Plan typically vests at the rate of 50% per year
over two years. Under these plans, the option exercise price equals the stock’s
market price on the date of grant. Options and restricted stock awards may be
granted to employees, officers, directors and consultants. Under the 2007 Equity
Incentive Plan, restricted stock awards typically vest within one
year.
Restricted
shares are granted with a per share or unit purchase price at 100% of fair
market value on the date of grant. The shares of restricted stock vest after
either three, six or twelve months, and are not transferable for one year after
the grant date. Stock-based compensation will be recognized over the expected
vesting period of the stock options and restricted stock.
The
following table summarizes information regarding options outstanding and options
exercisable at June 26, 2009 and July 2, 2010 and the changes during the periods
then ended:
| |
|
Number of |
|
Weighted |
|
Number of |
|
Weighted |
| |
|
Options |
|
Average |
|
Shares |
|
Average |
| |
|
Outstanding |
|
Exercise
Price |
|
Exercisable |
|
Exercise
Price |
| |
|
(000’s) |
|
per
Share |
|
(000’s) |
|
per Share |
| Balance of March 31,
2009 |
|
2,746 |
|
|
$ |
1.92 |
|
2,374 |
|
$ |
1.93 |
| Granted |
|
78 |
|
|
$ |
0.63 |
|
|
|
|
|
| Exercised |
|
-- |
|
|
|
-- |
|
|
|
|
|
| Expired |
|
(20 |
) |
|
$ |
1.80 |
|
|
|
|
|
| Balance of June 26,
2009 |
|
2,804 |
|
|
$ |
1.92 |
|
2,493 |
|
$ |
1.92 |
| |
| |
|
Number of |
|
Weighted |
|
Number of |
|
Weighted |
| |
|
Options |
|
Average |
|
Shares |
|
Average |
| |
|
Outstanding |
|
Exercise
Price |
|
Exercisable |
|
Exercise
Price |
| |
|
(000’s) |
|
per Share |
|
(000’s) |
|
per Share |
| Balance of March 31,
2010 |
|
2,604 |
|
|
$ |
1.86 |
|
2,402 |
|
$ |
1.89 |
| Granted |
|
156 |
|
|
$ |
0.44 |
|
|
|
|
|
| Exercised |
|
-- |
|
|
|
-- |
|
|
|
|
|
| Expired |
|
(27 |
) |
|
$ |
1.61 |
|
|
|
|
|
| Balance of July 2,
2010 |
|
2,733 |
|
|
$ |
1.78 |
|
2,438 |
|
$ |
1.89 |
Information
regarding stock options outstanding as of July 2, 2010 is as
follows:
|
|
|
|
|
|
Options
Outstanding |
|
|
| |
|
|
|
|
Weighted
Average |
|
Weighted
Average |
| |
Price Range |
|
Shares (in
000s) |
|
Exercise
Price |
|
Remaining
Life |
| |
$0.44 - $1.25 |
|
901 |
|
$0.69 |
|
8.92 |
| |
$1.50 - $2.50 |
|
1,169 |
|
$1.91 |
|
5.68 |
| |
$2.68 - $5.34 |
|
663 |
|
$3.03 |
|
4.49 |
| |
|
| |
|
|
|
|
Options
Exercisable |
|
|
| |
|
|
|
|
Weighted
Average |
|
Weighted
Average |
| |
Price Range |
|
Shares (in
000s) |
|
Exercise
Price |
|
Remaining
Life |
| |
$0.44 - $1.25 |
|
703 |
|
$0.75 |
|
3.60 |
| |
$1.50 - $2.50 |
|
1,080 |
|
$1.93 |
|
5.45 |
| |
$2.68 - $5.34 |
|
655 |
|
$3.03 |
|
4.49 |
7
The
intrinsic value of options exercised in quarters ending July 2, 2010 and June
26, 2009 was zero in each quarter since no stock options were exercised.
During FY
2009 and FY 2010, restricted shares were issued to certain individuals. The
restricted share transactions are summarized below:
|
|
|
|
|
Weighted
Average |
|
|
|
Shares (000’s) |
|
Grant Date Fair
Value |
| Unvested, March 31,
2009 |
|
29 |
|
|
$ |
1.50 |
| Granted |
|
195 |
|
|
$ |
0.65 |
| Vested |
|
(29 |
) |
|
$ |
1.50 |
| Expired |
|
-- |
|
|
|
-- |
| Unvested, June 26,
2009 |
|
195 |
|
|
$ |
0.65 |
| |
|
|
|
|
|
Weighted
Average |
|
|
|
Shares (000’s) |
|
Grant Date Fair
Value |
| Unvested, March 31,
2010 |
|
25 |
|
|
$ |
0.63 |
| Granted |
|
70 |
|
|
$ |
0.44 |
| Vested |
|
(25 |
) |
|
$ |
0.63 |
| Expired |
|
-- |
|
|
|
-- |
| Unvested, July 2,
2010 |
|
70 |
|
|
$ |
0.44 |
The Company
estimates the fair value of stock-based awards utilizing the Black-Scholes
pricing model for stock options and the intrinsic value for restricted stock.
The fair value of the awards is amortized as compensation expense on a
straight-line basis over the requisite service period of the award, which is
generally the vesting period. The Black-Scholes fair value calculations involve
significant judgments, assumptions, estimates and complexities that impact the
amount of compensation expense to be recorded in current and future periods. The
factors include:
- The time period that
stock-based awards are expected to remain outstanding has been determined
based on the average of the original award period and the remaining vesting
period in accordance with the SEC’s short-cut approach pursuant to SAB No.
107, “Disclosure About Fair Value of
Financial Statements”. The expected term assumption for awards issued during the three month
periods ended July 2, 2010 and June 26, 2009 was 6.3 years. As additional
evidence develops from the employee’s stock trading history, the expected term
assumption will be refined to capture the relevant trends.
- The future volatility of
the Company’s stock has been estimated based on the weekly stock price from
the acquisition date of Picometrix LLC (May 2, 2005) to the date of the latest
stock grant. The expected volatility assumption for awards issued during the
three month periods ending July 2, 2010 and June 26, 2009 averaged
68% and 42%, respectively. As additional evidence develops, the future
volatility estimate will be refined to capture the relevant trends.
- A dividend yield of zero
has been assumed for awards issued during the three month periods ended July
2, 2010 and June 26, 2009, based on the Company’s actual past experience and
the fact that Company does not anticipate paying a dividend on its shares in
the near future.
- The Company has based
its risk-free interest rate assumption for awards issued during the three
month periods ended July 2, 2010 and June 26, 2009 on the implied yield
available on U.S. Treasury issues with an equivalent expected term, which
averaged 2.2% and 2.2% during the respective periods.
- The forfeiture rate, for
awards issued during the three month periods ended July 2, 2010 and June 26,
2009, were approximately 20.0% and 20.4%, respectively, and was based on the
Company’s actual historical forfeiture trend.
8
The Company
recorded $18,000 and $95,000 of stock-based compensation expense (as classified
in table below) in our consolidated statements of operations for the three month
periods ended July 2, 2010 and June 26, 2009, respectively
|
|
|
Three months
ended |
|
|
|
July 2, 2010 |
|
June 26,
2009 |
| Cost of Products
Sold |
|
$ |
3,000 |
|
$ |
3,000 |
| Research and Development
expense |
|
|
4,000 |
|
|
23,000 |
| General and Administrative
expense |
|
|
8,000 |
|
|
64,000 |
| Sales and Marketing
expense |
|
|
3,000 |
|
|
5,000 |
| Total Stock Based
Compensation |
|
$ |
18,000 |
|
$ |
95,000 |
At July 2,
2010, the total stock-based compensation expense related to unvested stock
options and restricted shares granted to employees under the Company’s stock
option plans but not yet recognized was approximately $135,000. This expense
will be amortized on a straight-line basis over a weighted-average period of
approximately 1.9 years and will be adjusted for subsequent changes in
estimated forfeitures.
Note 4 Credit Risk
Pervasiveness of Estimates and Risk
- The
preparation of condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash equivalents and trade
accounts receivable.
The Company
maintains cash balances at four financial institutions that are insured by the
Federal Deposit Insurance Corporation (FDIC) up to $250,000. As of July 2, 2010,
the Company had cash at one financial institution in excess of federally insured
amounts. As excess cash is available, the Company invests in short-term and
long-term investments, primarily consisting of Government Securities Money
Market instruments, and Repurchase agreements. As of July 2, 2010, cash deposits
held at financial institutions in excess of FDIC insured amounts of $250,000
were approximately $1.4 million. As of March 31, 2010, cash deposits held at
financial institutions in excess of FDIC insured amounts of $250,000 were
approximately $1.8 million.
Accounts
receivable are unsecured and the Company is at risk to the extent such amount
becomes uncollectible. The Company performs periodic credit evaluations of its
customers’ financial condition and generally does not require collateral. At
July 2, 2010, no customer comprised 10% or more of accounts receivable. As of
March 31, 2010, one customer comprised 10% or more of accounts receivable.
Note 5. Detail of Certain Asset
Accounts
Cash and Cash
Equivalents - The Company considers all highly
liquid investments, with an original maturity of three months or less when
purchased, to be cash equivalents.
9
Compensating Cash
Balance -
The Company’s credit facility with The PrivateBank and Trust Company has a
minimum compensating balance requirement of $500,000. This amount has been
separately disclosed on the accompanying balance sheets as restricted cash.
Accounts
Receivable - Receivables are stated at amounts
estimated by management to be the net realizable value. The allowance for
doubtful accounts is based on specific identification. Accounts receivable are
charged off when it becomes apparent, based upon age or customer circumstances,
that such amounts will not be collected.
Accounts
receivable are unsecured and the Company is at risk to the extent such amount
becomes uncollectible. The Company performs periodic credit evaluations of its
customers’ financial condition and generally does not require collateral. Any
unanticipated change in the customers’ credit worthiness or other matters
affecting the collectability of amounts due from such customers could have a
material effect on the results of operations in the period in which such changes
or events occur. The allowance for doubtful accounts on both July 2, 2010 and
March 31, 2010 was $51,000.
Inventories
- Inventories, which include material,
labor and manufacturing overhead, are stated at the lower of cost (on a first
in, first out method) or market. Inventories consist of the following at July 2,
2010 and March 31, 2010:
|
|
July 2, 2010 |
|
March 31,
2010 |
| Raw material |
$ |
2,505,000 |
|
$
|
2,375,000 |
| Work-in-process |
|
975,000 |
|
|
867,000 |
| Finished products |
|
325,000 |
|
|
414,000 |
| Inventories, net |
$ |
3,805,000 |
|
$ |
3,656,000 |
Slow moving
and obsolete inventories are reviewed throughout the year to assess whether a
cost adjustment is required. Our review of slow moving and obsolete inventory
begins with a listing of all inventory items which have not moved regularly
within the past 12 months. In addition, any residual inventory, which is
customer specific and remaining on hand at the time of contract completion, is
included in the list. The complete list of slow moving and obsolete inventory is
then reviewed by the production, engineering and/or purchasing departments to
identify items that can be utilized in the near future. These items are then
excluded from the analysis and the remaining amount of slow-moving and obsolete
inventory is then further assessed and a write down is recorded when warranted.
Additionally, non-cancelable open purchase orders for parts we are obligated to
purchase where demand has been reduced may also be written down. Impairments for
open purchase orders where the market price is lower than the purchase order
price are also recorded. The impairments established for excess, slow moving,
and obsolete inventory create a new cost basis for those items. The cost basis
of these parts is not subsequently increased if the circumstances which led to
the impairment change in the future. If a product that had previously been
impaired is subsequently sold, the amount of reduced cost basis is reflected as
cost of goods sold.
10
Intangible Assets - Intangible assets that have definite lives
consist of the following (dollars in thousands):
|
|
Weighted |
July 2, 2010 |
|
|
Average Lives |
Amortization |
Carrying |
Accumulated |
Intangibles |
|
|
in Years |
Method |
Value |
Amortization |
Net |
| Non-Compete agreement |
3 |
Cash
Flow |
$ |
130 |
$ |
130 |
$ |
-- |
| Customer list |
15 |
Straight Line |
|
475 |
|
350 |
|
125 |
| Trademarks |
15 |
Cash
Flow |
|
2,270 |
|
689 |
|
1,581 |
| Customer relationships |
5 |
Cash Flow |
|
1,380 |
|
1,380 |
|
-- |
| Technology |
10 |
Cash
Flow |
|
10,950 |
|
6,817 |
|
4,133 |
| Patents pending |
|
|
|
637 |
|
-- |
|
637 |
| Patents |
10 |
Straight Line |
|
463 |
|
138 |
|
325 |
|
Total Intangibles |
|
|
$ |
16,305 |
$ |
9,504 |
$ |
6,801 |
|
|
Weighted |
March 31, 2010 |
|
|
Average Lives |
Amortization |
Carrying |
Accumulated |
Intangibles |
|
|
in Years |
Method |
Value |
Amortization |
Net |
| Non-Compete agreement |
3 |
Cash
Flow |
$ |
130 |
$ |
130 |
$ |
-- |
| Customer list |
15 |
Straight Line |
|
475 |
|
347 |
|
128 |
| Trademarks |
15 |
Cash
Flow |
|
2,270 |
|
653 |
|
1,617 |
| Customer relationships |
5 |
Cash Flow |
|
1,380 |
|
1,380 |
|
-- |
| Technology |
10 |
Cash
Flow |
|
10,950 |
|
6,460 |
|
4,490 |
| Patents pending |
|
|
|
535 |
|
-- |
|
535 |
| Patents |
10 |
Straight Line |
|
454 |
|
128 |
|
326 |
|
Total Intangibles |
|
|
$ |
16,194 |
$ |
9,098 |
$ |
7,096 |
Amortization expense
for the three-month periods ended July 2, 2010 and June 26, 2009 was
approximately $406,000 and $515,000, respectively. The current patents held by
the Company have remaining useful lives ranging from 2 years to 20
years.
Assuming no
impairment to the intangible value, future amortization expense for intangible
assets and patents are as follows:
| Intangible Assets and Patents
(000’s) |
| Remainder of 2011 |
|
$ |
1,217 |
| 2012 |
|
|
1,345 |
| 2013 |
|
|
1,128 |
| 2014 |
|
|
941 |
| 2015 |
|
|
597 |
| 2016
& after |
|
|
936 |
|
Total |
|
$ |
6,164 |
| a) |
|
Patent pending
costs of $637,000 are not included in the chart above. These costs will be
amortized beginning the month the patents are
granted.
|
11
Note 6. Debt
Total outstanding
debt of the Company as of July 2, 2010 and March 31, 2010 consisted of the
following (dollars in thousands):
|
|
|
July 2, 2010 |
|
March 31, 2010 |
| Bank term loan |
|
$ |
976 |
|
$ |
1,121 |
| Bank
line of credit |
|
|
1,394 |
|
|
1,394 |
| MEDC loans |
|
|
2,224 |
|
|
2,224 |
| Debt to
Related Parties |
|
|
1,401 |
|
|
1,401 |
|
Total |
|
$ |
5,995 |
|
$ |
6,140 |
Bank Debt –The Company has a
credit facility with The PrivateBank and Trust Company. As part of this credit
facility, the Company has a term loan and a $3.0 million line of credit. The
term loan is to be repaid in monthly principal payments of $36,161, plus
interest at prime plus 2%, until maturity on September 25, 2011, provided that
if the existing loans to the Company by the Michigan Economic Development
Corporation (MEDC) or Michigan Strategic Fund (MSF) have not converted to equity
on or before August 31, 2011, the outstanding principal shall be due on August
31, 2011. The interest rate on the term loan on July 2, 2010 was 5.25%. The line
of credit bears interest at prime plus 2% and any outstanding borrowings are due
on December 25, 2011, provided that if the existing loans to the Company by the
MEDC or MSF have not been converted to equity on or before August 31, 2011, the
outstanding principal will be due on August 31, 2011. The availability under the
line of credit is determined by a calculation of a borrowing base that includes
a percentage of accounts receivable and inventory.
The line of credit is
guaranteed by each of API’s wholly-owned subsidiaries and the term loan is
secured by a Security Agreement among API, its subsidiaries and The PrivateBank,
pursuant to which API and its subsidiaries granted to The PrivateBank a
first-priority security interest in certain described assets.
The Company’s credit
facility contains financial covenants including minimum Debt Service Coverage
ratio, Adjusted EBITDA level, and Net Worth requirements. The minimum Debt
Service Coverage ratio is 1.0 to 1.0 for the first three quarters of fiscal 2011
and 1.2 to 1.0 thereafter. The minimum Adjusted EBITDA level is measured on a
trailing three month basis for the July 2, 2010 ($190,000), September 30, 2010
($190,000), December 31, 2010 ($260.000) and March 31, 2011 ($400,000) test
dates and thereafter on a trailing twelve month basis ($1,160,000). The minimum
Net Worth requirement is $13.0 million for the first quarter of FY 2011, $12.5
million for the second quarter of FY 2011, $12.1 million for the third quarter
of FY 2011 and $11.8 million for the fourth quarter of FY 2011. The Company was
in compliance with its financial covenants in Q1 2011.
In addition to the
financial covenants, the Company is required to amend the secured promissory
notes issued to our CFO and CTO (Related Parties Debt) to defer the December 1,
2010 and March 1, 2011 installment payments owed under the related party notes.
Failure to amend the related party notes by August 25, 2010 will constitute an
event of default under the agreement.
Interest payments
made to the Lender during the three-month periods ended July 2, 2010 and June
26, 2009 were approximately $39,000 and $32,000, respectively.
MEDC Loans -
The Michigan Economic Development Corporation (MEDC) entered into two loan
agreements with Picometrix LLC, one in fiscal 2005 (MEDC-loan 1) and one in
fiscal 2006 (MEDC-loan 2). Both loans are unsecured.
12
The MEDC-loan 1 was
issued in the original principal amount of $1,025,000. Under the original terms
of the MEDC – loan 1, the interest rate was 7% and interest accrued but unpaid
through October 2008 would be added to then outstanding principal balance of the
promissory note issued pursuant to the MEDC-loan 1 and the restated principal
would be amortized over the remaining four years (September 15, 2012). Effective
September 23, 2008, the MEDC-loan 1 was amended and restated to change the start
date of repayment of principal and interest from October 2008 to October
2009.
During the fourth
quarter of fiscal 2010, the Company began negotiations with the MEDC to further
amend the MEDC-loan 1 promissory note. The Company and the MEDC agreed that the
payment of restated principal and accrued interest was to be suspended until the
negotiations were completed. In May 2010, the Company entered into a debt
conversion agreement with the MEDC whereby the MEDC would convert the accrued
and unpaid interest as of November 30, 2009 totaling $324,669 into 601,239
unregistered shares of the Class A Common Stock of the Company at a price per
share of $0.54 (market value of the stock on the day of conversion). In
addition, the Company granted the MEDC a put option to sell back to the Company
the shares received pursuant to the debt conversion agreement in the event of a
trigger event as defined in the debt conversion agreement. In conjunction with
the debt conversion agreement, the Company amended the MEDC-loan 1 promissory
note to retroactively change the interest rate from 7% to 4% beginning in
December 2009, and to change the repayment terms of the outstanding principal
and interest such that beginning in October 2010, the Company is to repay the
remaining principal and accrued interest on a monthly basis through maturity in
November 2014.
MEDC-loan 2, which
was assigned to the Michigan Strategic Fund (MSF) in June 2010, was issued in
the original principal amount of $1.2 million. Under the original terms of the
MEDC – loan 2, the interest rate was 7% and interest accrued, but unpaid in the
first two years of this agreement was added to the then outstanding principal of
the promissory note issued pursuant to the MEDC-loan 2. During the third year of
this agreement, the Company was to pay interest on the restated principal of the
promissory note until October 2008, at which time the Company was to repay the
restated principal over the remaining three years (September 15, 2011).
Effective January 26, 2009, the MEDC-loan 2 was amended and restated to change
the start date of repayment of principal and interest from October 2008 to
November 2009 and to extend the repayment period to October 2012.
During the fourth
quarter of fiscal 2010, the Company began negotiations with the MEDC to further
amend the MEDC-loan 2 promissory note. The Company and the MEDC agreed that the
payment of restated principal and accrued interest was to be suspended until the
negotiations were completed. In May 2010, the Company entered into a debt
conversion agreement with the MEDC whereby the MEDC would transfer the MEDC-loan
2 promissory note to the MSF which would convert the accrued and unpaid interest
as of October 31, 2009 totaling $237,667 into 440,124 unregistered shares of the
Class A Common Stock of the Company at a price per share of $0.54 (market value
of the stock on the day of conversion). In addition, the Company granted the MSF
a put option to sell back to the Company the shares received pursuant to the
debt conversion agreement in the event of a trigger event as defined in the debt
conversion agreement. In conjunction with the debt conversion agreement, the
Company amended the MEDC-loan 2 promissory note to retroactively change the
interest rate from 7% to 4% beginning in November 2009, and to change the
repayment terms of the outstanding principal and interest such that beginning in
July 2010, the Company is to repay the remaining principal and accrued interest
on a monthly basis through maturity in September 2014.
The Company performed
an assessment of the amendments made to the MEDC and MSF loans during Q1 fiscal
2011 to determine whether or not the amendments constituted a “troubled debt
restructuring” or a “substantial modification” in accordance with FASB guidance
and concluded that the amendments did not constitute either a troubled debt
restructuring or a substantial modification. Furthermore, the Company performed an assessment of the balance
sheet classification of the common shares issued as part of the debt conversion
agreements in light of the put options granted and determined that equity
classification of the shares is appropriate since the trigger event related to
the put option is considered to be in the control of the Company.
13
Related Parties Debt - As a result of
the acquisition of Picotronix, Inc., the Company issued four-year promissory
notes in the aggregate principal amount of $2.9 million to the stockholders of
Picometrix. The notes bear interest at a rate of prime plus 1.0% and are secured
by all of the intellectual property of Picometrix. The interest rate at July 2,
2010 was 4.25%. API has the option of prepaying the notes without penalty. Note
holders include Robin Risser and Steve Williamson, the Company’s CFO and CTO,
respectively.
On November 30, 2009,
the Company and the note holders entered into the fourth amendments to the Notes
to extend the due date for the remaining principal balance of the Notes (in the
aggregate amount of $1,400,500) to March 1, 2011 payable in two installments as
follows:
| December 1, 2010 |
|
$ |
450,000 |
| March
1, 2011 |
|
$ |
950,500 |
Interest payments
made to Related Parties during the three-month periods ended July 2, 2010 and
June 26, 2009 were approximately $15,000 and $15,000, respectively.
As described in the
Bank Debt section of Note 6 to the condensed consolidated financial statements,
the Company’s credit agreement with The PrivateBank and Trust Company requires
that the Company defer the December 1, 2010 and March 1, 2011 installments by
August 25, 2010. The Company anticipates the amendments to defer these
installments will be completed by the deadline.
Note 7. Stockholders’
Equity
At March 31, 2010,
the Company had the following warrants outstanding and exercisable:
|
|
|
Shares (000’s) |
|
Exercise Price |
| Convertible Note – 1st Tranche * |
|
695 |
|
$ |
1.7444 |
| Convertible Note – 2nd Tranche |
|
695 |
|
$ |
1.7444 |
| Private Placement |
|
741 |
|
$ |
1.8500 |
At July 2, 2010, the
Company had the following warrants outstanding and exercisable:
|
|
|
Shares (000’s) |
|
Exercise Price |
| Convertible Note – 2nd Tranche |
|
713 |
|
$ |
1.7000 |
| Private
Placement |
|
765 |
|
$ |
1.7900 |
*Expired on April 18, 2010
The exercise price
for the Convertible Note warrants are subject to adjustment, based on a formula
contained in the Convertible Note agreement, if common stock is issued in the
future below the $1.7444 exercise price. The exercise price was reduced to $1.70
in June 2010 as a result of the issuance of Class A Common Stock to the MEDC and
MSF at a price of $0.54 per share. Future adjustments cannot reduce the exercise
price below $1.70 without obtaining shareholder approval. The exercise price for
the Private Placement warrants are subject to adjustment based on a formula
contained in the Private Placement agreement, if common stock is issued in the
future below the $1.85 exercise price. The exercise price was reduced to $1.79 in June 2010 as a result of
the issuance of Class A Common Stock to the MEDC and MSF at a price of $0.54 per
share. Future adjustments cannot reduce the exercise price below $1.79 without
obtaining shareholder approval.
14
As a result of
adopting the FASB’s guidance, effective April 1, 2009, on how an entity should
evaluate whether an instrument is indexed to its own stock, the above mentioned
warrants, which previously were treated as equity, are no longer afforded equity
treatment because of their exercise price reset features. At the effective date
the Company was required to adjust its balance sheet to reflect the incremental
impact of treating the warrants as liabilities since their original issuance
date. On April 1, 2009, the Company reclassified $2,619,000 of previously
recorded debt discount from additional paid-in-capital, as a cumulative effect
adjustment, and recorded the initial recognition of a $294,000 warrant
liability, to reflect the fair value of the warrants on that date. These
adjustments resulted in a $2,325,000 decrease to the accumulated deficit. The
fair value liability of these warrants decreased to approximately $58,000 as of
July 2, 2010. As a result, the Company recorded other income of $54,000, from
the change in the fair value of these warrants for the three-month period ended
July 2, 2010. The Company recorded other income of $39,000, from the change in
the fair value of these warrants for the three-month period ended June 26,
2009.
The fair value of the
warrants was estimated using the Black-Scholes option pricing model using the
following assumptions:
|
|
|
July 2, 2010 |
|
June 26, 2009 |
| Expected term (in years) |
|
1.2 – 2.2 |
|
0.8 – 3.2 |
| Volatility |
|
59.09% - 80.29% |
|
76.01% - 104.13% |
| Expected dividend |
|
-- |
|
-- |
| Risk-free interest rate |
|
0.83% - 1.16% |
|
0.58% -
1.16% |
Expected volatility
is based primarily on historical volatility. Historical volatility is based on
the weekly stock price for the most recent period equivalent to the term of the
warrants. A dividend yield of zero has been assumed based on the Company’s
actual past experience and the fact that the Company does not anticipate paying
a dividend on its shares in the future. The Company has based its risk-free
interest on the implied yield available on U.S. Treasury issues with equivalent
expected term.
The inputs used to
determine the fair value of the warrants are classified as Level 3 inputs.
Management classified these as Level 3 measurements as they are based on
unobservable inputs and involve management judgment.
Note 8. Earnings Per Share
The Company’s net
earnings per share calculations are in accordance with FASB ASC 260-10.
Accordingly, basic earnings (loss) per share are computed by dividing net
earnings (loss) by the weighted average number of shares outstanding for each
year. The calculation of earnings (loss) per share is as follows:
|
|
|
Three months ended |
| Basic and Diluted |
|
July 2, 2010 |
|
June 26, 2009 |
| Weighted Average Basic Shares
Outstanding |
|
|
24,675,000 |
|
|
|
24,135,000 |
|
| Dilutive effect of Stock Options and Warrants |
|
|
-- |
|
|
|
-- |
|
| Weighted Average Diluted Shares
Outstanding |
|
|
24,675,000 |
|
|
|
24,135,000 |
|
| Net
loss |
|
$ |
(273,000 |
) |
|
$ |
(296,000 |
) |
| Basic & diluted loss per
share |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
15
The dilutive effect
of stock options for the periods presented was not included in the calculation
of diluted loss per share because to do so would have had an anti-dilutive
effect as the Company had a net loss for these periods. As of July 2, 2010, the
number of anti-dilutive shares excluded from diluted earnings per share totaled
approximately 4.2 million shares, which includes 1.5 million anti-dilutive
warrants.
On April 1, 2009, the
Company adopted the FASB’s guidance on determining whether instruments granted
in share-based payment transactions are participating securities which requires
that unvested restricted stock with a non-forfeitable right to receive dividends
be included in the two-class method of computing earnings per share. This
guidance did not have a material impact on our reported earnings per share
amounts.
Note 9. Fair Value of Financial
Instruments
The carrying value of
all financial instruments potentially subject to valuation risk (principally
consisting of cash equivalents, accounts receivable, accounts payable, and debt)
approximates the fair value based upon the short-term nature of these
instruments, and in the case of debt, the prevailing interest rates available to
the Company.
16
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements contained in this Management’s Discussion and Analysis
(MD&A), including, without limitation, statements containing the words
“may,” “will,” “can,” “anticipate,” “believe,” “plan,” “estimate,” “continue,”
and similar expressions constitute “forward-looking statements.” These
forward-looking statements reflect our current views with respect to future
events and are based on assumptions and subject to risks and uncertainties. You
should not place undue reliance on these forward-looking statements. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including risks described in the Risk Factors
sections and elsewhere in this filing. Except for our ongoing obligation to
disclose material information as required by federal securities laws, we do not
intend to update you concerning any future revisions to any forward-looking
statements to reflect events or circumstances occurring after the date of this
report. The following discussion should be read in conjunction with the Risk
Factors as well as our financial statements and the related
notes.
Critical Accounting Policies and
Estimates
The
discussion and analysis of Company’s financial condition and results of
operations is based on its condensed consolidated financial statements, which
have been prepared in conformity with accounting principles generally accepted
in the United States of America. The preparation of these condensed consolidated
financial statements requires us to make judgments and estimates that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statement and the reported amount of
revenues and expenses during the reporting period. The Company bases its
estimates on historical experience and on various other assumptions that it
believes are reasonable under the circumstances. Actual results may differ from
such estimates under different assumptions or conditions.
Certain prior year
balances have been reclassified in the consolidated financial statements to
conform to the current year presentation.
Application of Critical Accounting
Policies
Application of
the Company’s accounting policies requires management to make certain judgments
and estimates about the amounts reflected in the financial statements.
Management uses historical experience and all available information to make
these estimates and judgments, although differing amounts could be reported if
there are changes in the assumptions and estimates. Estimates are used for, but
not limited to, the accounting for the allowance for doubtful accounts,
inventory allowances, valuation of intangible assets and goodwill, depreciation
and amortization, warranty costs, taxes and contingencies. Management has
identified the following accounting policies as critical to an understanding of
its financial statements and/or as areas most dependent on management’s judgment
and estimates.
Global Economic
Conditions
The credit
markets and the financial services industry continue to experience a period of
significant disruption characterized by the bankruptcy, failure, collapse or
sale of various financial institutions, increased volatility in securities
prices, severely diminished liquidity and credit availability and a significant
level of intervention from the United States and other governments. Continued
concerns about the systemic impact of potential long-term or widespread
recession, energy costs, geopolitical issues, the availability and cost of
credit, the global commercial and residential real estate markets and related
mortgage markets and reduced consumer confidence have contributed to increased
market volatility and diminished expectations for most developed and emerging
economies continuing into 2010. As a result of these market conditions, the cost
and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider
credit spreads. Continued turbulence in the United States and international
markets and economies could restrict our ability to refinance our existing
indebtedness, increase our costs of borrowing, limit our access to capital
necessary to meet our liquidity needs and materially harm our operations or our
ability to implement our business strategy.
17
Revenue Recognition
Revenue is derived principally from the sales
of the Company’s products. The Company recognizes revenue when the basic
criteria of SEC Staff Accounting Bulletin No. 104 are met. Specifically, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
usually in the form of a purchase order, when shipment has occurred since its
terms are FOB source, or when services have been rendered, title and risk of
loss have passed to the customer, the price is fixed or determinable and
collection is reasonably assured in terms of both credit worthiness of the
customer and there are no post shipment obligations or uncertainties with
respect to customer acceptance.
The Company sells
certain of its products to customers with a product warranty that provides
warranty repairs at no cost. The length of the warranty term is one year from
date of shipment. The Company accrues the estimated exposure to warranty claims
based upon historical claim costs. The Company’s management reviews these
estimates on a regular basis and adjusts the warranty provisions as actual
experience differs from historical estimates or as other information becomes
available.
The Company does not
provide price protection or general right of return. The Company’s return policy
only permits product returns for warranty and non-warranty repair or replacement
and requires pre-authorization by the Company prior to the return. Credit or
discounts, which have been historically insignificant, may be given at the
discretion of the Company and are recorded when and if determined.
The Company
predominantly sells directly to original equipment manufacturers with a direct
sales force. The Company sells in limited circumstances through distributors.
Sales through distributors represent approximately 6% of total revenue.
Significant terms and conditions of distributor agreements include FOB source,
net 30 days payment terms, with no return or exchange rights, and no price
protection. Since the product transfers title to the distributor at the time of
shipment by the Company, the products are not considered inventory on
consignment.
Revenue is also
derived from technology research and development contracts. We recognize revenue
from these contracts as services and/or materials are provided.
Impairment of Long-Lived
Assets
As of July 2,
2010 and March 31, 2010, our consolidated balance sheet included $4.6 million in
goodwill. Goodwill represents the excess purchase price over amounts assigned to
tangible or identifiable intangible assets acquired and liabilities assumed from
our business acquisitions.
Goodwill and
intangible assets that are not subject
to amortization shall be tested for impairment annually or more frequently if
events or changes in circumstances indicate that the asset might be impaired.
The impairment test shall consist of a comparison of the fair value of the asset
with its carrying amount, as defined. This guidance requires a two-step method
for determining goodwill impairment. Step one is to compare the fair value of
the reporting unit with the unit’s carrying amount, including goodwill. If this
test indicates that the fair value is less than the carrying value, then step
two is required to compare the implied fair value of the reporting unit’s
goodwill with the carrying amount of the reporting unit’s goodwill. If the
carrying amount of the asset exceeds its fair value, an impairment loss shall be
recognized in an amount equal to that excess. The Company has selected March 31
as the date for its annual impairment test.
18
We determine the fair
value of our single reporting unit to be equal to our market capitalization plus
a control premium. Market capitalization is determined by multiplying the shares
outstanding on the assessment date by the average market price of our common
stock over a 10-day period before and a 10-day period after each assessment
date. We use this 20-day duration to consider inherent market fluctuations that
may affect any individual closing price. We believe that our market
capitalization alone does not fully capture the fair value of our business as a
whole, or the substantial value that an acquirer would obtain from its ability
to obtain control of our business. As such, in determining fair value, we add a
control premium — which seeks to give effect to the increased consideration a
potential acquirer would be required to pay in order to gain sufficient
ownership to set policies, direct operations and make decisions related to our
Company— to our market capitalization.
The Company’s
evaluation as of March 31, 2010 indicated there was no impairment. As of March
31, 2010, our market capitalization calculated as described as above, was $14.2
million and our carrying value, including goodwill, was $14.4 million. We
applied a 25% control premium to market capitalization to determine a fair value
of $17.8 million. We believe that including a control premium at this level is
supported by recent transaction data in our industry. Absent the inclusion of a
control premium, our carrying value would have exceeded fair value, requiring a
step two analysis which may have resulted in an impairment of
goodwill.
As evidenced above,
our stock price and control premium are significant factors in assessing our
fair value for purposes of the goodwill impairment assessment. Our stock price
can be affected by, among other things, changes in industry or market
conditions, changes in our results of operations, and changes in our forecasts
or market expectations relating to future results. Significant turmoil in the
financial markets and weakness in macroeconomic conditions globally have
recently contributed to volatility in our stock price and a significant decline
in our stock price during the first quarter of FY 2011. Our stock price had
fluctuated from a high of $0.59 to a low of $0.42 during the first quarter of FY
2011. After updating our control premium analysis to include recent transaction
data, the control premium averaged 62%. Absent the inclusion of a control
premium greater than 18% for FY 2011, our carrying value would have exceeded
fair value, requiring a step two analysis which may have resulted in an
impairment of goodwill. The current macroeconomic environment, however,
continues to be challenging and we cannot be certain of the duration of these
conditions and their potential impact on our stock price performance. If our
recent stock price decline persists and our market capitalization remains below
our carrying value for a sustained period, it is reasonably likely that a
goodwill impairment assessment prior to the next annual review in the fourth
quarter of fiscal 2011 would be necessary and an impairment of goodwill may be
recorded. A non-cash goodwill impairment charge would have the affect of
decreasing our earnings or increasing our losses in such period. If we are
required to take a substantial impairment charge, our operating results would be
materially adversely affected in such period.
The carrying value of
long-lived assets, including amortizable intangibles and property and equipment,
are evaluated whenever events or changes in circumstances indicate that a
potential impairment has occurred relative to a given asset or assets.
Impairment is deemed to have occurred if projected undiscounted cash flows
associated with an asset are less than the carrying value of the asset. The
estimated cash flows include management’s assumptions of cash inflows and
outflows directly resulting from the use of that asset in operations. The amount
of the impairment loss recognized is equal to the excess of the carrying value
of the asset over its then estimated fair value. The Company’s evaluation for
the fiscal year ended March 31, 2010 indicated there were no impairments. There
were no events or changes in circumstances that indicated a potential impairment
has occurred during the three-months ended July 2, 2010.
19
Deferred Tax Asset Valuation
Allowance
The Company
records deferred income taxes for the future tax consequences of events that
were recognized in the Company’s financial statements or tax returns. The
Company records a valuation allowance against deferred tax assets when, in
management’s judgment, it is more likely than not that the deferred income tax
assets will not be realized in the foreseeable future. Consistent with the March
31, 2010 10-K, the Company has a full valuation allowance on its net Deferred
Tax Assets as of July 2, 2010.
Inventories
The Company’s inventories are stated at the
lower of cost (under the first-in, first-out method) or market. Slow moving and
obsolete inventories are reviewed throughout the year. To calculate a reserve
for obsolescence, we begin with a review of our slow moving inventory. Any
inventory, which has been slow moving within the past 12 months, is evaluated
and reserved if deemed appropriate. In addition, any residual inventory, which
is customer specific and remaining on hand at the time of contract completion,
is reserved for at the standard unit cost. The complete list of slow moving and
obsolete inventory is then reviewed by the production, engineering and/or
purchasing departments to identify items that can be utilized in the near
future. These items are then excluded from the analysis and the remaining amount
of slow-moving and obsolete inventory is then reserved for. Additionally,
non-cancelable open purchase orders for parts we are obligated to purchase where
demand has been reduced may be reserved. Reserves for open purchase orders where
the market price is lower than the purchase order price are also established. If
a product that had previously been reserved for is subsequently sold, the amount
of reserve specific to that item is then reversed.
RESULTS OF OPERATIONS
In anticipation of
the economic slowdown, the Company instituted company-wide cost reduction
measures to mitigate the impact of the revenue shortfall. These included
headcount reductions, benefit reductions and wage freezes. In addition, the
Company deferred all non-essential capital expenditures. These measures,
combined with prior cost savings through facility consolidations over the past
few years, have significantly lowered the Company’s breakeven cash flow during
this fiscal year.
Revenues
The Company predominantly operates in one
industry segment, consisting of light and radiation detection devices. The
Company sells its products to multiple markets including telecommunications,
industrial sensing/non destructive testing (NDT), military-aerospace, medical,
and homeland security.
Revenues by market
consisted of the following (dollars in thousands):
|
|
|
Three months ended |
| Revenues |
|
July 2, 2010 |
|
June 26, 2009 |
| Telecommunications |
|
$ |
1,799 |
|
29% |
|
$ |
1,701 |
|
29% |
| Industrial Sensing/NDT |
|
|
3,456 |
|
55% |
|
|
2,126 |
|
36% |
| Military/Aerospace |
|
|
943 |
|
15% |
|
|
1,937 |
|
32% |
| Medical |
|
|
55 |
|
1% |
|
|
122 |
|
2% |
| Homeland Security |
|
|
-- |
|
-- |
|
|
48 |
|
1% |
|
Total Revenues |
|
$ |
6,253 |
|
100% |
|
$ |
5,934 |
|
100% |
The Company's
revenues for the quarter ended July 2, 2010 were $6.3 million, an increase of 5%
(or $319,000) from revenues of $5.9 million for the quarter ended June 26, 2009.
Revenues increased 22% from the quarter ended March 31, 2010. The Company
experienced increases in two of our five markets for the quarter ending July 2,
2010 compared to the prior year period.
20
Industrial
Sensing/NDT market revenue was $3.5 million in Q1 2011, an increase of 63% (or
$1.3 million) from the comparable prior year period and an increase of 32% from
the Q4 2010. Growth in our comparative and consecutive quarters reflect a
strengthening in our industrial markets as the economy continues to recover from
the economic recession and additional revenue from our Terahertz NDT application
development contracts to inspect the F-35 Joint Strike Fighter. The Company
expects substantial growth in the industrial/NDT market for fiscal year
2011.
Telecommunications
revenue in the first quarter of FY 2011 was $1.8 million, an increase of
approximately 6% ($98,000) over the prior year first quarter and an increase of
33% compared to Q4 2010. This increase in the Company’s telecommunications
revenue is an indication that our customers are recovering from the prior year
economic recession. The Company expects telecommunication revenue to have
accelerating growth during the remainder of fiscal year 2011.
Medical market
revenues in the first quarter of FY 2011 decreased $67,000 or 55% from the prior
year first quarter of $122,000. This decrease was primarily a result of the
Company’s decision to eliminate business at a customer that did not meet its
profitability criteria. The Company expects Medical market revenues to grow for
the fiscal year 2011.
Military/Aerospace
market revenue was $943,000, a decrease of 51% (or $1.0 million) from the
comparable prior year revenues of $1.9 million. This decrease was attributable
primarily to the timing of customer order releases. The Company’s expects
military revenues to result in moderate growth in fiscal year 2011.
During the first
quarter of FY 2011, the Company had zero Homeland security revenue, a decrease
of $48,000 from the comparable prior year period. This decrease was the result
of the completion of the Terahertz development contract from the Department of
Homeland Security for the Nuclear Gauge feasibility demonstration completed in
September 2009. The Company expects Homeland Security revenues for balance of
fiscal year 2011 to remain at the current level, absent a significant new
development contract.
Gross Profit
Gross profit for Q1 2011 was $2.9 million
compared to Q1 2010 of $3.0 million, or a slight decrease of $79,000 on an
increase in revenue volume of 5% (or $319,000). Gross profit margins decreased
8% to 47% for Q1 2011 compared to 51% of sales for the comparable prior year.
The lower gross profit margin for Q1 2011 was due primarily to product mix, 100G
HSOR Telcordia qualification costs and low hybrid assembly manufacturing yields
on 40G and new 100G line side products.
Operating Expenses
Total operating expenses were $3.2 million
during Q1 2011, approximately $63,000 lower than Q1 2010. This decrease was
primarily driven by G&A cost savings initiatives and lower amortization
expense on intangible assets, combined with the completion of the Wafer
Fabrication consolidation in Q1 2010. These decreases were partially offset by
an increase in R&D expenses and higher sales and marketing expenses related
to the increase in revenue.
Research, development
and engineering (RD&E) expenses of $1.3 million increased by $225,000 in Q1
2011 compared to Q1 2010, primarily due to higher spending on product
development in our high speed optical receiver (HSOR) product platform and our
THz application development for the F-35 Joint Strike Fighter. The Company
expects to increase investment in the next generation 40G/100G HSOR products and
THz application and market development in fiscal year 2011 in order to gain HSOR
market share and move THz from the laboratory to the factory floor.
21
Sales
and marketing expenses increased $22,000 (or 5%) to $473,000 in Q1 2011, as
compared to $451,000 for Q1 2010. This increase was primarily attributable to
advertising expense increase and Terahertz sales force increase. As the economy
rebounds and revenues improve, the Company will continue to focus its sales and
marketing activities in our growth markets. As a result, we expect increases in
sales and marketing expenses in fiscal year 2011.
Total
general and administrative expenses (G&A) decreased $161,000 (14%), to
approximately $1.0 million (16% of sales) in Q1 2011 as compared to $1.2 million
(20% of sales) in Q1 2010. The decrease was primarily attributable to the
Company’s cost savings initiatives resulting in labor and other spending
reductions. The Company expects an increase in G&A expenses for fiscal year
2011 compared to 2010, primarily driven by the reinstatement of wage increases
and the Company 401(K) matching benefit in the second half of the fiscal
year.
Amortization expense of $406,000 in Q1 2011 was $109,000 lower compared
to Q1 2010. The Company’s utilizes the cash flow amortization method on the
majority of its intangible assets.
The
non-cash expensing of stock option and restricted stock grants included in
operating expenses was $15,000 for the three month period ended July 2, 2010
compared to $92,000 for the three months ended June 26, 2009, a decrease of
$77,000.
Other
operating expense incurred, related to the previously announced wafer
fabrication consolidation to the Company’s Ann Arbor facility, was zero in Q1
2011 compared to $40,000 in Q1 2010. Wafer fabrication consolidation was
completed in the first quarter of FY 2010.
Other Income (Expense),
net
Interest income for
Q1 2011 was $1,000, the same as Q1 2010.
Interest expense in Q1 2011 was $65,000 compared to $81,000 in Q1 2010, a
decrease of $16,000 (or 20%). This decrease was primarily due to the combination
of reduced debt obligations and lower interest rates.
As
discussed in Note 7 to the Condensed Consolidated Financial Statements, FASB
guidance on determining whether instruments granted in share-based payment
transactions are participating securities requires our outstanding warrants to
be recorded as a liability at fair value with subsequent changes in fair value
recorded in earnings. The fair value of the warrant is determined using a
Black-Scholes option pricing model, and is affected by changes in inputs to that
model including our stock price, expected stock price volatility and contractual
term. To the extent that the fair value of the warrant liability increases or
decreases, the Company records an expense or income in our statements of
operations. The income of $54,000 on the change in fair value of the warrant
liability in the first quarter of FY 2011 is primarily due to the change in the
stock price, expected volatility, interest rates and contractual life of the
warrants which are the primary assumptions applied to the Black-Scholes model
used to calculate the fair value of the warrants.
The
Company incurred a net loss for Q1 2011 of approximately $273,000 ($0.01 per
share), as compared to a net loss of $296,000 ($0.01 per share) in Q1 2010, a
decrease in loss of approximately $23,000.
Fluctuation in Operating
Results
The
Company’s operating results may fluctuate from period to period and will depend
on numerous factors, including, but not limited to, customer demand and market
acceptance of the Company’s products, new product introductions, product
obsolescence, component price fluctuation, varying product mix, and other
factors. If demand does not meet the Company’s expectations in any given
quarter, the sales shortfall may result in an increased impact on operating
results due to the Company’s inability to adjust operating expenditures quickly
enough to compensate for such shortfall. The Company’s results of operations
could be materially adversely affected by changes in economic conditions,
governmental or customer spending patterns for the markets it serves. The
current turbulence in the global financial markets and its potential impact on
global demand for our customers’ products and their ability to finance capital
expenditures could materially affect the Company’s operating results. In
addition, any significant reduction in defense spending as a result of a change
in governmental spending patterns could reduce demand for the Company’s product
sold into the military market.
22
Liquidity and Capital
Resources
At July
2, 2010, the Company had cash and cash equivalents of $1.4 million, a decrease
of $331,000 from the March 31, 2010 balance of $1.8 million. The lower balance
is attributable to an increase of cash from operating activities of $106,000,
offset by a decrease from investing activities of $293,000 and a decrease of
$144,000 from financing activities.
Operating Activities
The
increase of $106,000 in cash resulting from operating activities was primarily
attributable to net cash provided by operations of $341,000, offset by net cash
used for operating assets and liabilities of $235,000. This net cash decrease
from operating assets and liabilities was primarily the result of an increase in
net accounts receivable of $728,000, an increase in inventories of $149,000, an
increase in prepaid and other assets of $178,000, offset by an increase in
accounts payable and accrued expenses of $820,000. Cash provided by operations
of $341,000 included a loss from operations of $273,000, offset by $614,000 in
depreciation, amortization, change in warrant liability fair value and
stock-based compensation expenses.
Investing Activities
The
Company used $293,000 in investing activities including capital expenditures of
$182,000 and patent expenditures of $111,000.
Financing Activities
For the
three-months ended July 2, 2010, $144,000 was used in financing activities,
comprised primarily of payments on our bank term loan.
On June
25, 2010, the Company and The PrivateBank and Trust Company entered into a
second amendment to the credit agreement. The amendment increased the interest
rate from prime plus 1% to prime plus 2%. Furthermore, financial covenants were
amended. According to the terms of the amended agreement, the minimum Debt
Service Coverage ratio is 1.0 to 1.0 for the first three quarters of fiscal 2011
and 1.2 to 1.0 thereafter. The minimum Adjusted EBITDA level is measured on a
trailing three month basis for the July 2, 2010 ($190,000), September 30, 2010
($190,000), December 31, 2010 ($260.000) and March 31, 2011 ($400,000) test
dates and thereafter on a trailing twelve month basis ($1,160,000). The minimum
Net Worth requirement is $13.0 million for the first quarter of FY 2011, $12.5
million for the second quarter of FY 2011, $12.1 million for the third quarter
of FY 2011 and $11.8 million for the fourth quarter of FY 2011. The Company was
in compliance with its financial covenants in Q1 2011.
In
addition to the financial covenants, the Company is required to amend the
secured promissory notes issued to our CFO and CTO (Related Parties Debt) to
defer the December 1, 2010 and March 1, 2011 installment payments owed under the
related party notes. Failure to amend the related party notes by August 25, 2010
will constitute an event of default under the agreement.
23
In May
2010, the Company entered into a debt conversion agreement with the MEDC whereby
the MEDC converted the accrued and unpaid interest under MEDC-loan 1 as of
November 30, 2009 totaling $324,669 into 601,239 unregistered shares of the
Class A Common Stock of the Company at a price per share of $0.54 (market value
of the stock on the day of conversion). In addition, the Company granted the
MEDC a put option to sell back to the Company the shares received pursuant to
the debt conversion agreement in the event of a trigger event as defined in the
agreement. In conjunction with the debt conversion agreement, the Company
amended the MEDC-loan 1 promissory note to retroactively change the interest
rate from 7% to 4% beginning in December 2009, and to change the repayment terms
of the outstanding principal and interest such that beginning in October 2010,
the Company is to repay the remaining principal and accrued interest on a
monthly basis through maturity in November 2014.
In May
2010, the Company also entered into a debt conversion agreement with the MEDC
related to MEDC-loan 2 whereby the MEDC transferred the MEDC-loan 2 promissory
note to the MSF which converted the accrued and unpaid interest as of October
31, 2009 totaling $237,667 into 440,124 unregistered shares of the Class A
Common Stock of the Company at a price per share of $0.54 (market value of the
stock on the day of conversion). In addition, the Company granted the MSF a put
option to sell back to the Company the shares received pursuant to the debt
conversion agreement in the event of a trigger event as defined in the debt
conversion agreement. In conjunction with the debt conversion agreement, the
Company amended the MEDC-loan 2 promissory note to retroactively change the
interest rate from 7% to 4% beginning in November 2009, and to change the
repayment terms of the outstanding principal and interest such that beginning in
July 2010, the Company is to repay the remaining principal and accrued interest
on a monthly basis through maturity in September 2014.
The
Company identifies and discloses all significant off balance sheet arrangements
and related party transactions. API does not utilize special purpose entities or
have any known financial relationships with other companies’ special purpose
entities.
Operating Leases
The Company enters into operating leases where
the economic climate is favorable. The liquidity impact of operating leases is
not material.
Purchase Commitments
The Company has purchase commitments for materials, supplies, services,
and property, plant and equipment as part of the normal course of business.
Commitments to purchase inventory at above-market prices have been reserved.
Certain supply contracts may contain penalty provisions for early termination.
Based on current expectations, API does not believe that it is reasonably likely
to incur any material amount of penalties under these contracts.
Other Contractual
Obligations
The Company
does not have material financial guarantees that are reasonably likely to affect
liquidity.
The
Company believes that existing cash and cash equivalents and cash flow from
future operations, in conjunction with the current amended credit facility, or a
similar new credit facility arrangement that is entered into, will be sufficient
to fund our anticipated cash needs at least for the next twelve months. However,
we may require additional financing to fund our operations in the future and
there can be no assurance that additional funds will be available, especially if
we experience operating results below expectations, or, if financing is
available, there can be no assurance as to the terms on which funds might be
available. If adequate financing is not available as required, or is not
available on favorable terms, our business, financial position and results of
operations will be adversely affected.
24
Recent Pronouncements and Accounting Changes
See “Note 2. Recent Pronouncements and
Accounting Changes” in the Condensed Consolidated Financial Statements regarding
the effect of certain recent accounting pronouncements on our consolidated
financial statements.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk
At July
2, 2010, most of the Company’s interest rate exposure is linked to the prime
rate, subject to certain limitations, offset by cash investments indexed to the
prime rate. As such, the Company is at risk to the extent of changes in the
prime rate and does not believe that moderate changes in the prime rate will
materially affect our operating results or financial condition.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief
Financial Officers (the “Certifying Officers”) are responsible for establishing
and maintaining disclosure controls and procedures for the Company. The
Certifying Officers have designed such disclosure controls and procedures to
ensure that material information is made known to them, particularly during the
period in which this report was prepared. The Certifying Officers have evaluated
the effectiveness of the Company’s disclosure controls and procedures (as such
term is defined in Exchange Act Rule 13a-15(e) and 15d-15(e) (the Rules) under
the Securities Exchange Act of 1934 (or Exchange Act)) as of the end of the
period covered by this quarterly report and believe that the Company’s
disclosure controls and procedures are effective based on the required
evaluation.
There
was no change in the Company’s internal control over financial reporting that
occurred during the quarter ended July 2, 2010 that has materially affected or
is reasonably likely to materially affect the Company’s internal control over
financial reporting.
25
Part II — OTHER
INFORMATION
| Item 1. |
Legal
Proceedings
The
information regarding litigation proceedings described in our Annual
Report on Form 10K for the year ended March 31, 2010 is incorporated
herein by
reference.
|
|
|
|
| Item
1A. |
Risk
Factors
The
Company’s Annual Report on Form 10K for the fiscal year ended March 31,
2010 includes a detailed discussion of its risk factors. This 10-Q should
be read in conjunction with the risk factors and information disclosed in
the Company’s Annual Report on Form 10K. |
|
|
|
| Item
2. |
Unregistered
Sales of Equity Securities and Use of
Proceeds
None |
|
|
|
| Item
3. |
Defaults
upon Senior
Securities
None |
|
|
|
| Item
5. |
Other
Information
None |
26
Item 6. Exhibits and Reports on Form
8-K
The following documents are filed
as Exhibits to this report:
| Exhibit No. |
|
|
| 3.1.3 |
|
Amendment to Certificate of
Incorporation of Advanced Photonix, Inc., dated August 22,
2008 |
|
|
|
|
| 31.1 |
|
Certificate of the Registrant’s
Chairman, Chief Executive Officer, and Director pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
|
| 31.2 |
|
Certificate of the Registrant’s Chief
Financial Officer, and Secretary pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
|
| 32.1 |
|
Certificate pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
|
|
|
|
| 32.2 |
|
Certificate pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
27
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.
Advanced Photonix,
Inc.
(Registrant)
August 16,
2010
| /s/ Richard
Kurtz |
| Richard Kurtz |
| Chairman, Chief Executive Officer, President |
| and Director |
| /s/ Robin
Risser |
| Robin Risser |
| Chief Financial Officer |
| and Director |
28