UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 March 31, 2005
Commission file number 0-21832
TURBOSONIC TECHNOLOGIES, INC.
(Exact Name of Small Business Issuer in its Charter)
| Delaware | 13-1949528 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
550 Parkside Drive, Suite A-14,
Waterloo, Ontario, Canada
N2L 5V4
(Address of principal executive offices)
(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
No
The number of shares outstanding of the Issuer's common stock as of March 31, 2005: 10,507,197
Transitional Small Business Disclosure Format (check one): Yes No
| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | Form 10-QSB |
| INDEX | |
| PART I: FINANCIAL INFORMATION | PAGE |
| ITEM 1: Consolidated Condensed Statement of Income (Loss) and Comprehensive Income (Loss) | |
| (Unaudited) for the Three-Month and Nine Month Periods Ended March 31, 2005 and March 31, | |
| 2004 | 3 |
| Consolidated Condensed Balance Sheet (Unaudited) at March 31, 2005 and June 30, 2004 | 4 |
| Consolidated Condensed Statement of Cash Flows (Unaudited) for the Nine Month Periods | |
| Ended March 31, 2005 and March 31, 2004 | 5 |
| Notes to Consolidated Financial Statements (Unaudited) | 6-8 |
| ITEM 2: Management's Discussion and Analysis of Financial Conditions and Results of Operation | 8-10 |
| ITEM 3: Controls and Procedures | 10 |
| PART II: OTHER INFORMATION | |
| ITEM 1: Legal Proceedings | 11 |
| ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds | 11 |
| ITEM 3: Defaults Upon Senior Securities | 11 |
| ITEM 4: Submission of Matters to a Vote of Security Holders | 11 |
| ITEM 5: Other Information | 11 |
| ITEM 6: Exhibits | 11 |
| Signature | 11 |
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| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | Form 10-QSB |
CONSOLIDATED CONDENSED STATEMENT OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
United States dollars (unaudited)
(see note 1 - Going Concern)
| For the Three | For the Three | For the Nine | For the Nine | |
| Months Ended | Months Ended | Months Ended | Months Ended | |
| March 31, 2005 | March 31, 2004 | March 31, 2005 | March 31, 2004 | |
| $ | $ | $ | $ | |
| OEM systems revenue | 3,309,462 | 522,156 | 5,371,863 | 1,200,803 |
| Aftermarket revenue | 771,140 | 638,547 | 2,382,730 | 1,836,419 |
| Total revenue | 4,080,602 | 1,160,703 | 7,754,593 | 3,037,222 |
| OEM systems costs | 3,006,196 | 514,971 | 4,877,726 | 1,181,065 |
| Aftermarket costs | 514,143 | 357,875 | 1,569,462 | 1,073,028 |
| Total cost of goods sold | 3,520,339 | 872,846 | 6,447,188 | 2,254,093 |
| OEM systems gross profit | 303,266 | 7,185 | 494,137 | 19,738 |
| Aftermarket gross profit | 256,997 | 280,672 | 813,268 | 763,391 |
| Gross profit | 560,263 | 287,857 | 1,307,405 | 783,129 |
| Selling, general and administrative expenses | 538,349 | 530,697 | 1,590,685 | 1,615,331 |
| Stock-based compensation expense | 510 | 1,573 | 1,792 | 5,048 |
| Depreciation and amortization | 20,451 | 15,842 | 60,471 | 45,022 |
| Total expenses | 559,310 | 548,112 | 1,652,948 | 1,665,401 |
| Income (loss) from operations | 953 | (260,255) | (345,543) | (882,272) |
| Interest income net | 2,445 | 155 | 3,229 | 7,570 |
| Income (loss) before taxes | 3,398 | (260,100) | (342,314) | (874,702) |
| Recovery of income taxes | (19,287) | (18,551) | (18,787) | (16,931) |
| Net income (loss) | 22,685 | (241,549) | (323,527) | (857,771) |
| Other comprehensive (loss) income: | ||||
| Foreign currency translation | (12,120) | (19,429) | 139,396 | 29,881 |
| Comprehensive income (loss) | 10,565 | (260,978) | (184,131) | (827,890) |
| Weighted average number of shares | 10,507,220 | 10,507,250 | 10,507,220 | 10,507,250 |
| Diluted weighted average number of shares [note 9] | 10,576,959 | 10,507,250 | 10,507,220 | 10,507,250 |
| Basic EPS | 0.00 | (0.02) | (0.03) | (0.08) |
| Diluted EPS | 0.00 | (0.02) | (0.03) | (0.08) |
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| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | Form 10-QSB |
CONSOLIDATED CONDENSED BALANCE SHEET
United States dollars (unaudited)
(see note 1 - Going Concern)
| March 31, 2005 | June 30, 2004 | ||
| $ | $ | ||
| ASSETS | |||
| Current assets: | |||
| Cash and cash equivalents | 1,877,796 | 219,738 | |
| Contracts and accounts receivable, net of allowance for doubtful accounts of $18,986 and nil | 1,577,192 | 1,249,721 | |
| Retentions receivable | 95,112 | 71,347 | |
| Deferred contract costs and unbilled revenue [note 5] | 144,932 | 38,233 | |
| Inventories | 69,409 | 52,514 | |
| Other current assets | 122,792 | 66,808 | |
| Total current assets | 3,887,233 | 1,698,361 | |
| Capital assets, at cost, net of accumulated depreciation | 72,086 | 111,230 | |
| Goodwill [note 7] | 398,897 | 398,897 | |
| Other assets | 21,522 | 21,827 | |
| Total assets | 4,379,738 | 2,230,315 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||
| Current liabilities: | |||
| Accounts payable | 1,758,089 | 528,928 | |
| Accrued expenses | 420,865 | 359,675 | |
| Billings in excess of costs and estimated earnings on uncompleted contracts [note 5] | 1,385,811 | 340,308 | |
| Obligations under capital leases, current portion | 9,051 | 8,873 | |
| Total current liabilities | 3,573,816 | 1,237,784 | |
| Obligations under capital leases, long-term portion | 6,350 | 10,605 | |
| 3,580,166 | 1,248,389 | ||
| Stockholders' equity | |||
| Share capital | |||
| Authorized | |||
| 21,800,000 Common shares, par value $0.10 per share | |||
| 8,200,000 Exchangeable common shares, par value $0.10 per share | |||
| Issued | |||
| 6,385,832 Common shares [note 8] | 50,725 | 50,725 | |
| 4,121,365 Exchangeable shares | 2,299,093 | 2,299,093 | |
| Additional paid - in capital [notes 3 and 8] | 2,024,433 | 2,022,655 | |
| 4,374,251 | 4,372,473 | ||
| Accumulated other comprehensive income | 265,912 | 126,516 | |
| Accumulated deficit | (3,840,591) | (3,517,063) | |
| Total stockholders' equity | 799,572 | 981,926 | |
| Total liabilities and stockholders' equity | 4,379,738 | 2,230,315 | |
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| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | Form 10-QSB |
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
United States dollars (unaudited)
(see note 1 - Going Concern)
| For the Nine | For the Nine | |
| Months Ended | Months Ended | |
| March 31, 2005 | March 31, 2004 | |
| $ | $ | |
| CASH FLOWS FROM OPERATING ACTIVITIES | ||
| Net loss | (323,527) | (857,771) |
| Add charge to operations not requiring a current cash payment: | ||
| Stock-based compensation expense | 1,792 | 5,048 |
| Depreciation and amortization | 60,471 | 45,022 |
| (261,264) | (807,701) | |
| CHANGES IN NON-CASH BALANCES RELATED TO OPERATIONS | ||
| (Increase) in contracts & accounts receivable: | (202,958) | (356,144) |
| (Increase) decrease in retentions receivable | (16,326) | 72,229 |
| (Increase) in inventories | (13,023) | (18,114) |
| (Increase) in deferred contract costs and unbilled revenue | (101,339) | (38) |
| (Increase) in other current assets | (49,076) | (59,902) |
| Decrease in other assets | 575 | -- |
| Increase in accounts payable and accrued expenses | 1,176,802 | 147,143 |
| Increase in unearned revenue and contract advances | 983,642 | 162,937 |
| 1,778,297 | (51,889) | |
| Net cash provided by (applied to) operating activities | 1,517,033 | (859,590) |
| CASH FLOWS FROM INVESTING ACTIVITIES | ||
| Purchase of capital assets | (12,432) | (73,901) |
| Net cash (applied to) investing activities | (12,432) | (73,901) |
| CASH FLOWS FROM FINANCING ACTIVITIES | ||
| Funds advanced for capital assets | -- | 16,365 |
| (Repayment) of capital leases | (5,910) | (10,284) |
| Net cash (applied to) provided by financing activities | (5,910) | 6,081 |
| Effect of exchange rate change on cash | 159,367 | 24,067 |
| Net cash provided (applied) during the period | 1,658,058 | (903,343) |
| Cash - beginning of period | 219,738 | 1,183,885 |
| Cash - end of period | 1,877,796 | 280,542 |
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| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | Form 10-QSB |
NOTE 1: GOING CONCERN UNCERTAINTY
These consolidated financial statements have been prepared on a going concern basis, which presumes that assets will be realized and liabilities discharged in the normal course of business over the foreseeable future. The Company has incurred significant losses during the current fiscal year and the past two most recently completed fiscal years, which have reduced the Company's cash reserves and reduced stockholders' equity. These conditions raise substantial doubt about the Company's ability to continue in the normal course of business as a going concern. The Company's ability to continue in the normal course of business is dependent on achieving a profitable level of operations and support from the Company's suppliers and shareholders.
In order to reverse this trend, the Company has taken initiatives to optimize operating expenses and to generate new OEM system and Aftermarket orders. As the result of marketing and sales plans instituted in fiscal 2004, the Company received new OEM systems orders valued in excess of $12 million in the fourth quarter of fiscal 2004 and the first three quarters of fiscal 2005, with positive revenue impact commencing late in the fourth quarter of fiscal 2004 and expected to continue into all quarters of fiscal 2005 and the first two quarters of fiscal 2006. Additionally, the Company is also pursuing a line of credit on the basis of current and future projects. TurboSonic currently has no debt. The Company has not yet addressed the prospects of shareholder loans or equity financing. Based upon reported revenue and confirmed orders at March 31, 2005, its current cash position, and an anticipated stream of Aftermarket orders, subject to its profitable execution of projects and successful management of costs, the Company expects to have sufficient operating cash for fiscal 2005.
These consolidated financial statements do not include any of the adjustments to the amounts or classification of assets and liabilities that may be required should the Company be unable to continue its business in the normal course of business.
NOTE 2: GENERAL
The Company, directly and through subsidiaries, designs and markets integrated air 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 Item 310(b) of Regulation S-B. 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 nine-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending June 30, 2005. 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, 2004.
NOTE 3: STOCK-BASED COMPENSATION
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:
| For the Three | For the Three | For the Nine | For the Nine | |
| Months Ended | Months Ended | Months Ended | Months Ended | |
| March 31, 2005 | March 31, 2004 | March 31, 2005 | March 31, 2004 | |
| $ | $ | $ | $ | |
| Net income (loss) | 22,685 | (241,549) | (323,527) | (857,771) |
| Stock-based compensation expense | ||||
| under APB No. 25 | 510 | 1,573 | 1,792 | 5,048 |
| Stock-based compensation expense | ||||
| under SFAS No. 123 | (510) | (6,456) | (2,652) | (52,968) |
| Pro forma income (loss) | 22,685 | (246,432) | (324,387) | (905,691) |
| Pro forma income (loss) per share: | ||||
| Basic | 0.00 | (0.02) | (0.03) | (0.09) |
| Diluted | 0.00 | (0.02) | (0.03) | (0.09) |
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| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | Form 10-QSB |
NOTE 4: WARRANTY
In accordance with FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others", the Company is required to make the following disclosure regarding product warranties.
As part of the normal sale of OEM 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 charges in the accompanying consolidated balance sheets:
| For the Three | For the Three | For the Nine | For the Nine | |
| Months Ended | Months Ended | Months Ended | Months Ended | |
| March 31, 2005 | March 31, 2004 | March 31, 2005 | March 31, 2004 | |
| $ | $ | $ | $ | |
| Opening balance | 69,165 | 62,180 | 60,442 | 68,623 |
| Payments made during the period | (114) | (26,572) | (4,856) | (39,689) |
| Warranty provision made during the period | (436) | 33,047 | 13,029 | 39,721 |
| Transfers made during the period | (18,986) | 0 | (18,986) | 0 |
| Closing balance | 49,629 | 68,655 | 49,629 | 68,655 |
The transfer noted above was a re-allocation to the reserve for doubtful accounts.
NOTE 5: COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
| March 31, 2005 | June 30, 2004 | |
| $ | $ | |
| �� | ||
| Costs incurred on uncompleted contracts | 6,953,273 | 2,548,297 |
| Estimated earnings | 739,248 | 359,735 |
| 7,692,521 | 2,908,032 | |
| Billings to date | (8,933,400) | (3,210,107) |
| (1,240,879) | (302,075) | |
| Included in accompanying balance sheets under the following captions: | ||
| Deferred contract costs and unbilled revenues | 144,932 | 38,233 |
| Estimated earnings | (1,385,811) | (340,308) |
| (1,240,879) | (302,075) |
NOTE 6: 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.
At March 31, 2005, 100,000 warrants were outstanding. These 100,000 expired on April 1, 2005. The warrants had a $1.00 exercise price. There was no exercise prior to expiry of the 100,000 warrants on April 1, 2005.
NOTE 7: GOODWILL
The Company had adopted SFAS No. 142 effective July 1, 2001, under which goodwill is no longer amortized but is subject to an annual impairment review (or more frequently if deemed appropriate). The Company completed the goodwill impairment test as at April 1, 2004 for the Aftermarket business segment, as required by SFAS No. 142. The Company has concluded that there has not been an impairment of goodwill associated with the Aftermarket segment for the year ended June 30, 2004. The next impairment test will be conducted April 1, 2005.
NOTE 8: SHARE CAPITAL
During fiscal 2004 and the first three quarters of fiscal 2005, there were no stock options exercised by employees, directors or advisers.
At the December 11, 2003 board meeting, options to purchase an aggregate of 100,000 shares of common stock were awarded to the then current directors pursuant to the 2003 Stock Plan, including options to purchase an aggregate of 40,000 shares in recognition of those directors serving on the Company's audit and compensation committees. These options have an exercise price of $0.35 per share [Black-Scholes fair value $0.28 per share], 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. Options to purchase 400,000 shares of common stock pursuant to the 2003 Stock Plan remain available for future issuance.
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| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | Form 10-QSB |
NOTE 9: 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 nine month period ended March 31, 2005, all warrants and stock options have been excluded from the denominator for the EPS calculation, as these instruments would be anti-dilutive.
NOTE 10: SEGMENT INFORMATION
During fiscal 2004, the Company realigned its business activities on the basis of long-term contracts and components/spare parts. Internal reporting to support decision-making regarding the allocation of resources and evaluation of activities was realigned to be consistent with the alignment of the business. As such the Company commenced reporting to shareholders on the two business segments into which management now classifies the business - OEM systems and Aftermarket. The comparative segment information has been reclassified to be consistent with this presentation.
| For the Three | For the Three | For the Nine | For the Nine | |
| Months Ended | Months Ended | Months Ended | Months Ended | |
| March 31, 2005 | March 31, 2004 | March 31, 2005 | March 31, 2004 | |
| $ | $ | $ | $ | |
| Income (loss) before provision for | ||||
| income taxes: | ||||
| OEM systems | (37,870) | (326,847) | (497,947) | (990,369) |
| Aftermarket | 41,268 | 66,747 | 155,633 | 115,667 |
| Total | 3,398 | (260,100) | (342,314) | (874,702) |
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, such as the Company's dependence on environmental regulation and the concentration of its revenues among a small group of customers, which could cause actual results to differ materially from those expressed therein. In evaluating these statements, you should specifically consider the risks discussed in the Company's Annual Report on Form 10-KSB for the year ended June 30, 2004 and other reports or documents that it has filed from time to time with the SEC.
The air pollution control industry has come through a very difficult period with most companies, including this Company, experiencing unprofitable operations for several years; however, the Company appears to be entering a period of significant market opportunity. The new EPA Maximum Achievable Control Technologies ("MACT") regulations that have recently been signed into law in the U.S. require compliance within three years. The Company believes it is well positioned with superior products that are designed for applications in industries now required to up-grade their air pollution controls. The Company has received new OEM systems order placements in the aggregate of $12 million commencing in the fourth quarter of fiscal 2004 and the first three quarters of fiscal 2005, with positive revenue impact experienced in the same quarters and expected for the remaining quarter of fiscal 2005 and the first two quarters of fiscal 2006.
Three Months ended March 31, 2005 Compared with Three Months ended March 31, 2004
OEM systems revenue increased by $2,787,306 (533.8%) to $3,309,462 for the three-month period ended March 31, 2005 from $522,156 for the same period in fiscal 2004. The increase is the result of increased sales in the period, and in particular, those of Wet Electrostatic Precipitator ("WESP") systems and components, for the reasons discussed above.
Aftermarket revenue increased by $132,593 (20.8%) to $771,140 for the three month period ended March 31, 2005 from $638,547 for the same period one year earlier. The increased revenue is the result of increased shipments of evaporative gas cooling components in the third quarter of fiscal 2005.
OEM systems costs increased by $2,491,225 (483.8%) to $3,006,196 for the three months ended March 31, 2005 from $514,971 for the same period in fiscal 2004. The higher costs are due to the increased volume of OEM systems work, as discussed above, together with provision for contract-specific rework costs due to performance issues on a venturi scrubber order and a WESP component order and increased projected costs on a WESP order.
Aftermarket costs increased by $156,268 (43.7%) to $514,143 for the three month period ended March 31, 2005 from $357,875 for the same period one year earlier. The higher costs recorded were due to the increased revenue volume discussed above.
The OEM gross profit increased to 9.2% for the three month period ended March 31, 2005 from 1.4% for the same period in fiscal 2004, due to the level of over absorbed engineering costs in the current three month period compared to the level of under absorbed engineering costs in the corresponding three months of fiscal 2004 partially offset by the provision in the current quarter for contract-specific rework costs relating to performance issues and increased projected costs on a WESP order.
The Aftermarket gross profit decreased to 33.3% for the three-month period ended March 31, 2005 from 44.0% for the same period in fiscal
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| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | Form 10-QSB |
2004. The decreased gross profit for the three month period ended March 31, 2005 compared to the same period one year earlier was the result of a favourable variance in the previous fiscal period on close-out of a scrubber upgrade not duplicated in the current fiscal period.
Selling, general and administrative expenses increased $7,652 (1.4%) to $538,349 for the three month period ended March 31, 2005 from $530,697 for the same period in fiscal 2004. The variance was the result of increases in sales expenses including travel expense. As a percentage of total revenue, selling, general and administrative expenses were 13.2% for the quarter ended March 31, 2005 and 45.7% for the same period a year earlier. Also included in total expenses was $510 of stock-based compensation expense for the three-month period ended March 31, 2005, and $1,573 for the same period in fiscal 2004.
For the quarter ended March 31, 2005, income before tax was $3,398 compared to the loss before taxes of $260,100 for the same period in fiscal 2004, an increase of $264,398. Income tax recovery of $19,287 was recorded in the three month period ended March 31, 2005 compared to $18,551 in the same period one year ago.
An "other comprehensive loss" of $12,120 was recorded for the three months ended March 31, 2005, as compared to an "other comprehensive loss" of $19,429 for the same period in fiscal 2004. The change in "other comprehensive income" between 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 the Company's balance sheet relative to Canadian dollar-denominated accounts.
Nine Months ended March 31, 2005 Compared with Nine Months ended March 31, 2004
OEM systems revenue increased by $4,171,060 (347.4%) to $5,371,863 for the nine-month period ended March 31, 2005 from $1,200,803 for the same period in fiscal 2004. The increase is the result of increased sales in the period, and in particular, those of WESP system and components and venturi scrubbers, for the reasons discussed above.
Aftermarket revenue increased by $546,311 (29.8%) to $2,382,730 for the nine month period ended March 31, 2005 from $1,836,419 for the same period one year earlier. The increased revenue is the result of increased shipments of evaporative gas cooling components in the first three quarters of fiscal 2005.
OEM systems costs increased by $3,696,661 (313.0%) to $4,877,726 for the nine months ended March 31, 2005 from $1,181,065 for the same period in fiscal 2004. The higher costs are due to the increased volume of OEM systems work, as discussed above, together with provision for contract-specific rework costs due to performance issues on a venturi scrubber order and a WESP component order and projected increased costs on a WESP order.
Aftermarket costs increased by $496,434 (46.3%) to $1,569,462 for the nine month period ended March 31, 2005 from $1,073,028 for the same period one year earlier. The higher costs recorded were due to the increased revenue volume discussed above.
OEM systems gross profit increased to 9.2% for the nine month period ended March 31, 2005 from 1.6% for the same period in fiscal 2004, due to the level of over absorbed engineering costs in the current nine month period compared to the level of under absorbed engineering costs in the first nine months of fiscal 2004, partially offset by the provision for contract-specific rework costs due to performance issues, increased projected costs on a WESP order and foreign exchange losses
The Aftermarket gross profit decreased to 34.1% for the nine month period ended March 31, 2005 from 41.6% for the same period in fiscal 2004. The increased ratio of costs to revenue for the nine month period ended March 31, 2005 compared to the same period one year earlier was the result of a favourable variance in the previous fiscal period on close-out of a scrubber upgrade not duplicated in the current fiscal period.
Selling, general and administrative expenses decreased $24,646 (1.5%) to $1,590,685 for the nine month period ended March 31, 2005 from $1,615,331 for the same period in fiscal 2004. The variance was the result of decreases in sales expenses including travel expense. As a percentage of total revenue, selling, general and administrative expenses were 20.5% for the nine month period ended March 31, 2005 and 53.2% for the same period a year earlier. Also included in total expenses was $1,792 of stock-based compensation expense for the nine month period ended March 31, 2005, and $5,048 for the same period in fiscal 2004.
The loss before tax decreased $532,388 to $342,314 from the loss before taxes of $874,702 for the same period in fiscal 2004. Income tax recovery of $18,787 was recorded in the nine month period ended March 31, 2005 compared to an income tax recovery of $16,931 in the same period one year ago.
An "other comprehensive income" of $139,396 was recorded for the nine months ended March 31, 2005, as compared to "other comprehensive income" of $29,881 for the same period in fiscal 2004. The change in "other comprehensive income" between 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 the Company's balance sheet relative to Canadian dollar-denominated accounts.
Liquidity and Capital Resources
The Company had net cash provided by operating activities of $1,517,033 for the nine month period ended March 31, 2005 as compared to net cash applied to operating activities of $859,590 for the same period in fiscal 2004. The net cash provided for the nine month period ended March 31, 2005 is primarily the result of the operating loss more than offset by increased unearned revenue and contract advances, together with accounts payable and accrued charges. The net cash applied in the prior nine month period was the result of the operating loss plus increased current assets. The operating loss in the latter period was the result of a reduced level of OEM system orders as discussed above.
At March 31, 2005, the Company had working capital of $313,417, as compared to working capital as at June 30, 2004 of $460,577, a decrease of $147,160. The Company's current ratio (current assets divided by current liabilities) was 1.09 and 1.37 as at March 31, 2005 and June 30, 2004, respectively. TurboSonic has no debt.
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| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | Form 10-QSB |
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 negatively impact cash flow and working capital. At March 31, 2005, "Billings in excess of costs and estimated earnings on uncompleted contracts" exceeded "Deferred contract costs and unbilled revenue" by $1,257,413, thereby favourably impacting cash flow. At June 30, 2004, "Billings in excess of costs and estimated earnings on uncompleted contracts" also exceeded "Deferred contract costs and unbilled revenue" by $302,075. The variances are the result of favourable terms of payment with the Company's current contracts in progress.
The Company's backlog at March 31, 2005 was approximately $8.7 million, of which the Company believes 37% will be shipped prior to the end of the current fiscal year.
Based upon reported revenue and confirmed orders at March 31, 2005, its current cash position, initiatives to optimize operating expenses, and an anticipated stream of Aftermarket orders, subject to profitable execution of projects and successful management of costs, the Company expects to have enough cash to fund its operations over the next twelve-month period. At March 31, 2005 the cash balance was $1,877,796, which is an increase of $1,658,058 compared to June 30, 2004. As indicated earlier, the Company has received new OEM systems orders in the fourth quarter of fiscal 2004 and the first three quarters of fiscal 2005, with positive revenue impact realized in the fourth quarter of fiscal 2004 and expected to continue into all quarters of fiscal 2005 and the first two quarters of fiscal 2006. The Company is also pursuing a line of credit on the basis of current and future projects. The Company has not yet addressed the prospects of shareholder loans or equity financing.
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 not entered into forward or future contracts, purchased options and entered into swaps. The Company has no outstanding debt, 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 March 31, 2005. 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 March 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | Form 10-QSB |
| PART II: OTHER INFORMATION | |
| ITEM 1: Not applicable. | |
| ITEM 2: Not applicable | |
| ITEM 3: Not applicable | |
| ITEM 4: Not applicable | |
| ITEM 5: Not applicable | |
| ITEM 6: Exhibit 31.1 | Rule 13a-14(a)/15d-14(a) Certifications |
| Exhibit 32.1 | Section 1350 Certifications |
SIGNATURE
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: May 13, 2005
| TURBOSONIC TECHNOLOGIES, INC. |
| By: /s/ Patrick J. Forde |
| Patrick J. Forde, President, |
| Secretary and Treasurer |
| (Chief Financial Officer) |
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