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| ATCO > SEC Filings for ATCO > Form 10-Q on 3-Aug-2009 | All Recent SEC Filings |
3-Aug-2009
Quarterly Report
The following discussion should be read in conjunction with the accompanying unaudited interim financial statements and the related notes included under Item 1 of this Quarterly Report on Form 10-Q, together with Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended September 30, 2008.
The following discussion provides an overview of our results of operations for the three and nine months ended June 30, 2009 and 2008. Significant period-to-period variances in the consolidated statements of operations are discussed under the caption "Results of Operations." Our financial condition and cash flows are discussed under the caption "Liquidity and Capital Resources."
Forward Looking Statements
This report contains certain statements of a forward-looking nature relating to future events or future performance. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the only means of identifying forward-looking statements. Readers are cautioned that such statements are only predictions and actual events or results may differ materially. In evaluating such statements, readers should specifically consider various factors identified in this report and any matters set forth under Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K, which could cause actual results to differ materially from those indicated by such forward-looking statements.
Overview
We are a pioneer of highly intelligible, high clarity, directed sound technologies and products. We aggressively seek to create markets for our products, and we are increasing our focus on and investment in worldwide sales and marketing activities while we continue to innovate.
During 2008, we completed the development of a new generation of LRAD® products called the LRAD-X®. Our new LRAD-X products use directionality and focused acoustic output to clearly transmit critical information, instructions and warnings 500 meters and beyond. The LRAD-X product line can be manually operated or integrated into a remotely controlled security network's command and control center. Through the use of powerful voice commands and deterrent tones, large safety zones can be created while determining the intent and influencing the behavior of an intruder. Our LRAD-X products are the industry's loudest, most intelligible line of directed acoustic hailing and warning devices (AHDs), and feature rugged, weatherproof construction and enhanced voice, tone and frequency response. We continue to improve and expand our LRAD product line that includes the following major products:
• LRAD 1000X-selected by the U.S. Navy as its AHD for Block 0 of the Shipboard Protection System- can be manually operated to provide long distance hailing and warning with highly intelligible communication.
• LRAD 500X-selected by the U.S. Navy and U.S. Army as their AHD for small vessels and vehicles- is lightweight and can be easily transported to provide security personnel long-range communications and a highly effective hailing and warning capability where needed.
• LRAD 300X is compact, lightweight and ideally suited for use on military and armored vehicles, common remote-operated weapon systems, and small vessels to influence the behavior of targeted threats.
• LRAD 100X is portable and designed for use in a variety of mass notification and commercial security applications. It is ideally suited for short-range perimeter security and it adds highly intelligible sound/communication resources into traditional camera-based security networks in an integrated package.
• LRAD-RXTM is our prescription for remotely controlled security. It enables system operators to detect and communicate with an intruder over long distances. LRAD-RX features an LRAD 1000X emitter head and an integrated IP-addressable full pan and tilt drive system for precise aiming and tracking. LRAD-RX reduces manpower and false alarms while providing an intelligent, cost-effective security solution. The LRAD-RX can be operated remotely from anywhere across a TCP/IP network enabling system operators to respond to security threats from a safe remote environment. The LRAD-RX is aimed and controlled by our proprietary pan and tilt drive system. We designed and engineered this pan and tilt drive system to meet the demanding specifications of customers that deploy these devices on large vessels, offshore oil and other platforms. The LRAD-RX can be integrated with a number of other sensors (radar, camera, etc.) creating a fully integrated unmanned perimeter security solution.
These products have been well received by our military customers and interest has been strong for other applications such as oil rig protection, maritime and homeland security, port security, bird and wildlife deterrents and by law enforcement. We believe these products provide an increased opportunity for us in both the government and commercial markets that we are developing, and will allow us to continue as the leader in this market. We believe that our products are offered at price and performance points to attract serious market interest. Accelerating our product sales and revenue growth will require organizational discipline, improved customer focus, and a new, sustained marketing push of our Company and products. We are focused on these areas of our business while also containing costs.
As has been widely reported, financial markets in the United States, Europe and Asia have been experiencing extreme disruption in recent months, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. Governments have taken unprecedented actions intended to address extreme market conditions that include severely restricted credit and declines in real estate values. While currently these conditions have not impaired our ability to operate our business, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies, which can then lead to challenges in the operation of our business. These economic developments affect businesses such as ours in a number of ways. The current tightening of credit in financial markets adversely affects the ability of commercial customers to finance purchases and operations and could result in a decrease in orders and spending for our products as well as create supplier disruptions. Economic developments could also reduce future government spending on our products. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions and the effects they will have on our business and financial condition.
Overall Performance for the Third Quarter of Fiscal 2009
For our third fiscal quarter ended June 30, 2009:
• Our revenues for the three months ended June 30, 2009 increased 60% to $4,404,040 from $2,748,234 for the three months ended June 30, 2008. The revenue growth was from our LRAD product line, partially offset by reductions in HSS and SoundSaber product sales. Revenue growth was driven by strong sales to U.S. and foreign Navies, anti-piracy applications by commercial shipping companies and commercial bird and wildlife applications.
• We recorded a gross profit of $1,987,803 for the three months ended June 30, 2009 (45% of revenues), which was $943,481 higher than $1,044,322 for the quarter ended June 30, 2008 (38% of revenues), driven by higher revenues, increased product margins and better fixed overhead absorption.
• Operating expenses of $1,855,283 for the three months ended June 30, 2009 decreased by $733,525, or 28%, from the three months ended June 30, 2008. The prior year quarter included $162,800 in costs and expenses related to the development of our LRAD-X product line that were not incurred during the 2009 quarter. In addition, we had $272,055 of reduced non-cash share-based compensation expense, $124,963 from reduced staffing levels, $91,676 from reduced impairment of patents, and other savings, offset by an increase in third party sales commissions of $161,530.
• During the quarter ended June 30, 2009, we generated net income for the second consecutive quarter, the first two quarters of reported net income in the Company's history. Our net income during this period of $136,184, or $0.00 per share was an increase of $1,656,089 compared to the net loss of $1,519,905, or $0.05 per share, for the quarter ended June 30, 2008, due to the increased revenues and gross profit and reduction in operating expenses described above. Future operating results will depend on future product sales levels, international market conditions and many other factors, some of which are beyond our control and accordingly there is no assurance of continued quarterly profitability.
• For the three month period ended June 30, 2009, we increased our cash and cash equivalents by $1,866,083, primarily due to our net income for the period, including adjustments for non-cash expenses, and a reduction of our accounts receivable balance. Net income (losses) and changes in working capital components cause significant variances in operating cash on a quarter over quarter basis.
We believe we have a solid technology and product foundation for business growth over the next several years. We have additional new technologies and products in various stages of development. We believe we have strong market opportunities, particularly given the continuing global threats to both governments and commerce, where our LRAD products have proven to be effective at determining intent and hailing and notification for force protection.
Critical Accounting Policies
We have identified a number of accounting policies as critical to our business operations and the understanding of our results of operations. These are described in our consolidated financial statements located in Item 1 of Part I, "Financial Statements," and Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report of Form 10-K for the year ended September 30, 2008. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported and expected financial results.
The methods, estimates and judgments we use in applying our accounting policies, in conformity with generally accepted accounting principles in the United States, have a significant impact on the results we report in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The estimates affect the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Results of Operations for the Three Months Ended June 30, 2009 and 2008
Revenues
Revenues for the three months ended June 30, 2009 were $4,404,040, representing a 60% increase from $2,748,234 in revenues for the three months ended June 30, 2008. Revenues for the three months ended June 30, 2009 included $4,289,200 of product sales and $114,840 of contract, license and other revenues. Revenues for the three months ended June 30, 2008 included $2,505,601 of product sales and $242,633 of contract, license and other revenues. The revenue growth was in our LRAD product line, partially offset by reductions in our HSS and SoundSaber product sales. In addition to strong sales to the U.S. Navy and Army, we have continued to diversify our revenues to foreign military groups, shipping companies, fisheries, police, bird and wildlife protection and other commercial applications. Our revenues are highly dependent on the timing of large orders from a small number of customers. We expect continued uneven quarterly revenues in future periods due to the lack of established markets for our proprietary products.
For the three months ended June 30, 2008, we recognized $54,167 in contract revenue representing ratable earned revenue under a three year license agreement. We did not record any similar contract revenue in the three months ended June 30, 2009 as the contract expired in September 2008. At June 30, 2009, there was no revenue unearned under this agreement. At June 30, 2009, we had aggregate deferred license revenue of $275,509 representing amounts collected from another license agreement in advance of recognized earnings. This revenue component is subject to significant variability based on the timing, amount and recognition of new arrangements, if any.
Gross Profit
Gross profit for the three months ended June 30, 2009 was $1,987,803, or 45% of revenues, compared to $1,044,322, or 38% of revenues, for the three months ended June 30, 2008. The increase in gross profit was driven by higher revenues, increased product margins due to reduced product cost and favorable mix, and broader absorption of our fixed overhead expenses as a result of the higher revenues. We incurred increased warranty costs during the most recent quarter compared to the prior year's third quarter primarily to replace some units that were damaged due to unique application of our product by one of our customers. We have worked with our customer and this issue has been resolved.
Our products have varying gross margins, so product sales mix will materially affect gross profits. In addition, we continue to make product updates and changes, including raw material and component changes that may impact product costs. With such product updates and changes we have limited warranty cost experience and estimated future warranty costs can impact our gross margins. We do not believe that historical gross profit margins should be relied upon as an indicator of future gross profit margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended June 30, 2009 decreased $334,857 to $1,395,777, or 32% of revenues, compared to $1,730,634, or 63% of revenues, for the three months ended June 30, 2008. The decrease in selling general and administrative expenses was primarily attributed to $165,880 in lower salaries and consulting expense, $97,017 due to lower non-cash share-based compensation expense, $57,353 of reduced marketing expenses, and $176,137 of travel and other cost savings, partially offset by $161,530 increase in outside sales commissions.
We incurred non-cash share-based compensation expenses related to SFAS No. 123(R) allocated to selling, general and administrative expenses in the three months ended June 30, 2009 and 2008 of $269,348 and $366,363, respectively.
We may expend additional resources on marketing and selling our products in future periods as we identify ways to optimize our potential opportunity. This may result in increased selling, general and administrative expenses in the future. Commission expense will vary based on the sales channel and revenue levels.
Research and Development Expenses
Research and development expenses decreased $398,668 to $459,506, or 10% of revenues, for the three months ended June 30, 2009, compared to $858,174, or 31% of revenues, for the three months ended June 30, 2008. This decrease in research and development expense was primarily due to $162,800 of consulting, prototypes and testing costs incurred in the prior year for the development of our new LRAD-X product line that were not incurred in the 2009 quarter, $175,038 for reduced non-cash share-based compensation expense, and $91,676 from the reduction in expenses incurred for impairment of patents.
Included in research and development expenses for the three months ended June 30, 2009 and 2008 was $18,004 and $193,042 of non-cash share-based compensation costs, respectively. The prior year expense included a $145,375 adjustment to true-up the forfeiture rate.
Each quarter, we review the ongoing value of our capitalized patent costs and in the third quarter identified some of these assets as being associated with patents that are no longer consistent with our business strategy. As a result of this review, we reduced the value of our previously capitalized patents by $13,151 during the quarter ended June 30, 2009, compared to an impairment of $104,827 in the three months ended June 30, 2008.
Research and development costs vary period to period due to the timing of projects, the availability of funds for research and development and the timing and extent of use of outside consulting, design and development firms. We completed the development of the LRAD-X product line in the third fiscal quarter of 2008 with enhanced performance and louder, more intelligible communications. Based on current plans and reduced engineering staffing, we expect research and development costs to continue in the current fiscal year at a lower level than last year.
Income (Loss) from Operations
Income from operations was $132,520 for the three months ended June 30, 2009, compared to loss from operations of $1,544,486 for the three months ended June 30, 2008. The income from operations is primarily attributable to the increase in revenues, improved gross profit margins and reduced operating expenses.
Other Income
During the three months ended June 30, 2009, we earned $4,447 of interest income on our cash and cash equivalents balances compared to $24,581 during the three months ended June 30, 2008 due to lower cash balances and lower interest rates.
Net Income (Loss)
The net income for the three months ended June 30, 2009 was $136,184, or $0.00 per share, an increase of $1,656,089 from a net loss of $1,519,905, or $0.05 per share, for the three months ended June 30, 2008. The net income was primarily the result of increased revenues, improved gross profit margins and reduced operating expenses. We had no income tax expense for either of the periods presented.
Results of Operations for the Nine Months Ended June 30, 2009 and 2008
Revenues
Revenues for the nine months ended June 30, 2009 were $12,769,765, representing a 74% increase from $7,332,250 in revenues for the nine months ended June 30, 2008. Revenues for the nine months ended June 30, 2009 included $12,521,443 of product sales and $248,322 of contract, license and other revenues. Revenues for the nine months ended June 30, 2008 included $6,888,597 of product sales and $443,653 of contract, license and other revenues. Sales increased in our LRAD product line and decreased in our HSS and SoundSaber product lines. We expect continued uneven quarterly revenues in future periods as we continue to develop the markets for our proprietary products.
For the nine months ended June 30, 2008, we recognized $162,500 in contract revenue representing ratable earned revenue under a six year license agreement. We did not record any similar contract revenue in the nine months ended June 30, 2009 as the contract expired in September 2008. At June 30, 2009, there was no revenue unearned under this agreement. At June 30, 2009, we had aggregate deferred license revenue of $275,509 representing amounts collected from another license agreement in advance of recognized earnings. This revenue component is subject to significant variability based on the timing, amount and recognition of new arrangements, if any.
Gross Profit
Gross profit for the nine months ended June 30, 2009 was $6,246,931, or 49% of revenues, compared to $2,929,304, or 40% of revenues, for the nine months ended June 30, 2008. The increase in gross profit was due to higher revenues, increased product margins due to reduced product cost and favorable mix and greater absorption of our fixed overhead expenses as a result of the higher revenues.
Our products have varying gross margins, so product sales mix will materially affect gross profits. In addition, we continue to make product updates and changes, including raw material and component changes that may impact product costs. With such product updates and changes we have limited warranty cost experience and estimated future warranty costs can impact our gross margins. We do not believe that historical gross profit margins should be relied upon as an indicator of future gross profit margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended June 30, 2009 decreased $733,214 to $4,780,654, or 37% of revenues, compared to $5,513,868, or 75% of revenues, for the nine months ended June 30, 2008. The decrease in selling general and administrative expenses was primarily attributed to $383,064 in lower professional fees resulting from a change in audit firms, $394,002 from reduced staffing levels, $116,418 from reduced non-cash share-based compensation expense, $129,664 from lower marketing expenses and $366,650 from a reduction in travel and other expense, partially offset by an increase of $656,585 in outside sales commission expense.
We incurred non-cash share-based compensation expenses related to SFAS No. 123(R) allocated to selling, general and administrative expenses in the nine months ended June 30, 2009 and 2008 of $1,234,300 and $1,350,718, respectively.
We may expend additional resources on marketing and selling our products in future periods as we identify ways to optimize our potential opportunity. This may result in increased selling, general and administrative expenses in the future. Commission expense will also vary based on the sales channel and revenue levels.
Research and Development Expenses
Research and development expenses decreased $1,474,587 to $1,360,614, or 11% of revenues, for the nine months ended June 30, 2009, compared to $2,835,201, or 39% of revenues, for the nine months ended June 30, 2008. This decrease in research and development expense was primarily due to a reduction of $747,235 in consulting, prototypes and testing costs in the prior year for the development of our new LRAD-X product line. In addition, we had savings of $252,789 from reduced staffing levels and $221,453 from the reduction in expenses incurred for impairment of patents and $216,356 from reduced non-cash share-based compensation expense.
Included in research and development expenses for the nine months ended June 30, 2009 and 2008 was $96,992 and $313,348 of SFAS No. 123(R) non-cash share-based compensation costs, respectively. The prior year expense included a $145,375 adjustment to true-up the forfeiture rate.
Each quarter, we review the ongoing value of our capitalized patent costs and in the first three quarters identified some of these assets as being associated with patents that are no longer consistent with our business strategy. As a result of this review, we reduced the value of our previously capitalized patents by $88,895 during the nine months ended June 30, 2009, compared to an impairment of $310,348 in the nine months ended June 30, 2008.
Research and development costs vary period to period due to the timing of projects, the availability of funds for research and development and the timing and extent of use of outside consulting, design and development firms. We completed the development of the LRAD-X product line in the third fiscal quarter of 2008 with enhanced performance and louder, more intelligible communications. Based on current plans and reduced engineering staffing, we expect research and development costs to continue in the current fiscal year at a lower level than last year.
Income (Loss) from Operations
Income from operations was $105,663 for the nine months ended June 30, 2009, compared to loss from operations of $5,419,765 for the nine months ended June 30, 2008. The decreased loss from operations is primarily attributable to the increase in revenues, improved gross profit margins and lower operating expenses.
Other Income (Expense)
During the nine months ended June 30, 2009, we earned $29,086 of interest income on our cash and cash equivalents balances compared to $151,313 during the nine months ended June 30, 2008 due to lower cash balances and lower interest rates. During the nine months ended June 30, 2008, we recorded a $108,821 financing expense for estimated liquidated damages based on certain registration rights agreements compared to $783 of interest expense during the nine month ended June 30, 2009.
Net Income (Loss)
The net income for the nine months ended June 30, 2009 was $133,966, compared to a net loss of $5,377,273 for the nine months ended June 30, 2008. The significantly reduced loss was primarily the result of increased revenues, improved gross margins and lower operating expenses. We had no income tax expense for either of the periods presented.
Liquidity and Capital Resources
We generated positive cash flow from operating activities and a net increase in cash and cash equivalents during the nine months ended June 30, 2009 of $2,101,922 and $1,931,117, respectively. During this period, we financed our working capital requirements through cash and cash equivalents on hand at the beginning of the period, and from cash generated from operating activities. Cash and cash equivalents at June 30, 2009 was $4,625,986 compared to $2,694,869 at September 30, 2008. The net increase in cash and cash equivalents during this period resulted from net cash from operating activities and $1,500 from financing activities through the exercise of options, offset by $172,305 in net cash used in investing activities that related to purchases of equipment and patent costs paid.
Other than cash and cash equivalents, inventory and our balance of accounts receivable, we have no other unused sources of liquidity as of June 30, 2009.
Principal factors that could affect the availability of our internally generated funds include:
• ability to meet sales projections;
• government spending levels;
• introduction of competing technologies;
• product mix and effect on margins;
• ability to collect accounts receivable balances;
• ability to reduce current inventory levels; and
• product acceptance in new markets.
Principal factors that could affect our ability to obtain cash from external sources include:
• volatility in the capital markets; and
• market price and trading volume of our common stock.
Based on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for at least the next twelve months. However, we operate in a rapidly evolving and unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that we may not be required to raise additional funds through the sale of equity or debt securities or from credit facilities. Additional capital, if needed, may not be available on satisfactory terms, or at all.
Cash Flows
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