UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to ____
________________
Commission File Number 0-15362
NAVTECH, INC.
(Exact name of small business issuer as specified in its charter)
Delaware | | 11-2883366 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
2340 Garden Road, Suite 207, Monterey, California 93940
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (519) 747-1170
N/A
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 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 shell company (as defined by Rule 12b-2 of the
Exchange Act
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or
15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
The number of shares outstanding of the issuer's common stock as of August 31, 2005 was4,898,140shares.
Transitional Small Business Disclosure Format.Yes [ ] No [X]
NAVTECH, INC.
FORM 10-QSB
For the Quarter Ended July 31, 2005
INDEX
Part I. Financial Information | | |
| | | |
| Item. 1 Financial Statements | | Page |
| | | |
| | a) | Consolidated Statements of Operations for the Three and Nine Months Ended July 31, 2005 and 2004 | 1 |
| | | | |
| | b) | Consolidated Balance Sheets as of July 31, 2005 and October 31, 2004 | 2 |
| | | | |
| | c) | Consolidated Statement of Stockholders’ Equity for the Nine MonthsEnded July 31, 2005 | 3 |
| | | | |
| | d) | Consolidated Statements of Cash Flows for the Nine Months EndedJuly 31, 2005 and 2004 | 4 |
| | | | |
| | e) | Notes to Consolidated Financial Statements | 5 |
| | | | |
| Item 2. Management’s Discussion and Analysis or Plan of Operations | 8 |
| | |
| Item 3. Controls and Procedures | 13 |
| | |
Part II. Other Information | |
| | |
Item 6. Exhibits | 14 |
| | |
Signatures | 15 |
Part I. Financial Information
Item 1. Financial Statements
NAVTECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In US Dollars)
(Unaudited)
| | | Three months ended July 31, | Nine months ended July 31, |
| | | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | | |
REVENUE | | | | | | | | | | | | | |
Service fees | | $ | 2,515,707 | | $ | 2,011,836 | | $ | 7,663,548 | | $ | 5,884,822 | |
| | | | | | | | | | | | | | |
COSTS AND EXPENSES | | | | | | | | | | | | | |
Cost of service fees | | | 1,334,649 | | | 1,013,317 | | | 4,031,750 | | | 3,158,152 | |
Research and development | | | 181,874 | | | 217,987 | | | 766,288 | | | 657,976 | |
Sales and marketing | | | 418,012 | | | 265,472 | | | 1,208,122 | | | 872,562 | |
General and administrative | | | 447,135 | | | 399,915 | | | 1,346,584 | | | 989,314 | |
| | | | 2,381,670 | | | 1,896,691 | | | 7,352,744 | | | 5,678,004 | |
| | | | | | | | | | | | | | |
Earnings from operations | | | 134,037 | | | 115,145 | | | 310,804 | | | 206,818 | |
Other expense | | | | | | | | | | | | | |
Interest expense | | | (6,762 | ) | | (9,830 | ) | | (16,574 | ) | | (27,232 | ) |
Earnings before income taxes | | | 127,275 | | | 105,315 | | | 294,230 | | | 179,586 | |
Income taxes (recovery) | | | - | | | (34,713 | ) | | - | | | (54,551 | ) |
Net earnings | | $ | 127,275 | | $ | 140,028 | | $ | 294,230 | | $ | 234,137 | |
Net earnings per share | | | | | | | | | | | | | |
Basic | | $ | 0.03 | | $ | 0.03 | | $ | 0.06 | | $ | 0.06 | |
Diluted | | $ | 0.02 | | $ | 0.03 | | $ | 0.06 | | $ | 0.05 | |
See accompanying notes.
CONSOLIDATED BALANCE SHEETS
(In US Dollars)
| | | July 31, 2005(1) | | | October 31, 2004 | |
| | | | | | | | |
ASSETS | | | | | | | |
Current assets | | | | | | | |
Cash | | $ | 594,131 | | $ | 445,309 | |
Accounts receivable (net of allowance for bad debts of$180,530; 2004 - $158,011) | | | 1,647,667 | | | 1,133,963 | |
| Investment tax credits receivable | | | 95,580 | | | - | |
| Prepaid expenses and other | | | 641,784 | | | 223,209 | |
| | | | 2,979,162 | | | 1,802,481 | |
| | | | | | | | |
Deferred tax assets | | | 339,668 | | | 437,419 | |
Capital assets | | | 1,293,619 | | | 547,914 | |
| | | $ | 4,612,449 | | $ | 2,787,814 | |
| | | | | | | | |
LIABILITIES | | | | | | | |
Current liabilities | | | | | | | |
Accounts payable and accrued liabilities | | $ | 1,359,210 | | $ | 973,584 | |
Obligations under capital lease - current portion | | | 243,312 | | | 36,310 | |
Deferred lease inducements - current portion | | | 32,071 | | | 17,850 | |
Deferred revenue | | | 809,627 | | | 623,183 | |
| | | | 2,444,220 | | | 1,650,927 | |
| | | | | | | | |
Obligations under capital lease | | | 486,308 | | | 7,992 | |
Deferred lease inducements | | | 16,365 | | | 17,849 | |
| | | | 2,946,893 | | | 1,676,768 | |
Commitments and contingencies | | | | | | | |
| | | | | | | | |
STOCKHOLDERS’ EQUITY | | | | | | | |
| Share capital | | | 5,560 | | | 4,884 | |
Authorized - 20,000,000, Par Value $0.001, Issued - 5,560,390 (2004 - 4,884,271) | | | | | | | |
Treasury stock - 733,188(2004 - 607,918) | | | (733 | ) | | (608 | ) |
| Additional paid-in capital | | | 3,403,017 | | | 3,094,441 | |
| Accumulated other comprehensive income | | | 81,841 | | | 130,688 | |
| Accumulated deficit | | | (1,824,129 | ) | | (2,118,359 | ) |
| | | | 1,665,556 | | | 1,111,046 | |
| | | $ | 4,612,449 | | $ | 2,787,814 | |
(1) Unaudited
See accompanying notes.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In US Dollars)
| | | | | | | | | Accumulated | | | | | | | | | |
| | | | | | | | | Additional | | | Other | | | | | | | | | Total | | | | |
| | | | Issued | | | Share | | | Paid-In | | | Comprehensive | | | Treasury | | | Accumulated | | | Stockholders’ | | | Comprehensive | |
| | | Shares | | | Capital | | | Capital | | | Income | | | Stock | | | Deficit | | | Equity | | | Income | |
| Balances, October 31, 2004 | | | 4,884,271 | | $ | 4,884 | | $ | 3,094,441 | | $ | 130,688 | | $ | (608 | ) | $ | (2,118,359 | ) | $ | 1,111,046 | | | | |
| Warrants and stock options exercised | | | 676,119 | | | 676 | | | 511,201 | | | | | | | | | | | | 511,877 | | | | |
| Treasury Shares | | | | | | | | | (202,625 | ) | | | | | (125 | ) | | | | | (202,750 | ) | | | |
| Translation adjustments | | | | | | | | | | | | (48,847 | ) | | | | | | | | (48,847 | ) | $ | (48,847 | ) |
| Net earnings | | | | | | | | | | | | | | | | | | 294,230 | | | 294,230 | | | 294,230 | |
Balances, July 31, 2005 (Unaudited) (1) | | | 5,560,390 | | $ | 5,560 | | $ | 3,403,017 | | $ | 81,841 | | $ | (733 | ) | $ | (1,824,129 | ) | $ | 1,665,556 | | $ | 245,383 | |
(1)Issued shares at July 31, 2005 include 733,188 of shares held in treasury. Total outstanding shares at July 31, 2005 was 4,827,202.
See accompanying notes.
NAVTECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In US Dollars)
(Unaudited)
Nine Months ended July 31, | | | 2005 | | | 2004 | |
| | | | | | | | |
OPERATING ACTIVITIES | | | | | | | |
| Net earnings | | $ | 294,230 | | $ | 234,137 | |
| Adjustments to reconcile net earnings to net | | | | | | | |
cash provided by operating activities: | | | | | | | |
Depreciation | | | 151,472 | | | 138,115 | |
Provision for uncollectable accounts | | | 101,335 | | | 49,942 | |
Deferred lease inducements | | | 13,991 | | | (12,366 | ) |
| Changes in operating assets and liabilities | | | | | | | |
Accounts receivable | | | (641,740 | ) | | (267,213 | ) |
Investment tax credits receivable | | | (96,058 | ) | | (8,609 | ) |
Prepaid expenses and other | | | (423,025 | ) | | (53,545 | ) |
Deferred tax assets | | | 96,058 | | | - | |
Accounts payable and accrued liabilities | | | 394,870 | | | (102,209 | ) |
Deferred revenue | | | 195,002 | | | 84,991 | |
Income taxes payable | | | - | | | (11,360 | ) |
| | | | 86,135 | | | 51,883 | |
| | | | | | | | |
INVESTING ACTIVITIES | | | | | | | |
| Purchase of capital assets | | | (216,029 | ) | | (106,646 | ) |
| | | | (216,029 | ) | | (106,646 | ) |
| | | | | | | | |
FINANCING ACTIVITIES | | | | | | | |
| Repayment of capital leases | | | (28,133 | ) | | (24,707 | ) |
| Repayment of loans | | | - | | | (26,103 | ) |
| Exercises of warrants | | | 234,375 | | | - | |
| Exercises under stock option plan, net of treasury shares | | | 74,878 | | | 11,480 | |
| | | | 281,120 | | | (39,330 | ) |
| | | | | | | | |
| Effect of foreign exchange rates on cash | | | (2,404 | ) | | (6,283 | ) |
Net cash flow | | | 148,822 | | | (100,376 | ) |
Cash, beginning of period | | | 445,309 | | | 138,785 | |
Cash, end of period | | $ | 594,131 | | $ | 38,409 | |
| Supplemental disclosure of cash flow information: | | | | | | | |
Cash paid during the period for interest | | $ | (16,574 | ) | $ | (27,232 | ) |
Cash received during the period for income taxes | | $ | - | | $ | 91,243 | |
Assets acquired through capital leases | | $ | 710,976 | | $ | - | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DESCRIPTION OF BUSINESS AND ORGANIZATION
Navtech, Inc. (Navtech-US) was originally incorporated in the State of New York in 1981 and then reincorporated in the State of Delaware in 1987. Navtech Systems Support Inc. (Navtech-Canada), a wholly-owned subsidiary of Navtech-US, was incorporated in the Province of Ontario in 1987. Navtech (UK) Limited (Navtech-UK), a wholly-owned subsidiary of Navtech-Canada, was incorporated in the United Kingdom in 1994. When we refer to Navtech, we are speaking of Navtech-US and its subsidiaries.
Our head office is located at 2340 Garden Road, Suite 207, Monterey, CA 93940. Our principal operations are based at 175 Columbia Street West, Suite 102, Waterloo, Ontario, Canada, N2L 5Z5. We maintain a website at www.navtechinc.com. Our common stock is publicly traded on the OTC Bulletin Board under the symbol “NAVH”. For investor information, we can be reached at (519) 747-1170.
We develop, market and support flight operations management systems for the commercial aviation industry. Our systems are designed to assist commercial passenger and cargo air carriers in the dynamic environment of their daily flight operations.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated balance sheet as of July 31, 2005, the consolidated statements of operations for the three and nine months ended July 31, 2005 and 2004, the consolidated statements of cash flows for the nine months ended July 31, 2005 and 2004 and the consolidated statement of stockholders’ equity for the nine months ended July 31, 2005 have been prepared by us without audit. In our opinion, all adjustments (which include only normal recurring accrual adjustments) necessary to present fairly the financial position, results of operations and cash flows at July 31, 2005, and for all periods presented, have been made.
The consolidated financial statements include the accounts of Navtech-US and its wholly owned subsidiaries, Navtech-Canada and Navtech-UK. All material inter-company balances and transactions have been eliminated. In accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translations,” assets and liabilities of foreign operations are translated at current rates of exchange, while results of operations are translated at average rates in effect for that period. Unrealized translation gains or losses are accumulated in comprehensive income (loss), which is a separate component of equity.
Due to the size and nature of certain recent customer contracts, we have adopted the percentage of completion method of accounting for custom programming contracts.
For information concerning our significant accounting policies, reference is made to our Annual Report on Form 10-KSB for the year ended October 31, 2004. Results of operations for the nine months ended July 31, 2005 are not necessarily indicative of the operating results for the full year.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123R"), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure and Amendment of SFAS No. 123 ("SFAS 148"). SFAS No. 123R supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees ("APB 25") and amends certain provisions of SFAS No. 95, Statement of Cash Flows. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options. In addition, SFAS No. 123R will cause unrecognized expense (based on the amounts in our pro forma footnote disclosure) related to options vesting after the date of initial adoption to be recognized as a charge to operations over the remaining vesting period. We are required to adopt SFAS No. 123R in our quarter ending April 30, 2006. Under SFAS No. 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition alternatives include prospective and retroactive adoption methods. Under the retroactive method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
compensation expense be recorded for all unvested stock options and share awards at the beginning of the first quarter of adoption of SFAS No. 123R, while the retroactive method would record compensation expense for all unvested stock options and share awards beginning with the first period restated. We are evaluating the requirements of SFAS No. 123R and have not yet quantified the impact of SFAS No. 123R on our consolidated results of operations and earnings per share.
EARNINGS PER SHARE
Basic and diluted earnings per share are calculated as follows:
| | | Three months ended July 31, | Nine months ended July 31, |
| | | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| Numerator: | | | | | | | | | | | | | |
Net earnings (A) | | $ | 127,275 | | $ | 140,028 | | $ | 294,230 | | $ | 234,137 | |
| Denominator: | | | | | | | | | | | | | |
Denominator for basic earnings per share - weighted average | | | | | | | | | | | | | |
number of common shares outstanding (B) | | | 4,827,202 | | | 4,245,656 | | | 4,614,072 | | | 4,256,237 | |
Effect of dilutive securities: | | | | | | | | | | | | | |
Employee stock options | | | 631,282 | | | 835,025 | | | 631,282 | | | 835,025 | |
Denominator for diluted earnings per share adjusted weighted adjusted | | | | | | | | | | | | | |
weighted average number of common shares outstanding (C) | | | 5,458,484 | | | 5,080,681 | | | 5,245,354 | | | 5,091,262 | |
| Earnings per share - basic (A)/(B) | | | 0.03 | | | 0.03 | | | 0.06 | | | 0.06 | |
| Earnings per share - diluted (A)/(C) | | | 0.02 | | | 0.03 | | | 0.06 | | | 0.05 | |
Dilutive securities consist of employee stock options and warrants. Specific employee stock options and warrants are excluded if their effect is antidilutive.
STOCK BASED COMPENSATION
The Company has adopted SFAS No. 123, “Accounting for Stock-Based Compensation.” As permitted under this standard, the Company elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair value of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
| | July 31, |
| Assumption | | | 2005 | | | 2004 | |
| Volatility factor of expected market price of the Company’s stock | | | 133 | % | | 168 | % |
| Dividend yield | | | 0 | % | | 0 | % |
| Risk-free rate | | | 4 | % | | 4 | % |
| Weighted average expected life of stock options (years) | | | 2.4 | | | 4 | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SFAS 123 requires that, for the pro forma disclosure, the compensation cost based on the fair values of the options at the grant date be amortized over the vesting period. If compensation cost for stock options had been determined based on the fair value at the grant dates consistent with the method described by SFAS 123, the Company’s net earnings and earnings per share would have been adjusted to the pro forma amounts indicated below.
| | Three months ended July 31, | Nine months ended July 31, |
| | | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| Net earnings | | | | | | | | | | | | | |
| Net earnings - reported | | $ | 127,275 | | $ | 140,028 | | $ | 294,230 | | $ | 234,137 | |
Pro forma stock-based compensation | | | (15,424 | ) | | (552 | ) | | (49,581 | ) | | (1,679 | ) |
| Net earnings - pro forma | | $ | 111,851 | | $ | 139,476 | | $ | 244,649 | | $ | 232,458 | |
| Basic earnings per share - reported | | $ | 0.03 | | $ | 0.03 | | $ | 0.06 | | $ | 0.06 | |
| Diluted earnings per share - reported | | $ | 0.02 | | $ | 0.03 | | $ | 0.06 | | $ | 0.05 | |
Pro forma stock-based compensation | | | (0.01 | ) | | - | | | (0.01 | ) | | - | |
| Basic earnings per share - pro forma | | $ | 0.02 | | $ | 0.03 | | $ | 0.05 | | $ | 0.06 | |
| Diluted earnings per share - pro forma | | $ | 0.02 | | $ | 0.03 | | $ | 0.05 | | $ | 0.05 | |
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Item 2. Management's Discussion and Analysis or Plan of Operation
FORWARD-LOOKING STATEMENTS
This document contains ‘forward-looking statements’ as defined in the federal securities laws. The events described in forward-looking statements we make in this Form 10-QSB may not occur. Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions that may be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words "may," "will," "expect," "believe," "anticipate," "project," "plan," "intend," "estimate," and "continue," and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences (including those discussed under “Other Considerations” in Item 6 of our Form 10-KSB for the year ended October 31, 2004), many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.
RESULTS OF OPERATIONS
Revenues
Revenue from service fees increased approximately $1,779,000, or 30%, to approximately $7,663,000 for the nine months ended July 31, 2005, compared with approximately $5,884,000 for the nine months ended July 31, 2004.
The following table shows the major components of the revenue from service fees for the nine months ended July 31, 2005 and 2004 (in thousands except percentage amounts):
| | | | 2005 | | | 2004 | | | Percentage Change | |
| Software subscription fees | | $ | 5,996 | | $ | 5,227 | | | 15 | % |
| Development and other | | | 1,667 | | | 657 | | | 154 | % |
| | | $ | 7,663 | | $ | 5,884 | | | 30 | % |
Software subscription fees increased primarily as a result of the addition of new customers. We have enjoyed growth in our dispatch product customer base, with the majority of new long-term contracts being established in Europe and Asia-Pacific. We are also experiencing success with the marketing of our crew management products in the North American marketplace.
Development and other revenue represent amounts that are not subject to a recurring contract, including systems consulting, custom programming and the resale of hardware. Development and other revenue has increased as a result of the greater proportion of customers subscribing to our crew management products. These products typically have higher levels of systems consulting, custom programming and hardware requirements. Significant custom programming contracts are accounted for on a percentage of completion basis.
NAVTECH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Costs and expenses
Overall, the recent appreciation of major currencies relative to the US dollar has increased our total costs and expenses as reported in US dollars. The majority of our expenditures, including personnel costs, originate in Canada or the United Kingdom and are paid in the respective local currencies. Consequently, the stronger currencies in those countries have effectively increased our costs and expenses as reported in US dollars. For the nine months ended July 31, 2005, the appreciation of other currencies relative to the US dollar has resulted in an increase in our total costs and expenses by approximately $420,000 as compared to the same period in 2004.
Cost of service fees
The following table shows the major components of the cost of service fees for the nine months ended July 31, 2005 and 2004 (in thousands except percentage amounts):
| | | | 2005 | | | 2004 | | | Percentage Change | |
| Salaries and benefits | | $ | 2,476 | | $ | 1,859 | | | 33 | % |
| Communication costs | | | 637 | | | 607 | | | 5 | % |
| Facilities | | | 248 | | | 177 | | | 40 | % |
| Hardware and travel | | | 213 | | | 120 | | | 78 | % |
| Royalties | | | 173 | | | 150 | | | 15 | % |
| Depreciation | | | 106 | | | 97 | | | 9 | % |
| Other | | | 179 | | | 148 | | | 22 | % |
| | | $ | 4,032 | | $ | 3,158 | | | 28 | % |
Excluding the impact of changes in relative currency value, the cost of services increased by approximately $609,000, or 19%.
Excluding the impact of changes in relative currency value, salaries and benefits for the nine months ended July 31, 2005 increased 24% from the same period in the prior year. This increase was primarily a result of staffing increases in the quality assurance and installation management groups to support the current and anticipated future growth of our customer base.
Excluding the impact of changes in relative currency values, facilities expense for the nine months ended July 31, 2005 increased approximately $57,000, or 32%, compared to the same period last year. This increase was a result of higher costs associated with the relocation and expansion of our UK office during fiscal 2005.
The increase in hardware and travel was a result of an increase in expenses directly related to the implementation of new services at new or existing customers. These costs relate to the cost of hardware and travel that is generally re-billed to customers as part of an implementation.
Royalty costs for the nine months ended July 31, 2005, which are all denominated in US dollars and paid as a direct percentage of the related revenue, increased 15% compared to the same period in fiscal 2004 as a direct result of an increase in monthly service volumes, and an increase in the proportion of revenues subject to royalties.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Research and development expenditures increased approximately $108,000, or approximately 16%, for the nine months ended July 31, 2005 compared to the same period in fiscal 2004. Excluding the impact of changes in relative currency values, research and development expenditures increased approximately $50,000, or approximately 8%. Research and development will remain an area of focus through fiscal 2005 as we continue to invest in the development of new products and additional functionality in existing products.
Sales and marketing expenses
The following table shows the major components of the sales and marketing expenses for the nine months ended July 31, 2005 and 2004 (in thousands except percentage amounts):
| | | | 2005 | | | 2004 | | | Percentage Change | |
| Salaries and benefits | | $ | 864 | | $ | 662 | | | 31 | % |
| Travel | | | 223 | | | 166 | | | 34 | % |
| Marketing | | | 104 | | | 29 | | | 259 | % |
| Other | | | 17 | | | 16 | | | 6 | % |
| | | $ | 1,208 | | $ | 873 | | | 38 | % |
Excluding the impact of changes in relative currency values, sales and marketing expenses for the nine months ended July 31, 2005 increased approximately $288,000, or 33%, compared to the same period in the prior year.
Excluding the impact of changes in relative currency values, salaries and benefits have increased approximately $165,000, or 25%, as a result of a larger sales force with an expanded geographic focus.
Excluding the impact of changes in relative currency values, travel costs have increased approximately 30% also as a result of a larger sales force with an expanded geographic focus.
Marketing costs, which were primarily denominated in US dollars, increased $74,000 as a result of additional events that were held or attended in 2005 but not in the prior year.
General and administrative expenses
The following table shows the major components of the general and administrative expenses for the nine months ended July 31, 2005 and 2004 (in thousands except percentage amounts):
| | | | 2005 | | | 2004 | | | Percentage Change | |
| Salaries and benefits | | $ | 484 | | $ | 364 | | | 33 | % |
| Professional fees | | | 239 | | | 167 | | | 43 | % |
| Insurance | | | 164 | | | 160 | | | 3 | % |
| Provision for bad debts | | | 101 | | | 50 | | | 102 | % |
| Telephone | | | 141 | | | 113 | | | 25 | % |
| Travel | | | 51 | | | 40 | | | 28 | % |
| Depreciation | | | 23 | | | 21 | | | 10 | % |
| Loss on foreign exchange | | | 1 | | | 13 | | | (92 | %) |
| Other | | | 143 | | | 61 | | | 136 | % |
| | | $ | 1,347 | | $ | 989 | | | 36 | % |
Excluding the impact of changes in relative currency values, general and administrative expenses for the nine months ended July 31, 2005 increased approximately $295,000, or 30%, compared to the same period in fiscal 2004.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Excluding the impact of changes in relative currency values, salaries and benefits for the nine months ended July 31, 2005 increased approximately $85,000 or 23% compared to the same period in fiscal 2004 due to an increase in personnel and compensation costs for general and administrative positions.
Excluding the impact of changes in relative currency values, professional fees increased approximately $65,000, or 39%, compared to the same period last year. Professional fees have increased as a result of additional costs associated with increasing regulatory requirements.
The increase in insurance costs, which are primarily denominated in US dollars, was a direct result of increases in premiums on the renewal of existing policies.
Excluding the impact of changes in relative currency values, telephone costs have increased approximately $22,000, or 19%, compared to the same period last year as a result of increased staffing levels and a broader geographic focus.
Bad debt expense for the nine months ended July 31, 2005 increased approximately $51,000 as a result of certain customers declaring bankruptcy during fiscal 2005. As at July 31, 2005, the bad debt reserve covered 52% of accounts receivable over 90 days.
Other expense
Interest expense for the nine months ended July 31, 2005 was $17,000, a decrease of approximately $10,000, or 37%, compared to the same period last year. The reduction in interest expense was due to the elimination of long-term debt balances during fiscal 2004 as well as the continued improvement in our working capital that has resulted in a decrease in the usage of short-term financing during 2005.
Income tax(recovery)
No tax provision has been recorded for the nine months ended July 31, 2005 as corporate income taxes on earnings have been offset by recoveries resulting from assessed research and development investment tax credits. Refundable tax credits are recorded as receivable when assessed by taxation authorities.
The recovery of approximately $55,000 of income taxes in the prior year represented the reassessment of investment tax credits from prior fiscal years in excess of the amount recorded as receivable.
Net earnings
The unaudited consolidated financial statements reflect net earnings of approximately $294,000 for the nine months ended July 31, 2005 as compared to net earnings of approximately $234,000 for the nine months ended July 31, 2004, an increase of approximately $60,000, or 26%. The increase is primarily a result of an increase in revenues, partially offset by increases in costs and expenses, generally related to the increase in revenues, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 2005, our available funds consisted of approximately $594,000 in cash and an operating line of credit of $800,000 with RBC Royal Bank. There was no balance outstanding on the facility at July 31, 2005. The facility is secured by the assets of Navtech-Canada and is due for annual renewal in February 2006.
At July 31, 2005, our working capital had increased by 252% to approximately $535,000 from approximately $152,000 at October 31, 2004.
Cash flows from operationsfor the nine months ended July 31, 2005 accounted for a net inflow of approximately $86,000, primarily based on the net earnings for the period, depreciation of approximately $151,000 and provision for uncollectable accounts of approximately $101,000, offset by an increase in non-cash working capital of approximately $475,000. The increase in non-cash working capital was a result of an increase in accounts receivable related to the timing of invoicing on certain large contracts and higher sales volumes and the result of
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
deferred expenses associated with the hardware for future installations related to certain large contracts. These costs will be expensed when the revenue is recognized on implementation.
Cash flows from investing activities for the nine months ended July 31, 2005 represent a net outflow of approximately $216,000 due to the purchase of capital assets.
Cash flows from financing activities for the nine months ended July 31, 2005 represent a net inflow of approximately $281,000 due to cash received on the exercise of warrants and employee stock options, partially offset by repayments of capital leases.
During the quarter, approximately $711,000 of computer hardware was acquired through a capital lease. The hardware relates to a specific long-term customer contract that includes monthly compensation for the carrying cost and maintenance of the equipment.
At July 31, 2005, we had no significant capital commitments. However, we may, from time to time, consider acquisitions of complementary businesses, products or technologies.
OFF-BALANCE SHEET ARRANGEMENTS
Not applicable.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Item 3. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of July 31, 2005 in alerting them in a timely manner to material information required to be included in our SEC reports. In addition, no change in our internal control over financial reporting occurred during the fiscal quarter ended July 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 6. Exhibits
3(A) | Certificate of Incorporation, as amended (1) |
3(B) | By-Laws, as amended (2) |
31(A) | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31(B) | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Items 1 through 5 are not applicable and have been omitted.
| (1) | We hereby incorporate the footnoted exhibit by reference in accordance with Rule 12b-32, as such exhibit was originally filed as an exhibit in our Quarterly Report on Form 10-QSB for the fiscal period ended April 30, 2001. |
| (2) | We hereby incorporate the footnoted exhibit by reference in accordance with Rule 12b-32, as such exhibit was originally filed as an exhibit in our Annual Report on Form 10-KSB for the fiscal year ended October 31, 1999. |
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | NAVTECH, INC. |
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| Date: September 7, 2005 | By: | /s/ David Strucke |
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David Strucke, |
| | Chief Executive Officer |
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| By: | /s/ Gordon Heard |
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Gordon Heard, |
| | Chief Financial Officer |
