UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the quarterly period ended | December 31, 2003 |
| Commission File Number | 0-21832 |
TurboSonic Technologies, Inc.
(Exact name of small business issuer as specified in its charter)
| Delaware | 13-1949528 |
| (State of other jurisdiction of | (I.R.S. Employer Identification No.) |
| incorporation or organization) | |
| 550 Parkside Drive, Suite A-14, | |
| Waterloo, Ontario, Canada | N2L 5V4 |
| (Address of principal executive offices) | (Zip Code) |
519-885-5513
(Issuer's telephone number, including area code)
Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X ] No [ ]
The number of shares outstanding of the Issuer's Common Stock was 10,507,250 as of December 31, 2003.
Transitional Small Business Disclosure Format (check one).
Yes [ ] No [X]
1 -
TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES
Form 10-QSB
INDEX
| PART 1 - FINANCIAL INFORMATION | PAGE | |
| Item 1. | ||
| Consolidated Statement of Loss and Comprehensive Loss | ||
| (Unaudited) for the Three Month and Six Month Periods | ||
| Ended December 31, 2003 and December 31, 2002 | 3 | |
| Consolidated Balance Sheet | ||
| At December 31, 2003 (Unaudited) and June 30, 2003 (Audited) | 4 | |
| Consolidated Statement of Cash Flows | ||
| (Unaudited) for the Six Months Ended | ||
| December 31, 2003 and December 31, 2002 | 5 | |
| Notes to Consolidated Financial Statements | ||
| (Unaudited) | 6 - 8 | |
| Item 2. | ||
| Management's Discussion and Analysis of | ||
| Financial Conditions and Results of Operations | 9 - 11 | |
| Item 3. | ||
| Controls and Procedures | 11 | |
| PART II - OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 12 |
| Item 2. | Changes in Securities | 12 |
| Item 3. | Defaults Upon Senior Securities | 12 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 12 |
| Item 5. | Other Information | 12 |
| Item 6. | Exhibits and Reports on Form 8-K | 12 |
| Signature | 12 | |
2 -
TURBOSONIC TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Loss and Comprehensive Loss
US dollars (Unaudited)
| For the Three | For the Three | For the Six | For the Six | |||||
| Months Ended | Months Ended | Months Ended | Months Ended | |||||
| December 31, | December 31, | December 31, | December 31, | |||||
2003 | 2002 | 2003 | 2002 | |||||
| Nozzle systems revenue | $ 538,453 | $ 519,698 | $ 1,081,509 | $ 1,366,871 | ||||
| Scrubber systems revenue | 191,446 | 681,738 | 795,010 | 2,063,748 | ||||
| Total revenue | 729,899 | 1,201,436 | 1,876,519 | 3,430,619 | ||||
| Cost of nozzles systems | 413,633 | 388,202 | 756,219 | 1,016,548 | ||||
| Cost of scrubber systems | 148,763 | 519,351 | 625,030 | 1,683,382 | ||||
| Total cost of goods sold | 562,396 | 907,553 | 1,381,249 | 2,699,930 | ||||
| Gross profit | 167,503 | 293,883 | 495,270 | 730,689 | ||||
| Selling, general and administrative expenses | 580,284 | 451,274 | 1,084,634 | 804,231 | ||||
| Stock-based compensation expense | 1,652 | 2,452 | 3,475 | 4,112 | ||||
| Depreciation and amortization | 15,567 | 9,109 | 29,180 | 18,083 | ||||
| Total expenses | 597,503 | 462,835 | 1,117,289 | 826,426 | ||||
| (Loss) from operations | (430,000) | (168,952) | (622,019) | ( 95,737) | ||||
| Interest income net | 3,272 | 582 | 7,415 | 1,630 | ||||
| (Loss) before taxes | (426,728) | (168,370) | (614,604) | ( 94,107) | ||||
| (Recovery of) provision for income taxes | -- | (26,184) | 1,620 | 16,095 | ||||
| Net (loss) | $ (426,728) | $ (142,186) | $ (616,224) | $ (110,202) | ||||
| Other comprehensive income (loss): foreign | ||||||||
| currency translation | 54,968 | 9,679 | 49,310 | (49,103) | ||||
| Comprehensive (loss) | $ (371,760) | $ (132,507) | $ (566,914) | $ (159,305) | ||||
| Weighted average number of shares outstanding | 10,507,250 | 10,507,250 | 10,507,250 | 10,507,250 | ||||
| Diluted weighted average number of shares [note 6] | 10,507,250 | 10,507,250 | 10,507,250 | 10,507,250 | ||||
| Basic EPS | (0.04) | (0.01) | (0.06) | (0.01) | ||||
| Diluted EPS | (0.04) | (0.01) | (0.06) | (0.01) | ||||
3 -
TURBOSONIC TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
(US dollars)
| December 31 2003 | June 30, 2003 | |||
| (Unaudited) | (Audited) | |||
| Assets | ||||
| Current Assets: | ||||
| Cash and cash equivalents | $ 507,058 | $ 1,183,885 | ||
| Contracts and accounts receivable, net of allowance | ||||
| for doubtful accounts of $50,890 and $45,628 | 774,473 | 612,261 | ||
| Retentions receivable | 82,263 | 148,358 | ||
| Deferred contract costs and unbilled revenue [note 2] | 42,627 | 64,524 | ||
| Inventories | 61,280 | 57,198 | ||
| Other current assets | 38,879 | 47,206 | ||
| Total current assets | 1,506,580 | 2,113,432 | ||
| Capital assets, at cost, net of accumulated depreciation | 108,886 | 95,593 | ||
| Goodwill, net of accumulated amortization [note 4] | 398,897 | 398,897 | ||
| Other assets | 19,409 | 19,409 | ||
| Total Assets | $ 2,033,772 | $ 2,627,331 | ||
| Liabilities and Stockholders' Equity | ||||
| Current Liabilities: | ||||
| Accounts payable | 339,324 | 293,053 | ||
| Accrued expenses | 317,761 | 339,198 | ||
| Billings in excess of costs and estimated earnings | ||||
| on uncompleted contracts [note 2] | 172,380 | 221,262 | ||
| Income taxes payable | 20,128 | 19,366 | ||
| Obligations under capital leases, current portion | 5,444 | 9,955 | ||
| Total Current Liabilities | 855,037 | 882,834 | ||
| Obligations under capital leases, long-term portion | 3,109 | 5,432 | ||
858,146 | 888,266 | |||
| Stockholders' Equity: | ||||
| Authorized share capital | ||||
| 21,800,000 common shares par value $0.10 per share | ||||
| 8,200,000 exchangeable common shares par value $0.10 per share | ||||
| Issued share capital | ||||
| 6,055,885 common shares [note 5] | 50,725 | 50,725 | ||
| 4,451,365 exchangeable shares | 2,299,096 | 2,299,096 | ||
| Additional paid - in capital [notes 3 and 5] | 2,019,521 | 2,016,046 | ||
| 4,369,342 | 4,365,867 | |||
| Accumulated other comprehensive income | 157,964 | 108,654 | ||
| Accumulated deficit | (3,351,680) | (2,735,456) | ||
| Total stockholders' equity | 1,175,626 | 1,739,065 | ||
| Total Liabilities and Stockholders' Equity | $ 2,033,772 | $ 2,627,331 | ||
4 -
TURBOSONIC TECHNOLOGIES, INC.
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the six months ended December 31, 2003 and December 31, 2002
(US dollars) (Unaudited)
| December 31, 2003 | December 31, 2002 | ||||
| Cash flows from operating activities | |||||
| Net (loss) | $ (616,224) | $ (110,202) | |||
| Add changes to operations not requiring | |||||
| a current cash payment: | |||||
| Stock-based compensation expense | 3,475 | 4,112 | |||
| Depreciation and amortization | 29,180 | 18,083 | |||
(583,569) | (88,007) | ||||
| Changes in non-cash working capital balances | |||||
| related to operations: | |||||
| (Increase) decrease in contracts & accounts receivable | (135,417) | 407,489 | |||
| Decrease (increase) in retentions receivable | 69,436 | (149,823) | |||
| (Increase) in inventories | (3,235) | (7,265) | |||
| Decrease in deferred contract costs | |||||
| and unbilled revenue | 23,515 | 3,499 | |||
| Decrease (increase) in other current assets | 8,911 | (53,591) | |||
| Increase in accounts payable and | |||||
| accrued expenses | 4,049 | 439,021 | |||
| (Decrease) in unearned revenue and | |||||
| contract advances | (55,569) | (264,043) | |||
| Increase in income taxes payable | -- | 15,908 | |||
(88,310) | 391,195 | ||||
| Net cash (applied to) provided by operating activities | (671,879) | 303,188 | |||
| Cash flows from investing activities: | |||||
| Purchase of capital assets | (38,962) | (9,754) | |||
| Net cash (applied to)investing activities | (38,962) | (9,754) | |||
| Cash flows from financing activities | |||||
| (Repayment) of capital leases | (7,185) | (14,840) | |||
| Net cash (applied to) financing activities | (7,185) | (14,840) | |||
| Effect of exchange rate change on cash | 41,199 | (29,472) | |||
| Net cash (applied) provided during the period | (676,827) | 249,122 | |||
| Cash - beginning of period | 1,183,885 | 840,665 | |||
| Cash - end of period | $ 507,058 | $ 1,089,787 |
5 -
TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003
(Unaudited)
Note 1.
TurboSonic Technologies, Inc. and its subsidiaries (collectively the "Company"), directly and through subsidiaries, designs and markets integrated pollution control and industrial gas cooling/conditioning systems including liquid atomization technology and dust suppression systems to ameliorate or abate industrial environmental problems.
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by generally accepted accounting principles. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and six month periods ended December 31, 2003 are not necessarily indicative of the results that may be expected for the year ending June 30, 2004. These consolidated financial statements should be read in conjunction with the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-KSB for the year ended June 30, 2003.
The Company accounts for option grants in accordance with APB Opinion No. 25, Accounting for Stock Issues to Employees and SFAS No. 123 Accounting for Stock-Based Compensation. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee, director and adviser stock options under the fair value method of that statement. The fair value of these options was estimated at the date of grant using a Black-Scholes option-pricing model.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows:
| Three Months | Three Months | Six Months | Six Months | |||
| ended | ended | ended | ended | |||
| December 31, | December 31, | December 31, | December 31, | |||
| 2003 | 2002 | 2003 | 2002 | |||
| Net (loss) | $ | (426,728) | $ (142,186) | $ | (616,224) | $ (110,202) |
| Stock-based compensation expense under APB | ||||||
| No.25 | 1,652 | 2,452 | 3,475 | 4,112 | ||
| Stock-based compensation expense under SFAS | ||||||
| No.123, | (40,056) | ( 6,456) | (46,512) | (12,912) | ||
| Pro forma (loss) | $ | (465,132) | $ (146,190) | $ | (659,261) | $ (119,002) |
| Pro forma income per share: | ||||||
| Basic | (0.04) | (0.01) | (0.06) | (0.01) | ||
| Diluted | (0.04) | (0.01) | (0.06) | (0.01) | ||
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others" ("FIN 45"), which requires elaborating on the disclosures, that must be made by a guarantor, in financial statements about its obligations under certain types of guarantees. It also requires that a guarantor recognize, at the time of inception of certain types of guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are effective for financial statements issued after December 15, 2002, and have been applied in the presentation of the accompanying consolidated financial statements. The recognition requirements of FIN 45 are applicable for guarantees issued or modified after December 31, 2002.
In accordance with FIN 45, the Company is required to make the following disclosure regarding product warranties:
6 -
As part of the normal sale of scrubber and nozzle systems, the Company has provided its customers with product warranties. The warranties generally extend for twelve months from the date of start-up or eighteen months after shipment to the customer. The following summarizes the accrual of product warranties that is recorded as part of other accrued liabilities in the accompanying consolidated balance sheets:
| Three Months | Three Months | Six Months | Six Months | |||||
| ended | ended | ended | ended | |||||
| December 31, | December 31, | December 31, | December 31, | |||||
| 2003 | 2002 | 2003 | 2002 | |||||
| Opening balance | $ | 64,304 | $ | 55,773 | $ | 68,623 | $ | 58,385 |
| Payments made during the period | (4,478) | (4,733) | (19,560) | (4,846) | ||||
| Warranty provision made during the period | 2,354 | 5,072 | 13,117 | 2,573 | ||||
| Closing balance | $ | 62,180 | $ | 56,112 | $ | 62,180 | $ | 56,112 |
Note. 2. Costs and Estimated Earnings on Uncompleted Contracts
December 31, 2003 | June 30, 2003 | |||
| Costs incurred on uncompleted contracts | $ | 3,069,576 | $ 3,097,549 | |
| Estimated earnings | 660,879 | 746,105 | ||
| 3,730,455 | 3,843,654 | |||
| Billings to date | (3,860,208) | (4,000,392) | ||
| $ | (129,753) | $ (156,738) | ||
| Included in accompanying balance sheets | ||||
| under the following captions: | ||||
| Deferred contract costs and unbilled revenue | $ | 42,627 | $ 64,524 | |
| Billings in excess of costs and estimated | ||||
| earnings on uncompleted contracts | (172,380) | ( 221,262) | ||
| $ | (129,753) | $ ( 156,738) | ||
Note 3. Warrants
The Company has in the past granted detachable warrants for 800,000 common shares to debt holders as an inducement to advance funds to the Company. In accordance with APB 14, a portion of the proceeds of the debt securities issued with detachable stock purchase warrants, which is allocated as the fair-value of the warrants, has been accounted for as paid-in capital. The related discount on the debt securities was amortized over the remaining period to the original maturity dates.
As at December 31, 2003, 600,000 warrants were outstanding. One hundred thousand warrants expire on each of the following dates: January 1, 2004, April 1, 2004, October 21, 2004, October 21, 2004, January 1, 2005 and April 1, 2005. The January 1, 2004 and April 1, 2004 warrants have an exercise price of $0.5625, with the remaining warrants having a $1.00 exercise price.
Note 4. Goodwill
Effective July 1, 2001, the Company early adopted SFAS No. 142, Goodwill and Intangible Assets. Under SFAS No.142, goodwill is no longer amortized but is subject to an annual impairment review (or more frequently if deemed appropriate). Since the adoption of SFAS No. 142 at July 1, 2001, the Company has completed the transitional
7 -
impairment test as at July 1, 2001 and an annual impairment test as at April 1, 2002 and 2003, to identify if there is any impairment to the goodwill using a fair value methodology by reporting unit. The Company concluded at April 1, 2003 that, of the two business segments under review, the scrubber system business segment was impaired but the nozzle systems segment was not. In the fourth quarter of fiscal 2003, the Company took a charge against earnings of $398,897 thereby reducing the carrying value of goodwill to $398,897. The next annual impairment test will be conducted as at April 1, 2004.
Note 5. Share Capital
On August 7, 2001, the Company announced that it had entered into an agreement to form a strategic alliance with Hamon Research-Cottrell, Inc. ("HAMON") As part of the agreement, Hamon acquired directly from the Company 500,000 shares of TurboSonic common stock, representing an approximately 4.7% equity interest at $1.00 U.S. per share. Amounts of $50,000 and $450,000 were added to Common Shares and Additional Paid-in Capital as the result of this transaction. The investment agreement also provides for the joint marketing of certain products. Certain of
TurboSonic's shareholders, including officers and directors, granted options to Hamon to acquire control of TurboSonic from these shareholders at prices ranging from $1.80 to $2.50 per share. These options were exercisable only in the event that Hamon initiated a tender offer for TurboSonic's common stock. These options expired August 31, 2003, without further action by Hamon.
During fiscal 2003 and the two quarters of fiscal 2004, there were no stock options exercised by employees, directors or advisers.
At the 2002 annual shareholders meeting held December 10, 2002, the 2003 Stock Plan was approved by the shareholders. At the December 11, 2003 board meeting, 120,000 stock options were awarded to the current directors from the 2003 Stock Plan, including 40,000 stock options in recognition of those serving on the Company's audit and compensation committees. These options have an exercise price of $0.35 [Black-Scholes fair value $0.28], which was the market value at the close of business on December 11, 2003, vest immediately and are exercisable for five years from the date of grant. With this grant, there remain 380,000 shares in the 2003 Stock Plan for future issuance.
Note 6. Earnings Per Share
Basic earnings per share is calculated based on the weighted average shares of common stock outstanding during the period. Diluted earnings per share is calculated based on the weighted average shares of common stock outstanding, plus the dilutive effect of stock options and warrants outstanding, calculated using the treasury stock method. For the three months and six months ended December 31, 2002 and 2003, all outstanding warrants and stock options have been excluded from the denominator for the EPS calculation, as these instruments would be anti-dilutive.
Note 7. Segment Information
| Three Months | Three Months | Six Months | Six Months | |||||
| ended | ended | ended | ended | |||||
| December 31, | December 31, | December 31, | December 31, | |||||
| 2003 | 2002 | 2003 | 2002 | |||||
| (Loss) Income Before Provision for | ||||||||
| Income Taxes: | ||||||||
| Scrubber systems | $ | (240,961) | $ | (124,140) | $ | (468,644) | $ | (123,007) |
| Nozzle systems | $ | (185,767) | $ | (44,230) | $ | (145,960) | $ | 28,900 |
| Total | $ | (426,728) | $ | (168,370) | $ | (614,604) | $ | (94,107) |
8 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
Forward-looking statements in this Report, including without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed therein. In evaluating these statements, you should specifically consider the risks discussed in our Annual Report on Form 10-KSB for the year ended June 30, 2003 and other reports or documents that we have filed from time to time with the SEC.
Due to deferred demand in the capital goods markets relative to the timing of environmental regulatory changes, the scrubber systems business segment, and to a lesser degree the nozzle systems business segment, has experienced depressed revenue levels for large systems orders although our parts order levels have remained largely constant. Although there can be no assurances, we expect to continue to receive new order placements early in the 2004 calendar year, with positive revenue impact expected late in our third and in our fourth quarters of fiscal 2004 and into 2005. At the end of January 2004, in-house orders received and expected to convert to revenue by June 30, 2004 total $1.9 million.
Three Months ended December 31, 2003
Compared with Three Months ended December 31, 2002
Nozzle systems revenue increased by $18,755 (3.6%) to $538,453 for the three-month period ended December 31, 2003 from $519,698 for the same period in fiscal 2003. The increase is the result of increased sales of evaporative gas cooling systems in the period.
Scrubber system revenue decreased by $490,292 (71.9%) to $191,446 for the three month period ended December 31, 2003 from $681,738 for the same period one year earlier. As discussed above regarding the deferred demand in the capital goods markets and environmental regulatory change, decreased revenue for scrubber systems and, to a lesser degree, spare parts from the levels recorded for the same period in fiscal 2003 are responsible for this reduction.
Cost of nozzle systems increased by $25,431 (6.6%) to $413,633 for the three months ended December 31, 2003 from $388,202 for the same period in fiscal 2003. The higher costs are due to the increased gas cooling systems revenue volume discussed above and the associated historically lower margins of these systems compared to parts order revenue. As a percentage of nozzle systems revenue, the cost of nozzle systems increased to 76.8% for the three month period ended December 31, 2003 from 74.7% for the same period in fiscal 2003, due to the higher proportion of systems revenue to the total, and the associated lower margins.
Cost of scrubber systems decreased by $370,588 (71.4%) to $148,763 for the three month period ended December 31, 2003 from $519,351 for the same period one year earlier. The lower costs recorded were due to the reduced scrubber systems revenue volume discussed above. As a percentage of scrubber systems revenue, the cost of scrubber systems increased to 77.7% for the three-month period ended December 31, 2003 from 76.2% for the same period in fiscal 2003. The increased ratio of costs to revenue in this fiscal period was the result of lower spare parts margin percentage-wise to revenue in the current fiscal period, due to more favourable than normal margins experienced in fiscal 2003.
Selling, general and administrative expenses increased $129,010 (28.6%) to $580,284 for the three month period ended December 31, 2003 from $451,274 for the same period in fiscal 2003. The variance was the result of increases in sales travel expense, additional sales personnel and insurance premiums. As a percentage of total revenue, selling, general and administrative expenses were 79.5% for the quarter ended December 31, 2003 and 37.6% for the same period a year earlier. Also included in total expenses was $1,652 of stock-based compensation expense for the three-month period ended December 31, 2003, and $2,452 for the same period in fiscal 2003.
The loss before tax increased $258,358 to $426,728 from the loss before taxes of $168,370 for the same period in fiscal 2003. Income tax expense of nil was recorded in the three month period ended December 31, 2003 compared to an income tax recovery of $26,184 in the same period one year ago.
An "other comprehensive income" of $54,968 was recorded for the three months ended December 31, 2003, as compared to "other comprehensive income" of $9,679 for the same period in fiscal 2003. The "other comprehensive income" in the comparative quarters was the result of the fluctuation in the value of the Canadian dollar relative to the US dollar in the two fiscal periods, and the resulting changes in our balance sheet relative to Canadian dollar-denominated accounts.
9 -
Six Months ended December 31, 2003
Compared with Six Months ended December 31, 2002
Nozzle systems revenue decreased by $285,362 (20.9%) to $1,081,509 for the six-month period ended December 31, 2003 from $1,366,871 for the same period in fiscal 2003. The decrease is primarily the result of reduced revenue for semi-dry spray systems compared to the same fiscal period one year ago, and as discussed above regarding deferred demand in the capital goods market and environmental regulatory change.
Scrubber system revenue decreased by $1,268,738 (61.5%) to $795,010 for the six month period ended December 31, 2003 from $2,063,748 for the same period one year earlier. As discussed above regarding the deferred demand in the capital goods markets and environmental regulatory change, decreased revenue for wet scrubber systems from the levels recorded for the same period in fiscal 2003 is responsible for this reduction.
Cost of nozzle systems decreased by $260,329 (25.6%) to $756,219 for the six months ended December 31, 2003 from $1,016,548 for the same period in fiscal 2003. The lower costs due to the reduced nozzle systems revenue volume discussed above were partially offset by the increased margins on a percentage-wise basis, due to the higher proportion of parts order revenue to the total in 2004. As a percentage of nozzle systems revenue, the cost of nozzle systems decreased to the total to 69.9% for the six month period ended December 31, 2003 from 74.4% for the same period in fiscal 2003, due to the higher proportion of parts revenue to the total, and the associated higher margins.
Cost of scrubber systems decreased by $1,058,352 (62.9%) to $625,030 for the six month period ended December 31, 2003 from $1,683,382 for the same period one year earlier. The lower costs recorded were due to the reduced scrubber systems revenue volume discussed above. As a percentage of scrubber systems revenue, the cost of scrubber systems was 78.6% versus 81.6% for the same period in fiscal 2003. The reduced ratio of costs to revenue was the result of higher than normal margins achieved on scrubber systems in the current fiscal period.
Selling, general and administrative expenses increased $280,403 (34.9%) to $1,084,634 for the six month period ended December 31, 2003 from $804,231 for the same period in fiscal 2003. The variance was the result of increases in sales travel expense, additional sales personnel and insurance premiums. As a percentage of total revenue, selling, general and administrative expenses were 57.8% for the two quarters ended December 31, 2003 and 23.4% for the same period a year earlier. Also included in total expenses was $3,475 of stock-based compensation expense for the six-month period ended December 31, 2003, and $4,112 for the same period in fiscal 2003.
The loss before tax increased $520,497 to $614,604 from the loss before taxes of $94,107 for the same period in fiscal 2003. Income tax expense of $1,620 was recorded in the six month period ended December 31, 2003 compared to $16,095 tax expense in the same period one year ago.
An "other comprehensive income" of $49,310 was recorded for the six months ended December 31, 2003, as compared to "other comprehensive loss" of $49,103 for the same period in fiscal 2003. The "other comprehensive loss and income" in the comparative quarters was the result of the fluctuation in the value of the Canadian dollar relative to the US dollar in the two fiscal periods, and the resulting changes in our balance sheet relative to Canadian dollar-denominated accounts.
Liquidity and Capital Resources
The Company had net cash applied to operating activities of $671,879 for the six-month period ended December 31, 2003 as compared to net cash provided by operating activities of $303,188 for the same period in fiscal 2003. The net cash applied for the period ended December 31, 2003 is primarily the result of the operating loss, an increase in accounts receivable, together with a decrease in unearned revenue and contract advances. The net cash provided in the prior period was the result of a decrease in accounts receivable and increases in accounts payable and accrued charges and income taxes payable.
At December 31, 2003, the Company had working capital of $651,543, as compared to working capital as at June 30, 2003 of $1,230,598, a decrease of $579,055. The Company's current ratio (current assets divided by current liabilities) was 1.76 and 2.39 as at December 31, 2003 and June 30, 2003, respectively.
The Company's contracts typically provide for progress payments based upon the achievement of performance milestones or the passage of time. The Company's contracts often provide for the Company's customers to retain a portion of the contract price until the achievement of performance guarantees has been demonstrated. The Company endeavours to have its progress billings exceed its costs and estimated earnings on uncompleted contracts; however, it is possible that, at any point in time, costs and estimated earnings can exceed progress billings on uncompleted contracts, which would
10 -
negatively impact cash flow and working capital. At December 31, 2003, "Billings in excess of costs and estimated earnings on uncompleted contracts" exceeded "Deferred contract costs and unbilled revenue" by $129,753, thereby favourably impacting cash flow. At June 30, 2003, "Billings in excess of costs and estimated earnings on uncompleted contracts" also exceeded "Deferred contract costs and unbilled revenue" by $156,738. The variances are the result of favourable terms of payment with our current mix of contracts in progress.
The Company's backlog at December 31, 2003 was approximately $1.15 million, of which the Company believes 100% will be shipped prior to the end of the current fiscal year. With the value of new bookings received in January 2004, the projected value of shipments from backlog prior to the end of fiscal 2004 has risen to $1.9 million. The Company believes that the projected cash generated from operations, together with current cash reserves will be sufficient to meet its cash needs through the coming year.
Quantitative and Qualitative Information About Market Risk
The Company does not engage in trading market risk sensitive instruments and does not purchase hedging instruments or "other than trading" instruments that are likely to expose the Company to market risks, whether interest rate, foreign currency exchange, commodity price or equity prices risk. The Company has purchased no options and entered into no swaps. The Company has no bank borrowing facility, which could subject it to the risk of interest rate fluctuations.
Item 3. Controls and Procedures.
Management of the Company carried out an evaluation, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures as of December 31, 2003. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by it in reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission.
There has not been any change in the Company's internal control over financial reporting in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act that occurred during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
11 -
Part II - Other Information
| Item 1. | None | ||||
| Item 2. | During the three months ended December 31, 2003, the Company granted stock options to its directors | ||||
| to purchase an aggregate of 120,000 shares of common stock. These stock options were not registered | |||||
| under the Securities Act of 1933 because the issuance of such securities either did not involve an offer | |||||
| or sale for purposes of Section 2(a)(3) of the Securities Act of 1933, in reliance on the fact that the stock | |||||
| options were granted for no consideration, or were offered and sold in transactions not involving a | |||||
| public offering, exempt from registration under the Securities Act of 1933 pursuant to Section 4(2). | |||||
| Item 3. | None | ||||
| Item 4. | Submission of Matters to a Vote of Security Holders | ||||
| The Annual Meeting of Stockholders was held December 11, 2003. | |||||
| The voting results of the meeting were as follows: | |||||
| 1) | Election of Officers: | ||||
| Name | For | Against | |||
| Edward F. Spink | 7,157,012 | 27,743 | |||
| Patrick J. Forde | 7,156,985 | 27,770 | |||
| Richard H. Hurd | 7,154,401 | 30,354 | |||
| Dr. Donald R. Spink | 7,156,985 | 27,770 | |||
| Jonathan R. Lagarenne | 7,178,163 | 6,592 | |||
| Frederick G. Berlet | 7,178,136 | 6,619 | |||
| James R. Thompson | 7,178,163 | 6,592 | |||
| Michael J. Widico | 7,178,163 | 6,592 | |||
| 2) | Ratification of Selection of Ernst & Young as Independent Auditors: | ||||
| For | Against | Abstention | |||
| 7,167,433 | 15,285 | 2,037 | |||
| Item 5. | None | ||||
| Item 6. | (a) | Exhibit 31.1 | Rule 13a-14(a)/15d-14(a) Certifications | ||
| Exhibit 32.1 | Section 1350 Certifications | ||||
| (b) | None | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 17, 2004
| TURBOSONIC TECHNOLOGIES, INC. |
| By: /s/ PATRICK J. FORDE |
| Patrick J. Forde, President, |
| Secretary and Treasurer |
