UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended September 26, 2008
OR
o
|
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 incorporation
or
organization)
|
|
(I.R.S. Employer Identification Number)
|
2925 Boardwalk,
Ann Arbor, Michigan 48104
(Address
of principal executive offices) (Zip Code)
Registrant's
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 x
No
¨
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
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
(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 ¨
No x
As
of
November 7, 2008, there were 24,089,726 of Class A Common Stock, $.001 par
value, and 31,691 shares of Class B Common Stock, $.001 par value
outstanding.
Advanced
Photonix, Inc.
Form
10-Q
For
the Quarter Ended September 26, 2008
Table
of Contents
|
|
|
Page
|
PART
I
|
FINANCIAL
INFORMATION
|
|
|
|
|
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Item 1.
|
Financial
Statements
|
|
|
|
Condensed
Consolidated Balance Sheets at September 26, 2008 (unaudited)
and March
31, 2008
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|
3
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the three-month and
six-month
periods ended September 26, 2008 and September 28, 2007(unaudited)
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4
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|
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Condensed
Consolidated Statements of Cash Flows for the three-month periods
ended
September 26, 2008 and September 28, 2007 (unaudited)
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5
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|
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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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26
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Item 4.
|
Controls
and Procedures
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26
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PART
II
|
OTHER
INFORMATION
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|
|
|
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Item
1
|
Legal
Proceedings
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27
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Item
1A
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Risk
Factors
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27
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|
Item
2
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Unregistered
Sales of Equity Securities and Use of Proceeds
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27
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|
Item
3
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Defaults
Upon Senior Securities
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27
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Item
4
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Submission
of Matters to a Vote of Security Holders
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27
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Item
5
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Other
Information
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27
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|
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Item 6.
|
Exhibits
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28
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|
|
|
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|
Exh.
31.1 Section 302 Certification of Chief Executive Officer
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Exh.
31.2 Section 302 Certification of Chief Financial Officer
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Exh.
32.1 Section 906 Certification of Chief Executive Officer
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Exh.
32.2 Section 906 Certification of Chief Financial Officer
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Signatures
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|
29
|
PART
I — FINANCIAL INFORMATION
ADVANCED
PHOTONIX, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
September 26,
2008
(Unaudited)
|
|
March 31, 2008
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|
ASSETS
|
|
|
|
|
|
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Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
389,000
|
|
$
|
82,000
|
|
Restricted
cash
|
|
|
500,000
|
|
|
1,500,000
|
|
Accounts
receivable, net
|
|
|
5,188,000
|
|
|
3,202,000
|
|
Inventories,
net
|
|
|
4,309,000
|
|
|
4,131,000
|
|
Prepaid
expenses and other current assets
|
|
|
478,000
|
|
|
195,000
|
|
Total
current assets
|
|
|
10,864,000
|
|
|
9,110,000
|
|
Equipment
and leasehold improvements, net
|
|
|
4,599,000
|
|
|
4,757,000
|
|
Goodwill
|
|
|
4,579,000
|
|
|
4,579,000
|
|
Intangibles
and patents, net
|
|
|
9,916,000
|
|
|
10,871,000
|
|
Other
assets
|
|
|
385,000
|
|
|
386,000
|
|
TOTAL
ASSETS
|
|
$
|
30,343,000
|
|
$
|
29,703,000
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
1,363,000
|
|
$
|
1,300,000
|
|
Accounts
payable
|
|
|
1,420,000
|
|
|
1,339,000
|
|
Accrued
expenses
|
|
|
1,962,000
|
|
|
1,254,000
|
|
Current
portion of long-term debt-related parties
|
|
|
1,851,000
|
|
|
900,000
|
|
Current
portion of long term debt- capital lease obligations
|
|
|
—
|
|
|
460,000
|
|
Current
portion of long term debt- bank term loan
|
|
|
398,000
|
|
|
—
|
|
Current
portion of long-term debt - MEDC
|
|
|
322,000
|
|
|
62,000
|
|
Total
current liabilities
|
|
|
7,316,000
|
|
|
5,315,000
|
|
Long-term
debt, less current portion - MEDC
|
|
|
1,989,000
|
|
|
2,249,000
|
|
Long-term
debt, less current portion - capital lease obligations
|
|
|
—
|
|
|
1,457,000
|
|
Long-term
debt, less current portion - bank term loan
|
|
|
1,338,000
|
|
|
—
|
|
Long-term
debt, less current portion - related parties
|
|
|
—
|
|
|
951,000
|
|
Total
liabilities
|
|
|
10,643,000
|
|
|
9,972,000
|
|
|
|
|
|
|
|
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|
Shareholders'
equity:
|
|
|
|
|
|
|
|
Class
A common
stock,
$.001 par value, 100,000,000 authorized; September 26, 2008 – 24,076,216
shares issued and outstanding, March 31, 2008– 23,977,678 shares issued
and outstanding.
|
|
|
24,000
|
|
|
24,000
|
|
Class
B common
stock,
$.001 par value; 4,420,113 shares authorized; September 26, 2008
and March
31, 2008 - 31,691 issued and outstanding.
|
|
|
—
|
|
|
—
|
|
Additional
paid-in capital
|
|
|
52,298,000
|
|
|
52,150,000
|
|
Accumulated
deficit
|
|
|
(32,622,000
|
)
|
|
(32,443,000
|
)
|
Total
shareholders' equity
|
|
|
19,700,000
|
|
|
19,731,000
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
30,343,000
|
|
$
|
29,703,000
|
|
See
notes to condensed consolidated financial statements.
ADVANCED
PHOTONIX, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
September 26,
2008
|
|
September 28,
2007
|
|
September 26,
2008
|
|
September 28,
2007
|
|
Sales,
net
|
|
$
|
8,188,000
|
|
$
|
6,529,000
|
|
$
|
15,958,000
|
|
$
|
12,674,000
|
|
Cost
of products sold
|
|
|
4,624,000
|
|
|
3,784,000
|
|
|
8,638,000
|
|
|
7,459,000
|
|
Gross
profit
|
|
|
3,564,000
|
|
|
2,745,000
|
|
|
7,320,000
|
|
|
5,215,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research,
development and engineering
|
|
|
1,081,000
|
|
|
1,016,000
|
|
|
2,209,000
|
|
|
1,910,000
|
|
Sales
and marketing
|
|
|
710,000
|
|
|
559,000
|
|
|
1,330,000
|
|
|
1,205,000
|
|
General
and administrative
|
|
|
1,432,000
|
|
|
1,180,000
|
|
|
2,515,000
|
|
|
2,353,000
|
|
Amortization
Expense
|
|
|
518,000
|
|
|
490,000
|
|
|
1,044,000
|
|
|
980,000
|
|
Wafer
fabrication relocation expenses
|
|
|
48,000
|
|
|
268,000
|
|
|
208,000
|
|
|
611,000
|
|
Total
operating expenses
|
|
|
3,789,000
|
|
|
3,513,000
|
|
|
7,306,000
|
|
|
7,059,000
|
|
(Loss)
Income from operations
|
|
|
(225,000
|
)
|
|
(768,000
|
)
|
|
14,000
|
|
|
(1,844,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
12,000
|
|
|
26,000
|
|
|
28,000
|
|
|
47,000
|
|
Interest
expense
|
|
|
(83,000
|
)
|
|
(280,000
|
)
|
|
(164,000
|
)
|
|
(512,000
|
)
|
Interest
expense, related parties
|
|
|
(28,000
|
)
|
|
(42,000
|
)
|
|
(55,000
|
)
|
|
(99,000
|
)
|
Interest
expense, debt discount
|
|
|
—
|
|
|
(805,000
|
)
|
|
—
|
|
|
(1,373,000
|
)
|
Other
income/(expense)
|
|
|
(2,000
|
)
|
|
12,000
|
|
|
(2,000
|
)
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(326,000
|
)
|
$
|
(1,857,000
|
)
|
$
|
(179,000
|
)
|
$
|
(3,763,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.01
|
)
|
$
|
(0.09
|
)
|
$
|
(0.01
|
)
|
$
|
(0.19
|
)
|
Weighted
average common shares outstanding
Basic
and diluted
|
|
|
24,060,000
|
|
|
19,906,000
|
|
|
24,035,000
|
|
|
19,584,000
|
|
See
notes to condensed consolidated financial statements.
ADVANCED
PHOTONIX, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six Months Ended
|
|
|
|
September 26, 2008
|
|
September 28, 2007
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(179,000
|
)
|
$
|
(3,763,000
|
)
|
Adjustment
to reconcile net (loss) to net cash (used in) operating
activities
|
|
|
|
|
|
|
|
Depreciation
|
|
|
536,000
|
|
|
522,000
|
|
Amortization
|
|
|
1,044,000
|
|
|
980,000
|
|
Stock-based
compensation expense
|
|
|
100,000
|
|
|
133,000
|
|
Amortization,
convertible note discount
|
|
|
—
|
|
|
1,373,000
|
|
Amortization,
debt issue costs
|
|
|
—
|
|
|
60,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,986,000
|
)
|
|
(544,000
|
)
|
Inventories
|
|
|
(178,000
|
)
|
|
631,000
|
|
Prepaid
expenses and other assets
|
|
|
(281,000
|
)
|
|
(130,000
|
)
|
Accounts
payable and accrued expenses
|
|
|
789,000
|
|
|
138,000
|
|
Net
cash (used in) operating activities
|
|
|
(155,000
|
)
|
|
(600,000
|
)
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(378,000
|
)
|
|
(687,000
|
)
|
Change
in restricted cash
|
|
|
1,000,000
|
|
|
—
|
|
Patent
expenditures
|
|
|
(89,000
|
)
|
|
(113,000
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
533,000
|
|
|
(800,000
|
)
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from capital lease financing
|
|
|
—
|
|
|
433,000
|
|
Payments
on capital lease financing
|
|
|
(1,917,000
|
)
|
|
(153,000
|
)
|
Proceeds
from bank term loan
|
|
|
1,736,000
|
|
|
—
|
|
Borrowings
on line of credit
|
|
|
63,000
|
|
|
159,000
|
|
Payments
on long-term debt – related parties
|
|
|
—
|
|
|
(550,000
|
)
|
Net
proceeds from equity financing
|
|
|
—
|
|
|
4,321,000
|
|
Proceeds
from exercise of stock options
|
|
|
47,000
|
|
|
54,000
|
|
Proceeds
from MEDC term loan
|
|
|
—
|
|
|
357,000
|
|
Net
cash (used in) provided by financing activities
|
|
|
(71,000
|
)
|
|
4,621,000
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
307,000
|
|
|
3,221,000
|
|
Cash
and cash equivalents at beginning of year
|
|
|
82,000
|
|
|
3,274,000
|
|
Cash
and cash equivalents at end of quarter
|
|
$
|
389,000
|
|
$
|
6,495,000
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
3,000
|
|
$
|
55,000
|
|
Cash
paid for interest
|
|
$
|
150,000
|
|
$
|
438,000
|
|
See
notes to condensed consolidated financial statements.
Advanced
Photonix, Inc.
September
26, 2008
Note
1. Basis of Presentation
Business
Description
General –
Advanced Photonix, Inc. (the Company or API), was incorporated under the
laws of
the State of Delaware in June 1988. API is a leading supplier of custom
optoelectronic solutions, high-speed optical receivers and Terahertz sensors
and
instrumentation, serving a variety of global Original Equipment Manufacturer
(OEM) markets including telecommunications, military/aerospace, industrial
sensing/NDT, medical and homeland security. The Company’s optoelectronic
solutions are based on its silicon Large Area Avalanche Photodiode (LAAPD),
PIN
(positive-intrinsic-negative) photodiode and FILTRODE® detectors. Our patented
high-speed optical receivers include Avalanche Photodiode technology (APD)
and
PIN photodiode technology based upon III-V materials, including InP, InAlAs,
and
GaAs. Our newly emerging Terahertz sensor product line is targeted to the
industrial non-destructive testing (NDT), quality control, homeland security,
and military markets. Using our patented fiber coupled technology and high
speed
Terahertz generation and detection sensors, the Company is engaged in
transferring Terahertz technology from the application development laboratory
to
the factory floor. The Company has two manufacturing facilities, one in
Camarillo, CA and one in Ann Arbor, MI.
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. Certain prior quarter amounts have been reclassified to conform
to the
current quarter presentation. Operating results for the six-month period
ended
September 26, 2008 are not necessarily indicative of the results that may
be
expected for the fiscal year ending March 31, 2009.
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, 2008.
Note
2. Recent Pronouncements and Accounting Changes
In
September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements” (“SFAS
No. 157”), which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures
about
fair value measurements. This statement is effective for fiscal years beginning
after November 15, 2007. However, on February 12, 2008, the FASB
issued FASB Staff Position No. FAS No. 157-2, “Effective
Date of FASB Statement No. 157” (“FSP
FAS
No. 157-2”), which delays the effective date of SFAS No. 157 for nonfinancial
assets and nonfinancial liabilities, except for items that are recognized
or
disclosed at fair value in the financial statements on a recurring basis
(at
least annually). FSP FAS No. 157-2 defers the effective date of SFAS No.157
to
fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years for items within the scope of FSP FAS No. 157-2. The adoption
of SFAS No. 157 did not have a material impact on our consolidated
financial statements.
In
October 2008, the FASB issued FSP FAS No. 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Is Asset Not
Active”
(“FAS
No. 157-3”) with an immediate effective date, including prior periods for which
financial statements have not been issued. FSP FAS No. 157-3 clarifies the
application of fair value in inactive markets and allows for the use of
management’s internal assumptions about future cash flows with appropriately
risk-adjusted discount rates when relevant observable market data does not
exist. The objective of FAS No. 157 has not changed and continues to be the
determination of the price that would be received in an orderly transaction
that
is not a forced liquidation or distressed sale at the measurement date. The
adoption of FSP FAS No. 157-3 in the second quarter did not have a material
effect on the Company’s results of operations, financial position or
liquidity.
In
February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS
No. 159”),
which
permits entities to choose to measure many financial instruments and certain
other items at fair value. SFAS No. 159 also includes an amendment to SFAS
No.
115,
“Accounting for Certain Investments in Debt and Equity
Securities”
which
applies to all entities with available-for-sale and trading securities. This
Statement is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. The
adoption of this pronouncement had no impact on our financial
statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),
“Business Combinations”
(“SFAS
No. 141(R)”).
The
objective of SFAS No. 141(R) is to improve reporting by creating greater
consistency in the accounting and financial reporting of business combinations,
resulting in more complete, comparable and relevant information for investors
and other users of financial statements. SFAS No. 141(R) requires the
acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose to investors
and
other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination. SFAS No.
141(R) includes both core principles and pertinent application guidance,
eliminating the need for numerous EITF issues and other interpretative guidance,
thereby reducing the complexity of existing GAAP. SFAS No. 141(R) is
effective as of the start of fiscal years beginning after December 15,
2008. Early adoption is not allowed. The adoption of SFAS No. 141(R) will
change our accounting treatment for business combinations on a prospective
basis
beginning April 1, 2009.
In
December 2007, the FASB issued SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements”
(“SFAS
No. 160”).
SFAS
No. 160 improves the relevance, comparability, and transparency of financial
information provided to investors by requiring all entities to report
non-controlling (minority) interests in subsidiaries in the same way—as
equity in the consolidated financial statements. Moreover, SFAS No. 160
eliminates the diversity that currently exists in accounting for transactions
between an entity and non-controlling interests by requiring they be treated
as
equity transactions. SFAS No. 160 is effective as of the start of fiscal
years
beginning after December 15, 2008. Early adoption is not allowed. Since the
Company currently has no minority interest, this standard will have no impact
on
our financial position, results of operations or cash flows.
In
April
2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3, “Determination
of the Useful Life of Intangible Assets” (”FSP No. FAS 142-3”).
The
final
FSP amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, “Goodwill
and Other Intangible Assets”. The
FSP
is intended to improve the consistency between the useful life of an intangible
asset determined under SFAS No. 142 and the period of expected cash flows
used
to measure the fair value of the asset under SFAS No. 141 (revised 2007),
“Business
Combinations”, and
other
US generally accepted accounting principles. The FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The Company is currently evaluating
the impact FSP No. FAS 142-3 will have on its consolidated financial statements.
In
May
2008, the FASB issued FASB Staff Position (FSP) No. APB 14-1. This FSP
clarifies that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) are not addressed by paragraph
12
of APB Opinion No. 14, “Accounting
for Convertible Debt and Debt Issued with Stock Purchase
Warrants”.
Additionally, this FSP specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that
will
reflect the entity’s nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. This FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. The Company is in the process of evaluating the
impacts, if any, of adopting this FSP.
In
June 2008, the FASB ratified the consensus reached by the Emerging Issues
Task Force, EITF Issue No. 07-5, “Determining
Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own
Stock”
(“EITF
07-5”). EITF 07-5 addresses how an entity should evaluate whether an instrument
is indexed to its own stock. The consensus is effective for fiscal years
(and
interim periods) beginning after December 15, 2008. The consensus must be
applied to outstanding instruments as of the beginning of the fiscal year
in
which the consensus is adopted and should be treated as a cumulative-effect
adjustment to the opening balance of retained earnings. Early adoption is
not
permitted. The Company is in the process of evaluating the impacts, if any,
of
adopting this EITF.
In
June
2008, the FASB issued FASB Staff Position (“FSP”) EITF 03-6-1,
“Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.”
This
FSP provides that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid
or
unpaid) are participating securities and shall be included in the computation
of
basic earnings per share pursuant to the two-class method described in SFAS
No. 128, “Earnings
per Share.”
All
prior period earnings per share data presented shall be adjusted retrospectively
to conform to the provisions of this FSP. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and
interim periods within those fiscal years. Early application is prohibited.
This
FSP is not expected to have a material impact on the Company’s consolidated
financial statements.
Note
3. Share-Based Compensation
The
Company accounts for stock-based incentives plans, in accordance with Statement
of Financial Accounting Standards No. 123(R), “Share-Based
Payment” (“SFAS No. 123(R)”).
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 September 26, 2008 and September 28, 2007 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
September 26, 2008 and September 28, 2007 was 40.8% and 49.9%,
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 September 26, 2008 and September 28,
2007, 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 September 26, 2008 and September
28,
2007 on the implied yield available on U.S. Treasury issues with an
equivalent expected term, which was 2.9% and 4.44% during the respective
periods.
|
|
•
|
The
forfeiture rate for awards issued during the three-month periods
ended
September 26, 2008 and September 28, 2007 were approximately 18.7%
and was
based on the Company’s actual historical forfeiture
trend.
|
Under
the
provisions of SFAS No. 123(R), the Company recorded $66,000 and $48,000 of
stock-based compensation expense (as classified in table below) in our
consolidated statements of operations for the three-month periods ended
September 26, 2008 and September 28, 2007, respectively, and $100,000 and
$133,000 for the six-month periods ended September 26, 2008 and September
28,
2007, respectively.
|
|
Three months ended
|
|
Six months ended
|
|
|
|
Sept. 26, 2008
|
|
Sept. 28, 2007
|
|
Sept. 26, 2008
|
|
Sept. 28, 2007
|
|
Cost
of Products Sold
|
|
$
|
3,000
|
|
$
|
5,000
|
|
$
|
5,000
|
|
$
|
11,000
|
|
Research
and Development expense
|
|
|
18,000
|
|
|
11,000
|
|
|
25,000
|
|
|
29,000
|
|
General
and Administrative expense
|
|
|
37,000
|
|
|
28,000
|
|
|
56,000
|
|
|
82,000
|
|
Sales
and Marketing expense
|
|
|
8,000
|
|
|
4,000
|
|
|
14,000
|
|
|
11,000
|
|
Total
Stock Based Compensation
|
|
$
|
66,000
|
|
$
|
48,000
|
|
$
|
100,000
|
|
$
|
133,000
|
|
At
September 26, 2008, the total stock-based compensation expense related to
unvested stock options granted to employees under the Company’s stock option
plans but not yet recognized was approximately $297,000. This expense will
be
amortized on a straight-line basis over a weighted-average period of
approximately 2.6 years and will be adjusted for subsequent changes in
estimated
forfeitures.
Stock
Options
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 September 26, 2008, there were 24,000 shares available
for
issuance under the 2000 Plan and 2,163,000 shares available for issuance under
the 2007 Plan.
As
of
September 26, 2008, the Company’s various equity plans provide for the granting
of non-qualified and incentive stock options and restricted stock awards to
purchase up to 2,187,000 shares of common stock. 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. The Directors’ Plan typically vested 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.
During
the three-month period ended September 26, 2008, the Company granted 28,000
stock options with an estimated total grant-date fair value of $49,000 and
issued 26,738 shares of restricted stock at a grant date fair value of $50,000
($1.87 per share). During the three months ended September 28, 2007, the Company
granted 36,000 stock options with an estimated total grant-date fair value
of
$68,000.
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 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 September 26, 2008 and September 28, 2007 and the changes during
the three months then ended:
|
|
Number of
Options
Outstanding
|
|
Weighted Average
Exercise Price per Share
|
|
Number of
Shares
Exercisable
|
|
Weighted Average
Exercise Price per Share
|
|
|
|
(000’s)
|
|
|
|
(000’s)
|
|
|
|
Balance
of March 31, 2007
|
|
|
2,540
|
|
$
|
1.90
|
|
|
1,978
|
|
$
|
1.81
|
|
Granted
|
|
|
115
|
|
$
|
1.80
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Balance
of June 29, 2007
|
|
|
2,655
|
|
$
|
1.88
|
|
|
2,192
|
|
$
|
1.82
|
|
Granted
|
|
|
36
|
|
$
|
1.89
|
|
|
|
|
|
|
|
Exercised
|
|
|
(81
|
)
|
$
|
0.65
|
|
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Balance
of September 28, 2007
|
|
|
2,610
|
|
$
|
1.92
|
|
|
2,140
|
|
$
|
1.87
|
|
|
|
Number of
Options
Outstanding
|
|
Weighted Average Exercise Price per Share
|
|
Number of
Shares
Exercisable
|
|
Weighted Average Exercise Price per Share
|
|
|
|
(000’s)
|
|
|
|
(000’s)
|
|
|
|
Balance
of March 31, 2008
|
|
|
2,619
|
|
$
|
1.92
|
|
|
2,198
|
|
$
|
1.87
|
|
Granted
|
|
|
264
|
|
$
|
1.50
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Expired
|
|
|
(38
|
)
|
$
|
1.25
|
|
|
|
|
|
|
|
Balance
of June 27, 2008
|
|
|
2,845
|
|
$
|
1.89
|
|
|
2,312
|
|
$
|
1.90
|
|
Granted
|
|
|
28
|
|
$
|
1.76
|
|
|
|
|
|
|
|
Exercised
|
|
|
(42
|
)
|
$
|
0.88
|
|
|
|
|
|
|
|
Expired
|
|
|
(21
|
)
|
$
|
1.75
|
|
|
|
|
|
|
|
Balance
of September 26, 2008
|
|
|
2,810
|
|
$
|
1.91
|
|
|
2,343
|
|
$
|
1.93
|
|
Information
regarding stock options outstanding as of September 26, 2008 is as follows:
|
|
|
|
Option Outstanding
|
|
|
|
(in 000s)
|
|
Weighted Average
|
|
Weighted Average
|
|
Price Range
|
|
Shares
|
|
Exercise Price
|
|
Remaining Life
|
|
$0.50 - $1.25
|
|
|
770
|
|
$
|
0.75
|
|
|
1.94
|
|
$1.50
- $2.50
|
|
|
1,326
|
|
$
|
1.90
|
|
|
5.56
|
|
$2.87
- $5.34
|
|
|
714
|
|
$
|
3.18
|
|
|
5.26
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
Weighted Average
|
|
Weighted Average
|
|
Price Range
|
|
Shares
|
|
Exercise Price
|
|
Remaining Life
|
|
$0.50
- $1.25
|
|
|
769
|
|
$
|
0.75
|
|
|
1.94
|
|
$1.50
- $2.50
|
|
|
908
|
|
$
|
2.00
|
|
|
6.49
|
|
$2.87
- $5.34
|
|
|
666
|
|
$
|
3.21
|
|
|
5.14
|
|
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 $100,000 (was
increased to $250,000 on October 4, 2008). As of September 26, 2008, 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 September 26, 2008 and March
31,
2008, cash deposits held at financial institutions in excess of FDIC insured
amounts of $100,000 were $0.8 million and $1.4 million, respectively.
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
September 26, 2008, two (2) customers each comprised 10% or more of accounts
receivable. As of March 31, 2008, no 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.
Compensating
Cash Balance
At
the
end of Q2 FY 2009, the Company terminated its Line of Credit loan agreement
with
Fifth Third Bank and established a new Line of Credit Agreement with The
PrivateBank and Trust Company with the following terms: A revolving line of
credit of $3.0
million (formerly $2.5 million) with a minimum compensating balance requirement
of $500,000. The
new
Loan Agreement contains customary representations, warranties and financial
covenants including minimum debt service coverage ratio, Adjusted EBITDA level
and Net Worth requirements (as defined in the agreement). At September 26,
2008,
the Company was in compliance with the financial covenants. The interest rate
is
variable based on the prime rate plus 1% (previously prime plus 2%) and is
adjusted quarterly. The Prime rate at September 26, 2008 was 5.0%. The new
loan
maturity date is now September 25, 2011.
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. At
September 26, 2008, two (2) customers each comprised 10% or more of accounts
receivable. As of March 31, 2008, no customer comprised 10% or more of accounts
receivable.
Inventories
Inventories,
which include material, labor and manufacturing overhead, are stated at the
lower of standard cost (which approximates the first in, first out method)
or
market. Inventories consist of the following at September 26, 2008 and March
31,
2008.
|
|
September 26, 2008
|
|
March 31, 2008
|
|
Raw
material
|
|
$
|
3,610,000
|
|
$
|
3,260,000
|
|
Work-in-process
|
|
|
1,309,000
|
|
|
1,626,000
|
|
Finished
products
|
|
|
528,000
|
|
|
229,000
|
|
Total
inventories
|
|
|
5,447,000
|
|
|
5,115,000
|
|
Less
reserve
|
|
|
(1,138,000
|
)
|
|
(984,000
|
)
|
Inventories,
net
|
|
$
|
4,309,000
|
|
$
|
4,131,000
|
|
Slow
moving and obsolete inventories are reviewed throughout the year. To calculate
a
reserve for obsolescence, the Company begins with a review of its 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. Items identified as useable in the near future are then
excluded from slow moving and obsolete inventory and the remaining amount is
then reserved as slow moving and obsolete. Additionally, non-cancelable open
purchase orders for parts the Company is 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.
Goodwill
and Intangible Assets
Intangible
assets that have definite lives consist of the following (in
thousands):
|
|
|
|
September 26, 2008
|
|
March 31, 2008
|
|
|
|
Weighted Average Lives
|
|
Amortization
Method
|
|
Carrying Value
|
|
Accumulated
Amortization
|
|
Intangibles Net
|
|
Carrying Value
|
|
Accumulated
Amortization
|
|
Intangibles Net
|
|
Non-Compete
agreement
|
|
|
3
|
|
|
Cash
Flow
|
|
$
|
130
|
|
$
|
130
|
|
$
|
—
|
|
$
|
130
|
|
$
|
117
|
|
$
|
13
|
|
Customer
list
|
|
|
15
|
|
|
Straight Line
|
|
|
475
|
|
|
328
|
|
|
147
|
|
|
475
|
|
|
322
|
|
|
153
|
|
Trademarks
|
|
|
15
|
|
|
Cash
Flow
|
|
|
2,270
|
|
|
453
|
|
|
1,817
|
|
|
2,270
|
|
|
391
|
|
|
1,879
|
|
Customer
relationships
|
|
|
5
|
|
|
Cash
Flow
|
|
|
1,380
|
|
|
588
|
|
|
792
|
|
|
1,380
|
|
|
450
|
|
|
930
|
|
Technology
|
|
|
10
|
|
|
Cash
Flow
|
|
|
10,950
|
|
|
4,411
|
|
|
6,539
|
|
|
10,950
|
|
|
3,592
|
|
|
7,358
|
|
Patents
pending
|
|
|
|
|
|
|
|
|
492
|
|
|
—
|
|
|
492
|
|
|
424
|
|
|
—
|
|
|
424
|
|
Patents
|
|
|
|
|
|
Straight
Line
|
|
|
209
|
|
|
80
|
|
|
129
|
|
|
187
|
|
|
73
|
|
|
114
|
|
Total
Intangibles
|
|
|
|
|
|
|
|
$
|
15,906
|
|
$
|
5,990
|
|
$
|
9,916
|
|
$
|
15,816
|
|
$
|
4,945
|
|
$
|
10,871
|
|
Amortization
expense for the six-month periods ended September 26, 2008 and September 28,
2007 was approximately $1.04 million and $976,000, respectively. Patent
amortization expense, for the six-month periods ended September 26, 2008 and
September 28, 2007 was approximately $7,000 and $4,000, 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
|
|
Patents
(a)
|
|
2009
(6 months)
|
|
$
|
1,025,000
|
|
2009
(6 months) |
|
$
|
8,000
|
|
2010
|
|
|
2,035,000
|
|
2010 |
|
|
16,000
|
|
2011
|
|
|
1,584,000
|
|
2011 |
|
|
16,000
|
|
2012
|
|
|
1,305,000
|
|
2012 |
|
|
15,000
|
|
2013
|
|
|
1,088,000
|
|
2013 |
|
|
15,000
|
|
2014
& after
|
|
|
2,258,000
|
|
2014
& after |
|
|
59,000
|
|
Total
|
|
$
|
9,295,000
|
|
Total
|
|
$
|
129,000
|
|
|
a)
|
Patent
pending costs of $492,000 are not included in the chart above. These
costs
will be amortized beginning the month the patents are granted.
|
Note
6. Debt
Total
outstanding debt of the Company as of September 26, 2008 and March 31, 2008
consisted of the following (dollars in thousands):
|
|
As of
|
|
|
|
September 26, 2008
|
|
March 31, 2008
|
|
Capital
lease obligations
|
|
$
|
—
|
|
$
|
1,917
|
|
Bank
term loan
|
|
|
1,736
|
|
|
—
|
|
Bank
line of credit
|
|
|
1,363
|
|
|
1,300
|
|
MEDC
loans
|
|
|
2,311
|
|
|
2,311
|
|
Debt
to Related Parties
|
|
|
1,851
|
|
|
1,851
|
|
Total
|
|
$
|
7,261
|
|
$
|
7,379
|
|
Line
of Credit
At
the
end of Q2 FY 2009, the Company terminated its Line of Credit loan agreement
with
Fifth Third Bank and established a new Line of Credit agreement with The
PrivateBank and Trust Company with the following terms: A revolving line of
credit of $3.0
million (formerly $2.5 million) with a minimum compensating balance requirement
of $500,000. The
new
Loan Agreement contains customary representations, warranties and financial
covenants including minimum debt service coverage ratio, Adjusted EBITDA level,
and Net Worth requirements. (as defined in the agreement). At September 26,
2008, the Company was in compliance with the financial covenants. The interest
rate is variable based on the prime rate plus 1% (previously prime plus 2%)
and
is adjusted quarterly. The prime rate at September 26, 2008 was 5.0%. The new
loan maturity date is now September 25, 2011.
The
Line
of Credit Agreement is guaranteed by each of API’s wholly-owned subsidiaries and
the 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.
During
the quarter ending September 26, 2008, API had no additional draws under the
current Loan Agreement. The outstanding balance as of September 26, 2008 is
$1.36 million.
MEDC
Loans, Capital Lease Obligations and Installment Loans
The
Michigan
Economic Development Corporation (MEDC)
entered
into two loan agreements with Picometrix LLC, one in fiscal 2004 (MEDC-loan
1)
and one in fiscal 2005 (MEDC-loan 2). Both loans are unsecured. The remaining
balance against each loan can be drawn against as the Company meets certain
THz
product development milestones.
The
MEDC-loan 1 is for an amount up to $1,025,000 with an interest rate of 7% and
is
fully amortized by the end of an eight year period (ending on September 15,
2012). Interest accrued, but unpaid in the first four years of this agreement
will be added to the then outstanding principal of this promissory note. Under
the original terms of the promissory note interest accrue through October 2008
would be added to then outstanding principle of the note and the restate
principle would be amortized over the remaining four years. Effective
September 23, 2008, the MEDC-loan 1 of $1,025,000 was amended and restated
to
change the start date of repayment of principal and interest from October 2008
to October 2009. Commencing
in October 2009, the Company will pay MEDC the restated principal and accrued
interest on any unpaid balance over the remaining three years.
MEDC-loan
2 is for an amount up to $1.2 million with an interest rate of 7% and is fully
amortized by the end of a six year
period (ending on September 15, 2011). Interest
accrued, but unpaid in the first
two
years of this agreement will be added to the then outstanding principal of
this
promissory note. During the third year of this agreement, the Company will
pay
interest on the restated principal of the Note. Commencing in October 2008,
the
Company will pay MEDC the restated principal and accrued interest on any unpaid
balance over the remaining three years. Currently, the commencement of the
repayment of this MEDC-loan 2 has been deferred to December 31, 2008, pending
renegotiation of the terms of this loan.
In
March
2007, API, as Lessee, entered into a Master Equipment Lease Agreement with
Fifth
Third Leasing Company, as Lessor, to finance the purchase of new manufacturing
equipment up to an aggregate of $2,300,000 (Lease). API purchased equipment
under the Lease until June 30, 2007. This lease was accounted for as a capital
lease in accordance with SFAS No. 13. On September 25, 2008, the Company retired
the Master Equipment Lease Agreement with Fifth Third Leasing Company by paying
the principal amount of $1,736,000.
On
September 25, 2008, the Company
established a new credit facility with The PrivateBank and Trust Company,
headquartered in Chicago, IL. As part of this new banking relationship, the
Company established a three year Line of Credit of $3.0 million and an Equipment
Installment Loan of $1.736 million amortized over a term of four years, both
at
an interest rate of prime plus 1%. The
new
Loan Agreements contain customary representations, warranties and financial
covenants including minimum debt service coverage ratio, Adjusted EBITDA level,
and Net Worth requirements (as defined in the agreement). The
principal loan amount, with respect to the Line of Credit, is due on September
25, 2011, and, with respect to the Term Loan, is due on September 25, 2012,
provided that if existing loans to the Company by the Michigan Economic
Development Corporation have not converted to equity on or before August 31,
2011, the Line of Credit and the Term Loan shall each be due on August 31,
2011. The
Company utilized the Equipment Installment loan to retire the
Master Equipment Lease Agreement with Fifth Third Leasing Company and drew
down
$1.36 million of the new line of credit and utilized these funds to retire
the
line of
credit previously held by Fifth Third Bankcorp Trust.
Convertible
Promissory Notes Payable
As
of
September 26, 2008 and September 28, 2007, the Company had outstanding
convertible notes of zero and $5.5 million, respectively. These convertible
notes were paid off or converted to equity in the quarter ended December 27,
2007. In the quarter ending September 28, 2007, the Company had interest expense
of $934,000, comprised of $805,000 debt discount related to the warrants and
intrinsic value and $129,000 of interest expense at prime plus 1%, related
to
the convertible notes. For the six-month period ended September 28, 2007, the
Company had interest expense of $1.63 million, comprised of approximately $1.37
million debt discount related to the warrants and intrinsic value and $256,000
of interest expense at prime plus 1%, related to the convertible notes.
Related
Party Debt
As
a
result of the acquisition of Picotronix, Inc. (dba Picometrix) in May 2005,
the
stockholders of Picometrix received four-year API promissory notes in the
aggregate principal amount of $2.9 million ("Debt to Related Parties"). The
notes are payable in four annual installments with the first being a payment
of
$500,000 paid May 2006, the second being a payment of $550,000 paid May 2007,
the third being a payment of $900,000 originally due May 2008 and the fourth
being a payment of $950,500 due May 2009. The notes bear an interest rate of
prime plus 1.0% and are secured by all of the intellectual property of
Picometrix. The interest rate at September 26, 2008 was 6.0%. API has the option
of prepaying the debt to related parties without penalty. Note holders include
Robin Risser and Steve Williamson, the Company’s CFO and CTO,
respectively.
As
disclosed in the Form 8-K filed with the SEC on May 1, 2008, the Company and
Messrs. Risser and Williamson entered into amendments to the Notes to extend
the
due date for the third installment under each of the Notes (in the aggregate
amount of $900,000) to December 1, 2008 from the original agreement payment
date
of May 1, 2008. Prior to entering into the Amendments, the transaction was
reviewed and approved by the Company’s Audit Committee pursuant to the Company’s
policies relating the review and approval of related party transactions since
Mr. Risser currently serves as the Company’s Chief Financial Officer and Mr.
Williamson currently serves as the Company’s Chief Technology
Officer.
Note
7. Consolidation Activities
The
Company is in the process of consolidating and modernizing its wafer fabrication
facilities. The Company estimates its wafer fabrication consolidation expense
will be approximately $2.4 million to complete its consolidation of this
business. Projected costs consist of labor and associated expense of
approximately $1.1 million, accelerated depreciation expense on de-commissioned
assets of $200,000 and travel, supplies, consulting and other related costs
of
$1.1 million. To date the Company has incurred approximately $2.1 million of
such expense. Even though the Company had excess capacity in its Wisconsin
and
California production facilities, no abnormally low production levels were
experienced. Unallocated overheads were recognized as an expense in the period
in which they were incurred in accordance with SFAS No. 151,
“Inventory Costs”,
during
the normal course of business.
The
balance expected to be incurred through the 4th quarter of fiscal 2009 is
projected to be approximately $192,000. During the six months ended September
26, 2008 and September 28, 2007, wafer fabrication consolidation expenses
amounted to $208,000 and $611,000, respectively. In accordance with SFAS No.
146, “Accounting
for Cost Activities Associated with Exit or Disposal Activities”,
all
costs
associated with the consolidation are recorded as expenses when incurred. Upon
fiscal year 2009 completion of the wafer fabrication consolidation, the Company
expects cost reduction through elimination of duplicate expenditures and yield
improvements as well as an increase in new product development
capability.
Note
8. Earnings Per Share
The
Company’s net earnings per share calculations are in accordance with SFAS No.
128, “Earnings
per Share”.
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
|
|
Six months ended
|
|
Basic
and Diluted
|
|
September 26, 2008
|
|
September 28, 2007
|
|
September 26, 2008
|
|
September 28, 2007
|
|
Weighted
Average Basic Shares Outstanding
|
|
|
24,060,000
|
|
|
19,906,000
|
|
|
24,035,000
|
|
|
19,584,000
|
|
Net
income (loss)
|
|
$
|
(326,000
|
)
|
$
|
(1,857,000
|
)
|
$
|
(179,000
|
)
|
$
|
(3,763,000
|
)
|
Basic
earnings per share
|
|
$
|
(0.01
|
)
|
$
|
(0.09
|
)
|
$
|
(0.01
|
)
|
$
|
(0.19
|
)
|
The
dilutive effect of stock options outstanding at September 26, 2008 and September
28, 2007 was not included in the calculation of diluted loss per share for
the
three-month and six-month periods because to do so would have had an
anti-dilutive effect as the Company had a net loss for this period. As of
September 26, 2008, the number of anti-dilutive shares excluded from diluted
earnings per share totaled approximately 3.7 million shares, which includes
2.2
million anti-dilutive warrants.
Note
9. Subsequent Events
None
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.
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, impairment costs, 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.
Revenue
Recognition
Revenue
is derived principally from the sales of the Company’s products. The Company
recognizes revenue when the basic criteria of 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 5% 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.
Impairment
of Long-Lived Assets
In
accordance with SFAS No. 142, “Goodwill
and Other Intangible Assets”, 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 an intangible asset with its carrying amount,
as defined. If the carrying amount of goodwill or an intangible asset exceeds
its fair value, an impairment loss shall be recognized in an amount equal to
that excess.
In
accordance with SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-lived Assets,” 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.
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 in accordance
with SFAS 109, “Accounting
for Income Taxes,”
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, 2008 10K, the Company has a full valuation allowance on its net
Deferred Tax Assets as of September 26, 2008.
Inventory
Obsolescence
Slow
moving and obsolete inventories are reviewed throughout the year. To calculate
a
reserve for obsolescence, the Company begins with a review of its 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. Items identified as useable in the near future are then
excluded from slow moving and obsolete inventory and the remaining amount is
then reserved as slow moving and obsolete. Additionally, non-cancelable open
purchase orders for parts the Company is 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
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
|
|
Six months ended
|
|
Revenues
|
|
September 26, 2008
|
|
%
|
|
September 28,
2007
|
|
%
|
|
September 26,
2008
|
|
%
|
|
September 28,
2007
|
|
%
|
|
Telecommunications
|
|
$
|
1,490
|
|
|
18
|
%
|
$
|
1,589
|
|
|
24
|
%
|
$
|
3,689
|
|
|
23
|
%
|
$
|
2,847
|
|
|
21
|
%
|
Industrial
Sensing/NDT
|
|
|
3,111
|
|
|
38
|
%
|
|
2,630
|
|
|
40
|
%
|
|
6,322
|
|
|
40
|
%
|
|
5,546
|
|
|
47
|
%
|
Military/Aerospace
|
|
|
2,480
|
|
|
30
|
%
|
|
950
|
|
|
15
|
%
|
|
4,243
|
|
|
27
|
%
|
|
1,821
|
|
|
14
|
%
|
Medical
|
|
|
492
|
|
|
6
|
%
|
|
1,360
|
|
|
21
|
%
|
|
992
|
|
|
6
|
%
|
|
2,460
|
|
|
18
|
%
|
Homeland
Security
|
|
|
615
|
|
|
8
|
%
|
|
—
|
|
|
—
|
|
|
712
|
|
|
4
|
%
|
|
—
|
|
|
—
|
|
Total
Revenues
|
|
$
|
8,188
|
|
|
100
|
%
|
$
|
6,529
|
|
|
100
|
%
|
$
|
15,958
|
|
|
100
|
%
|
$
|
12,674
|
|
|
100
|
%
|
The
Company's revenues for the quarter ended September 26, 2008 were $8.2 million,
an increase of 25% (or $1.7 million) over revenues of $6.5 million for the
quarter ended September 28, 2007. Year to date revenues were approximately
$16
million, 26% higher (or approximately $3.3 million) over the previous six-month
period. The Company had growth in four of its five markets offset by a
substantial decrease in the medical market as compared to the comparable prior
year period ended September 28, 2007.
Military/Aerospace
market revenues for the second quarter were $2.48 million, an increase of 161%
(or $1.53 million) from the comparable prior period revenues of $950,000.
Military/Aerospace revenues for the six-month period were approximately $4.2
million, 133% (or approximately $2.4 million) higher than the comparable prior
year period. The increases in both periods were attributable to customer orders
which had been delayed from prior quarters, an increase in R&D contracts and
an increase in demand. The Company expects significant military revenues for
the
remainder of FY 2009 to approximately equal the first six months of the
year.
Industrial
Sensing/NDT market revenues increased to $3.1 million in Q2 2009, and $6.3
million for the six-month period, increases of 18% (or $481,000) and 14 % (or
$751,000) from the comparable prior year periods. The increases were due
primarily to increases in sales and research contracts for non-destructive
testing equipment utilizing our proprietary terahertz technology. We expect
revenues for the second half of the year to be slightly lower than the first
six
months of FY 2009.
Homeland
Security revenues in Q2 2009 were $615,000 and $712,000 for the six month
period.
There
were no Homeland Security sales in the comparable periods of the prior year.
The
sales in the current fiscal year are attributable to a THz development contract
for the nuclear gauge replacement from the Department of Homeland Security.
We
expect
Homeland Security revenues for the second half of the fiscal year to continue
the same strong growth as demonstrated in the first half.
Telecommunications
market revenues for the first six months were approximately 31% higher than
the
prior year; however they were 6% (or $99,000) lower for the quarter ended
September 26, 2008 (Q2 2009) as compared to the quarter ended September 28,
2007
(Q2 2008). The Company believes this year to year quarterly variation in
telecommunications revenues is primarily the result of variability in customer
shipment requirements and not the result of a changing underlying market demand.
The Company’s telecommunications revenues have been primarily driven by
increased shipments of 40G client side products, and the Company expects growth
in this segment to continue in the second half of the year driven by new
products for the 40G line side.
Medical
market revenues for Q2 2009 and for the six months then ended were $492,000
and
$992,000, respectively, a decrease of 64% (or $868,000) and 60% (approximately
$1,468,000) from the comparable periods in the prior year. The decreases are
primarily a result of reduced demand but also reflect a customer having
discontinued a specific product. The Company expects the medical market revenues
in the second half of the year to equal the first half revenues.
Gross
Profit
Gross
Profit for Q2 2009 was $3.6 million compared to Q2 2008 of $2.7 million, or
an
increase of $819,000 on higher revenue volume of $1.7 million. Gross profit
margins increased to 43.5% for Q2 2009 compared to 42.0% of sales for the
comparable prior year. The improvement in gross profit margin was due
primarily
to increased revenue from products sold into the military and homeland security
markets combined with cost reductions achieved through our facilities
consolidation.
Year
to
date Gross Profit was $7.3 million (or 45.9% of revenue), compared to the first
six months of FY 2008 of $5.2 million (or 41.1 % of revenue). The improvement
in
gross profit was due primarily to the favorable product mix of higher military,
telecommunications, THz industrial sensing and homeland security revenues,
combined with cost reductions achieved through our facilities
consolidation.
Operating
Expenses
Total
operating expenses were $3.8 million during Q2 2009 as compared to $3.5 million
in Q2 2008.
However,
total operating expenses, excluding non-recurring wafer fabrications
consolidation expenses, were $3.7 million for the quarter as compared to $3.2
million for Q2 2008, an increase of $496,000 or 15% compared to the prior year.
Total
operating expenses for the six-month period ended September 26, 2008 were $7.3
million as compared to $7.1 million for same prior year period. The increase
of
$247,000 was primarily due to increases in other operating expenses of $586,000,
increased amortization of intangible assets of $64,000, offset by $403,000
lower
wafer fabrication relocation expenses. The increased operating expenses were
due
primarily to higher labor costs of $444,000 ($235,000 for engineering, $106,000
in G&A, and $103,000 in sales and marketing) and one time bank financing
expenses of $73,000.
Research,
development and engineering (RD&E) expenses increased 6%, or $65,000, to
$1.1 million during Q2 2009 compared to $1.0 million in Q2 2008. The increase
was primarily due to higher staffing required for development programs in the
Terahertz and our high speed optical receiver (HSOR) product
platforms.
Research,
development and engineering (RD&E) expenses increased by $299,000 (or 16%)
to $2.2 million during six months ended September 26, 2008 compared to $1.9
million for the six months ended September 28, 2007. The increase was primarily
due to higher staffing required for development programs in the Terahertz and
HSOR product platforms. The Company expects that future RD&E expenses will
be at least the same level or greater during the current fiscal year, continuing
its investment in high growth opportunities.
Sales
and
marketing expenses increased by $151,000 (or 27%) to $710,000 in Q2 2009, as
compared to $559,000 for Q2 2008. The increase was primarily attributable to
increased staffing, travel and trade show/marketing expenses.
Sales
and
marketing expenses increased by $125,000 (or 10%) to $1.3 million (8% of sales)
for the six-month period ended September 26, 2008, as compared to $1.2 million
(10% of sales) for the six-month period ended September 28, 2007. The increase
was primarily attributable to the increased field sales activity.
The
Company has and will continue to expand its sales and marketing for the growing
telecom market and Terahertz product platforms for Industrial/NDT and homeland
security markets. As a result, further increases in sales and marketing expenses
are expected during the last half of fiscal year 2009.
Total
general and administrative expenses (G&A) increased 21%, or $252,000, to
approximately $1.4 million (17% of sales) in Q2 2009 as compared to $1.2
million
(18% of sales) in Q2 2008. The increase was primarily the result of higher
non-recurring costs related to the new loan facility and severance cost
(approximately $115,000), higher costs for Sarbanes-Oxley compliance
(approximately $34,000) and higher labor costs (approximately
$103,000).
Total
general and administrative expenses (G&A) increased by $162,000 (or 7%) to
approximately $2.5 million (16% of sales) for the six-month period ended
September 26, 2008 as compared to $2.35 million (19% of sales) for the six-month
period ended September 28, 2007. These increases were primarily the result
of
higher non-recurring costs related to the new loan facility ($74,000) and
to
higher consulting costs of $67,000 for Sarbanes-Oxley compliance.
The
Company expects G&A expenses to increase for the year primarily driven by
expenses relating to Section 404 of the Sarbanes-Oxley Act, the implementation
of a new Enterprise Resource Planning software system and associated expenses
resulting from increased revenue. Currently, the Company is required to be
compliant with Section 404 by the end of fiscal year 2010. External costs
required to be in compliance will materially increase over the next two years.
Amortization
expense increased by 6%, or $28,000, to $518,000 in Q2 2009 compared to $490,000
in Q2 2008 due to the Company’s utilization of the cash
flow
amortization method on
the
majority of its intangible assets. Year to date amortization expense increased
$64,000 to $1.04 million for the six months ended September 26, 2008 compared
to
$980,000 for the six months ended September 28, 2007.
The
non-cash expensing of stock option grants included in operating expenses
was
$95,000 for the six-month period ended September 26, 2008 compared to $122,000
for the six months ended September 28, 2007, a decrease of $27,000.
Other
operating expense incurred was related to the previously announced wafer
fabrication consolidation to the Company’s Ann Arbor facility, which amounted to
$48,000 in Q2 2009, compared to $268,000 in Q2 2008. The
Company estimates wafer fabrication consolidation expense will total
approximately $2.4 million over the consolidation period and has incurred
$2.1
million since the start of this project. The balance expected to be incurred
through the remainder of the fiscal year is approximately $200,000. The Company
has completed the Wisconsin wafer fabrication consolidation and expects to
complete the California consolidation during the year. The Company anticipates
future benefits as a result of the wafer fabrication consolidation, including
cost savings through increased efficiencies, reduced scrap, improved process
capability, and higher yields. In addition, the Company believes that the
consolidation will provide new capabilities for product development, leading
to
growth opportunities through new product introductions.
Financing
and Other Income (Expense), net
Interest
income in Q2 2009 totaled approximately $12,000, a decrease of $14,000 from
Q2
2008 interest income of $26,000, due primarily to lower interest rates and
lower
bank balances for short term investments.
Interest
income for the six months ended September 26, 2008 totaled approximately
$28,000, a decrease of $19,000 from the six months ended September 28, 2007
amount of $47,000, due to lower interest rates and lower cash balances available
for short-term investments.
Interest
expense in Q2 2009 was $111,000 compared to $1.1 million in Q2 2008, a decrease
of $1.0 million, primarily attributable to a $934,000 decrease in the interest
expense and amortization of the discount related to the convertible notes
which
were paid off or converted to equity by December 27, 2007. In addition, the
Company incurred lower interest expense to banks and related parties of $82,000,
primarily due to the combination of lower debt obligations and lower interest
rates.
Interest
expense for the six months ended September 26, 2008 was $219,000 compared
to
$2.0 million for the six months ended September 28, 2007, a decrease of $1.8
million, primarily attributable to a $1.6 million decrease in the interest
expense and amortization of the discount related to the convertible notes
which
were paid off or converted to equity by December 27, 2007. In addition, the
Company incurred lower interest expense to banks and related parties of
$136,000, primarily due to the combination of lower debt obligations and
lower
interest rates.
The
Company incurred a net loss for Q2 2009 of $326,000 ($0.01 per share), as
compared to a net loss of $1.9 million ($0.09 per share) in Q2 2008, for
a
decrease in losses of approximately $1.5 million.
Net
loss
for the six-month period ended September 26, 2008 was $179,000 ($0.01 per
share), as compared to a net loss of $3.76 million ($0.19 per share) for
the
comparable prior year periods, a decreased loss of approximately $3.6 million.
The decreased loss is primarily attributable to the decrease in non-cash
interest expense related to the convertible notes, higher sales and improved
gross margins and lower wafer fabrication relocation spending offset by higher
other operating expenses.
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.
Liquidity
and Capital Resources
At
September 26, 2008, the Company had cash and cash equivalents of $389,000,
an
increase of $307,000 from the March 31, 2008 balance of $82,000. The higher
balance is attributable to an increase of cash from investing activities
of
$533,000, offset by a decrease in cash from operating activities of $155,000,
and a decrease in cash of $71,000 from financing activities.
Operating
Activities
The
decrease of $155,000 in cash resulting from operating activities was primarily
attributable to net cash generated from operations of $1.5 million offset
by net
changes in operating assets and liabilities of $1.65 million, primarily the
result of an increase in accounts receivable of $2.0 million due to revenue
increases. Cash generated from operations of $1.5 million included a loss
from
operations of $179,000 (which includes approximately $208,000 in non-recurring
wafer fabrication consolidation expenses) and $1.7 million in non-cash
depreciation, amortization, and stock-based compensation expenses.
Investing
Activities
The
increase from investing activities of $533,000 was primarily the result of
a
$1.0
million reduction in restricted cash requirements related to the new bank
loan
agreement which became effective at the end of the 2nd quarter of fiscal
year
2009, offset by capital expenditures of approximately $378,000 and patent
expenditures of $89,000.
Financing
Activities
The
Company used ($71,000) in net financing activities through the first six
months.
Proceeds from financing were $1.846 million which included borrowing $1.736
million on a term loan from The PrivateBank, increasing line of credit
borrowings by $63,000, and receiving $47,000 from stock options exercised
during
the six-month period ended September 26, 2008. These proceeds from financing
were offset by the retirement of the capital lease of $1.917
million
The
Company maintains a revolving line of credit with a regional bank (new loan
agreement signed September 25, 2008), that provides for borrowings up to
$3.0
million (formerly $2.5 million), with a minimum compensating balance requirement
of $500,000. The borrowings are based on 80% of the Company’s eligible accounts
receivable and 50% of the Company’s eligible inventory, subject to certain
limitations as defined by the agreement. At September 26, 2008, the outstanding
balance on the line was $1.36 million. All business assets of the Company
secure
the line other than the intellectual property of the Company’s Picometrix
subsidiary. The
loan
agreement contains customary representations, warranties and financial covenants
including minimum debt service coverage ratio, Adjusted EBITDA level, and
Net
Worth Requirements (as defined in the agreement). At September 26, 2008,
the
Company was in compliance with the financial covenants. The interest rate
is
variable at a prime rate plus 1.0% (formerly prime plus 2%) and is adjusted
quarterly. Interest is payable
monthly,
with principal due at maturity date on September 25, 2011. The prime interest
rate was 5.0% at September 26, 2008.
The
Company is exposed to interest rate risk. The Company continually monitors
interest rates and will attempt to utilize the best possible avenues of
investment as excess cash becomes available.
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 has related party debt of $900,000 maturing on Dec. 2, 2008. The
Company
is currently in discussion with the related parties to restructure some or
all
of the payment due in December. The Company would not be able to make the
December payment and still be in compliance with the convents on its financing
facility.
We
believe that existing cash and cash equivalents and cash flow from future
operations in conjunction with the available credit facility will be sufficient
to fund our anticipated cash needs at least for the next twelve months, provided
the Company’s loans to related parties are restructured. 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.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements” (“SFAS
No. 157”), which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures
about
fair value measurements. This statement is effective for fiscal years beginning
after November 15, 2007. However, on February 12, 2008, the FASB
issued FASB Staff Position No. FAS No. 157-2, “Effective
Date of FASB Statement No. 157” (“FSP
FAS
No. 157-2”), which delays the effective date of SFAS No. 157 for nonfinancial
assets and nonfinancial liabilities, except for items that are recognized
or
disclosed at fair value in the financial statements on a recurring basis
(at
least annually). FSP FAS No. 157-2 defers the effective date of SFAS No.157
to
fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years for items within the scope of FSP FAS No. 157-2. The adoption
of SFAS No. 157 did not have a material impact on our consolidated
financial statements.
In
October 2008, the FASB issued FSP FAS No. 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Is Asset Not
Active”
(“FAS
No. 157-3”) with an immediate effective date, including prior periods for which
financial statements have not been issued. FSP FAS No. 157-3 clarifies the
application of fair value in inactive markets and allows for the use of
management’s internal assumptions about future cash flows with appropriately
risk-adjusted discount rates when relevant observable market data does not
exist. The objective of FAS No. 157 has not changed and continues to be the
determination of the price that would be received in an orderly transaction
that
is not a forced liquidation or distressed sale at the measurement date. The
adoption of FSP FAS No. 157-3 in the second quarter did not have a material
effect on the Company’s results of operations, financial position or
liquidity.
In
February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS
No. 159”),
which
permits entities to choose to measure many financial instruments and certain
other items at fair value. SFAS No. 159 also includes an amendment to SFAS
No.
115,
“Accounting for Certain Investments in Debt and Equity
Securities”
which
applies to all entities with available-for-sale and trading securities. This
Statement is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. The
adoption of this pronouncement had no impact on our financial
statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),
“Business Combinations”
(“SFAS
No. 141(R)”).
The
objective of SFAS No. 141(R) is to improve reporting by creating greater
consistency in the accounting and financial reporting of business combinations,
resulting in more complete, comparable and relevant information for investors
and other users of financial statements. SFAS No. 141(R) requires the
acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose to investors
and
other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination. SFAS No.
141(R) includes both core principles and pertinent application guidance,
eliminating the need for numerous EITF issues and other interpretative guidance,
thereby reducing the complexity of existing GAAP. SFAS No. 141(R) is
effective as of the start of fiscal years beginning after December 15,
2008. Early adoption is not allowed. The adoption of SFAS No. 141(R) will
change our accounting treatment for business combinations on a prospective
basis
beginning April 1, 2009.
In
December 2007, the FASB issued SFAS No. 160,“Non-controlling
Interests in Consolidated Financial Statements”
(“SFAS
No. 160”).
SFAS
No. 160 improves the relevance, comparability, and transparency of financial
information provided to investors by requiring all entities to report
non-controlling (minority) interests in subsidiaries in the same way—as
equity in the consolidated financial statements. Moreover, SFAS No. 160
eliminates the diversity that currently exists in accounting for transactions
between an entity and non-controlling interests by requiring they be treated
as
equity transactions. SFAS No. 160 is effective as of the start of fiscal
years
beginning after December 15, 2008. Early adoption is not allowed. Since the
Company currently has no minority interest, this standard will have no impact
on
our financial position, results of operations or cash flows.
In
April
2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3, “Determination
of the Useful Life of Intangible Assets” (”FSP No. FAS 142-3”).
The
final
FSP amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, “Goodwill
and Other Intangible Assets”. The
FSP
is intended to improve the consistency between the useful life of an intangible
asset determined under SFAS No. 142 and the period of expected cash flows
used
to measure the fair value of the asset under SFAS No. 141 (revised 2007),
“Business
Combinations”, and
other
US generally accepted accounting principles. The FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The Company is currently evaluating
the impact FSP No. FAS 142-3 will have on its consolidated financial statements.
In
June
2008, the FASB issued FASB Staff Position (“FSP”) EITF 03-6-1,
“Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.”
This
FSP provides that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid
or
unpaid) are participating securities and shall be included in the computation
of
basic earnings per share pursuant to the two-class method described in SFAS
No. 128, “Earnings
per Share.”
All
prior period earnings per share data presented shall be adjusted retrospectively
to conform to the provisions of this FSP. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and
interim periods within those fiscal years. Early application is prohibited.
This
FSP is not expected to have a material impact on the Company’s consolidated
financial statements.
In
May
2008, the FASB issued FASB Staff Position (FSP) No. APB 14-1. This FSP
clarifies that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) are not addressed by paragraph
12
of APB Opinion No. 14, “Accounting
for Convertible Debt and Debt Issued with Stock Purchase
Warrants”.
Additionally, this FSP specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that
will
reflect the entity’s nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. This FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. The Company is in the process of evaluating the
impacts, if any, of adopting this FSP.
In
June 2008, the FASB ratified the consensus reached by the Emerging Issues
Task Force, EITF Issue No. 07-5, “Determining
Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own
Stock”
(“EITF
07-5”). EITF 07-5 addresses how an entity should evaluate whether an instrument
is indexed to its own stock. The consensus is effective for fiscal years
(and
interim periods) beginning after December 15, 2008. The consensus must be
applied to outstanding instruments as of the beginning of the fiscal year
in
which the consensus is adopted and should be treated as a cumulative-effect
adjustment to the opening balance of retained earnings. Early adoption is
not
permitted. The Company is in the process of evaluating the impacts, if any,
of
adopting this EITF.
At
September 26, 2008, most
of
the Company’s interest rate exposure is linked to the prime rate, subject to
certain limitations, offset by cash investment indexed to the LIBOR 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
its
operating results or financial condition.
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 defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) 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 September 26, 2008 that
has
materially affected or is reasonably likely to materially affect the Company’s
internal control over financial reporting.
Forward
Looking Statements
The
information contained herein includes forward looking statements that are
based
on assumptions that management believes to be reasonable but are subject
to
inherent uncertainties and risks including, but not limited to, risks associated
with the integration of newly acquired businesses, unforeseen technological
obstacles which may prevent or slow the development and/or manufacture of
new
products, limited (or slower than anticipated) customer acceptance of new
products which have been and are being developed by the Company, the
availability of other competing technologies and a decline in the general
demand
for optoelectronic products.
Item
1. Legal
Proceedings
The
information regarding litigation proceedings described in our Annual Report
on
Form 10K for the year ended March 31, 2008 and in our Quarterly Report on
Form
10Q for the quarter ended June 27, 2008 is incorporated herein by
reference.
Item
1 A.
Risk
Factors
The
Company’s Annual Report on Form 10K for the fiscal year ended March 31, 2008
includes a detailed discussion of its risk factors. The information presented
below adds an additional risk factor and should be read in conjunction with
the
risk factors and information disclosed in the Company’s Annual Report on Form
10K.
The
volatility and disruption of the capital and credit markets and adverse changes
in the global economy may negatively impact our ability to access financing
as
well as our revenues.
Our
ability to obtain financing for acquisitions, the replacement of maturing
liabilities (including related party debt as discussed in the Liquidity Section
of the MD&A) or other general corporate and commercial purposes will depend
on our operating and financial, business and other factors beyond our control.
Due to the existing uncertainty in capital and credit markets, our access
to
capital may not be available on terns acceptable to the Company or at all.
Further, if adverse regional and nation economic condition persist or worsen,
we
could experience decrease revenues from our operation attributable to decrease
in consumer spending levels.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None
Item
3. Defaults
upon Senior Securities
None
Item
4.
Submission
of Matters to a Vote of Security Holders
None
Item
5. Other
Information
None
Item 6.
Exhibits and Reports on Form 8-K
The
following documents are filed as Exhibits to this report:
Exhibit
No.
|
|
|
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
|
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)
|
|
November
10, 2008
|
|
/s/
Richard Kurtz
|
Richard
Kurtz
|
Chairman,
Chief Executive Officer
|
and
Director
|
|
/s/
Robin Risser
|
Robin
Risser
|
Chief
Financial Officer
|
and
Director
|