Amortization expense was $2.1 million in FY 2009 compared to $2.0 million in FY 2008, an increase of $118,000. This increase was primarily the result of the Company’s use of the estimated cash flow methodology for its intangible assets in the amount of $111,000 and an approximately $7,000 increase in patent amortization expense.
Other operating expenses decreased $1.5 million as a result of a decrease in non-recurring wafer fabrication consolidation expenses of $1.0 million and the Wisconsin facility closure expenses of $534,000. Wafer fabrication consolidation expenses to our Ann Arbor facility were $300,000 in FY 2009 compared to $1.3 million in FY 2008.
The Company’s evaluations of Intangible assets and Goodwill for the year ended March 31, 2009 resulted in no impairment adjustments. In FY 2008, the Intangible assets and Goodwill evaluation resulted in no impairment adjustments.
Interest expense for FY 2009 was $405,000 as compared to $2.5 million in FY 2008, a decrease of $2.1 million. This decrease was primarily attributable to a $1.9 million decrease in the interest expense and amortization of the discount related to the convertible notes which were paid off or converted to equity in Q3 2008. In addition, the Company’s interest expense was $176,000 lower on the related party notes and other notes. This decrease was primarily due to reduced debt and lower interest rates.
Net loss for FY 2009 was $2.0 million, as compared to net loss of $9.6 million in FY 2008, an improvement of $7.6 million. This improvement was primarily attributable to higher gross margins of $4.1 million, the decrease in interest expense of $2.1 million, lower provision for income taxes of $1.2 million and lower wafer fabrication relocation and facility closure expenses of $1.5 million, offset by higher other operating expenses of $1.2 million. During the year ended March 31, 2008, the company recorded a full valuation allowance on its net deferred tax assets and recognized an income tax provision of approximately $1.2 million.
Operating Activities
Net cash provided by operating activities of $2.7 million for the year ended March 31, 2009 was primarily the result of net cash provided by operations of $1.4 million and net cash provided by changes in operating assets and liabilities of $1.3 million. The net cash provided by operations included a net loss of $2.0 million, offset by net cash generated of $3.4 million from depreciation, amortization and stock based compensation. Changes in operating assets and liabilities were primarily a result of reduced inventories of $462,000 and increased accrued expenses of $912,000.
Net cash used in operating activities of $3.4 million for the year ended March 31, 2008 was primarily the result of a cash net loss of $3.3 million comprised of a net loss of $9.6 million, of which $6.3 million was non-cash expenses. This net cash loss was increased by $30,000 changes in operating assets and liabilities comprised of a decrease in accounts receivable of $385,000, inventories of $308,000 and prepaid/other assets of $111,000, offset by a decrease in accounts payable and accrued expenses of $834,000.
Investing Activities
Net cash provided by investing activities was approximately $93,000 for the year ended March 31, 2009. The amount consisted of capital expenditures of approximately $722,000, and patent expenditures of $186,000, offset by a $1.0 million lower restricted cash balance required under a new bank loan agreement.
Net cash used in investing activities was approximately $1.3 million for the year ended March 31, 2008. The amount consisted of capital expenditures of approximately $1.2 million and patent expenditures were $195,000 for the 2008 fiscal year.
Financing Activities
The Company used $759,000 of net cash from financing activities in FY 2009, primarily to reduce debt, including a net reduction in bank debt and capital lease obligations of $268,000 and payments to related parties of $450,000. The net reduction in bank debt included the payoff of the capital lease obligation of $1.9 million under the prior bank agreement, financed primarily by the bank term loan of $1.7 million under the new bank agreement.
On March 6, 2007, the Company and Fifth Third Bank entered into a Revolving Line of Credit (the Loan Agreement) providing for borrowings of up to a maximum of $2.0 million at the interest rate equal to the prime rate. On November 13, 2007, the Loan Agreement was amended to increase the principal amount available to $3.0 million. At March 31, 2008, the Company did not meet the debt service coverage ratio covenant and the Loan Agreement was subsequently amended on June 30, 2008 to reduce the principal amount available to $2.5 million and to amend the interest rate to be equal to prime plus 2%.
On September 25, 2008, the Company terminated the Loan Agreement with Fifth Third Bank and established a credit facility with The PrivateBank and Trust Company. As part of this new banking relationship, the Company established a three year Line of Credit of $3.0 million at an interest rate of prime plus 1%, adjusted quarterly. The prime rate at March 31, 2009 was 3.25%. The new facility contains customary representations, warranties and financial covenants including minimum debt service coverage ratio, Adjusted EBITDA level, and Net Worth requirements (as defined in the agreement). The principal loan amount, is due on September 25, 2011, provided that if existing loans to the Company by the Michigan Economic Development Corporation have not converted to equity on or before August 31, 2011, the outstanding principal shall be due on August 31, 2011. The availability under the new facility will be determined by the calculation of a borrowing base that includes a percentage of accounts receivable and inventory.
At March 31, 2009, the Company was in compliance with the debt service coverage ratio and Net Worth requirements, but was not in compliance with the Adjusted EBITDA level. The Company has received a waiver from the bank regarding the default and entered into an amendment to the loan agreement on May 29, 2009 effective March 31, 2009. According to the terms of the amended loan agreement, the Adjusted EBITDA level is measured on a year to date basis for the June 30, 2009, September 30, 2009, December 31, 2009 and March 31, 2010 test dates and thereafter on a trailing four quarter basis. In addition, the Debt Service Coverage ratio and the Net Worth covenants were amended. The amended minimum Debt Service Coverage ratio is 1.0 to 1.0 for the first quarter, 1.25 to 1.0 for the second quarter and 1.5 to 1.0 thereafter. The amended minimum Net Worth covenant is $15.5 million and will increase by 10% of Net Income for each fiscal year that the Company reports net income.
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The line of credit is guaranteed by each of API’s wholly-owned subsidiaries and the loan is secured by a Security Agreement among API, its subsidiaries and The PrivateBank, pursuant to which API and its subsidiaries granted to The PrivateBank a first-priority security interest in certain described assets. The outstanding balance as of March 31, 2009 is $1.4 million.
The Company generated net cash from financing activities in FY 2008 of $3.0 million including increases in cash from financing activities of $6.3 million offset by decreases in financing activities of $3.3 million. The increase of cash resulted from the private placement of Company Class A common stock of $4.3 million, $227,000 from the exercise of warrants and stock options for Company common stock, net increase in the bank line of credit of $559,000, and the net increase in the MEDC term loans of $790,000, offset by the retirement of convertible notes of $2.4 million, and the reduction in related parties notes payable of $550,000.
Debt
As a result of the acquisition of Picotronix, Inc. (dba Picometrix, Inc.), the Company issued promissory notes to the stockholders of Picometrix, (Debt to Related Parties). At March 31, 2009, the remaining balance on the notes was $1.4 million. The notes are payable in annual installments of varying amounts through March 2010 as amended in FY 2009. The notes bear interest at a rate of prime plus 1.0% and are secured by all of the intellectual property of Picometrix. API has the option of prepaying the notes without penalty.
In March 2007, API, as Lessee, entered into a Master Equipment Lease Agreement with Fifth Third Leasing Company, as Lessor, to finance the purchase of new manufacturing equipment up to an aggregate of $2,300,000 (Lease). API purchased equipment under the Lease until June 30, 2007. This lease was accounted for as a capital lease in accordance with SFAS No. 13. On September 25, 2008, the Company retired the Master Equipment Lease Agreement with Fifth Third Leasing Company by paying the remaining principal amount of $1,736,000.
On September 25, 2008, the Company established a new credit facility with The PrivateBank and Trust Company. As part of this banking relationship, in addition to the line of credit described above, the Company established an Equipment Installment Loan of $1.736 million amortized over a term of four years, at an interest rate of prime plus 1%. The principal loan amount is due on September 25, 2012, provided that if existing loans to the Company by the Michigan Economic Development Corporation have not converted to equity on or before August 31, 2011, the Loan shall be due on August 31, 2011. The Company utilized the Equipment Installment loan to retire the Master Equipment Lease Agreement with Fifth Third Leasing Company. The balance on this term loan at March 31, 2009 was $1.6 million.
The Company was not in compliance with the Adjusted EBITDA level requirements. The Company has received a waiver from the bank regarding the default. Based on the amended loan covenants, the Company anticipates that it will meet the loan covenants during FY 2010, and as a result has classified the current and future maturities in accordance with the loan agreement.
The Michigan Economic Development Corporation (MEDC) entered into two loan agreements with Picometrix LLC, one in fiscal 2004 (MEDC-loan 1) and one in fiscal 2005 (MEDC-loan 2). Both loans are unsecured.
The MEDC-loan 1 is $1,025,000 with an interest rate of 7%. Under the original terms of the promissory note, interest accrued but unpaid through October 2008 would be added to then outstanding principal balance of the note and the restated principal would be amortized over the remaining four years (September 15, 2012). Effective September 23, 2008, the MEDC-loan 1 of $1,025,000 was amended and restated to change the start date of repayment of principal and interest from October 2008 to October 2009. Commencing in October 2009, the Company will pay MEDC the restated principal and accrued interest on any unpaid balance over the remaining three years.
25
MEDC-loan 2 is $1.2 million with an interest rate of 7%. Under the original terms of the promissory notes, interest accrued, but unpaid in the first two years of this agreement was added to the then outstanding principal of this promissory note. During the third year of this agreement, the Company was to pay interest on the restated principal of the Note until October 2008, at which time the Company was to repay the restated principal over the remaining three years (September 15, 2011). Effective January 26, 2009, the MEDC-loan 2 of $1.2 million was amended and restated to change the start date of repayment of principal and interest from October 2008 to November 2009 and to extend the repayment period to October 2012. The current and long-term portions included in the March 31, 2009 balance sheet have been classified based on the terms of the January 2009 amendment.
The Company believes that current cash levels combined with cash generated from operations, our revolving line of credit and additional debt or equity financing will be sufficient for our 2010 fiscal year.
Summary of Contractual Obligations and Commitments
The following table sets forth the contractual obligations of the Company at March 31, 2009.
| Contractual Obligations | | | Payments due by period | |
| | | | | | Within 1 | | | | | | | | More than | |
| | Total | | | year | | 1 – 3 years | | 3 – 5 years | | 5 years | |
| Bank line of credit | | $ | 1,394,000 | | | $ | - | | $ | 1,394,000 | | $ | - | | $ | - | |
| Bank term loan | | | 1,555,000 | | | | 434,000 | | | 1,121,000 | | | - | | | - | |
| Long-term MEDC loans | | | 2,224,000 | | | | 353,000 | | | 1,871,000 | | | - | | | - | |
| Debt to related parties | | | 1,401,000 | | | | 1,401,000 | | | - | | | - | | | - | |
| Subtotal – Balance Sheet | | | 6,574,000 | | | | 2,188,000 | | | 4,386,000 | | | - | | | - | |
| Expected interest expense on | | | | | | | | | | | | | | | | | |
| current debt obligations | | | 744,000 | | | | 331,000 | | | 413,000 | | | - | | | - | |
| Operating lease obligations | | | 3,560,000 | | | | 1,101,000 | | | 2,077,000 | | | 382,000 | | | - | |
| Purchase obligations | | | 1,322,000 | | | | 1,322,000 | | | - | | | - | | | - | |
| Total | | $ | 12,200,000 | | | $ | 4,942,000 | | $ | 6,876,000 | | $ | 382,000 | | $ | - | |
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (“ SFAS No. 157”),which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement is effective for the fiscal years beginning after November 15, 2007. However, in February 2008, the FASB issued FASB Statement of Position (FSP) FAS No. 157-2,“Effective Date of FASB Statement No. 157”. This FSP delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The adoption of SFAS No. 157 did not have a material impact on our consolidated financial statements.
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In October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Is Asset Not Active” (“FAS No. 157-3”) with an immediate effective date, including prior periods for which financial statements have not been issued. FSP FAS No. 157-3 clarifies the application of fair value in inactive markets and allows for the use of management’s internal assumptions about future cash flows with appropriately risk-adjusted discount rates when relevant observable market data does not exist. The objective of FAS No. 157 has not changed and continues to be the determination of the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date. The adoption of FSP FAS No. 157-3 did not have a material effect on the Company’s results of operations, financial position or liquidity.
In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities”(“SFAS No. 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 also includes an amendment to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” which applies to all entities with available-for-sale and trading securities. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The adoption of this pronouncement had no impact on our financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007),“Business Combinations” (“SFAS No. 141(R)”). The objective of SFAS No. 141(R) is to improve reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable and relevant information for investors and other users of financial statements. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial affect of the business combination. SFAS No. 141(R) is effective as of the start of fiscal years beginning after December 15, 2008. Early adoption is not allowed. The adoption of SFAS No. 141(R) will change our accounting treatment for business combinations on a prospective basis beginning April 1, 2009.
In December 2007, the FASB issued SFAS No. 160,“Non-controlling Interests in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 improves the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report non-controlling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and non-controlling interests by requiring them to be treated as equity transactions. SFAS No. 160 is effective as of the start of fiscal years beginning after December 15, 2008. Early adoption is not allowed. Since the Company currently has no minority interest, adoption of this standard will have no impact on our financial position, results of operations or cash flows.
In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB No. 110”) to amend the SEC’s views discussed in Staff Accounting Bulletin No. 107 (“SAB No. 107”) regarding the use of the simplified method in developing an estimate of expected life of share options in accordance with SFAS No. 123(R). SAB No. 110 is effective for us beginning April 1, 2007. The Company currently uses reasonable estimates of expected life in accordance with SAB No. 107, as amended by SAB No. 110.
In April 2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3,“Determination of the Useful Life of Intangible Assets”(”FSP No. FAS 142-3”).The final FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The FSP is intended to improve the consistency between the useful life of an intangible asset determined under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007),“Business Combinations”,and other US generally accepted accounting principles. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact, if any, FSP No. FAS 142-3 will have on its consolidated financial statements.
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In May 2008, the FASB issued FASB Staff Position (FSP) No. APB 14-1. This FSP clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”. Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is in the process of evaluating the impacts, if any, of adopting this FSP.
In June 2008, the FASB ratified the consensus reached by the Emerging Issues Task Force, EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 addresses how an entity should evaluate whether an instrument is indexed to its own stock. The consensus is effective for fiscal years (and interim periods) beginning after December 15, 2008. The consensus must be applied to outstanding instruments as of the beginning of the fiscal year in which the consensus is adopted and should be treated as a cumulative-effect adjustment to the opening balance of retained earnings. Early adoption is not permitted. The Company is in the process of evaluating the impacts, if any, of adopting this EITF.
In June 2008, the FASB issued FASB Staff Position (“FSP”) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of basic earnings per share pursuant to the two-class method described in SFAS No. 128, “Earnings per Share”. All prior period earnings per share data presented shall be adjusted retrospectively to conform to the provisions of this FSP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Early application is prohibited. The Company is in the process of evaluating the impact, if any, of adopting this FSP.
In April 2009, the FASB issued FASB Staff Position (“FSP”) FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP FAS 141(R)-1 provides guidance for determining the acquisition-date fair value of assets acquired and liabilities assumed in a business combination that arise from contingencies, and provides guidance on how to account for these assets and liabilities subsequent to the completion of a business combination. FSP FAS 141(R)-1 also requires increased disclosures on assets acquired and liabilities assumed in a business combination that arise from contingencies. FSP FAS 141(R)-1 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of FSP FAS 141(R)-1 will change our accounting treatment for business combinations on a prospective basis beginning April 1, 2009.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
At March 31, 2009, most of the Company’s interest rate exposure is linked to the prime rate, subject to certain limitations, offset by cash investment tied to prime rate. As such, we are at risk to the extent of changes in the prime rate and do not believe that moderate changes in the prime rate will materially affect our operating results or financial condition.
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Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of Advanced Photonix, Inc., prepared in accordance with Regulation S-X and the Report of the Independent Registered Public Accounting Firm are included in Item 8:
| | Page |
| Report of Independent Registered Public Accounting Firm | | 30 |
| | | |
| Financial Statements: | | |
| Consolidated Balance Sheets, as of March 31, 2009 and March 31, 2008 | | 31 |
| | | |
| Consolidated Statements of Operations | | |
| for the years ended March 31, 2009 and March 31, 2008 | | 32 |
| | | |
| Consolidated Statements of Shareholders' Equity | | |
| for the years ended March 31, 2009 and March 31, 2008 | | 33 |
| | | |
| Consolidated Statements of Cash Flows | | |
| for the years ended March 31, 2009 and March 31, 2008 | | 34 |
| | | |
| Notes to Consolidated Financial Statements | | 35 |
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Advanced Photonix, Inc.
Ann Arbor, Michigan
We have audited the accompanying consolidated balance sheets of Advanced Photonix, Inc. as of March 31, 2009 and March 31, 2008 and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended. In connection with our audits of the financial statements, we have also audited the financial statement schedule for the years ended March 31, 2009 and March 31, 2008 included at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advanced Photonix, Inc. at March 31, 2009 and March 31, 2008, and the results of its operations and its cash flows for the years then ended,in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ BDO Seidman LLP
Troy, Michigan
June 26, 2009
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| ADVANCED PHOTONIX, INC. |
| CONSOLIDATED BALANCE SHEETS |
| | March 31, 2009 | | March 31, 2008 |
| ASSETS | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 2 ,072,000 | | | $ | 82,000 | |
| Restricted cash | | | 500,000 | | | | 1,500,000 | |
| Accounts receivable, net of allowance for doubtful accounts of $62,000 and | | | | | | | | |
| $14,000, respectively | | | 3,284,000 | | | | 3,202,000 | |
| Inventories | | | 3,669,000 | | | | 4,131,000 | |
| Prepaid expenses and other current assets | | | 252,000 | | | | 195,000 | |
| Total current assets | | | 9,777,000 | | | | 9,110,000 | |
| | | | | | | | | |
| Equipment and leasehold improvements, net | | | 4,322,000 | | | | 4,757,000 | |
| Other assets | | | | | | | | |
| Goodwill | | | 4,579,000 | | | | 4,579,000 | |
| Intangibles, net | | | 8,975,000 | | | | 10,871,000 | |
| Certificate of deposit | | | 278,000 | | | | 276,000 | |
| Security deposits and other assets | | | 110,000 | | | | 110,000 | |
| Total other assets | | | 13,942,000 | | | | 15,836,000 | |
| Total Assets | | $ | 28,041,000 | | | $ | 29,703,000 | |
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Line of credit | | $ | - | | | $ | 1,300,000 | |
| Accounts payable | | | 1,356,000 | | | | 1,339,000 | |
| Accrued compensation | | | 1,037,000 | | | | 527,000 | |
| Accrued interest | | | 513,000 | | | | 287,000 | |
| Other accrued expenses | | | 615,000 | | | | 440,000 | |
| Current portion of long-term debt, related parties | | | 1,401,000 | | | | 900,000 | |
| Current portion of long-term debt, MEDC | | | 353,000 | | | | 62,000 | |
| Current portion of long-term debt, bank term loan | | | 434,000 | | | | -- | |
| Current portion of long-term debt, capital lease obligations | | | -- | | | | 460,000 | |
| Total current liabilities | | | 5,709,000 | | | | 5,315,000 | |
| Long-term debt, less current portion - MEDC | | | 1,871,000 | | | | 2,249,000 | |
| Long-term debt – bank line of credit | | | 1,394,000 | | | | -- | |
| Long-term debt, less current portion – bank term loan | | | 1,121,000 | | | | -- | |
| Long-term debt, less current portion - related parties | | | -- | | | | 951,000 | |
| Long-term debt, less current portion - capital lease obligations | | | -- | | | | 1,457,000 | |
| Total liabilities | | | 10,095,000 | | | | 9,972,000 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| Shareholders' equity: | | | | | | | | |
| Class A redeemable convertible preferred stock, $.001 par value; 780,000 | | | | | | | | |
| shares authorized; 40,000 shares outstanding | | | -- | | | | -- | |
| Class ACommon Stock, $.001 par value, 100,000,000 authorized; 2009– | | | | | | | | |
| 24,089,726 shares issued and outstanding; 2008 – 23,977,678 shares issued and | | | | | | | | |
| outstanding | | | 24,000 | | | | 24,000 | |
| Class BCommon Stock, $.001 par value; 4,420,113 shares authorized, 2009 and | | | | | | | | |
| 2008 - 31,691 issued and outstanding | | | -- | | | | -- | |
| Additional paid-in capital | | | 52,400,000 | | | | 52,150,000 | |
| Accumulated deficit | | | (34,478,000 | ) | | | (32,443,000 | ) |
| Total shareholders' equity | | | 17,946,000 | | | | 19,731,000 | |
| Total Liabilities and Shareholders’ Equity | | $ | 28,041,000 | | | $ | 29,703,000 | |
See Notes to Consolidated Financial Statements.
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| ADVANCED PHOTONIX, INC. |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| For the Fiscal Years Ended March 31, 2009 and 2008 |
| | 2009 | | 2008 |
| Sales, net | | $ | 29,675,000 | | | $ | 23,215,000 | |
| Cost of products sold | | | 16,744,000 | | | | 14,340,000 | |
| Gross profit | | | 12,931,000 | | | | 8,875,000 | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| Research and development expenses | | | 4,676,000 | | | | 4,218,000 | |
| Sales and marketing expenses | | | 2,659,000 | | | | 2,312,000 | |
| General and administrative expenses | | | 4,871,000 | | | | 4,593,000 | |
| Amortization expense – intangible assets | | | 2,081,000 | | | | 1,963,000 | |
| Dodgeville consolidation expenses | | | -- | | | | 534,000 | |
| Wafer fabrication relocation expenses | | | 300,000 | | | | 1,256,000 | |
| Total operating expenses | | | 14,587,000 | | | | 14,876,000 | |
| Loss from operations | | | (1,656,000 | ) | | | (6,001,000 | ) |
| | | | | | | | | |
| Other income (expense): | | | | | | | | |
| Interest income | | | 28,000 | | | | 96,000 | |
| Interest expense on bank & MEDC loans | | | (311,000 | ) | | | (419,000 | ) |
| Interest expense related to convertible notes | | | -- | | | | (268,000 | ) |
| Interest expense, warrant discount | | | -- | | | | (1,672,000 | ) |
| Interest expense, related parties | | | (94,000 | ) | | | (162,000 | ) |
| Other income (expense) | | | (2,000 | ) | | | 23,000 | |
| Total other income and (expenses) | | | (379,000 | ) | | | (2,402,000 | ) |
| Loss before provision (benefit) for income taxes | | | (2,035,000 | ) | | | (8,403,000 | ) |
| | | | | | | | | |
| Provision (benefit) for income taxes: | | | | | | | | |
| Provision (benefit) for income taxes - deferred | | | -- | | | | 1,225,000 | |
| Total provision (benefit) for income taxes | | | -- | | | | 1,225,000 | |
| Net loss | | $ | (2,035,000 | ) | | $ | (9,628,000 | ) |
| | | | | | | | | |
| Basic and diluted loss per share | | $ | (0.08 | ) | | $ | (0.44 | ) |
| | | | | | | | | |
| Weighted average common shares outstanding | | | 24,074,000 | | | | 21,770,000 | |
See Notes to Consolidated Financial Statements.
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| ADVANCED PHOTONIX, INC. |
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY |
| For the Fiscal Years Ended March 31, 2009 and 2008 |
| (In thousands, except share data) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A | | Class A | | Class A | | Class A | | Class B | | Class B | | Additional | | | | | | | | |
| | Common | | Common | | Preferred | | Preferred | | Common | | Common | | Paid-in | | Accumulated | | | | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Total |
| BALANCE, | | | | | | | | | | | | | | | | | | | | | | | | | | |
| MARCH 31, 2007 | | 19,226,006 | | $ | 19 | | -- | | $ | -- | | 31,691 | | $ | -- | | $ | 43,887 | | $ | (22,815 | ) | | $ | 21,091 | |
| Exercise of stock options | | 98,200 | | | -- | | -- | | | -- | | -- | | | -- | | | 76 | | | -- | | | | 76 | |
| Reclassification of Class A | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Preferred | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock to equity | | -- | | | -- | | 40,000 | | | -- | | -- | | | -- | | | 32 | | | -- | | | | 32 | |
| Stock based compensation | | -- | | | -- | | -- | | | -- | | -- | | | -- | | | 230 | | | -- | | | | 230 | |
| Shares issued upon | | | | | | | | | | | | | | | | | | | | | | | | | | |
| conversion of notes payable | | 1,601,323 | | | 2 | | -- | | | -- | | -- | | | -- | | | 3,150 | | | -- | | | | 3,152 | |
| Warrants exercised | | 86,817 | | | -- | | -- | | | -- | | -- | | | -- | | | 151 | | | -- | | | | 151 | |
| Issuance of common stock | | 2,965,332 | | | 3 | | -- | | | -- | | -- | | | -- | | | 4,318 | | | -- | | | | 4,321 | |
| Adjustment of discount on | | | | | | | | | | | | | | | | | | | | | | | | | | |
| convertible notes (anti- | | | | | | | | | | | | | | | | | | | | | | | | | | |
| dilution adjustment) | | -- | | | -- | | -- | | | -- | | -- | | | -- | | | 306 | | | -- | | | | 306 | |
| Net loss | | -- | | | -- | | -- | | | -- | | -- | | | -- | | | -- | | | (9,628 | ) | | | (9,628 | ) |
| BALANCE, | | | | | | | | | | | | | | | | | | | | | | | | | | |
| MARCH 31, 2008 | | 23,977,678 | | $ | 24 | | 40,000 | | $ | -- | | 31,691 | | $ | -- | | $ | 52,150 | | $ | (32,443 | ) | | $ | 19,731 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercise of stock options | | 56,310 | | | -- | | -- | | | -- | | -- | | | -- | | | 46 | | | -- | | | | 46 | |
| Issuance of restricted shares | | 55,738 | | | -- | | -- | | | -- | | -- | | | -- | | | -- | | | -- | | | | -- | |
| Stock based compensation | | -- | | | -- | | -- | | | -- | | -- | | | -- | | | 204 | | | -- | | | | 204 | |
| Net loss | | -- | | | -- | | -- | | | -- | | -- | | | -- | | | -- | | | (2,035 | ) | | | (2,035 | ) |
| BALANCE, | | | | | | | | | | | | | | | | | | | | | | | | | | |
| MARCH 31, 2009 | | 24,089,726 | | $ | 24 | | 40,000 | | $ | -- | | 31,691 | | $ | -- | | $ | 52,400 | | $ | (34,478 | ) | | $ | 17,946 | |
See Notes to Consolidated Financial Statements.
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| ADVANCED PHOTONIX, INC. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| For the fiscal years ended March 31, 2009 and 2008 |
| | 2009 | | 2008 |
| Cash flows from operating activities: | | | | | | | | |
| Net loss | | $ | (2,035,000 | ) | | $ | (9,628,000 | ) |
| Adjustment to reconcile net loss to net cash provided by (used in) operating activities | | | | | | | | |
| Depreciation | | | 1,157,000 | | | | 1,130,000 | |
| Amortization | | | 2,081,000 | | | | 2,033,000 | |
| Stock based compensation expense | | | 204,000 | | | | 230,000 | |
| Amortization, convertible note discount | | | -- | | | | 1,672,000 | |
| Deferred income taxes | | | -- | | | | 1,225,000 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (82,000 | ) | | | 385,000 | |
| Inventories | | | 462,000 | | | | 308,000 | |
| Prepaid expenses and other current assets | | | (57,000 | ) | | | 70,000 | |
| Other assets | | | (2,000 | ) | | | 41,000 | |
| Accounts payable | | | 17,000 | | | | (62,000 | ) |
| Accrued expenses | | | 911,000 | | | | (772,000 | ) |
| Net cash provided by (used in) operating activities | | | 2,656,000 | | | | (3,368,000 | ) |
| Cash flows from investing activities: | | | | | | | | |
| Capital expenditures | | | (721,000 | ) | | | (1,151,000 | ) |
| Change in restricted cash | | | 1,000,000 | | | | -- | |
| Patent expenditures | | | (186,000 | ) | | | (195,000 | ) |
| Net cash provided by (used in) investing activities | | | 93,000 | | | | (1,346,000 | ) |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from capital lease financing | | | -- | | | | 433,000 | |
| Payments on capital lease financing | | | (1,917,000 | ) | | | (383,000 | ) |
| Proceeds from bank term loan | | | 1,736,000 | | | | -- | |
| Payment on bank term loan | | | (181,000 | ) | | | -- | |
| Net borrowings (repayments) on revolving line of credit | | | 94,000 | | | | 559,000 | |
| Payments of convertible note - net of conversion into common stock of | | | -- | | | | (2,375,000 | ) |
| $3,150,000 | | | | | | | | |
| Net proceeds (repayments) from MEDC term loan | | | (88,000 | ) | | | 790,000 | |
| Net proceeds from equity financing | | | -- | | | | 4,321,000 | |
| Proceeds from exercise of warrants | | | -- | | | | 151,000 | |
| Payments on related party debt | | | (450,000 | ) | | | (550,000 | ) |
| Proceeds from exercise of stock options | | | 46,000 | | | | 76,000 | |
| Net cash provided by (used in) financing activities | | | (759,000 | ) | | | 3,022,000 | |
| Net increase (decrease) in cash and cash equivalents | | | 1,990,000 | | | | (1,692,000 | ) |
| Cash and cash equivalents, beginning of year | | | 82,000 | | | | 1,774,000 | |
| Cash and cash equivalents, end of year | | $ | 2,072,000 | | | $ | 82,000 | |
| | | | | | | | | |
| Supplemental cash flow information: | | | 2009 | | | | 2008 | |
| Cash paid for interest | | $ | 265,000 | | | $ | 745,000 | |
| Cash paid for income taxes | | $ | 32,000 | | | $ | 81,000 | |
| | | | | | | | | |
| Supplemental disclosure of non-cash operating, investing and financing activities | | | | | | | | |
| Adjustment of discount on convertible notes (anti-dilution adjustment) | | | -- | | | | (306,000 | ) |
See Notes to Consolidated Financial Statements.
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ADVANCED PHOTONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009 and 2008
1. The Company
Advanced Photonix, Inc.® (the Company, we or API), was incorporated under the laws of the State of Delaware in June 1988. The Company is engaged in the development and manufacture of optoelectronic devices and value-added sub-systems and systems. The Company serves a variety of global Original Equipment Manufacturers (OEMs), in a variety of industries. The Company supports the customers from the initial concept and design phase of the product, through testing to full-scale production. The Company has two manufacturing facilities located in Camarillo, California and Ann Arbor, Michigan.
2. Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries (Silicon Sensors Inc. & Picometrix LLC). All significant inter-company balances and transactions have been eliminated in consolidation.
Reclassifications – Certain prior year balances have been reclassified in the consolidated financial statements to conform to the current year presentation.
Operating Segment Information – Statement of Financial Accounting Standards No. (SFAS) 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes annual and interim reporting standards for operating segments and requires certain disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenue, and its major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. API’s chief operating decision makers are its chief executive officer and chief financial officer, who review financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. API has one business activity, and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level, nor does API track gross margins by product, product line or market served. Accordingly, API considers its business to be in a single reportable segment.The Company’s products are light and radiation detection devices. The nature of the production process is similar for all product lines, and manufacturing for the different product lines occurs in common facilities. Generally, the same engineers with the same qualifications design and manufacture products for all product lines. The types and class of customers are similar across all product lines, and products are distributed through common channels and distributor networks.
Pervasiveness of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments – The carrying value of all financial instruments potentially subject to valuation risk (principally consisting of cash equivalents, accounts receivable, accounts payable, and debt) approximates fair value based upon the short term nature of these instruments, and in the case of debt, the prevailing interest rates available to the Company.
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.
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Compensating Cash Balance – During FY 2009; the Company terminated its Line of Credit loan agreement with Fifth Third Bank, which required a compensating balance of $1.5 million and established a new Line of Credit Agreement with The PrivateBank and Trust Company with a minimum compensating balance requirement of $500,000. This amount has been separately disclosed on the accompanying balance sheets as restricted cash.
Accounts Receivable – Receivables are stated at amounts estimated by management to be the net realizable value. The allowance for doubtful accounts is based on specific identification. Accounts receivable are charged off when it becomes apparent, based upon age or customer circumstances, that such amounts will not be collected.
Accounts receivable are unsecured and the Company is at risk to the extent such amount becomes uncollectible. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. Any unanticipated change in the customers’ credit worthiness or other matters affecting the collectability of amounts due from such customers could have a material effect on the results of operations in the period in which such changes or events occur. As of March 31, 2009, one customer comprised 10% or more of accounts receivable. As of March 31, 2008, no customer comprised 10% or more of accounts receivable.
Concentration of Credit Risk – Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash equivalents and trade accounts receivable. The Company maintains cash balances at four financial institutions that are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. As of March 31, 2009, the Company had cash at one financial institution in excess of federally insured amounts. As excess cash is available, the Company invests in short-term and long-term investments, primarily consisting of Government Securities Money Market instruments and Repurchase agreements. As of March 31, 2009 and March 31, 2008, cash deposits held at financial institutions in excess of FDIC insured amounts were $2.0 million and $1.4 million, respectively.
Inventories – Inventories, which include material, labor and manufacturing overhead, are stated at standard cost (which approximates the first in, first out method) or market. Slow moving and obsolete inventories are reviewed throughout the year. To calculate a reserve for obsolescence, we begin with a review of our slow moving inventory. Any inventory, which has been slow moving within the past 12 months, is evaluated and reserved if deemed appropriate. In addition, any residual inventory, which is customer specific and remaining on hand at the time of contract completion, is reserved for at the standard unit cost. The complete list of slow moving and obsolete inventory is then reviewed by the production, engineering and/or purchasing departments to identify items that can be utilized in the near future. These items are then excluded from the analysis and the remaining amount of slow-moving and obsolete inventory is then reserved for. Additionally, non-cancelable open purchase orders for parts we are obligated to purchase where demand has been reduced may be reserved. Reserves for open purchase orders where the market price is lower than the purchase order price are also established. If a product that had previously been reserved for is subsequently sold, the amount of reserve specific to that item is then reversed.
Equipment and Leasehold Improvements – Equipment and leasehold improvements are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, as follows:
| Leasehold Improvements | Term of lease or useful life, |
| | whichever is less |
| Machinery and Equipment | 5 – 7 years |
| Office Furniture | 3 – 7 years |
| Computer Hardware | 3 – 7 years |
| Computer Software | 3 – 5 years |
| Automobiles | 5 years |
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Patents - Patents represent costs incurred in connection with patent applications. Such costs are amortized using the straight-line method over the useful life of the patent once issued, or expensed immediately if any specific application is unsuccessful.
Impairment of Long-Lived Assets and Goodwill -In accordance with SFAS No. 142,“Goodwill and Other Intangible Assets”, goodwill andintangible assets that are not subject to amortization shall be tested for impairment annually on March 31st for the Company or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test shall consist of a comparison of the fair value of the asset with its carrying amount, as defined. SFAS 142 requires a two-step method for determining goodwill impairment. Step one is to compare the fair value of the reporting unit with the unit’s carrying amount, including goodwill. If this test indicates that the fair value is less than the carrying value, then step two is required to compare the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess.
The Company determines the fair value of our single reporting unit to be equal to our market capitalization plus a control premium. Market capitalization is determined by multiplying the shares outstanding on the assessment date by the average market price of our common stock over a 10-day period before and a 10-day period after each assessment date. We use this 20-day duration to consider inherent market fluctuations that may affect any individual closing price. We believe that our market capitalization alone does not fully capture the fair value of our business as a whole, or the substantial value that an acquirer would obtain from its ability to obtain control of our business. As such, in determining fair value, we add a control premium — which seeks to give effect to the increased consideration a potential acquirer would be required to pay in order to gain sufficient ownership to set policies, direct operations and make decisions related to our company — to our market capitalization.
As of March 31, 2008 our market capitalization, calculated as described above, was $31.8 million and our carrying value, including goodwill, was $19.7 million. Because market capitalization significantly exceeded our carrying value, our estimate of the control premium was not a determining factor in the outcome of step one of the impairment assessment. As of March 31, 2009, our market capitalization calculated as described above, had fallen to $17.1 million and our carrying value, including goodwill, had decreased to $17.9 million. We applied a 25% control premium to market capitalization to determine a fair value of $21.4 million. We believe that including a control premium at this level is supported by recent transaction data in our industry. The Company's evaluation for the fiscal year ended March 31, 2009, indicated there were no impairments. Absent the inclusion of a control premium greater than 4% for FY 2009, our carrying value would have exceeded fair value, requiring a step two analysis which may have resulted in an impairment of goodwill.
In accordance with SFAS No. 144,“Accounting for the Impairment or Disposal of Long-lived Assets”,the carrying value of long-lived assets, including amortizable intangibles and equipment and leasehold improvements, are evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred relative to a given asset or assets. Impairment is deemed to have occurred if projected undiscounted cash flows associated with an asset are less than the carrying value of the asset. The estimated cash flows include management’s assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. The amount of the impairment loss recognized is equal to the excess of the carrying value of the asset over its then estimated fair value. The Company’s evaluation for the fiscal year ended March 31, 3009, indicated there were no impairments.
Revenue Recognition – Revenue is derived principally from the sales of the Company’s products. The Company recognizes revenue when the basic criteria of Staff Accounting Bulletin No. 104 are met. Specifically, the Company recognizes revenue when persuasive evidence of an arrangement exists, usually in the form of a purchase order, when shipment has occurred since its terms are FOB source, or when services have been rendered, title and risk of loss have passed to the customer, the price is fixed or determinable and collection is reasonably assured in terms of both credit worthiness of the customer and there are no post shipment obligations or uncertainties with respect to customer acceptance.
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The Company sells certain of its products to customers with a product warranty that provides warranty repairs at no cost. The length of the warranty term is one year from date of shipment. The Company accrues the estimated exposure to warranty claims based upon historical claim costs. The Company’s management reviews these estimates on a regular basis and adjusts the warranty provisions as actual experience differs from historical estimates or as other information becomes available.
The Company does not provide price protection or general right of return. The Company’s return policy only permits product returns for warranty and non-warranty repair or replacement and requires pre-authorization by the Company prior to the return. Credit or discounts, which have been historically insignificant, may be given at the discretion of the Company and are recorded when and if determined.
The Company predominantly sells directly to original equipment manufacturers with a direct sales force. The Company sells in limited circumstances through distributors. Sales through distributors represent approximately 5% of total revenue. Significant terms and conditions of distributor agreements include FOB source, net 30 days payment terms, with no return or exchange rights, and no price protection. Since the product transfers title to the distributor at the time of shipment by the Company, the products are not considered inventory on consignment.
Revenue is also derived from technology research and development contracts. We recognize revenue from these contracts as the services and/or materials are provided.
Significant Customers– During fiscal years ended March 31, 2009 and March 31, 2008, no single customer accounted for more than 10% of the Company’s net sales.
Product Warranty – The Company generally sells products with a limited warranty of product quality. The Company accrues for known warranty issues if a loss is probable and can be reasonably estimated, and accrues for estimated incurred but unidentified issues based on historical activity. The accruals, and the related expenses, for known issues and for estimated incurred but unidentified issues were not significant during the periods presented.
The following table presents the movement in the product warranty liability for the years ended March 31, 2009 and March 31, 2008
| | Years ended March 31, |
| | 2009 | 2008 |
| Beginning balance | $ | 85,000 | | $ | 83,000 |
| Current period accruals | | 76,000 | | | 2,000 |
| Used for purpose intended | | (23,000 | ) | | ---- |
| Ending balance | $ | 138,000 | | $ | 85,000 |
Shipping and Handling Costs - The Company’s policy is to classify shipping and handling costs as a component of Costs of Products Sold in the Statement of Operations.
Research and Development Costs – The Company charges all research and development costs, including costs associated with development contract revenues, to expense when incurred. Manufacturing costs associated with the development of a new fabrication process or a new product are expensed until such times as these processes or products are proven through final testing and initial acceptance by the customer. Costs related to revenues on non-recurring engineering services billed to customers are generally classified as cost of product sales. The Company generally retains intellectual property rights related to paid research and development contracts.
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Advertising Costs– Advertising costs are expensed as incurred. Advertising expense was approximately $127,000 and $106,000 in FY 2009 and FY 2008, respectively.
Accounting for Stock Based Compensation –The Company accounts for stock-based incentives plans in accordance with Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”(SFAS No. 123(R)). Accordingly, the Company estimates the fair value of stock-based awards utilizing the Black-Scholes pricing model. The fair value of the awards is amortized as compensation expense on a straight-line basis over the requisite service period of the award, which is generally the vesting period.
Accounting for Income Taxes - Income tax provisions are provided for taxes currently payable or refundable, and for deferred income taxes arising from future tax consequences of events that were recognized in the Company’s financial statements or tax returns. The effects of income taxes are measured based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse. If necessary, a valuation allowance is established to reduce deferred income tax assets to an amount that will more likely than not be realized in accordance with SFAS No. 109“Accounting for Income Taxes”.
The calculation of federal income taxes involves dealing with uncertainties in the application of complex tax regulations. On January 1, 2007, the Company adopted FASB Interpretation No. 48“Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109”(“FIN 48”). As a result of the implementation of FIN 48, we recognize liabilities for uncertain tax positions based on the two-step process prescribed in the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on an annual basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. The application of FIN 48 has not had an impact on our financial statements or results of operations and we have taken no tax positions which would require disclosure under the new guidance. Although the IRS is not currently examining any of our income tax returns, tax years 2005 to 2008 remain open and are subject to examination.
Earnings per Share - The Company presents both basic and diluted earnings (loss) per share (EPS) amounts. Basic EPS is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS amounts are based upon the weighted average number of common and common equivalent shares outstanding during the period. The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. The total shares excluded from the computation of earnings per share for the year ended March 31, 2009 totaled 56,000 shares, representing outstanding stock options and warrants convertible into shares of common stock. The total shares excluded from the computation of earnings per share for the year ended March 31, 2008 totaled 426,000 shares, representing outstanding stock options and warrants convertible into shares of common stock.
Recent Pronouncements and Accounting Changes
In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements”(“SFAS No. 157”),whichdefines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement is effective for the fiscal years beginning after November 15, 2007. However, inFebruary 2008, the FASB issued FASB Statement of Position (FSP) FAS No. 157-2, “Effective Date of FASB Statement No. 157”.This FSP delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The adoption of SFAS No. 157 did not have a material impact on our consolidated financial statements.
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In October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Is Asset Not Active” (“FAS No. 157-3”) with an immediate effective date, including prior periods for which financial statements have not been issued. FSP FAS No. 157-3 clarifies the application of fair value in inactive markets and allows for the use of management’s internal assumptions about future cash flows with appropriately risk-adjusted discount rates when relevant observable market data does not exist. The objective of FAS No. 157 has not changed and continues to be the determination of the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date. The adoption of FSP FAS No. 157-3 did not have a material effect on the Company’s results of operations, financial position or liquidity.
In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities”(“SFAS No. 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 also includes an amendment to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” which applies to all entities with available-for-sale and trading securities. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The adoption of this pronouncement had no impact on our financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007),“Business Combinations” (“SFAS No. 141(R)”). The objective of SFAS No. 141(R) is to improve reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable and relevant information for investors and other users of financial statements. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) is effective as of the start of fiscal years beginning after December 15, 2008. Early adoption is not allowed. The adoption of SFAS No. 141(R) will change our accounting treatment for business combinations on a prospective basis beginning April 1, 2009.
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 improves the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report non-controlling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and non-controlling interests by requiring them to be treated as equity transactions. SFAS No. 160 is effective as of the start of fiscal years beginning after December 15, 2008. Early adoption is not allowed. Since the Company currently has no minority interest, adoption of this standard will have no impact on our financial position, results of operations or cash flows.
In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB No. 110”) to amend the SEC’s views discussed in Staff Accounting Bulletin No. 107 (“SAB No. 107”) regarding the use of the simplified method in developing an estimate of expected life of share options in accordance with SFAS No. 123(R). SAB No. 110 is effective for us beginning April 1, 2007. The Company currently uses reasonable estimates of expected life in accordance with SAB No. 107, as amended by SAB No. 110.
In April 2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3,“Determination of the Useful Life of Intangible Assets”(”FSP No. FAS 142-3”).The final FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,“Goodwill and Other Intangible Assets”. The FSP is intended to improve the consistency between the useful life of an intangible asset determined under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007),“Business Combinations”,and other US generally accepted accounting principles. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact, if any, FSP No. FAS 142-3 will have on its consolidated financial statements.
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In May 2008, the FASB issued FASB Staff Position (FSP) No. APB 14-1. This FSP clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”. Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is in the process of evaluating the impacts, if any, of adopting this FSP.
In June 2008, the FASB ratified the consensus reached by the Emerging Issues Task Force, EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 addresses how an entity should evaluate whether an instrument is indexed to its own stock. The consensus is effective for fiscal years (and interim periods) beginning after December 15, 2008. The consensus must be applied to outstanding instruments as of the beginning of the fiscal year in which the consensus is adopted and should be treated as a cumulative-effect adjustment to the opening balance of retained earnings. Early adoption is not permitted. The Company is in the process of evaluating the impacts, if any, of adopting this EITF.
In June 2008, the FASB issued FASB Staff Position (“FSP”) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of basic earnings per share pursuant to the two-class method described in SFAS No. 128, “Earnings per Share”. All prior period earnings per share data presented shall be adjusted retrospectively to conform to the provisions of this FSP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Early application is prohibited. The Company is in the process of evaluating the impact, if any, of adopting this FSP.
In April 2009, the FASB issued FASB Staff Position (“FSP”) FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP FAS 141(R)-1 provides guidance for determining the acquisition-date fair value of assets acquired and liabilities assumed in a business combination that arise from contingencies, and provides guidance on how to account for these assets and liabilities subsequent to the completion of a business combination. FSP FAS 141(R)-1 also requires increased disclosures on assets acquired and liabilities assumed in a business combination that arise from contingencies. FSP FAS 141(R)-1 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of FSP FAS 141(R)-1 will change our accounting treatment for business combinations on a prospective basis beginning April 1, 2009.
3. Inventories
Inventories consisted of the following at March 31:
| | | | 2009 | | 2008 |
| Raw material | | $ | 3,316,000 | | | $ | 3,260,000 | |
| Work-in-process | | | 808,000 | | | | 1,626,000 | |
| | Finished products | | | 392,000 | | | | 229,000 | |
| Total inventories | | | 4,516,000 | | | | 5,115,000 | |
| Less reserve | | | (847,000 | ) | | | (984,000 | ) |
| Inventories, net | | $ | 3,669,000 | | | $ | 4,131,000 | |
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4. Equipment and Leasehold Improvements
Equipment and leasehold improvements consisted of the following at March 31:
| | | | 2009 | | 2008 |
| Machinery and equipment | | $ | 8,117,000 | | | $ | 7,912,000 | |
| Furniture and fixtures | | | 715,000 | | | | 715,000 | |
| Leasehold improvements | | | 969,000 | | | | 952,000 | |
| | Computer hardware equipment | | | 611,000 | | | | 564,000 | |
| Vehicles | | | 26,000 | | | | 26,000 | |
| Capitalized software | | | 808,000 | | | | 419,000 | |
| Total assets | | | 11,246,000 | | | | 10,588,000 | |
| Accumulated depreciation | | | (7,148,000 | ) | | | (6,090,000 | ) |
| | | | 4,098,000 | | | | 4,498,000 | |
| Construction-in-process | | | 224,000 | | | | 259,000 | |
| Net equipment and leasehold improvements | | $ | 4,322,000 | | | $ | 4,757,000 | |
The estimated cost to complete the construction-in-process is not considered significant.
Depreciation expense was approximately $1.2 million for fiscal year ended March 31, 2009 and $1.1 million for fiscal year ended March 31, 2008.
5. Intangible Assets and Goodwill
Intangible assets that have definite lives consist of the following (in thousands):
| | | | | March 31, 2009 | | | March 31, 2008 | |
| | | Weighted | | Amortization | | Carrying | | Accumulated | | Intangibles | | | Carrying | | Accumulated | | Intangibles | |
| | | Average | | Method | | Value | | Amortization | | Net | | | Value | | Amortization | | Net | |
| | | Lives | | | | | | | | | | | | | | | | | | | | | | |
| Non-Compete | | 3 | | Cash Flow | | $ | 130 | | $ | 130 | | $ | -- | | | $ | 130 | | $ | 117 | | $ | 13 | |
| agreement | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer list | | 15 | | Straight | | | 475 | | | 334 | | | 141 | | | | 475 | | | 322 | | | 153 | |
| | | | | Line | | | | | | | | | | | | | | | | | | | | |
| Trademarks | | 15 | | Cash Flow | | | 2,270 | | | 514 | | | 1,756 | | | | 2,270 | | | 391 | | | 1,879 | |
| Customer | | 5 | | Cash Flow | | | 1,380 | | | 726 | | | 654 | | | | 1,380 | | | 450 | | | 930 | |
| relationships | | | | | | | | | | | | | | | | | | | | | | | | |
| Technology | | 10 | | Cash Flow | | | 10,950 | | | 5,231 | | | 5,719 | | | | 10,950 | | | 3,592 | | | 7,358 | |
| Patents | | | | | | | 502 | | | -- | | | 502 | | | | 424 | | | -- | | | 424 | |
| pending | | | | | | | | | | | | | | | | | | | | | | | | |
| Patents | | 10 | | Straight | | | 295 | | | 92 | | | 203 | | | | 187 | | | 73 | | | 114 | |
| | | | | Line | | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | $ | 16,002 | | $ | 7,027 | | $ | 8,975 | | | $ | 15,816 | | $ | 4,945 | | $ | 10,871 | |
| Intangibles | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization expense for the fiscal year ended March 31, 2009 was approximately $2.1 million compared to $2.0 million for the year ended March 31, 2008. Patent amortization expense, included above, was approximately $19,000 and $11,000 in FY 2009 and 2008, respectively. The current patents held by the Company have remaining useful lives ranging from 2 years to 20 years.
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Assuming no impairment to the intangible value, future amortization expense for intangible assets and patents are as follows:
| | Intangible Assets | | | Patents (a) |
| 2010 | $ | 2,035,000 | | 2010 | $ | 24,000 |
| 2011 | | 1,584,000 | | 2011 | | 24,000 |
| 2012 | | 1,305,000 | | 2012 | | 24,000 |
| 2013 | | 1,088,000 | | 2013 | | 24,000 |
| 2014 | | 901,000 | | 2014 | | 24,000 |
| 2015 & after | | 1,357,000 | | 2015 & after | | 83,000 |
| Total | $ | 8,270,000 | | Total | $ | 203,000 |
| a) | | Patent pending costs of $502,000 are not included in the chart above. These costs will be amortized beginning the month the patents are granted. |
6. Line of Credit
On March 6, 2007, the Company and Fifth Third Bank entered into a Revolving Line of Credit (the Loan Agreement) providing for borrowings of up to a maximum of $2.0 million at an interest rate equal to the prime rate. On November 13, 2007, the Loan Agreement was amended to increase the principal amount available to $3.0 million. At March 31, 2008, the Company did not meet the debt service coverage ratio covenant and the Loan Agreement was subsequently amended on June 30, 2008 to reduce the principal amount available to $2.5 million and to amend the interest rate to be equal to prime plus 2%.
On September 25, 2008, the Company terminated the Loan Agreement with Fifth Third Bank and established a credit facility with The PrivateBank and Trust Company. As part of this new banking relationship, the Company established a three year Line of Credit of $3.0 million at an interest rate of prime plus 1%, adjusted quarterly. The prime rate at March 31, 2009 was 3.25%. The new facility contains customary representations, warranties and financial covenants including minimum debt service coverage ratio, Adjusted EBITDA level, and Net Worth requirements (as defined in the agreement). The principal loan amount is due on September 25, 2011, provided that if existing loans to the Company by the Michigan Economic Development Corporation have not converted to equity on or before August 31, 2011, the outstanding principal shall be due on August 31, 2011. The availability under the new facility will be determined by the calculation of a borrowing base that includes a percentage of accounts receivable and inventory.
At March 31, 2009, the Company was in compliance with the debt service coverage ratio and Net Worth requirements, but was not in compliance with the Adjusted EBITDA level. The Company has received a waiver from the bank regarding the default and entered into an amendment to the loan agreement on May 29, 2009 effective March 31, 2009. According to the terms of the amended loan agreement, the Adjusted EBITDA level is measured on a year to date basis for the June 30, 2009, September 30, 2009, December 31, 2009 and March 31, 2010 test dates and thereafter on a trailing four quarter basis. In addition, the Debt Service Coverage ratio and the Net Worth covenants were amended. The amended minimum Debt Service Coverage ratio is 1.0 to 1.0 for the first quarter, 1.25 to 1.0 for the second quarter and 1.5 to 1.0 thereafter. The amended minimum Net Worth covenant is $15.5 million and will increase by 10% of Net Income for each fiscal year that the Company reports net income.
The line of credit is guaranteed by each of API’s wholly-owned subsidiaries and the loan is secured by a Security Agreement among API, its subsidiaries and The PrivateBank, pursuant to which API and its subsidiaries granted to The PrivateBank a first-priority security interest in certain described assets. The outstanding balance as of March 31, 2009 is $1.4 million.
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7. Long-Term Debt and Notes Payable
Convertible Debt -During FY 2005 the Company issued $5.0 million aggregate principal amount of its senior convertible notes (Convertible Debt 1st Tranche) and during FY 2006, the Company issued an additional $5.0 million aggregate principal amount (Convertible Debt 2nd Tranche) to four institutional investors. The notes carried an interest rate of prime plus 1% and had a maturity date of October 2007. In connection with the placement of the convertible notes, the Company issued detachable warrants granting the holders the right to acquire 1,731,145 shares of the Company’s common stock at $1.78 per share for 255,246 shares and $1.744 per share for 1,475,899 shares. The warrants and certain beneficial conversion features were valued at issuance and resulted in an aggregate of $3.7 million of additional paid in capital and debt discount. Approximately $4.5 million of the convertible notes were converted to common stock in FY 2006. In October 2007, $3.150 million of the remaining aggregate senior convertible notes were converted into 1,601,324 shares Class A Common Stock ($1.275 million @ $1.8818 per share and $1.875 million @ $2.0297 per share) and the balance of $2.375 million, plus interest, was retired with cash. Total interest expense related to these convertible notes was $1.9 million in FY 2008, comprised of $1.672 million debt discount amortization and $268,000 of cash interest expense. The Company reported no interest expense for FY 2009 related to convertible notes. As of March 31, 2009, there were warrants to purchase 1,389,082 shares of Class A Common stock outstanding at an exercise price of $1.744 per share, of which 694,541 will expire in April 2010 and 694,541 will expire in April 2011.
As a result of the common stock private placement, completed on September 14, 2007(see note 11), the anti-dilution clause of the Convertible Debt was triggered; increasing the number of shares issuable, if converted, by 104,047 and decreasing the weighted average conversion price to $1.99 from $2.06. In addition the number of warrants increased by 29,500 and the exercise price of the warrants decreased to $1.7444 from $1.78. The Company recorded the intrinsic value attributable to the additional shares and warrants issued of $306,000 as additional debt discount with an offset to Additional Paid in Capital. In accordance with EITF 00-27, the $306,000 was amortized to interest expense over the remaining life of the convertible notes during FY 2008.
Master Lease Agreement -In March, 2007, API, as Lessee, entered into a Master Equipment Lease Agreement with Fifth Third Leasing Company, as Lessor, to finance the purchase of new manufacturing equipment up to an aggregate of $2.3 million (Lease). API purchased equipment under the Lease until June 30, 2007. This Lease was accounted for as a capital lease in accordance with SFAS No. 13. On September 25, 2008, the Company retired the Master Equipment Lease Agreement by paying the remaining principal amount of $1,736,000.
Loan Agreement -On September 25, 2008, the Company established a new credit facility with The PrivateBank and Trust Company. As part of this banking relationship, in addition to the line of credit described in note 6, the Company established an Equipment Installment Loan of $1.736 million amortized over a term of four years, at an interest rate of prime plus 1%. The principal loan amount is due on September 25, 2012, provided that if existing loans to the Company by the Michigan Economic Development Corporation have not converted to equity on or before August 31, 2011, the Loan shall be due on August 31, 2011. The Company utilized the Equipment Installment loan to retire the Master Equipment Lease Agreement with Fifth Third Leasing Company. The balance on this term loan at March 31, 2009 was $1.6 million.
As discussed in Note 6, the Company was not in compliance with the Adjusted EBITDA level requirements. The Company has received a waiver from the bank regarding the default. Based on the amended loan covenants described in Note 6, the Company anticipates that it will meet the loan covenants during FY 2010, and as a result has classified the current and future maturities in accordance with the loan agreement.
MEDC Loans -The Michigan Economic Development Corporation (MEDC) entered into two loan agreements with Picometrix LLC, one in fiscal 2004 (MEDC-loan 1) and one in fiscal 2005 (MEDC-loan 2). Both loans are unsecured.
The MEDC-loan 1 is for $1,025,000 with an interest rate of 7%. Under the original terms of the promissory note, interest accrued but unpaid through October 2008 would be added to then outstanding principal balance of the note and the restated principal would be amortized over the remaining four years (September 15, 2012). Effective September 23, 2008, the MEDC-loan 1 of $1,025,000 was amended and restated to change the start date of repayment of principal and interest from October 2008 to October 2009. Commencing in October 2009, the Company will pay MEDC the restated principal and accrued interest on any unpaid balance over the remaining three years.
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MEDC-loan 2 is for $1.2 million with an interest rate of 7%. Under the original terms of the promissory notes, interest accrued, but unpaid in the first two years of this agreement was added to the then outstanding principal of this promissory note. During the third year of this agreement, the Company was to pay interest on the restated principal of the Note until October 2008, at which time the Company was to repay the restated principal over the remaining three years (September 15, 2011). Effective January 26, 2009, the MEDC-loan 2 of $1.2 million was amended and restated to change the start date of repayment of principal and interest from October 2008 to November 2009 and to extend the repayment period to October 2012. The current and long-term portions included in the March 31, 2009 balance sheet have been classified based on the terms of the January 2009 amendment.
Included in accrued interest at March 31, 2009 is approximately $488,000 of accrued interest that will be rolled into the principal of the MEDC loans when the repayment periods begin as described above.
Related Parties Debt -As a result of the acquisition of Picotronix, Inc. (dba Picometrix, Inc.), the Company issued promissory notes to the stockholders of Picometrix, (Debt to Related Parties) (see note 15). The notes are payable in annual installments of varying amounts through March 2010, as amended in FY 2009. The notes bear interest at a rate of prime plus 1.0% and are secured by all of the intellectual property of Picometrix. API has the option of prepaying the notes without penalty.
| Debt Maturity Table (in 000’s) |
| | | | | | | | | FY2015 |
| | Balance | Balance | | | | | | & |
| | 3/31/08 | 3/31/09 | FY2010 | FY2011 | FY2012 | FY2013 | FY2014 | Beyond |
| Credit Line - The | $ | -- | $ | 1,394 | $ | -- | $ | - | $ | 1,394 | $ | - | $ | - | $ | - |
| Private Bank | | | | | | | | - | | | | - | | - | | - |
| Credit Line - Fifth | | | | | | | | | | | | | | | | |
| Third Bank | | 1,300 | | -- | | -- | | -- | | -- | | -- | | -- | | -- |
| Term Loan – The | | | | | | | | | | | | | | | | |
| Private Bank | | -- | | 1,555 | | 434 | | 434 | | 434 | | 253 | | -- | | -- |
| Debt to Related | | | | | | | | | | | | | | | | |
| Parties | | 1,851 | | 1,401 | | 1,401 | | -- | | -- | | -- | | -- | | -- |
| MEDC loans | | 2,311 | | 2,224 | | 353 | | 892 | | 956 | | 23 | | -- | | -- |
| Capital Lease | | | | | | | | | | | | | | | | |
| Obligation | | 1,917 | | -- | | -- | | -- | | -- | | -- | | -- | | -- |
| TOTAL | $ | 7,379 | $ | 6,574 | $ | 2,188 | $ | 1,326 | $ | 2,784 | $ | 276 | $ | -- | $ | -- |
The Company performed an assessment of the amendments made to its MEDC and related party loans made during FY 2009 to determine whether the amendments constituted a “substantial modification” as defined in SFAS No. 140 (“Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities”), and EITF 96-19 (“Debtor’s Accounting for a Modification or Exchange of Debt Instruments”) and concluded that no substantial modifications were made.
8.Capitalization
The Company’s Certificate of Incorporation provides for two classes of common stock, a Class A for which 100,000,000 shares are authorized for issuance and a Class B for which 4,420,113 shares are authorized for issuance. The par value of each class is $.001. Subject to certain limited exceptions, shares of Class B Common Stock are automatically converted into an equivalent number of Class A shares upon the sale or transfer of the Class B Common Stock by the original holder. The holder of each share of Class A and Class B Common Stock is entitled to one vote per share.
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The Company has authorized 10,000,000 shares of Preferred Stock, of which 780,000 shares have been designated Class A Redeemable Convertible Preferred Stock with a par value of $.001 per share. At March 31, 2009, 40,000 shares of Class A Redeemable Convertible Preferred Stock (Class A Preferred) were issued and outstanding. The Class A convertible preferred stock is redeemable solely at the option of the Company and can also be mandatorily converted by the Comapany into Class A Common Stock at a rate of 3.33 Class A Preferred Stock to one share of Class A Common Stock. The Class A Preferred Stock contains a liquidation preference of $.80 per share, or a total of $32,000 with respect to all such shares outstanding. The Class A Preferred stockholders do not have voting rights except as required by applicable law.
9. Stock Based Compensation
The Company has five stock equity plans: The 1990 Incentive Stock Option and Non-Qualified Stock Option Plan, the 1991 Directors’ Stock Option Plan (The Directors’ Plan), the 1997 Employee Stock Option Plan, the 2000 Stock Option Plan and the 2007 Equity Incentive Plan. As of March 31, 2009, under all of our plans, there were 7,200,000 shares authorized for issuance, with 2,209,510 shares remaining avalable for future grant.
Options typically vest at the rate of 25% per year over four years and are exercisable up to ten years from the date of issuance. Options granted under the Directors’ Plan typically vests at the rate of 50% per year over two years. Under these plans, the option exercise price equals the stock’s market price on the date of grant. Options and restricted stock awards may be granted to employees, officers, directors and consultants. Under the 2007 Equity Incentive Plan, stock options typically vest within four years from grant date and restricted stock awards typically vest within one year.
Stock option transactions for fiscal years 2008 and 2009 are summarized as follows:
| | | Shares (000) | | Weight Average | | Weighted | | Aggregate |
| | | | Exercise Price | | Average | | Intrinsic |
| | | | | | | | Term | | Value |
| | | | | | | | (in years) | | | |
| Outstanding, March 31, 2007 | | 2,540 | | | | $1.90 | | | | | |
| Exercisable, March 31, 2007 | | 1,978 | | | | $1.81 | | | | | |
| |
| Outstanding, March 31, 2007 | | 2,540 | | | | $1.90 | | | | | |
| Granted | | 161 | | | | $1.87 | | | | | |
| Exercised | | (98 | ) | | | $0.78 | | | | | |
| Expired | | (16 | ) | | | $0.08 | | | | | |
| Outstanding, March 31, 2008 | | 2,619 | | | | $1.92 | | | | | |
| Exercisable, March 31, 2008 | | 2,198 | | | | $1.87 | | | | | |
| |
| Outstanding, March 31, 2008 | | 2,619 | | | | $1.92 | | | | | |
| Granted | | 292 | | | | $1.52 | | | | | |
| Exercised | | (57 | ) | | | $0.86 | | | | | |
| Expired | | (108 | ) | | | $1.62 | | | | | |
| Outstanding, March 31, 2009 | | 2,746 | | | | $1.92 | | 5.97 | | | $21,000 |
| Exercisable, March 31, 2009 | | 2,374 | | | | $1.93 | | 5.29 | | | $21,000 |
| Vested & expected to Vest, March 31, 2009 | | 2,676 | | | | $1.92 | | 5.97 | | | $17,000 |
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Information regarding stock options outstanding as of March 31, 2009 is as follows:
| | | | Options Outstanding |
| | | (in 000s) | | Weighted Average | | Weighted Average |
| Price Range | | Shares | | Exercise Price | | Remaining Life |
| $0.50 - $1.25 | | 755 | | $0.75 | | 1.43 |
| $1.50 - $2.50 | | 1,285 | | $1.90 | | 6.89 |
| $2.87 - $5.34 | | 706 | | $3.19 | | 4.75 |
| | | | | Options Exercisable |
| | | (in 000s) | | Weighted Average | | Weighted Average |
| Price Range | | Shares | | Exercise Price | | Remaining Life |
| $0.50 - $1.25 | | 755 | | $0.75 | | 1.43 |
| $1.50 - $2.50 | | 953 | | $1.98 | | 6.25 |
| $2.87 - $5.34 | | 666 | | $3.21 | | 4.63 |
The intrinsic value of options exercised in fiscal years 2009 and 2008 was approximately $48,000 and $116,000, respectively.
During FY 2009, restricted shares were issued to certain individuals. The restricted share transactions are summarized below.
| | Shares (000) | | Weighted Average |
| | | | | Grant Date Fair |
| | | | | Value |
| Unvested, March 31, 2008 | -- | | | -- |
| Granted | 56 | | | $1.68 |
| Vested | (27 | ) | | $1.87 |
| Expired | -- | | | -- |
| Unvested, March 31, 2009 | 29 | | | $1.50 |
The total fair value of restricted shares vesting during FY 2009 was $17,000.
The Company accounts for stock-based incentives plans, in accordance with Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”(SFAS No. 123(R)). Accordingly, the Company estimates the fair value of stock options utilizing the Black-Scholes pricing model. The fair value of the awards is amortized as compensation expense on a straight-line basis over the requisite service period of the award, which is generally the vesting period. The fair value calculations involve significant judgments, assumptions, estimates and complexities that impact the amount of compensation expense to be recorded in current and future periods. The factors include:
- The time period that stock-based awards are expected to remain outstanding has been determined based on the average of the original award period and the remaining vesting period in accordance with the SEC’s short-cut approach pursuant to SAB No. 107, “Disclosure about Fair Value of Financial Statements”. As additional evidence develops from the Company’s stock trading history, the expected term assumption will be refined to capture the relevant trends.
- The future volatility of the Company’s stock has been estimated based on the weekly stock price from the acquisition date of Picometrix LLC (May 2, 2005) to the date of the latest stock grant. As additional evidence develops, the future volatility estimate will be refined to capture the relevant trends.
- A dividend yield of zero has been assumed for awards issued for the years ended March 31, 2009 and March 31, 2008, based on the Company’s actual past experience and the fact that Company does not anticipate paying a dividend on its shares in the near future.
- The Company has based its risk-free interest rate assumption for awards issued during the years ended March 31, 2009 and March 31, 2008 on the implied yield available on U.S. Treasury issues with an equivalent expected term.
- The forfeiture rate for awards issued during the years ended March 31, 2009 and March 31, 2008 were approximately 18.7% and was based on the Company’s actual historical forfeiture trend.
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| Year |
| Ended |
| March 31, 2009 | | March 31, 2008 |
| Option Plan Shares: | | | |
| | | | |
| Expected term (in years) | 6.3 | | 6.3 |
| | | | |
| Volatility | 42.5% | | 49.8% |
| | | | |
| Expected dividend | 0% | | 0% |
| | | | |
| Risk-free interest rate | 2.2% | | 4.4% |
| | | | |
| Weighted-average grant date fair value | $ .71 | | $ 1.09 |
Under the provisions of SFAS No. 123(R), the Company recorded $204,000 and $230,000 of stock compensation expense in our consolidated statements of operations for the years ended March 31, 2009 and March 31, 2008, respectively.
The table below lists the classification of the Stock Based Compensation Expense for the years ended March 31, 2009 and March 31, 2008.
| | 2009 | | 2008 |
| Cost of products sold | | $ | 12,000 | | $ | 15,000 |
| Research and development expense | | | 48,000 | | | 58,000 |
| General and administrative expense | | | 117,000 | | | 143,000 |
| Sales and marketing expense | | | 27,000 | | | 14,000 |
| Total Stock Based Compensation | | $ | 204,000 | | $ | 230,000 |
At March 31, 2009, the total stock-based compensation expense related to unvested stock awards granted to employees and directors under the Company’s stock plans but not yet recognized was approximately $229,000. This expense will be amortized on a straight-line basis over a weighted-average period of approximately 2.1 years and will be adjusted for subsequent changes in estimated forfeitures.
10. Wafer Fabrication consolidation and Dodgeville closure
Wafer Fabrication consolidation - The Company is finalizing the consolidation and modernization of its wafer fabrication facilities. Prior to this consolidation, the Company had excess wafer fabrication capacity at its three locations (including Dodgeville, WI), with the Ann Arbor, MI facility having the most modern infrastructure. The wafer fabrication facilities and equipment in its Wisconsin and California facilities had similar capabilities and both required substantial upgrade and improvement in order to maintain production capabilities. Since the Ann Arbor facility, when equipped, would have the physical capacity to produce all of the Company’s current and foreseeable wafer requirements and would not significantly impact current production requirements during any upgrade process, management decided to consolidate all optoelectronic wafer fabrication into the Ann Arbor facility. Even though the Company had excess capacity in its Wisconsin and California production facilities, no abnormally low production levels were experienced. Unallocated overhead costs were recognized as an expense in the period in which they were incurred in accordance with SFAS No. 151, “Inventory Costs”, during the normal course of business.
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The Company estimates its total wafer fabrication consolidation expense to complete the consolidation will be approximately $2.4 million, of which $2.3 million has been incurred through the end of FY 2009. Projected costs consist of labor and associated expense of $1.1 million, travel and relocation costs of $169,000, accelerated depreciation expense on de-commissioned assets of $150,000 and supplies, consulting and other related costs of $854,000. The balance expected to be incurred through the remainder of the project is estimated to be approximately $100,000 to re-provision the California clean room into a hybrid assembly area. In accordance with SFAS No. 146,“Accounting for Cost Activities Associated with Exit or Disposal Activities”,all costs associated with the consolidation are recorded as expenses when incurred. Upon completion of the wafer fabrication consolidation, the Company expects cost reduction through elimination of duplicate expenditures and yield improvements as well as an increase in new product development capability.
Dodgeville closure -During the 3rd quarter of FY 2008, the Company recorded $534,000 in restructuring charges related to the consolidation of the Dodgeville, WI facility into the Camarillo, CA facility. These charges included $243,000 for severance and benefits, $266,000 for manufacturing transfer cost, and $25,000 for lease costs. This consolidation accounted for the termination of 30 employees. Of these reductions to headcount, 26 were in manufacturing, 1 in research and development and 3 in sales, general and administration functions. As of the end of the 3rd quarter of FY 2008, all of these employees were terminated. All closure restructuring charges were paid in the 3rd quarter of FY 2008. The Camarillo, CA and Dodgeville, WI facilities both had the same hybrid manufacturing and assembly capabilities, but combined represented excess capacity. As a result, management decided to reduce this excess capacity and consolidate into the California facility.
11. Equity
Shareholders’ Equity Transactions --On September 14, 2007, The Company completed a private placement (the “Offering”). Each unit sold by the Company in the Offering consisted of four (4) shares of the Company’s Class A Common Stock, par value $0.001 per share (the “Offering Shares”) and one (1) five year warrant exercisable for one share of Class A Common Stock at an exercise price of $1.85 (each a “Warrant”). The Company sold a total of 741,332 units (consisting of 2,965,332 Offering Shares and 741,332 Warrants), of which 33,000 units (consisting of 132,000 Offering Shares and 33,000 Warrants) were to related parties at the prevailing closing stock price of $1.83 per share, for an aggregate purchase price of $4.5 million. The offer and sale of the Offering Shares and Warrants were made pursuant to Rule 506 promulgated pursuant to the Securities Act and each of the investors is an “accredited investor” as defined by Rule 501 promulgated pursuant to the Securities Act.
The schedule below shows the outstanding warrants at March 31, 2008 and March 31, 2009, more fully described in Note 7 and the paragraph above:
| Warrants Outstanding & Exercisable |
| Shares | Shares | Exercise | Remaining |
| 2008 | 2009 | Price | Life (in yrs) |
| (000’s) | (000’s) | | at 3/31/09 |
| Convertible Note – 1st Tranche | 695 | 695 | $1.744 | 1.1 |
| Convertible Note – 2nd Tranche | 695 | 695 | $1.744 | 2.1 |
| Private Placement | 741 | 741 | $1.85 | 3.5 |
| Total | 2,131 | 2,131 | | |
During FY 2009, there was no activity regarding warrants outstanding and exercisable. During FY 2008, 87,000 warrants were exercised at an aggregate price of $151,000.
The exercise price for the warrants related to both tranches of convertible notes is subject to adjustment, based on a formula contained in the convertible note agreement, if common stock is issued in the future below the $1.744 exercise price. Such adjustments cannot reduce the exercise price below a $1.70 without obtaining shareholder approval.
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12. Foreign Sales
In FY 2009 and FY 2008, the Company had export sales of approximately $5.4 million and $3.5 million, respectively, made primarily to customers in North America, Asia and Europe.All foreign sales are denominated in U.S. dollars. Sales to specific countries, stated as a percentage of total sales, consist of the following:
| 2009 | | 2008 |
| Canada | 5 | % | | 1 | % |
| Germany | 1 | % | | 3 | % |
| Poland | 1 | % | | -- | |
| Israel | 2 | % | | -- | |
| Japan | -- | | | 1 | % |
| United Kingdom | 5 | % | | 7 | % |
| All other countries | 4 | % | | 3 | % |
| Total export sales | 18 | % | | 15 | % |
13. Employees’ Retirement Plan
The Company maintains a 401(k) Plan which is qualified under the Internal Revenue Code. All full-time employees are eligible to participate in the Plan after six months of full time employment. Employees may make voluntary contributions to the Plan, which is matched by the Company at the rate of $1.00 for every $1.00 of employee contribution up to 3% of wages, and $.50 for every $1.00 of employee contributions on the next 2% of wages, subject to certain limitations. Employer contributions are fully vested when earned. The Company contributions and administration costs recognized as expense were approximately $279,000 and $272,000 in FY 2009 and 2008, respectively.
Effective April 1, 2009, the Company matched portion of the 401K program was suspended through March 31, 2010 due to the unstable economic environment the country is currently experiencing. The matching program will be re-instituted when economic conditions improve.
14.Income Taxes
At March 31, 2009, the Company had net operating loss carry forwards (NOL’s) of approximately $21.0 million for Federal income tax purposes and $5.4 million for state income tax purposes that expire at various dates through fiscal year 2029. The tax laws related to the utilization of loss carry forwards are complex and the amount of the Company’s loss carry forward that will ultimately be available to offset future taxable income may be subject to annual limitations under IRC Section 382 resulting from changes in the ownership of the Company’s common stock.
The Company performed an analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code had occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of the net operating loss carry forwards attributable to periods before the change. As of March 31, 2009, the Company believes there are no limitations on the use of these Federal NOLs.
At March 31, 2009, our net deferred tax asset before consideration of a valuation allowance was approximately $7.3 million, mainly consisting of net operating loss carry-forwards which expire at various amounts over an approximate 20 year period. In assessing the realizability of deferred tax assets, the Company has determined that at this time it is “more likely than not” that deferred tax assets will not be realized , primarily due to uncertainties related to its ability to utilize the net operating loss carry-forwards before they expire based on the negative evidence of its recent years history of losses, including tax losses in two of the last three years and cumulative taxable losses over the past three years, outweighing the positive evidence of taxable income projections in future years. The ultimate realization of these deferred tax assets is dependent upon the generation of future taxable income during those periods in which those temporary differences become deductible or within the periods before NOL carry forwards expire. As of both March 31, 2009 and 2008, the Company recorded a full valuation allowance on its net deferred tax.
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Below are reconciliations between the provisions for income taxes compared with the amounts at the United States federal statutory rate:
| Years Ended | | March 31, 2009 | | March 31, 2008 |
| Federal income tax at statutory rates | | $ | (692,000 | ) | | $ | (2,857,000 | ) |
| State income taxes, net of federal benefit | | | 20,000 | | | | (110,000 | ) |
| Expiration of NOL carry-forwards | | | 1,300,000 | | | | 757,000 | |
| Change in valuation allowance | | | (559,000 | ) | | | 3,331,000 | |
| Change in R&D credit carry-forwards | | | (137,000 | ) | | | (29,000 | ) |
| Permanent items | | | 82,000 | | | | 298,000 | |
| Other | | | (14,000 | ) | | | (165,000 | ) |
| Effective federal income tax | | $ | -- | | | $ | (1,225,000 | ) |
The Company’s net deferred tax assets (liabilities) consisted of the following components, for fiscal years 2009 and 2008:
| | 2009 | | 2008 |
| Sec. 263A adjustment | | $ | 57,000 | | | $ | 62,000 | |
| Inventory reserve | | | 314,000 | | | | 372,000 | |
| Utility accruals | | | 3,000 | | | | 4,000 | |
| Warranty reserve | | | 55,000 | | | | 34,000 | |
| Accounts receivable allowance | | | 22,000 | | | | 5,000 | |
| Accrued vacation | | | 120,000 | | | | 88,000 | |
| Charitable contributions | | | 15,000 | | | | 14,000 | |
| NOL Carryforwards | | | 7,716,000 | | | | 9,018,000 | |
| Basis difference of intangibles | | | (2,172,000 | ) | | | (2,854,000 | ) |
| Basis difference of equipement | | | (748,000 | ) | | | (631,000 | ) |
| R&D credits | | | 1,561,000 | | | | 1,390,000 | |
| Goodwill amortization | | | 322,000 | | | | 322,000 | |
| California Mfg. credit | | | 39,000 | | | | 39,000 | |
| AMT credit | | | 1,000 | | | | 1,000 | |
| Total | | $ | 7,305,000 | | | $ | 7,864 ,000 | |
| Valuation allowance | | | (7,305,000 | ) | | | (7,864,000 | ) |
| Net deferred tax asset | | $ | 0 | | | $ | 0 | |
At March 31, 2009 the Company had net operating loss carry forwards for federal tax of approximately $21 million that expire between 2010 and 2029, and approximately $5.4 million for California state tax that expire between 2014 and 2020.
At March 31, 2009 the Company’s Federal R&D tax credit carry forwards totaled approximately $1.5 million. These will expire annually at March 31 over the next twenty (20) years.
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15. Related Party Transactions
The Company’s only significant related party transactions relate to the payment of principal and interest on Debt to Related Parties as disclosed in note 7. The Company and the note holders entered into amendments to the Notes to extend the due date for the third installment under each of the Notes (in the aggregate amount of $900,000) to December 1, 2008 from the original agreement payment date of May 1, 2008. In November 2008, a further amendment provided that the $1,850,500 aggregate principal balance of the Notes would be payable in three installments as follows:
| December 1, 2008 | $ | 450,000 |
| April 1, 2009 | $ | 450,000 |
| November 2, 2009 | $ | 950,500 |
In April 2009, a further amendment revised the payment schedule for the fourth and fifth installments as follows:
| December 1, 2009 | $ | 450,000 |
| March 1, 2010 | $ | 950,500 |
On March 31, 2009, the remaining balance on the notes was $1.4 million. The Company paid $450,000 of principal and $94,000 in interest to the note holders in FY 2009 and $550,000 of principal and $129,000 in interest to the note holders in FY 2008. Robin Risser and Steve Williamson, the Company’s CFO and CTO, respectively, are the note holders.
16. Commitments & Contingencies
Leases -The Company leases all of its executive offices, research, marketing and manufacturing facilities under non-cancellable operating leases. The lease for our facility located in Camarillo, California was amended in December 2008 and is now leased through February 2014. The facility located in Ann Arbor, Michigan is comprised of the corporate office and the Picometrix LLC manufacturing plant and is leased through June 2011, with two five year options to renew at the current lease rate with a CPI adjuster. In addition, the Company has the right of first refusal to purchase the facility. Minimum future lease payments under all non-cancellable operating leases are as follows:
| 2010 | $ | 1,101,000 |
| 2011 | | 1,095,000 |
| 2012 | | 575,000 |
| 2013 | | 407,000 |
| 2014 | | 382,000 |
| Total | $ | 3,560,000 |
Rent expense was approximately $1.2 million and $1.3 million in FY 2009 and 2008, respectively.
Legal- The Company is, from time to time, subject to legal and other matters in the normal course of its business. While the results of such matters cannot be predicted with certainty, management does not believe that the final outcome of any pending matters will have a material effect on the financial position and results of operations of the Company.
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17. Quarterly Financial Data
The table below lists financial information (unaudited) by quarter for each of the two fiscal years ending March 31, 2009 and 2008.
| 2009 | | | First | | Second | | Third | | Fourth | | Total Year |
| Net Sales | | $ | 7,770,000 | | $ | 8,188,000 | | | $ | 7,606,000 | | | $ | 6,111,000 | | | $ | 29,675,000 | |
| Cost of Products Sold | | | 4,014,000 | | | 4,624,000 | | | | 4,329,000 | | | | 3,777,000 | | | | 16,744,000 | |
| Gross Profit | | | 3,756,000 | | | 3,564,000 | | | | 3,277,000 | | | | 2,334,000 | | | | 12,931,000 | |
| Research & Development | | | | | | | | | | | | | | | | | | | |
| Expenses | | | 1,128,000 | | | 1,081,000 | | | | 1,112,000 | | | | 1,355,000 | | | | 4,676,000 | |
| Selling, General & | | | | | | | | | | | | | | | | | | | |
| Administrative Expenses | | | 2,389,000 | | | 2,708,000 | | | | 2,415,000 | | | | 2,399,000 | | | | 9,911,000 | |
| Net Income (Loss) | | $ | 147,000 | | $ | (326,000 | ) | | $ | (359,000 | ) | | $ | (1,497,000 | ) | | $ | (2,035,000 | ) |
| Basic Income (Loss) per | | | | | | | | | | | | | | | | | | | |
| Common Share | | $ | 0.01 | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | (0.06 | ) | | $ | (0.08 | ) |
| Diluted Income (Loss) per | | | | | | | | | | | | | | | | | | | |
| Common Share | | $ | 0.01 | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | (0.06 | ) | | $ | (0.08 | ) |
| Weighted Average Common | | | | | | | | | | | | | | | | | | | |
| Shares Outstanding | | | 24,010,000 | | | 24,060,000 | | | | 24,109,000 | | | | 24,121,000 | | | | 24,074,000 | |
| | | | | | | | | | | | | | | | | | | | |
| 2008 | | | | | | | | | | | | | | | | | | | |
| Net Sales | | $ | 6,145,000 | | $ | 6,529,000 | | | $ | 5,306,000 | | | $ | 5,235,000 | | | $ | 23,215,000 | |
| Cost of Products Sold | | | 3,675,000 | | | 3,784,000 | | | | 3,431,000 | | | | 3,450,000 | | | | 14,340,000 | |
| Gross Profit | | | 2,470,000 | | | 2,745,000 | | | | 1,875,000 | | | | 1,785,000 | | | | 8,875,000 | |
| Research & Development | | | | | | | | | | | | | | | | | | | |
| Expenses | | | 896,000 | | | 1,016,000 | | | | 1,034,000 | | | | 1,272,000 | | | | 4,218,000 | |
| Selling, General & | | | | | | | | | | | | | | | | | | | |
| Administrative Expenses | | | 2,650,000 | | | 2,497,000 | | | | 3,117,000 | | | | 2,397,000 | | | | 10,658,000 | |
| Net Income (Loss) | | $ | (1,906,000 | ) | $ | (1,857,000 | ) | | $ | (2,726,000 | ) | | $ | (3,139,000 | ) | | $ | (9,628,000 | ) |
| Basic Income (Loss) per | | | | | | | | | | | | | | | | | | | |
| Common Share | | $ | (0.10 | ) | $ | (0.09 | ) | | $ | (0.11 | ) | | $ | (0.13 | ) | | $ | (0.44 | ) |
| Diluted Income (Loss) per | | | | | | | | | | | | | | | | | | | |
| Common Share | | $ | (0.10 | ) | $ | (0.09 | ) | | $ | (0.11 | ) | | $ | (0.13 | ) | | $ | (0.44 | ) |
| Weighted Average Common | | | | | | | | | | | | | | | | | | | |
| Shares Outstanding | | | 19,258,000 | | | 19,906,000 | | | | 23,804,000 | | | | 23,926,000 | | | | 21,770,000 | |
| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
| |
| None |
| |
Item 9A(T). CONTROLS AND PROCEDURES |
| |
| Disclosure Controls Our Chief Executive Officer 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 (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) (the Rules) under the Securities Exchange Act of 1934 (or Exchange Act)) as of the end of the period covered by this Annual Report and believe that the Company's disclosure controls and procedures are effective based on the required evaluation. |
| |
| Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including the Certifying Officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2009 based on the criteria set forth inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organization of the Treadway Commission. Based on our evaluation under the criteria set forth inInternal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of March 31, 2009. |
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| This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We were not required to have, nor have we engaged our independent registered public accounting firm to perform, an audit on our internal control over financial reporting pursuant to the rules of the Securities and Exchange Commission that permit us to provide only managements’ report in this Annual Report. Changes in Internal Controls During our most recent fiscal quarter, there has not occurred any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. |
| |
| Item 9B. | OTHER INFORMATION |
| |
| None |
PART III
In accordance with General Instruction G (3), and except for certain of the information called for by Items 10 and 12 which is set forth below, the information called for by Items 10 through 13 of Part III is incorporated by reference from the Company’s definitive proxy statement (Proxy Statement) to be filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934 in connection with the Company’s 2009 Annual Meeting of Stockholders.
| Item 10. | DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
| | |
| Code of Ethics --The Company has adopted a Code of Ethics for Senior Financial Officers, pursuant to the Sarbanes-Oxley Act of 2002. The Code of Ethics is published on the Company's web site, www.advancedphotonix.com on the Investor Relations page. The Company will also provide a copy of the Code of Ethics to any person without charge upon his or her request. Any such request should be directed to our Secretary at 2925 Boardwalk, Ann Arbor, Michigan 48104. The Company intends to make all required disclosures concerning any amendments to or waivers from the Code of Ethics on its website. The response to the remainder of this item is incorporated by reference from the Company’s Proxy Statement. |
| |
| Item 11. | EXECUTIVE COMPENSATION |
| |
| The response to this item is incorporated by reference from the Company’s Proxy Statement. |
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| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth, as of March 31, 2009, the aggregated information pertaining to all securities authorized for issuance under the Company’s equity compensation plans: |
| | Number of | Weighted- | Number |
| | Securities to be | average exercise | of |
| | issued upon | price of | securities |
| Plan Category | exercise of | outstanding | remaining |
| | outstanding | options, | available |
| | options, warrants | warrants and | for future |
| | and rights | rights | issuance |
| Equity compensation | | | | | | | | | | |
| plans approved by | | 2,374,040 | | | $1.93 | | | 2,210,000 | | |
| shareholders | | | | | | | | (1 | ) | |
| | | | | | | | | | | |
| Equity compensation | | | | | | | | | | |
| plans not approved by | | - | | | - | | | - | | |
| shareholders | | | | | | | | | | |
| Total | | 2,374,040 | | | $1.93 | | | 2,210,000 | | |
| | | | | | | | | (1 | ) | |
| (1) | | Represents shares issuable upon the grant of restricted stock and stock options. |
| |
| The response to the remainder of this item is incorporated by reference from the Company’s Proxy Statement. |
| |
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
| |
| The response to this item is incorporated by reference from the Company’s Proxy Statement. |
| |
| Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
| |
| The response to this item is incorporated by reference from the Company’s Proxy Statement. |
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PART IV
| Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| | |
| The following is a list of the financial statements, schedules and exhibits filed herewith. (1) Financial Statements: No financial statements have been filed with this Form 10-K other than those listed in Item 8. (2) Financial Statement Schedules: The following additional financial statement schedule is furnished herewith pursuant to the requirements of Form 10-K. |
SCHEDULE II
ADVANCED PHOTONIX, INC.
Valuation and Qualifying Accounts
| | | Additions | | | | |
| | | Charged to | Charged to | | | | |
| March 31, 2008 | Expense | Other Accounts | Deductions | March 31, 2009 |
| Allowance for doubtful accounts | $ | 14,000 | $ | 48,000 | $ | -- | $ | -- | $ | 62,000 |
| Inventory reserves | $ | 984,000 | $ | 263,000 | $ | -- | $ | 400,000 | $ | 847,000 |
| Warranty reserves | $ | 85,000 | $ | 76,000 | $ | -- | $ | 23,000 | $ | 138,000 |
| Deferred tax valuation allowance | $ | 7,864,000 | $ | -- | $ | -- | $ | 559,000 | $ | 7,305,000 |
| | | | | | | | | | |
| | | | | | | | | | |
| | | Additions | | | | |
| | | Charged to | Charged to | | | |
| March 31, 2007 | Expense | Other Accounts | Deductions | March 31, 2008 |
| Allowance for doubtful accounts | $ | 51,000 | $ | 9,000 | $ | -- | $ | 46,000 | $ | 14,000 |
| Inventory reserves | $ | 924,000 | $ | 363,000 | $ | -- | $ | 303,000 | $ | 984,000 |
| Warranty reserves | $ | 83,000 | $ | 2,000 | $ | -- | $ | -- | $ | 85,000 |
| Deferred tax valuation allowance | $ | 4,533,000 | $ | 1,225,000 | $ | 2,106,000 | $ | -- | $ | 7,864,000 |
All other schedules for which provisions are made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, or are disclosed in the accompanying consolidated financial statements, or are inapplicable and, therefore, have been omitted.
(3) Exhibits: The following is a list of the exhibits filed as part of this Form 10-K.
| Exhibit | | |
| Number | | Description |
| 2.1 | | Stock Purchase Agreement dated December 21, 2004 between Advanced Photonix, Inc. and Photonic Detectors, Inc. – incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K, filed on December 23, 2004 |
| | |
| 2.2 | | Agreement and Plan of Merger between Advanced Photonix, Inc. and Michigan Acquisition Sub, LLC, Picotronix, Inc., Robin Risser and Steven Williamson, dated March 8, 2005 – incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K, filed on March 14, 2005 |
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| 3.1 | Certificate of Incorporation of the Registrant, as amended - incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, filed on November 23, 1990 |
| | |
| 3.1.1 | Amendment to Certificate of Incorporation of the Registrant, dated October 29, 1992- incorporated by reference to the Registrant's March 31, 1996 Annual Report on Form 10-K |
| |
| 3.1.2 | Amendment to Certificate of Incorporation of the Registrant, dated September 9, 1992- incorporated by reference to the Registrant's March 31, 1996 Annual Report on Form 10-K |
| |
| 3.2 | By-laws of the Registrant, as amended – incorporated by reference to Exhibit 3.(ii) to the Registrant’s Form 8-K as filed with the Securities and Exchange Commission on June 8, 2005 |
| |
| 4.1 | Rights Agreement, by and between the Company and Continental Stock Transfer and Trust Company, as amended – incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8- K, filed on February 9, 2005 |
| |
| 10.1 | Advanced Photonix, Inc. 1991 Special Directors Stock Option Plan – incorporated by reference to Exhibit 10.9 to the Registrant's March 31, 1991 Annual Report on Form 10-K |
| |
| 10.2 | Advanced Photonix, Inc. 1990 Incentive Stock Option and Non-Qualified Stock Option Plan – incorporated by reference to Exhibit No. 10.11 to the Registrant's Registration Statement on Form S-1, filed with the Securities and Exchange Commission on November 23, 1990 |
| | | |
| 10.3 | Advanced Photonix, Inc. 1997 Employee Stock Option Plan – incorporated by reference to Exhibit 10.13 to the Registrant’s March 30, 1997 Annual Report on Form 10-K |
| |
| 10.4 | Amendment No. 1 to 1997 Employee Stock Option Plan of Advanced Photonix, Inc. – incorporated by reference to Exhibit 10.14 to the Registrant’s December 28, 1997 Quarterly Report on Form 10-Q |
| |
| 10.5 | Advanced Photonix, Inc. 2000 Stock Option Plan, as amended – incorporated by reference to Exhibit 99.1 to the Registrant's Form 8-K, filed on November 19, 2004 |
| |
| 10.6 | Advanced Photonix, Inc. 2007 Equity Incentive Plan – incorporated by reference to the Registrant’s Exhibit A to the Proxy Statement relating to its 2007 Annual Meeting of Stockholders, as filed July 16, 2007 on Form 14A |
| |
| 10.7 | Form of Director Restricted Stock Agreement under the 2007 Equity Incentive Plan -- incorporated by reference to Exhibit 4.4 to the Registrant's Form S-8 on Registration Statement No.333-147012, filed on October 30, 2007 |
| |
| 10.8 | Form of Employee Restricted Stock Agreement under the 2007 Equity Incentive Plan -- incorporated by reference to Exhibit 4. to the Registrant's Form S-8 on Registration Statement No.333-147012, filed on October 30, 2007 |
| |
| 10.9 | Form of Employee Stock Option Agreement under the 2007 Equity Incentive Plan -- incorporated by reference to Exhibit 4.6 to the Registrant's Form S-8 on Registration Statement No.333-147012, filed on October 30, 2007 |
57
| 10.10 | Advanced Photonix, Inc. Executive Incentive Compensation Plan -- incorporated by reference to Exhibit 10.1 to the Registrant’s December 28, 2007 Quarterly Report on Form 10-Q |
| | |
| 10.11 | Lease Agreement dated February 23, 1998 between Advanced Photonix, Inc. and High Tech No. 1, Ltd. - incorporated by reference to Exhibit 10.9 to the Registrant's March 29, 1998 Annual Report on Form 10-K |
| |
| 10.12 | Form of Indemnification Agreement provided to Directors and Principal Officers of Advanced Photonix, Inc. - incorporated by reference to Exhibit 10.15 to the Registrant’s December 28, 1997 Quarterly Report on Form 10-Q |
| |
| 10.13 | Securities Purchase Agreement, Registration Rights Agreement, Senior Subordinated Convertible Note, Warrant to Purchase Class A Common Stock, and Additional Investment Right dated October 12, 2004 between Advanced Photonix, Inc. and private investors – incorporated by reference to Exhibits 10.13 through 10.13.4 to the Registrant’s Form 8-K, filed on October 12, 2004 |
| |
| 10.14 | Letters of Agreement amending the Securities Purchase Agreement and Warrant to Purchase Class A Common Stock, dated March 9, 2005, between Advanced Photonix, Inc. and private investors – incorporated by reference to Exhibits 10.2 through 10.5 to the Registrant’s Form 8-K, filed on March 14, 2005 |
| |
| 10.15 | Promissory Note between Picotronix, Inc. and Advanced Photonix, Inc., dated March 10, 2005 – incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed on March 14, 2005 |
| |
| 10.16 | Secured Promissory Note between Advanced Photonix, Inc. and Robin Risser, dated May 2, 2005 – incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed on May 6, 2005 |
| |
| 10.17 | Amendment dated May 1, 2008 to Secured Promissory Note dated May 2, 2005 by and between Advanced Photonix, Inc. and Robin Risser incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed on May 2, 2008 |
| |
| 10.18 | Second Amendment dated November 26, 2008 to Secured Promissory Note dated May 2, 2005 by and between Advanced Photonix, Inc. and Robin Risser – incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed on December 1, 2008 |
| |
| 10.19 | Secured Promissory Note between Advanced Photonix, Inc. and Steven Williamson, dated May 2, 2005 – incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K, filed on May 6, 2005 |
| |
| 10.20 | Amendment dated May 1, 2008 to Secured Promissory Note dated May 2, 2005 by and between Advanced Photonix, Inc. and Steven Williamson – incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K, filed on March 2, 2008 |
| |
| 10.21 | Second Amendment dated November 26, 2008 to Secured Promissory Note dated May 2, 2005 by and between Advanced Photonix, Inc. and Steven Williamson – incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed on December 1, 2008 |
| |
| 10.22 | Convertible Loan Agreement dated September 15, 2004 between Picometrix, LLC and the Michigan Economic Development Corporation – incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K, filed on October 30, 2008 |
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| 10.23 | First Amendment to Convertible Loan Agreement dated December 2, 2004 between Picometrix, LLC and the Michigan Economic Development Corporation – incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K, filed on October 30, 2008 |
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| 10.24 | Second Amendment to Convertible Loan Agreement dated March 17, 2005 between Picometrix, LLC and the Michigan Economic Development Corporation – incorporated by reference to Exhibit 10.4 to the Registrant’s Form 8-K, filed on October 30, 2008 |
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| 10.25 | Second Amended and Restated Promissory Note dated September 23, 2008 by Picometrix, LLC – incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed on October 30, 2008 |
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| 10.26 | Loan Agreement, dated September 15, 2005, between Picometrix, LLC and the Michigan Economic Development Corporation – incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed on September 16, 2005 |
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| 10.27 | Amended and Restated Promissory Note dated January 26, 2009 by Picometrix, LLC – incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed on January 30, 2009 |
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| 10.28 | Loan Agreement between Advanced Photonix, Inc. and Fifth Third Bank, dated March 6, 2007 – incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed on March 9, 2007 |
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| 10.29 | Promissory Note by Advanced Photonix, Inc. in favor of Fifth Third Bank, for $2,000,000 dated March 6, 2007 – incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K, filed on March 9, 2007 |
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| 10.30 | Security Agreement among Advanced Photonix, Inc., Silicon Sensors, Inc., Picometrix, LLC, and Fifth Third Bank – incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K, filed on March 9, 2007 |
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| 10.31 | Master Equipment Lease Agreement between Advanced Photonix, Inc. and Fifth Third Leasing Company dated March 6, 2007 – incorporated by reference to Exhibit 10.4 to the Registrant’s Form 8-K, filed on March 9, 2007 |
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| 10.32 | Interim Funding Schedule between Advanced Photonix and Fifth Third Leasing Company – incorporated by reference to Exhibit 10.5 to the Registrant’s Form 8-K, filed on March 9, 2007 |
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| 10.33 | First Amendment dated November 13, 2007 between Advanced Photonix, Inc. and Fifth Third Bank to that certain Business Loan Agreement dated as of March 6, 2007 – incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q/A, filed on June 17, 2008 |
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| 10.34 | Loan Agreement dated September 25, 2008 between Advanced Photonix, Inc. and The PrivateBank and Trust Company – incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed on September 29, 2008 |
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| 10.35 | Promissory Note (Term Loan – Prime) dated September 25, 2008 by Advanced Photonix, Inc. in favor of The PrivateBank and Trust Company – incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K, filed on September 29, 2008 |
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| 10.36 | Promissory Note (Line of Credit – Prime) dated September 25, 2008 by Advanced Photonix, Inc. in favor of The PrivateBank and Trust Company – incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K, filed on September 29, 2008 |
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| 10.37 | Continuing Security Agreement dated September 25, 2008 between Advanced Photonix, Inc. and The PrivateBank and Trust Company – incorporated by reference to Exhibit 10.4 to the Registrant’s Form 8-K, filed on September 29, 2008 |
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| 10.38 | Continuing Guaranty dated September 25, 2008 by Picometrix, LLC and Silicon Sensors, Inc. for the benefit of The PrivateBank and Trust Company – incorporated by reference to Exhibit 10.5 to the Registrant’s Form 8-K, filed on September 29, 2008 |
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| 10.39 | Form of Patent, Trademark and Security Agreement between Advanced Photonix, Inc. and The PrivateBank and Trust Company – incorporated by reference to Exhibit 10.6 to the Registrant’s Form 8-K, filed on September 29, 2008 |
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| 10.40 | Form of Third Party Subscription Agreement, dated August 31, 2007 – incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed on September 7, 2007 |
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| 10.41 | Form of Insiders Subscription Agreement, dated August 31, 2007 – incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K, filed on September 7, 2007 |
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| 10.42 | Form of 2007 Series Warrant to Purchase Class A Common Stock, dated August 31, 2007 – incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K, filed on September 7, 2007 |
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| 10.43 | Form of Registration Rights Agreement, dated August 31, 2007 – incorporated by reference to Exhibit 10.4 to the Registrant’s Form 8-K, filed on September 7, 2007 |
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| 10.44 | Insider Side Letter regarding the Warrant Exercise Price, dated August 31, 2007 – incorporated by reference to Exhibit 10.5 to the Registrant’s Form 8-K, filed on September 7, 2007 |
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| 10.45 | Insider Side Letter regarding the Registration Rights Agreement, dated August 31, 2007 – incorporated by reference to Exhibit 10.6 to the Registrant’s Form 8-K, filed on September 7, 2007 |
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| 10.46 | Form of Third Party Subscription Agreement, dated September 14, 2007 – incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K, filed on September 19, 2007 |
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| 10.47 | Advanced Photonix, Inc. Executive Incentive Compensation Plan (amended and restated as of March 6, 2009) |
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| 21.1 | List of Subsidiaries of Registrant |
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| 23.1 | Consent of BDO Seidman, LLP |
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| 31.1 | Certification of the Registrant’s Chairman, Chief Executive Officer and Director pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| 31.2 | Certification of the Registrant’s Chairman, Chief Financial Officer and Director pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| 32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| By: | /s/ Richard Kurtz | |
| Chief Executive President |
Date: June 29, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
| Signature | | Title | | Date |
| /s/ Richard D. Kurtz | | Chairman of the Board, President, and | | June 29, 2009 |
| Richard D. Kurtz | | Chief Executive Officer | | |
| | | | | |
| /s/ Robin Risser | | Chief Financial Officer and Director | | June 29, 2009 |
| Robin Risser | | | | |
| | | | | |
| /s/ M. Scott Farese | | Director | | June 29, 2009 |
| M. Scott Farese | | | | |
| | | | | |
| /s/ Lance Brewer | | Director | | June 29, 2009 |
| Lance Brewer | | | | |
| | | | | |
| /s/ Donald Pastor | | Director | | June 29, 2009 |
| Donald Pastor | | | | |
| | | | | |
| /s/ Stephen P. Soltwedel | | Director | | June 29, 2009 |
| Stephen P. Soltwedel | | | | |
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