UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
Commission file number 0-21832
TURBOSONIC TECHNOLOGIES, INC.
(Exact name of Registrant as specified 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)
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 Indicate by check mark whether the Issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes Q No £
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. :
Large accelerated filer £ Accelerated filer £ Non-accelerated filer £ Smaller reporting company Q
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No Q
As of October 31, 2008, there were 15,130,054 shares of common stock outstanding.
| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | (unaudited) | Form 10-Q |
TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2008
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
| Item 1. Financial Statements |
Consolidated Condensed Statements of Income and Comprehensive Income (unaudited) for the Three Month Periods Ended September 30, 2008 and 2007 |
Consolidated Condensed Balance Sheets (unaudited) at September 30, 2008 and June 30, 2008 |
Consolidated Condensed Statements of Cash Flows (unaudited) for the Three Month Periods Ended September 30, 2008 and 2007 |
Notes to Consolidated Financial Statements (unaudited) |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
| Item 3. Quantitative and Qualitative Disclosures about Market Risk |
| Item 4. Controls and Procedures |
PART II
OTHER INFORMATION
| Item 1. Legal Proceedings |
| Item 1A. Risk Factors |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
| Item 3. Defaults upon Senior Securities |
| Item 4. Submission of Matters to a Vote of Security Holders |
| Item 5. Other Information |
| Item 6. Exhibits |
–2–
| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | (unaudited) | Form 10-Q |
PART I: FINANCIAL INFORMATION
ITEM 1
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
United States dollars
| For the Three | For the Three | |
| Months Ended | Months Ended | |
| September 30, | September 30, | |
| 2008 | 2007 | |
| $ | $ | |
| CONTRACT REVENUE AND SALES | ||
| OEM systems revenue | 4,236,098 | 2,228,595 |
| Aftermarket revenue | 810,053 | 1,032,981 |
5,046,151 | 3,261,576 | |
|
| |
|
| |
| CONTRACT COSTS AND COST OF SALES |
|
|
| OEM systems contract costs and costs of sales | 3,355,777 | 2,005,487 |
| Aftermarket contract costs and costs of sales | 449,934 | 669,993 |
3,805,711 | 2,675,480 | |
| Gross profit | 1,240,440 | 586,096 |
|
| |
| EXPENSES |
|
|
| Selling, general and administrative | 1,113,231 | 928,558 |
| Research and development | 26,992 | 15,732 |
| Depreciation and amortization | 41,849 | 43,723 |
1,182,072 | 988,013 | |
|
| |
|
| |
| Gain (loss) income from operations | 58,368 | (401,917) |
| Interest income | 5,911 | 19,545 |
| Income (loss) before provision for (recovery of) income taxes | 64,279 | (382,372) |
| Provision for (recovery of) income taxes [Note 4] | 34,715 | (145,160) |
| Net income (loss) | 29,564 | (237,212) |
|
| |
|
| |
| Other comprehensive income (loss): |
|
|
Foreign currency translation adjustment | (70,570) | 112,422 |
| Comprehensive (loss) income | (41,006) | (124,790) |
| ||
| Weighted average number of shares | 15,130,054 | 15,130,054 |
| Diluted weighted average number of shares [Note 6] | 15,136,727 | 15,130,054 |
| Basic (loss) earnings per share [Note 6] | 0.00 | (0.02) |
| Diluted earnings per share [Note 6] | 0.00 | (0.02) |
| See accompanying notes |
–3–
| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | (unaudited) | Form 10-Q |
CONSOLIDATED CONDENSED BALANCE SHEETS
United States dollars
| September 30, 2008 | June 30, 2008 | ||
| $ | $ | ||
| ASSETS | |||
| Current assets: | |||
| Cash and cash equivalents | 1,148,393 | 3,190,181 | |
| Accounts receivable, net of allowance for doubtful accounts of $25,853 and $29,143 | 5,052,188 | 2,209,979 | |
| Retentions receivable | 751,550 | 188,193 | |
| Deferred contract costs and unbilled revenue [note 3] | 1,399,706 | 1,011,625 | |
| Inventories | 126,250 | 118,437 | |
| Income taxes receivable | 20,873 | 17,302 | |
| Other current assets | 56,259 | 79,498 | |
| Total current assets | 8,555,219 | 6,815,215 | |
|
| ||
| Property and equipment, less accumulated depreciation and amortization | 261,031 | 311,342 | |
| Goodwill | 398,897 | 398,897 | |
| Deferred income taxes | 727,351 | 774,959 | |
| Other assets | 13,784 | 13,916 | |
1,401,063 | 1,499,114 | ||
| Total assets | 9,956,282 | 8,314,329 | |
|
| ||
|
| ||
| LIABILITIES AND SHAREHOLDERS' EQUITY |
|
| |
| Current liabilities: |
|
| |
| Accounts payable | 2,019,798 | 1,119,082 | |
| Accrued charges [note 2] | 722,936 | 534,164 | |
| Unearned revenue and contract advances [note 3] | 2,877,267 | 2,290,095 | |
| Long-term debt, current portion | 9,939 | 10,373 | |
| Total current liabilities | 5,629,940 | 3,953,714 | |
|
| ||
| Long-term debt | 7,627 | 10,535 | |
5,637,567 | 3,964,249 | ||
|
| ||
| Stockholders' equity |
|
| |
| Authorized share capital |
|
| |
30,000,000 | common shares, par value $0.10 per share |
|
|
1,500 | preferred shares, no par value |
|
|
| Issued share capital [note 5] |
|
| |
14,289,950 | common shares [14,289,950 at June 30, 2008] | 2,549,446 | 2,549,446 |
840,104 | common shares reserved for the conversion of the subsidiary's |
|
|
| Class B exchangeable shares |
|
| |
| Additional paid – in capital [note5] | 3,527,622 | 3,517,998 | |
6,077,068 | 6,067,444 | ||
| Accumulated other comprehensive income | 522,007 | 592,577 | |
| Accumulated deficit | (2,280,360) | (2,309,941) | |
| Total stockholders' equity | 4,318,715 | 4,350,080 | |
| Total liabilities and stockholders' equity | 9,956,282 | 8,314,329 | |
|
| ||
| See accompanying notes |
|
| |
–4–
| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | (unaudited) | Form 10-Q |
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
United States dollars
| For the Three | For the Three | |
| Months Ended | Months Ended | |
| September 30, 2008 | September 30, 2007 | |
| $ | $ | |
| CASH FLOWS FROM OPERATING ACTIVITIES | ||
| Net (loss) income | 29,564 | (237,212) |
| Add charges to operations not requiring a current cash payment: |
|
|
Stock-based compensation | 9,624 | 9,624 |
Depreciation and amortization | 41,849 | 43,723 |
Deferred income tax | 47,608 | (181,243) |
(Gain) on sale of fixed assets | (50) | -- |
| Changes in non-cash assets and liabilities related to operations: |
|
|
(Increase) decrease in contracts and accounts receivable: | (2,913,910) | 3,596 |
(Increase) in retentions receivable | (565,506) | (45,098) |
(Increase) in inventories | (12,937) | (13,720) |
(Increase) decrease in income taxes recoverable | (3,618) | 16,944 |
(Increase) in deferred contract costs and unbilled revenue | (402,947) | (176,024) |
Decrease in other current assets | 21,734 | 4,231 |
Increase in accounts payable and accrued charges | 1,162,807 | 742,380 |
Increase (decrease) in unearned revenue and contract advances | 633,523 | (198,593) |
|
| |
| Cash (applied to) operating activities | (1,952,259) | (31,392) |
|
| |
| CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
| Purchase of property and equipment | (4,423) | (6,199) |
| Disposition proceeds – fixed assets | 841 | -- |
| Cash (applied to) investing activities | (3,582) | (6,199) |
|
| |
| CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
| (Repayment) of obligations under capital leases | (2,501) | (2,479) |
| Cash (applied to) provided by financing activities | (2,501) | (2,479) |
|
| |
| Effect of exchange rate changes on cash | (83,446) | 86,188 |
|
| |
| Cash (applied) provided during the period | (2,041,788) | 46,118 |
| Cash and cash equivalents – beginning of period | 3,190,181 | 2,452,710 |
| Cash and cash equivalents – end of period | 1,148,393 | 2,498,828 |
|
| |
| Supplemental cash flow information: |
|
|
| Interest paid | (175) | 233 |
| Interest received | 6,036 | 19,312 |
| Income taxes paid | (15,928) | (16,367) |
| See accompanying notes |
–5–
| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | (unaudited) | Form 10-Q |
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1: GENERAL
TurboSonic Technologies, Inc., directly and through subsidiaries (collectively "TurboSonic"), designs and markets integrated air pollution control, evaporative gas cooling/conditioning systems and liquid atomization technology to ameliorate or abate industrial environmental problems.
The unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations promulgated by the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the information and footnotes required in annual financial statements. The unaudited consolidated condensed financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Operating results for the three-month period ended September 30, 2008 are not necessarily indicative of the results that may be expected for the full year ending June 30, 2009. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2008.
SFAS No. 157, "Fair Value Measurements" ("SFAS 157") and SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159") became effective for TurboSonic on July 1, 2008. The adoption of SFAS 157 had no impact on our consolidated financial statements in the fiscal period ended September 30, 2008.
NOTE 2: WARRANTY
In accordance with FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others", we are required to make the following disclosure regarding product warranties.
As part of the normal sale of OEM systems, we have provided our 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 condensed balance sheets:
| For the Three | For the Three | |
| Months Ended | Months Ended | |
| September 30, 2008 | September 30, 2007 | |
| $ | $ | |
| Opening balance | 98,362 | 94,143 |
| Payments made during the period | -- | -- |
| Warranty provision made during the period | -- | -- |
| Foreign exchange adjustments | (4,113) | 6,671 |
| Closing balance | 94,249 | 100,814 |
NOTE 3: COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
| September 30, 2008 | June 30, 2008 | |
| $ | $ | |
| Costs incurred on uncompleted contracts | 29,796,118 | 24,828,506 |
| Estimated earnings | 4,078,074 | 3,156,233 |
33,874,192 | 27,984,739 | |
| Less: Billings to date | (35,351,753) | (29,263,209) |
| (1,477,561) | (1,278,470) | |
|
| |
| Included in accompanying consolidated condensed balance sheets under the following captions: |
|
|
| Deferred contract costs and unbilled revenues | 1,399,706 | 1,011,625 |
| Unearned revenue and contract advances | (2,877,267) | (2,290,095) |
| (1,477,561) | (1,278,470) |
–6–
| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | (unaudited) | Form 10-Q |
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INCOME TAXES
We believe our income tax provision at June 30, 2008 reflects a full accounting of our tax filings and that no adjustments are required with our adoption of FIN 48. We are not currently under Internal Revenue Service, state, local or foreign jurisdiction tax examinations. We recognize interest and penalties, as estimated or incurred, as selling, general and administrative expense.
For the three months ended September 30, 2008, we recorded a provision for taxes of $34,715 based on a pre-tax income of $64,279.
NOTE 5: SHARE CAPITAL
No options to purchase shares of our common stock were exercised in the first quarter of fiscal 2009 or during fiscal 2008.
No options were granted in the first quarter of fiscal 2009. At the December 11, 2007 annual meeting, the 2008 Stock Plan was approved by a vote of shareholders. This new plan, which will expire in 2017, allows for 800,000 shares of common stock to be available for issuance pursuant to option grants under this Plan. Pursuant to the 2008 Stock Plan, options to purchase 20,000 shares of common stock were granted to each of the eight directors (160,000 in total) of our company who were elected to serve at the December 11, 2007 annual meeting. The options awarded to directors have an exercise price of $0.84 per share [Black-Scholes fair value $0.52], which was the market value at the close of business on December 11, 2007, vested immediately and are exercisable for eight years from the date of grant. The stock-based compensation expense for the options granted to directors was recognized in the second quarter of fiscal 2008 [$83,200].
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.
NOTE 7: SEGMENT INFORMATION
| For the Three | For the Three | |
| Months Ended | Months Ended | |
| September 30, 2008 | September 30, 2007 | |
| $ | $ | |
| Income (loss) before (recovery of) provision for income taxes: | ||
| - OEM systems | 7,573 | (408,178) |
| - Aftermarket | 56,706 | 25,806 |
| Total | 64,279 | (382,372) |
NOTE 9: CONTINGENT LIABILITY
On October 6, 2005 a statement of claim was filed against our company in the Ontario Superior Court of Justice (Canada) by Abuma Manufacturing Limited, one of our vendors, in which they claimed additional charges for work performed and refute our claim for back charges on a specific project. The claim is for CAD 95,647 in respect of unpaid accounts, CAD 50,000 for aggravated, punitive and/or exemplary damages, interest on the past due accounts and costs of the action. It is our position that the claims are without merit and we have filed a statement of defense and counter-claim. Each company has filed an affidavit of documents and discovery of TurboSonic has been conducted.
NOTE 10: CREDIT FACILITY
During fiscal 2008, we arranged a credit facility with a major Canadian bank for a total of CAD 4.25 million. This facility included a demand operating line of CAD 1.5 million secured by our receivables, a demand credit for standby letters of credit for CAD 2.0 million secured by a general security agreement and guarantees where provided by Export Development Canada, on a fee-for-service basis, plus a demand credit for foreign exchange contracts for CAD 750,000. At September 30, 2008 we had standby letters of credit for approximately $423,988 in place with various customers in order to receive cash proceeds in line with customer-specified milestones. There were no drawdowns against the operating or foreign exchange credit lines at September 30, 2008.
–7–
| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | (unaudited) | Form 10-Q |
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-looking statements in this Report, including without limitation, statements relating to our 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 our dependence on environmental regulation, the concentration of our revenues among a small group of customers, and economic downturns and other factors that may negatively affect our customers' demands for our products. These risks and uncertainties could cause actual results to differ materially from those expressed therein. In evaluating these statements, you should specifically consider the risks discussed in this report, our Annual Report on Form 10-K for the year ended June 30, 2008 and other reports or documents that we have filed from time to time with the SEC.
TurboSonic Technologies, Inc. designs and supplies air pollution control technologies to industrial customers worldwide. We believe our products, which are designed to meet the strictest emission regulations for gaseous and particulate emissions, afford economic and technical advantages over competitive air pollution equipment. We currently have two reportable business segments – OEM systems and Aftermarket.
Initiatives for an improved environment are on worldwide grassroots and political agendas. We believe that the increasing demand for the reduction and control of industrial air pollutants will both improve the environment and drive our growth over the long term. We also believe that we are contributing significantly to the "greening" of the production process by mitigating its environmental impact. Our products are enabling customers to reduce energy consumption, operating costs, and their carbon footprint from CO2 emissions. Growth of the biofuels market is expected to continue as the demand for "carbon-neutral" alternatives to non-renewable fuels increases. We are actively pursuing opportunities related to the production of alternative fuels as cellulosic ethanol, pelletizing, biodiesel and other biofuels processes are developed.
Sales are frequently attained through the recommendation of engineering firms who are often engaged in complete plant installations or upgrades. Other sales opportunities are sourced directly with the end user by our independent sales representatives or by our internal sales team. We have sales, project management and field service personnel in remote offices to support local markets.
Our leading edge technology and strong project management performance contribute significantly to our strategy of building long-term loyalty and growth through customer satisfaction. This allows us to serve the demanding requirements of multinational firms that we believe can provide a series of opportunities over many years.
We perform all process engineering and the detailed design and specifications for all applicable structural, electrical, mechanical and chemical components of such system. We subcontract the manufacturing of designs. When customer contracts include installation we subcontract the service. Our project managers and quality assurance personnel supervise, and manage all aspects of our contracts to ensure we meet the performance criteria, as agreed with our customers.
We conduct business in Canadian, US and European currency to accommodate customers and mitigate our exchange risk through matching the sales currency with the supplier currency, where practical, and by currency hedging through the use of forward foreign exchange contracts.
Results of Operation
As commented on in previous fiscal periods, court challenges to the implementation of the National Emission Standards for Hazardous Air Pollutants ("NESHAP") in the United States market has delayed order placement by companies intending to be compliant. The standards set by the Environmental Protection Agency ("EPA") under NESHAP for a particular source category (such as (i) plywood and composite wood and (ii) boilers and process heaters) is known as Maximum Achievable Control Technology ("MACT") standards. Plants subject to Wood MACT rules operated under an October 2008 compliance deadline, which did result in several OEM equipment orders in the second half of the 2008 fiscal year. New Boiler MACT rules in the US market for industrial steam and power generation are expected to be in force in calendar 2009, with a three-year compliance time frame. We believe we are well positioned for this market as we have a significant number of prior installations as a reference base for prospective purchasers..
We entered into several new equipment contracts in the first quarter of fiscal 2009 totaling $12.0 million, despite a downturn in several industries. A growing number of these contracts are for upgrades to previous evaporative gas cooling and wet electrostatic precipitator installations supplied by our competitors. The lower capital requirements for upgrading existing equipment over replacement with new equipment is expected to continue to have a positive impact on our revenues. Of note, our evaporative gas cooling system sales are primarily driven by process considerations and not by regulations alone. Significant savings in operating cost and reduced maintenance have been reported by certain of our customers as a consequence of their use of our proprietary designs.
In the current economic downturn we are closely monitoring our backlog orders for contract delays or cancellations, pursuing prospective orders that are driven by regulatory compliance obligations, and responding to foreign currency exchange advantages that arise as a consequence of upward movement of the US dollar. We have taken significant steps to mitigate economic cycles through expansion into the European Union, through widening our product offering, and through sales to diversified industry groups. Prospective customers continue to report intentions to place orders for air pollution control systems.
–8–
| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | (unaudited) | Form 10-Q |
We established an office in Milan, Italy in 2007 to diversify our market reach beyond North American economic and market cycles. Opportunities continue to grow in this market as a result of our growing sales network in conjunction with EU antipollution rules.
Order backlog has been building steadily since December 2007, enabling positive net income for our fourth quarter for 2008 and providing a strong start to fiscal 2009. The backlog of $5.7 million at June 30, 2008 has now grown to $15.1 million at September 30, 2008. Subsequent to September 30, 2008, three orders in progress, with a current outstanding value of approximately $2.2 million, were placed on hold by our customers. Two of these orders representing approximately 25% of the $2.2 million have now been delayed for 15 months. We anticipate a similar delay for the third order.
Three Months ended September 30, 2008 Compared with Three Months ended September 30, 2007
3 MONTH COMPARATIVE INCOME STATEMENTS AT SEPTEMBER 30, 2008 AND 2007
| 2009 | 2008 | Increase (Decrease) | ||||
| $ | % | $ | % | $ | % | |
| Contract revenue & sales | ||||||
OEM Systems | 4,236,098 | 84% | 2,228,595 | 68% | 2,007,503 | 90% |
Aftermarket parts & retrofits | 810,053 | 16% | 1,032,981 | 32% | (222,928) | (22%) |
5,046,151 | 100% | 3,261,576 | 100% | 1,784,575 | 55% | |
| Contract costs & cost of sales |
|
|
|
|
|
|
OEM Systems | 3,355,777 | 67% | 2,005,487 | 61% | 1,350,290 | 67% |
Aftermarket parts & retrofits | 449,934 | 9% | 669,993 | 21% | (220,059) | (33%) |
3,805,711 | 75% | 2,675,480 | 82% | 1,130,231 | 42% | |
| Gross profit |
|
|
|
|
|
|
OEM Systems | 880,321 | 17% | 223,108 | 7% | 657,213 | 295% |
Aftermarket parts & retrofits | 360,119 | 7% | 362,988 | 11% | (2,869) | (1%) |
1,240,440 | 25% | 586,096 | 18% | 654,344 | 112% | |
| Expenses |
|
|
|
|
|
|
Selling, general & administrative | 1,113,231 | 22% | 928,558 | 28% | 184,673 | 20% |
Research & development costs | 26,992 | 1% | 15,732 | 1% | 11,260 | 72% |
Depreciation | 41,849 | 1% | 43,723 | 1% | (1,874) | (4%) |
1,182,072 | 24% | 988,013 | 30% | 194,059 | 20% | |
|
|
|
|
|
| |
| Income (loss) from operations | 58,368 | 1% | (401,917) | (12%) | 460,285 | 115% |
|
|
|
|
|
| |
| Other (income) expense |
|
|
|
|
|
|
Interest, net | 5,911 | 0% | 19,545 | 0% | (13,634) | (70%) |
|
|
|
|
|
| |
| Income before taxes (EBT) | 64,279 | 1% | (382,372) | (12%) | 446,651 | 117% |
Provision for (recovery of) income taxes | 34,715 | 1% | (145,160) | (5%) | 179,875 | 124% |
|
|
|
|
|
| |
| Net income (loss) | 29,564 | 0% | (237,212) | (7%) | 266,776 | 112% |
OEM systems revenue increased 90% for the three month period ended September 30, 2008 over the same period in fiscal 2008, due primarily to the sale of a Wet Electrostatic Precipitator (WESP) retrofit to the wood products industry (22% of increase), and evaporative cooling systems (78% of increase) to the cement industry.
The cost of sales for OEM systems increased 67% for the three month period ended September 30, 2008 over the same period in the prior year, which reflects the increased volume partially offset by lower contract costs when compared to the prior year. In 2007, two projects incurred significant cost over-runs that skews the comparison year-to-year.
As a result, gross profit on OEM systems in the first quarter of fiscal 2009 was 21% and in the same period in fiscal 2008 was 10%. Relative to total revenue for our company, OEM Systems gross profit was 17% in the first quarter of fiscal 2009 and 7% for the same period in fiscal 2008.
Aftermarket revenues decreased 22% for the three month period ended September 30, 2008 over the same period in the prior fiscal year due mostly to decreased evaporative cooling, wet scrubber and DeNox retrofit orders and shipments. We expect that this decrease in orders is temporary in nature.
–9–
| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | (unaudited) | Form 10-Q |
The cost of sales for Aftermarket products decreased 33% for the three month period ended September 30, 2008 over the same period in fiscal 2008, which reflects in a higher gross profit return of 44% in fiscal 2009 compared to 35% in fiscal 2008. This change was due to improved cost control by project management.
The gross profit attributable to Aftermarket fell from 11% on total revenue for the three month period ended September 30, 2007 to 7% in the same period in fiscal 2009 while the dollar value remained consistent. This percentage change was the result of the increase in OEM volume and profit in the current quarter.
The gross profit contribution from OEM systems in fiscal 2009 increased 295% over fiscal 2008, and Aftermarket gross profit contributions in fiscal 2009 declined 1% over fiscal 2008. This was due to the change in mix of revenues between the reporting segments and the improvement in cost controls within both segments.
Selling, general and administrative expenses increased $184,673 (20%) for the three-month period ended September 30, 2008 over the prior fiscal year. This increase is represented by changes in the following: salaries and benefits $32,431(+18%), consulting fees $7,800(+4%), European office expenses $134,909 (+73%) and press releases $9,533 (+5%). The increased salaries and benefits are attributable to scheduled increases. Increases in the European office expenses are due to an increase in staff and expenses in support of activity levels. As a percentage of total revenue, selling, general and administrative expenses were 22% for the three month period ended September 30, 2008 compared to 28% in the comparable period in fiscal 2008.
Income before taxes increased by $446,651 (117%) for the three-month period ended September 30, 2008 over the comparable period in the prior fiscal year. This increase reflects breakeven volumes and margins achieved in the first quarter of fiscal 2009 compared to losses recorded in the first quarter of fiscal 2008.
The decrease of $13,634 in interest earned is due to the lower cash balances experienced in fiscal 2009 versus those of fiscal 2008. Cash was being used in operations in the fiscal 2009 quarter to support the growth in contract activity.
Provision for income taxes for first three months of fiscal 2009 was $34,715 compared to an income tax recovery of $145,160 for the comparable period in 2007.
The foreign currency translation adjustment reflects the exchange values for Canadian dollar and Euro accounts on the balance sheet converted to US dollars. The statement of comprehensive income reflects a decrease in the carrying value of these accounts of $70,570 during the first three months of fiscal 2009 while the shareholders' equity carries the cumulative value of currency exchange for balance sheet accounts.
Liquidity and Capital Resources
| Cash Summary | September 30, 2008 | September 30, 2007 | |
| Cash (applied to) provided by: | $ | $ | |
Operations | (1,952,259) |
| (31,392) |
Purchase of equipment | (4,423) |
| (6,199) |
Disposition proceeds – Inventory | 841 |
| -- |
Repayment of capital leases | (2,501) |
| (2,479) |
Foreign currency translation of cash | (83,446) |
| 86,188 |
| Net cash (applied) provided during the year | (2,041,788) |
| 46,118 |
| Cash beginning of year | 3,190,181 |
| 2,452,710 |
| Cash end of period | 1,148,393 |
| 2,498,828 |
|
|
| |
| Working Capital Summary |
|
|
|
| Current assets | 8,555,219 |
| 6,149,562 |
| Current liabilities | 5,629,940 |
| 3,003,581 |
Net working capital | 2,925,279 |
| 3,145,981 |
Current ratio | 1.52 |
| 2.05 |
|
|
| |
| Summary of Contracts in Progress |
|
|
|
| Contract value completed and to be invoiced | 1,399,706 |
| 1,590,434 |
| Contract advances invoiced | (2,877,267) |
| (516,739) |
Net contracts in progress | (1,477,561) |
| 1,073,695 |
|
|
| |
| Contract Backlog |
|
|
|
| Contract value to be recognized as revenue | 15,100,000 | 2,800,000 |
In the three-month period ended September 30, 2008 over the prior comparable fiscal period in fiscal 2008, operations drew $1,952,424 in cash compared to the same fiscal period in 2008 when operations drew $31,392 in cash. The drawdown of cash in fiscal 2009 is due to increased contract volume and timing of contract completion.
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| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | (unaudited) | Form 10-Q |
The working capital position returned to 1.52:1 in the three month period ended September 30, 2008 from an elevated 2.05:1 in the first quarter fiscal 2008 as contract volumes increased.
Our contract payment terms provide for funding the progression of work to the point of delivery. A final holdback amount is often dependent on commissioning, specified performance criteria or a fixed time of operations. At any point in time, the contracts in process with costs that exceed invoicing may be greater than the contracts that have been invoiced in advance of performance. At September 30, 2008, the net position of contracts in process is advance payments of $1,477,561 compared to September 30, 2007 with an investment of $1,073,695.
During 2008, we arranged a credit facility with a major Canadian bank for a total of CAD 4.25 million. At September 30, 2008 we had standby letters of credit for approximately $423,988 in place with various customers in order to receive cash proceeds consistent with customer-specified milestones. There were no drawdowns against the operating or foreign exchange credit lines at September 30, 2008.
Our backlog as at September 30, 2008 was approximately $15,100,000, compared to the September 30, 2007 backlog of $2,800,000. There are no assurances that backlog will be replicated, increased or converted at current value into revenues in the future.
In summary, we believe that we have sufficient capital resources to support anticipated operations through fiscal 2009. We do have contingent obligations for outstanding standby letters of credit (L/C) within our credit facility at September 30, 2008. We also have our full operating line of credit of CAD 1.5 million available at September 30, 2008.
ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Foreign transactions are conducted in Canadian dollars, US dollars or Euro to accommodate customers and all reporting is prepared in US dollars. As a result, fluctuations in currency exchange rates may affect operating results. To mitigate currency exposure, we attempt to contract outsourcing, where practical, in the same currency as the sales contract or with fabricators where the all-in costs, including currency, are most favorable. We do not engage in trading market risk sensitive instruments that are likely to expose us to market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk , other than as noted. In the present currency market where the Canadian dollar has decreased relative to the US dollar, we have hedged an exchange of US currency for Canadian currency commencing in October 2008 to protect exchange gains that may occur over the next eight months.
We are currently not using any bank borrowing facility, other than outstanding standby letters of credit totaling $423,988 at September 30, 2008, that could subject us to the risk of interest rate fluctuations.
ITEM 4: CONTROLS AND PROCEDURES
Our management has carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 (e) under the Securities Exchange Act of 1934) as of September 30, 2008. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2008.
There has not been any change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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| TURBOSONIC TECHNOLOGIES, INC. AND SUBSIDIARIES | (unaudited) | Form 10-Q |
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not applicable.
ITEM 1A: RISK FACTORS
There have been no material changes in the risk factors from those disclosed in Item 1A of our annual report on Form 10-K for the year ended June 30, 2008.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5: OTHER INFORMATION
Not applicable
ITEM 6: EXHIBITS
| 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: November 14, 2008 | |
| TURBOSONIC TECHNOLOGIES, INC. | |
| By: /s/ Carl A. Young | |
| Carl A. Young | |
| Chief Financial Officer |
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