UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file no. 1-11056
ADVANCED PHOTONIX, INC.
Incorporated pursuant to the Laws of Delaware
IRS Employer Identification No. 33-0325826
1240 Avenida Acaso, Camarillo, CA 93012
(805) 987-0146
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 [ ]
On February 9, 2005, 13,512,631 shares of Class A Common Stock, $.001 par value,
and 31,691 shares of Class B Common Stock, $.001 par value, were outstanding.
ADVANCED PHOTONIX, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet at December 26, 2004 3 - 4
Consolidated Statements of Operations for the three and nine month periods
ended December 26, 2004 and December 28, 2003 5
Consolidated Statements of Cash Flows for the nine month periods ended
December 26, 2004 and December 28, 2003 6 - 7
Notes to Consolidated Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis 12 - 15
Item 3. Controls and Procedures 15
PART II OTHER INFORMATION 16
SIGNATURES 17
2
ADVANCED PHOTONIX, INC.
CONSOLIDATED BALANCE SHEET
AT DECEMBER 26, 2004
(UNAUDITED)
---------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,934,000
Short-term investments 2,800,000
Accounts receivable, less allowance of $44,000 2,846,000
Inventories 3,327,000
Prepaid expenses and other current assets 630,000
-----------------------------
Total Current Assets 12,537,000
-----------------------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost 5,091,000
Less accumulated depreciation and amortization (3,620,000)
-----------------------------
Total Equipment and Leasehold Improvements 1,471,000
-----------------------------
OTHER ASSETS
Goodwill, net of accumulated amortization of $353,000 2,421,000
Patents, net of accumulated amortization of $50,000 14,000
Prepaid capital finance expenses, net of current portion and accumulated
amortization of $30,000 326,000
Customer list of acquired company, net of current portion 490,000
Other 85,000
-----------------------------
Total Other Assets 3,336,000
-----------------------------
TOTAL ASSETS $ 17,344,000
=============================
See notes to consolidated financial statements.
3
ADVANCED PHOTONIX, INC.
CONSOLIDATED BALANCE SHEET
AT DECEMBER 26, 2004
(UNAUDITED)
---------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 77,000
Accounts payable 687,000
Accrued salaries, wages and benefits 488,000
Current portion of capital lease payable 11,000
Other 520,000
-----------------------------
Total Current Liabilities 1,783,000
-----------------------------
LONG TERM DEBT
Convertible note payable, net of discount of $141,000 4,859,000
Capital lease payable, net of current portion 5,000
-----------------------------
Total Long Term Debt 4,864,000
-----------------------------
COMMITMENTS AND CONTINGENCIES
Class A redeemable convertible preferred stock, $.001 par value; 780,000 32,000
shares authorized; 40,000 shares issued and outstanding
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value; 10,000,000 shares authorized;
780,000 shares designated Class A redeemable convertible; --
no shares issued and outstanding other than Class A
redeemable convertible
Class A common stock, $.001 par value; 50,000,000 shares authorized; 13,000
13,512,631 shares issued and outstanding
Class B common stock, $.001 par value; 4,420,113 shares authorized; --
31,691 shares issued and outstanding
Additional paid-in capital 27,995,000
Accumulated Deficit (17,343,000)
-----------------------------
Total Shareholders' Equity 10,665,000
-----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,344,000
=============================
See notes to consolidated financial statements.
4
ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
--------------------------------------------- ----------------------------------------------
December 26, 2004 December 28, 2003 December 26, 2004 December 28, 2003
--------------------- ---------------------- ---------------------- ----------------------
SALES $3,852,000 $2,933,000 $10,814,000 $8,836,000
Cost of goods sold 2,832,000 1,895,000 7,239,000 5,801,000
--------------------- ---------------------- ---------------------- ----------------------
GROSS PROFIT 1,020,000 1,038,000 3,575,000 3,035,000
Research and development expenses 33,000 32,000 112,000 189,000
Marketing and sales expenses 278,000 188,000 888,000 715,000
General and administrative expenses 592,000 568,000 1,865,000 1,544,000
--------------------- ---------------------- ---------------------- ----------------------
INCOME FROM OPERATIONS 117,000 250,000 710,000 587,000
--------------------- ---------------------- ---------------------- ----------------------
OTHER INCOME / (EXPENSE)
Interest income 17,000 5,000 29,000 15,000
Interest expense (63,000) (7,000) (70,000) (25,000)
Other, net (36,000) 8,000 (27,000) 16,000
--------------------- ---------------------- ---------------------- ----------------------
TOTAL OTHER INCOME (EXPENSE) (82,000) 6,000 (68,000) 6,000
--------------------- ---------------------- ---------------------- ----------------------
NET INCOME $ 35,000 $ 256,000 $ 642,000 $ 593,000
===================== ====================== ====================== ======================
Basic Earnings Per Share $ .00 $ .02 $ .05 $ .04
Diluted Earnings Per Share $ .00 $ .02 $ .05 $ .04
Weighted Average Number
of Common Shares Outstanding 13,437,000 13,458,000 13,433,000 13,441,000
See notes to consolidated financial statements.
5
ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine month period ended December 26, 2004 December 28, 2003
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 642,000 $ 593,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 269,000 170,000
Amortization 89,000 58,000
Disposal of fixed assets 53,000 --
Changes in operating assets and liabilities:
Cash acquired through acquisition of Photonic Detectors, Inc. 44,000 --
Short-term investments (1,100,000) (300,000)
Accounts receivable (165,000) 118,000
Inventories (680,000) 136,000
Prepaid expenses and other current assets (240,000) (33,000)
Other assets (400,000) (29,000)
Accounts payable and accrued expenses 266,000 (522,000)
------------------------ -----------------------
Net cash provided by (used by) operating activities (1,222,000) 191,000
------------------------ -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (150,000) (227,000)
Purchase of outstanding shares of Photonic Detectors, Inc. common stock (1,094,000) --
------------------------ -----------------------
Net cash used by investing activities (1,244,000) (227,000)
------------------------ -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from private placement of convertible note 5,000,000 --
Proceeds from exercise of stock options 1,000 63,000
Repayment of Line of Credit (900,000) (300,000)
------------------------ -----------------------
Net cash provided by (used by) financing activities 4,101,000 (237,000)
------------------------ -----------------------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 1,635,000 (273,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,299,000 902,000
------------------------ -----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,934,000 $ 629,000
======================== =======================
See notes to consolidated financial statements.
6
ADVANCED PHOTONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(UNAUDITED)
For the nine month period ended December 26, 2004 December 28, 2003
----------------- -----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 70,000 $ 25,000
Cash paid for taxes 19,000 5,000
7
ADVANCED PHOTONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 26, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Advanced Photonix, Inc. ("the Company") and the Company's wholly
owned subsidiaries, Silicon Sensors Inc. ("SSI"), Texas Optoelectronics, Inc.
("TOI") and Photonic Detectors, Inc. ("PDI"). (See Note 2). These consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-QSB and Article 10 of Regulation S-X and
Regulation S-B. All significant intercompany accounts and transactions have been
eliminated in consolidation. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
have been included. Operating results for the nine month period ended December
26, 2004 are not necessarily indicative of the results that may be expected for
the fiscal year ending March 27, 2005. For further information, refer to the
financial statements and notes thereto included in the Advanced Photonix, Inc.
Annual Report on Form 10-KSB for the fiscal year ended March 28, 2004.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Operating Segment Information: The Company predominantly operates in one
industry segment: light and radiation detection devices. Substantially all of
the Company's assets and employees are located at the Company's facilities in
Camarillo, California and Dodgeville, Wisconsin. In addition, the assets and
employees located at the Photonic Detectors, Inc. facility in Simi Valley,
California (see note 2) are currently in the process of being evaluated for
transfer to either the Camarillo or Dodgeville site. It is expected that the
transfer of business from Simi Valley into the other California and Wisconsin
facilities will be completed by March 31, 2005.
For the nine month period ended December 26, 2004, sales to foreign countries
amounted to approximately 16% of total revenues, with sales to the United
Kingdom representing the largest portion at 7%. For the same nine month period
in the prior year, export sales represented approximately 10% of total revenues,
including sales to the United Kingdom amounting to 4% of total revenues.
Shipping and Handling Costs: The Company's policy is to classify shipping and
handling costs as a component of Costs of Goods Sold in the Statement of
Operations.
8
NOTE 2 - Continued
Net Income (Loss) Per Share: Net income (loss) per share is based on the
weighted average number of common shares outstanding. Such weighted average
shares were approximately 13,433,000 at December 26, 2004 and 13,441,000 at
December 28, 2003. Net income (loss) per share calculations are in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" (SFAS 128). Accordingly, "basic" net income (loss) per share is computed
by dividing net income (loss) by the weighted average number of shares
outstanding for the year. The impact of Statement 128 on the calculation of
earnings per share is as follows:
Nine Months Ended Nine Months Ended
BASIC December 26, 2004 December 28, 2003
----- ----------------- -----------------
Average Shares Outstanding 13,433,000 13,441,000
Net Income 642,000 593,000
Basic Income Per Share $ 0.05 $ 0.04
DILUTED
Average Shares Outstanding 13,433,000 13,441,000
Net Effect of Shares Issuable
pursuant to terms of convertible
note, based on a weighted average 708,000 --
Net Effect of Dilutive Stock Options
and Warrants based on the treasury stock
method using average market price 873,000 497,000
---------- ----------
Total Shares 15,014,000 13,938,000
Net Income, adjusted for interest
expense on convertible note
(net of tax) 683,000 593,000
Diluted Earnings Per Share $ 0.05 $ 0.04
Average Market Price of Common Stock $ 2.27 $ 1.43
Ending Market Price of Common Stock $ 1.76 $ 2.13
The following stock options granted to Company employees, directors, and former
owners were excluded from the calculation of earnings per share in the financial
statements because they were anti-dilutive for the periods reported:
Nine Months Ended December 26, 2004 Nine Months Ended December 28, 2003
--------------------------------------------- ---------------------------------------------
No. of Shares Exercise Price No. of Shares Exercise Price
Underlying Options Per Share Underlying Options Per Share
--------------------------------------------- ---------------------------------------------
27,700 2.5000 80,000 1.8750
1,000 3.0940 28,400 2.5000
350,000 3.1875 1,000 3.0940
50,000 5.3440 350,000 3.1875
-------------------------------------------- 50,000 5.3440
428,700 ---------------------------------------------
============================================ 509,400
=============================================
9
NOTE 2 - Continued
Inventories: Inventories consist of the following:
December 26, 2004
------------------------------
Raw materials $ 3,156,000
Work in progress 1,008,000
Finished products 224,000
------------------------------
Total inventories $ 4,388,000
==============================
Less reserve (1,061,000)
------------------------------
Inventories, net $ 3,327,000
==============================
NOTE 3 - ACQUISITION
On December 21, 2004, the Company purchased all of the issued and outstanding
shares of common stock of PDI, a privately owned manufacturer of opto-electronic
components and assemblies located in Simi Valley, California. The purchase price
was 113,572 shares of API Class A Common Stock (issued at $1.82 per share) plus
$1,075,000 in cash and the assumption of the Seller's trade accounts payable,
accrued liabilities, and bank line of credit amounting to approximately
$259,000. The Company incurred $19,000 of expenses in connection with this
acquisition. The Company has plans to close the Simi Valley location and
integrate its business into the Camarillo, California and Dodgeville, Wisconsin
facilities. In connection with the transaction, the Company recorded a $612,000
intangible asset ("Customer List") which it will amortize over a 5 year period,
beginning January 2005. A summary of the assets and liabilities acquired at fair
market value is as follows:
Assets Acquired
Cash $ 44,000
Accounts receivable 239,000
Inventories 423,000
Prepaid & other current assets 3,000
Furniture and equipment 239,000
Customer list 612,000
-------------
Total Assets Acquired $ 1,560,000
-------------
Liabilities Assumed
Accounts payable $ (159,000)
Accrued salaries & benefits (22,000)
Bank line of credit (78,000)
-------------
Total liabilities assumed $ (259,000)
-------------
Total Purchase Price $ 1,301,000
=============
10
NOTE 4 - NOTE PAYABLE
On October 12, 2004, the Company entered into a definitive agreement for the
private placement to three institutional investors of $5 million aggregate
principal amount of its senior convertible notes. The notes are convertible at
the option of the holder under certain circumstances into shares of the
Company's Class A Common Stock at an initial conversion price of $1.9393 per
share, subject to adjustment. The notes pay interest at an annual rate of prime
plus 1% and will mature on September 30, 2007. $2.5 million of the purchase
price for the notes is being held in a cash collateral account subject to
release upon satisfaction of certain conditions specified in the purchase
agreement. In connection with the transaction, the Company has issued to the
investors five-year warrants to purchase 850,822 shares of the Company's Class A
Common Stock at an exercise price of $2.1156 per share, subject to adjustment.
The Company has agreed to register the shares of common stock issuable upon
conversion of the notes and upon exercise of the warrants for resale under the
Securities Act of 1933. The investors have the option for a period of one year
following effectiveness of the registration statement to acquire an additional
$5 million aggregate principal amount of the notes with an initial conversion
price of $2.1156 per share and five-year warrants to purchase an additional
850,822 shares of common stock. In accordance with APB 14, the Company has
recorded a discount to the note, and an increase to Additional Paid In Capital,
of $141,000 to account for the fair value associated with the note's detachable
warrants. Upon any exercise of the conversion feature, the notes will then be
converted from debt to equity. A copy of the agreement and all related documents
were filed with the Securities and Exchange Commission on October 12, 2004 on
Form 8-K, and the foregoing summary is qualified in its entirety by reference
thereto.
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued Interpretation 46(r), ("FIN 46(r)")
"Consolidation of Variable Interest Entities". The pronouncement amends
Accounting Research Bulletin 51 to set standards to require financial statement
consolidation of certain variable interest entities that meet specific
characteristics if the company has a controlling financial interest. This
interpretation shall be applied to all variable interest entities by the end of
the first reporting period ending after December 15, 2004, for enterprises that
are small business issuers. The Company adopted this Interpretation on October
1, 2004.
In November 2004, the FASB issued SFAS 151 "Inventory Costs, an amendment of ARB
No. 43, Chapter 4". This statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). This
statement requires that those items be recognized as current-period chargees. In
addition, this statement requires that allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of the production
facilities. The Company will adopt this statement for the fiscal year beginning
March 27, 2006.
In December 2004, the FASB issued Statement No. 123(R), "Share-Based Payment".
This statement replaces FASB Statement No. 123, "Accounting for Stock-Based
Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees". This statement covers a wide range of share-based compensation,
including stock options, and requires that the compensation cost relating to
share-based transactions be measured at fair value and recognized in the
financial statements. Public entities filing as small business issuers will be
required to apply Statement 123(R) in the first interim or annual reporting
period beginning after December 15, 2005. The Company will adopt this statement
on December 26, 2005.
The Company does not believe that these accounting pronouncements will have a
material impact on its financial position or results of operations.
11
Item 2. Management's Discussion and Analysis
Application of Critical Accounting Policies
Application of our 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 our financial statements
and/or as areas most dependent on management's judgment and estimates.
Revenue Recognition
In accordance with Staff Accounting Bulletin No. 104, we recognize revenue from
the sale of products when the products are shipped to the customer. Revenues
from the sale of services consist of non-recurring engineering charges, which
are recognized when the services have been rendered. Historically, sales returns
have amounted to less than 1% of net income and all sales are recorded net of
sales returns and discounts.
Impairment of Long-Lived Assets
We continually review the recoverability of the carrying value of long-lived
assets using the methodology prescribed in Statement of Financial Accounting
Standards (SFAS) 144, "Accounting for the Impairment and Disposal of Long-Lived
Assets." We also review long-lived assets and the related intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. Upon such an occurrence,
recoverability of these assets is determined by comparing the forecasted
undiscounted net cash flows to which the assets relate, to the carrying amount.
If the asset is determined to be unable to recover its carrying value, then
intangible assets, if any, are written down first, followed by the other
long-lived assets to fair value. Fair value is determined based on discounted
cash flows, appraised values or management's estimates, depending on the nature
of the assets.
Deferred Tax Asset Valuation Allowance
We record a deferred tax asset in jurisdictions where we generate a loss for
income tax purposes. Due to our history of operating losses, we have recorded a
full valuation allowance against these deferred tax assets in accordance with
SFAS 109, "Accounting for Income Taxes," because, in management's judgment, the
deferred tax assets may not be realized in the foreseeable future.
Inventories
Our inventories are stated at standard cost (which approximates the first-in,
first-out method) or market. Slow moving and obsolete inventories are analyzed
quarterly. To calculate a reserve for obsolescence, we begin with a review of
our slow moving inventory. Any inventory which has not moved within the past 24
months is reserved for at 100% of book value; inventory which has not moved
within the past 12 months is reserved for at 40%. The percentages applied to the
reserve calculation are based on historical usage analyses. In addition, any
residual inventory which is customer specific and remaining on hand at the time
of contract completion is reserved for at the standard unit cost. The complete
list of slow moving and obsolete inventory is then reviewed by the production,
engineering and/or purchasing departments to identify items that can be utilized
in the near future. These items are then excluded from the analysis and the
remaining amount of slow-moving and obsolete inventory is then reserved for.
Additionally, non-cancelable open purchase orders for parts we are obligated to
purchase where demand has been reduced may be reserved. Reserves for open
purchase orders where the market price is lower than the purchase order price
are also established. If a product which had previously been reserved for is
subsequently sold, the amount of reserve specific to that item is then reversed.
12
Accounts Receivable and Allowance for Doubtful Accounts
The Allowance for Doubtful Accounts is established by analyzing each account
that has a balance over 90 days past due. Each account is individually assigned
a probability of collection. The total amount determined to be uncollectible in
the 90-days-past-due category is then reserved fully. The percentage of this
reserve to the 90-days-past-due total is then established as a guideline and
applied to the rest of the non-current accounts receivable balance where
appropriate. When other circumstances suggest that a receivable may not be
collectible, it is immediately reserved for, even if the receivable is not yet
in the 90-days-past-due category.
RESULTS OF OPERATIONS
The Company's net sales for the third quarter (Q3 05) and nine month period (YTD
05) ended December 26, 2004, were $3.85 million and $10.81 million,
respectively. As compared to the third quarter of the prior year ("Q3 04"), net
sales increased by 31%, while year to date net sales increased by 22% over the
same nine month period of the prior year (YTD 04).
As has been the case throughout most of the current fiscal year, the increase in
net sales for both the quarter and year to date periods is largely attributable
to increases in revenues to the medical and industrial sensing markets, which
have increased by 48% and 38%, respectively, over the same quarter of the
previous year. Year to date, sales to the medical markets, which represent 16%
of total sales, have increased 32% over the prior year and sales to the
industrial sensing markets, representing 42% of total sales, have increased by
26% over the same nine month period of the previous year. In addition, sales to
the military aerospace markets continue to grow and currently represent 35% of
total year to date revenues. As the acquisition of Photonic Detectors, Inc.
(PDI) was not completed until the end of the fiscal quarter, none of the sales
increases are attributable to revenues generated as a result of acquisition. We
continue to expect sales to increase in fiscal 2005 as compared to fiscal 2004;
however our shipment schedules and thus recognition of revenues are primarily
dependent on customer defined delivery schedules. As such, our quarter to
quarter comparisons often vary for revenue and market composition, due to
fluctuations in customer delivery schedules which are beyond our control.
COSTS AND EXPENSES
Cost of product sales increased by $937,000 (49%) during Q3 05 and by $1.44
million (25%) during YTD 05 as compared to the same periods of the prior year.
Stated as a percentage of net sales, cost of goods sold increased 9 percentage
points to 74% for Q3 05, as compared to 65% in Q3 04. Year over year, cost of
sales increased only slightly, to 67%, as compared to 66% in the previous year.
As a result, gross margin decreased to 26% for the quarter and to 33% year to
date, as compared to 35% and 34% for the comparable periods of the prior year.
The reduction in margins for the quarter is the direct result of manufacturing
issues, including machinery failures and other production yield issues,
encountered during the quarter. These issues, which resulted in low product
yields and large amounts of scrapped materials, accounted for approximately 50%
of the variance and occurred primarily during the latter half of the quarter.
The remaining variance was due to the recognition of manufacturing costs
(materials, labor and overhead) associated with work in progress jobs which were
determined to be no longer current. We regard both the quarterly and year to
date gross margins to be lower than expected and, assuming no additional
mechanical or production failures, we anticipate that year end gross margins
will improve slightly, by one to two percentage points over the current year to
date margin.
13
Research and development (R&D) costs remained flat at $33,000 in Q3 05 as
compared to $32,000 in Q3 04 (an increase of 3%). Year to date, research and
development costs have decreased by $77,000 or 41% as compared to YTD 04.
Throughout the year, management has continued to focus R&D expenditures on those
projects which offer higher commercial potential per each dollar spent and the
current level of expense approximates our expectations for both the quarter and
year to date periods. During the remainder of the fiscal year, we expect R&D
expenses to remain at or above the same level. At this time, we do not
anticipate any major fluctuations in R&D activity; however the possibility
exists that certain customer project parameters may change which would cause an
increase in R&D expenses for any given period.
Marketing and sales expenses increased by $90,000 (48%) to $278,000 in the third
quarter of 2005 compared to Q3 04 and by $173,000 (24%) to $888,000 year to
date, as compared to YTD 04. Stated as a percentage of sales, marketing and
sales expenses represent 7% and 8% for the quarter and year to date periods,
respectively. The increase over the prior year for both comparative periods
remains primarily due to expansion of the sales department during the year,
resulting in increased salaries, commissions, travel and other employee related
expenses as well as increases in advertising and marketing expenses over the
same periods of the prior year. In addition, marketing and sales expenses in the
prior year were lower than expected due to a recovery of amounts previously
recorded as bad debt expense. Although no significant bad debt expenses have
been recorded in the current year, net expenses are higher as they do not
reflect any credits as a result of bad debt recoveries. The Company expects that
the current level of marketing and sales expenses, presented as a percentage of
net sales, is a fair representation of what can be expected of the remainder of
the year.
General and administrative (G&A) expenses increased by $24,000 (4%) to $592,000
in Q3 05 as compared to $568,000 in Q3 04. Year to date, general and
administrative expenses increased by $321,000 (21%) to $1.865 million as
compared to $1.544 million for YTD 04. The net increase for the quarter is
primarily due to accumulated expenses associated with the private placement
transaction which are being amortized over the term of the note (36 months). In
addition to the capital finance expenses, the increases in year to date expenses
are attributable to costs associated with the Company's ongoing acquisition
investigation activities. As with the sales department, additional G&A personnel
have been added during the year, resulting in increased salary and employee
related expenses, as well as increased accruals of bonus expenses. Expressed as
a percentage of net sales, G&A expenses represent 17% of year to date revenues,
which we feel is indicative of what can be expected for the remainder of the
fiscal year.
In addition to the above, net income for the quarter was impacted by interest
expense of $63,000 and by losses on the disposal of fixed assets totaling
$33,000. Both the manufacturing issues and loss on fixed asset disposals are
considered by management to be one-time events, and are not expected to repeat
during the remainder of the fiscal year. As such, net income was $35,000, or
$0.00 per share, for Q3 05 and $642,000, or $0.05 per share, for YTD 05. During
the same periods of the prior year, the Company reported net income of $256,000
($0.02 per share) and $593,000 ($0.04 per share), respectively.
14
LIQUIDITY AND CAPITAL RESOURCES
On December 21, 2004, the Company purchased the business and all of the
outstanding stock of Photonic Detectors, Inc., a privately owned manufacturer of
optoelectronic components and assemblies, located in Simi Valley, California. In
connection with the transaction, the Company acquired certain net assets,
including $44,000 cash, and assumed certain outstanding liabilities of Photonic
Detectors, Inc. $1,050,000 net cash was expended for the transaction, which
included the agreed purchase price of $1,075,000, plus additional expenses
incurred of $19,000, less the $44,000 cash received.
At December 26, 2004 , the Company had cash, cash equivalents and short term
investments of $5.7 million and working capital of $10.8 million. The Company's
cash and cash equivalents increased by $1.6 million during the nine months ended
December 26, 2004, net of $1.1 million transferred from cash and cash
equivalents to short-term investments. $5.0 million was obtained through private
placement of a convertible note, of which $2.5 million was placed in a cash
collateral account subject to release upon satisfaction of certain conditions
(See Note 4 to the Consolidated Financial Statements), and the balance was
available for working capital and other requirements. Cash used by operating
activities totaled $122,000, which included significant outlays for capital
finance expenses and other prepaid expenses. $900,000 was used to pay off the
Company's credit line balance and $150,000 was used for capital expenditures
required primarily for necessary computer and manufacturing equipment upgrades
or replacements.
The Company is exposed to interest rate risk for marketable securities. Due to
continually declining interest rates available to the Company pursuant to its
investment policy, the Company was able to achieve the best yields on liquid
money market and equity fund accounts and thus transferred the majority of its
available cash reserves from longer term investment instruments to such accounts
during the past year. At December 26, 2004, the Company held $2.8 million in a
highly liquid equity fund account which carries an average interest rate of
1.3%. During the remainder of 2005, the Company will continue to monitor
available interest rates and will attempt to utilize the best possible avenues
of investment for its excess liquid assets.
Item 3. Controls and Procedures
Our Chief Executive Officer, President, and Chief Financial Officer (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 within 90 days of the date of
this report and believe that the Company's disclosure controls and procedures
are effective based on the required evaluation. There have been no significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
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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.
PART II OTHER INFORMATION
Items 1-5
None.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of the Registrant's Chairman, Chief Executive
Officer, and Director pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of the Registrant's Chief Financial Officer and
Secretary pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.3 Certification of the Registrant's President pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
The Company filed form 8-K on October 12, 2004 to announce that it had entered
into a definitive agreement for the private placement of $5 million aggregate
principal amount of its senior convertible notes. In connection with the
transaction, the Company also issued warrants to purchase up to 850,822 shares
of the Company's common stock.
The Company filed form 8-K on November 9, 2004 to report that an amendment to
the 2000 Stock Option Plan, increasing the amount of options available for
issuance from 1,500,000 to 2,500,000, had been approved by the shareholders at
the Annual Meeting of Shareholders held on August 27, 2004.
The Company filed form 8-K on November 10, 2004 to report that it had issued a
press release dated November 9, 2004 announcing financial results for the
quarter ended September 26, 2004.
The Company filed form 8-K on December 23, 2004 to report that it had entered
into a stock purchase agreement on December 21, 2004 and had purchased all of
the issued and outstanding shares of Photonic Detectors, Inc. for a purchase
price of $1,075,000 cash and 113,572 shares of API's common stock.
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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)
Date: February 15, 2005 /s/ Richard Kurtz
----------------- -------------------------------
Richard Kurtz
Chief Executive Officer,
Chairman and Director
/s/ Susan Schmidt
-------------------------------
Susan Schmidt
Chief Financial Officer and Secretary
/s/ Paul Ludwig
-------------------------------
Paul Ludwig
President
17