Add
ATCO to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| ATCO > SEC Filings for ATCO > Form 10-K on 7-Jan-2008 | All Recent SEC Filings |
7-Jan-2008
Annual Report
The discussion and analysis set forth below in this section should be read in conjunction with the information presented in other sections of this Annual Report on Form 10-K, including "Item 1. Business," "Item 1A. Risk Factors," "Item 6. Selected Financial Data," and "Item 8. Financial Statements and Supplementary Data." This discussion contains forward-looking statements which are based on our current expectations and industry experience, as well as our perception of historical trends, current market conditions, current economic data, expected future developments and other factors that we believe are appropriate under the circumstances. These statements involve risks and uncertainties that could cause actual results to differ materially from those suggested in the forward-looking statements.
Overview
We are a pioneer of highly intelligible, high clarity directed sound technologies and products. We aggressively seek to create markets for our products, and we are increasing our focus on and investment in worldwide sales and marketing activities while we continue to innovate.
We believe that our products are at price and performance points to attract serious market interest. Accelerating our product sales and revenue growth will require continued organizational discipline, customer focus and a sustained marketing push of our company and products. We are focused on these areas of our business while also containing costs.
We invest significant funds in research and development and on patent applications related to our technologies. Unanticipated technical or manufacturing obstacles can arise at any time, disrupt product sales or licensing activities, and result in lengthy and costly delays. Our products may not achieve market acceptance sufficient to sustain operations or achieve future profits. See "Item 1A. Risk Factors."
We incurred net losses of $5,560,848, $7,707,799 and $9,235,025 in the fiscal years ended September 30, 2007, 2006, and 2005, respectively. We have substantial research and development and selling, marketing and general administrative expenses, and our margins from the sale of our products have not yet been sufficient to offset these costs. We have developed an operating plan for fiscal 2008 and believe we have adequate financial resources to execute the plan and to sustain operations for the next twelve months. Our operating plan includes (a) growing revenues by focusing on direct sales to larger commercial and defense related companies, (b) improving product margins by reducing unit product costs and monitoring manufacturing overhead, and (c) controlling research and development and selling and administrative costs. Nevertheless, our operating results will depend on future product sales levels and other factors, some of which are beyond our control. If required, we have significant flexibility to take remedial actions to adjust the level of research and development and selling, general and administrative expenses based on the availability of resources.
Business Outlook
We recorded revenues of $9.9 million for the fiscal year ended September 30, 2007, a 10% increase over prior year's revenues of $9.0 million. Our operating loss for our fiscal year ended September 30, 2007 decreased from fiscal year 2006 primarily as a result of increased revenue, improved product margins, favorable product mix and decreased operating expenses. Gross profit improved from $2.9 million (32% of revenue) in the year ended September 30, 2006 to $3.4 million (34% of revenue) in the year ended September 30, 2007. In fiscal year 2007, we recorded an inventory reserve adjustment of $1.3 million due to a restructured order from a large HSS customer earlier in the year. This adjustment reduced our gross profit by 13% of revenue. Our margin improvement has been driven by reduced manufacturing costs, lower warranty costs and a favorable product mix from lower margin HSS products to higher margin LRAD products.
In late fiscal 2006, we reduced headcount and closed an office location resulting in reduced operating expenses in fiscal 2007. Our operating expenses for the year ended September 30, 2007 were $2.2 million less than the prior year. In fiscal 2008, we expect that certain expenses will continue to decrease such as legal and
In fiscal year 2008, we anticipate our revenues will grow, primarily due to the increased acceptance of our LRAD, HSS and NeoPlanar products. We believe we have a solid technology and product foundation for business growth. In addition to the opportunities we have with the LRAD-R launched earlier this year, we have new technologies and products in various stages of development. We have improved our product quality and performance over the past year and we believe we have strong market opportunities, within the government and military sector, as well as increased commercial applications, especially with continued global threats to both governments and commerce where our LRAD products have proven to be effective at hailing and notification for force and asset protection. Our selling network has expanded to include a number of key integrators and resellers within the United States, as well as in a number of worldwide locations.
Critical Accounting Policies and Estimates
We have identified the policies below as critical to our business operations and
to understanding our results of operations. Our accounting policies are more
fully described in our financial statements and related notes located in "Item
8. Financial Statements and Supplementary Data." The impact and any associated
risks related to these policies on our business operations are discussed in
"Item 1A. Risk Factors" and throughout Management's Discussion and Analysis of
Financial Condition and Results of Operations when such policies affect our
reported and expected financial results.
The methods, estimates and judgments we use in applying our accounting policies, in conformity with generally accepted accounting principles in the United States, have a significant impact on the results we report in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates affect the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition. We currently derive our revenue primarily from two sources:
(i) component and product sale revenues and associated engineering and
installation, which we refer to collectively as product sales and (ii) contract
and license fee revenues. Product sales revenues are recognized in the periods
that products are shipped to customers (FOB shipping point) or when product is
received by the customer (FOB destination), when the fee is fixed and
determinable, when collection of resulting receivables is probable and there are
no remaining obligations. Revenues from engineering contracts are recognized
based on milestones or completion of the contracted services. Revenues from
up-front license and other fees and annual license fees are evaluated for
multiple elements but are generally recognized ratably over the specified term
of the particular license or agreement. Revenues from ongoing per unit license
fees are earned based on units shipped by the licensee incorporating our
patented proprietary technologies. Revenues are recognized in the period when
the ultimate customer accepts the product and collectability is reasonably
assured.
Stock-Based Compensation. On October 1, 2005, we adopted the provisions of Statement of Financial Accounting Standards No. 123(R), "Share-based payments" ("SFAS 123(R)"), using the modified prospective method. Accordingly, prior period amounts presented in this report have not been restated to reflect the adoption of SFAS No. 123(R). Through September 30, 2005 we accounted for our stock-based compensation under the intrinsic value method of Accounting Principles Board (APB) Opinion No. 25. Under the modified prospective application, the fair values of options issued in periods prior to fiscal 2006 are not revised for comparative purposes, but estimated compensation expense for awards outstanding at the effective date are recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FASB Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). The adoption of this revised standard resulted in the recording of non-cash operating costs of $1,491,874 and $368,323 in fiscal 2007 and 2006, respectively. As of September 30, 2007, there was $3.9 million of total unrecognized compensation cost related to nonvested stock compensation arrangements granted under our plans. This cost is expected to be recognized over a weighted-average period of 3.8 years.
Valuation of Inventory. Our inventory is comprised of raw materials, assemblies and finished products. We must periodically make judgments and estimates regarding the future utility and carrying value of our inventory. The carrying value of our inventory is periodically reviewed and impairments, if any, are recognized when the expected future benefit from our inventory is less than its carrying value. For the fiscal year ended September 30, 2007, we reviewed the carrying value of our inventory and increased the inventory reserve to $1,337,822, primarily due to excess HSS materials resulting from a restructured contract involving reduced sales with a large HSS integrator during the fourth quarter of our fiscal year. The obsolescence reserve also takes into consideration raw materials and finished goods that were associated with our older generation of products, and raw materials that are considered to be slow-moving.
Valuation of Intangible Assets. Intangible assets consist of patents that are amortized over their estimated useful lives. We must make judgments and estimates regarding the future utility and carrying value of intangible assets. The carrying values of such assets are periodically reviewed and impairments, if any, are recognized when the expected future benefit to be derived from an individual intangible asset is less than its carrying value. In fiscal year ended September 30, 2007, we reviewed the carrying value of our intangible assets and reduced it by $88,196 due to certain assets that are no longer consistent with our business strategy and whose future value expected from these assets has decreased.
Warranty Reserve. We establish a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. This reserve requires us to make estimates regarding the amount and costs of warranty repairs we expect to make over a period of time. Factors affecting warranty reserve levels include the number of units sold, anticipated cost of warranty repairs, and anticipated rates of warranty claims. In the fiscal year ended September 30, 2006, we increased our reserve by $372,460 due to warranty claims associated with a custom made HSS unit. All of these costs have now been incurred. We also analyzed our warranty rate for our LRAD product in 2007 and reduced the reserve rate based on historical experience. This reduced the warranty reserve by $304,000. The warranty reserve at September 30, 2007 was $182,247, compared to $805,162 as of September 30, 2006. We evaluate the adequacy of this reserve each reporting period. See Note 9 to our consolidated financial statements for additional information regarding warranties.
Valuation of Derivative Instruments. In accordance with EITF 00-19 "Accounting for Derivative Financial Instruments, Indexed to, and Potentially Settled in a Company's Own Stock" we previously valued some warrants issued in connection with various equity financings as derivative liabilities. We made assumptions and estimates to periodically value our derivative liabilities. Factors affecting the amount of liability included changes in our stock price and other assumptions. Any change in value was recorded as a non-cash income or expense item. For the year ended September 30, 2006, we recorded $624,700 as an unrealized gain on derivative revaluation related to warrants and had aggregate derivative liability for warrants of $1,221,300 at September 30, 2006.
Effective in the first quarter of 2007, we elected early adoption of FASB Staff Position No. EITF 00-19-2 issued on December 21, 2006 ("FSP 00-19-2"). We recorded the effect of applying FSP 00-19-2 to our warrant derivative liability using the cumulative-effect transition method, which resulted in a decrease in derivative liability of $1,221,300, and an increase to the carrying amount of additional paid-in capital of $2,101,000 representing the original value assigned to the warrants with an offsetting cumulative-effect entry to accumulated deficit (see Note 6 to our consolidated financial statements). The cumulative adjustment was not recorded in the consolidated statement of operations and prior periods were not adjusted.
Guarantees and Indemnifications. Under our bylaws, we have agreed to indemnify our officers and directors for certain events. We also enter into certain indemnification and liquidated damage agreements in the normal course of our business. We have no liabilities recorded for such indemnities.
We undertake indemnification obligations in the ordinary course of business related to our products and the issuance of securities. Under these arrangements, we may indemnify other parties such as business partners, customers, underwriters, and investors for certain losses suffered, claims of intellectual property infringement, negligence and intentional acts in the performance of services, and violations of laws including certain violations of securities laws. Our obligation to provide such indemnification in such circumstances would arise if, for example, a third party sued a customer for intellectual property infringement and we agreed to indemnify the customer against such claims. We are unable to estimate with any reasonable accuracy the liability that may be incurred pursuant to our indemnification obligations. Some of the factors that would affect this assessment include, but are not limited to, the nature of the claim asserted, the relative merits of the claim, the financial condition of the parties, the nature and amount of damages claimed, insurance coverage that we may have to cover such claims, and the willingness of the parties to reach settlement, if any. Because of the uncertainty surrounding these circumstances, our indemnification obligations could range from immaterial to having a material adverse impact on our financial position and our ability to continue in the ordinary course of business.
Deferred Tax Asset. We have provided a full valuation reserve related to our substantial deferred tax assets. In the future, if sufficient evidence of our ability to generate sufficient future taxable income in certain tax jurisdictions becomes apparent, we may be required to reduce our valuation allowances, resulting in income tax benefits in our consolidated statement of operations. We evaluate quarterly the realizability of the deferred tax assets and assess the need for a valuation allowance. Utilizing the net operating loss carry forwards in future years could be substantially limited due to restrictions imposed under federal and state laws upon a change in ownership or control. Included in the net operating loss carryforward are deductions from stock options that if recognized will be recorded as a credit to additional paid-in capital rather than through operations.
Legal Proceedings. We may at times be involved in litigation in the ordinary course of business. For any legal proceedings that we are involved in, we estimate the range of liability relating to pending litigation, where the amount and range of loss can be estimated and the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the claim. As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates. Currently, there are no pending material legal proceedings to which we are a party or to which any of our property is subject.
Segment Information
We are engaged in the design, development and commercialization of directed sound technologies and products. During fiscal 2006, our operations were organized into two segments by the end-user markets they served. Late in fiscal 2006, in conjunction with executive management changes and a more diverse customer base, our sales force for all products and end-user markets was consolidated. Effective October 1, 2006, our former two business units were aggregated into one reportable segment due to the similarity in nature of products marketed, financial performance measures (revenue growth and gross margin), methods of distribution (direct and indirect) and customer markets (each product is sold by the same personnel to government and commercial
Comparison of Results of Operations for Fiscal Years Ended September 30, 2007 and 2006
Revenues
Revenues increased $899,375, or 10%, in the fiscal year ended September 30, 2007 to $9,900,880 compared to $9,001,505 for the fiscal year ended September 30, 2006. Fiscal year 2007 revenues included $9,424,305 of product sales and $476,575 of contract and license and other revenue. Fiscal year 2006 revenues included $8,606,840 of product sales and $394,665 of contract and license revenue. The increase in fiscal year 2007 revenues reflected an increase in LRAD revenue from $5,620,500 in fiscal 2006 to $7,700,138 in fiscal 2007, due primarily to expanded sales distribution. HSS revenues decreased from $2,390,960 in fiscal year 2006 to $1,305,583 in 2007, due to financial difficulties with some key customers in the digital signage and in-store broadcasting markets.
In fiscal 2005, we entered into a license agreement that contained multiple elements. Based on our evaluation of the agreement under the guidance of EITF Issue No. 00-21, we determined this arrangement does not qualify for multiple element accounting and revenue will be recognized ratably over the three-year term of the agreement. We recognized $216,667 of contract revenues for each of the years ended September 30, 2007 and 2006, representing the ratable earned revenue under the three-year agreement. At September 30, 2007, $6,945 remained unearned under this agreement and has been recorded as deferred revenue. At September 30, 2007, we had aggregate deferred license revenues of $286,482 representing amounts collected from license agreements in advance of recognized earnings. This revenue component is subject to significant variability based on the timing, amount and recognition of new arrangements, if any.
Gross Profit
Gross profit for the year ended September 30, 2007 was $3,392,025, or 34% of total revenues, compared to $2,851,133, or 32% of total revenues, for the year ended September 30, 2006. The increase in gross profit, both absolute and as a percentage of revenues, was principally the result of increased sales and a greater percentage of higher margin LRAD products. In addition, we experienced lower warranty cost in 2007 due to warranty expense of $372,460 in the fiscal year ended September 30, 2006 for claims associated with a custom HSS unit, and a reduction in warranty expense by $304,000 in the fiscal year ended September 30, 2007 due to a change in estimate of the warranty reserve for LRAD products based on historical experience. This favorability was partially offset by an increase in inventory reserves of $1,326,108, primarily related to excess HSS components that were purchased based on a sales contract with a customer who later experienced financial difficulty and significantly reduced the requirements on their contract.
Our products have varying gross margins, so product sales mix materially affects gross profits. In addition, we continue to make product updates and changes, including raw material and component changes that may impact product costs. We do not believe that historical gross profit margins should be relied upon as an indicator of future gross profit margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended September 30,
2007 decreased $2,485,425 to $7,052,163, or 71% of total revenues, compared to
$9,537,588, or 106% of total revenues, for the year ended September 30, 2006.
The major component changes in selling general and administrative expenses were:
$1,697,831 decreased personnel and related expenses; $680,099 reduction in
expense related to allowance for
We incurred non-cash stock-based compensation expenses related to SFAS No. 123(R) allocated to selling, general and administrative expenses in the fiscal years ended September 30, 2007 and 2006 of $1,269,096 and $296,176, respectively.
We may expend additional resources on marketing our products in future periods
which may increase selling, general and administrative expenses. During fiscal
year 2007 and 2006, we incurred a significant amount of outside consultant,
legal and audit fees to comply with the Sarbanes-Oxley Act (particularly
Section 404), relating to management's assessment of internal control over
financial reporting and in 2007 for a voluntary review of our historical stock
options and stock grants. We expect to incur continuing audit fees and other
costs in fiscal year 2008 to comply with the Sarbanes-Oxley Act and to continue
to improve our internal control over financial reporting and procedures.
Research and Development Expenses
Research and development expenses increased $313,285 to $2,223,119, or 22% of total revenues, for the year ended September 30, 2007, compared to $1,909,834, or 21% of total revenues, for the year ended September 30, 2006. This increase in research and development expenses was primarily due to a $105,406 increase in personnel and related expenses, $112,918 increase in non-cash compensation costs related to SFAS No. 123(R) and $72,025 increase in consulting fees associated with product design.
Included in research and development expenses for the year ended September 30, 2007 was $148,324 of SFAS No. 123(R) stock-based compensation costs. A total of $35,406 of non-cash compensation costs was included for the year ended September 30, 2006. During fiscal years 2007 and 2006, we reviewed the ongoing value of our capitalized patent expenses and identified some of these assets as being associated with patents that are no longer consistent with our business strategy. As a result of this review, we reduced the value of our previously capitalized patents for the fiscal year ended September 30, 2007 and 2006 by $88,196 and $1,039.
Research and development costs vary period to period due to the timing of projects, the availability of funds for research and development and the timing and extent of use of outside consulting, design and development firms. Based on current plans and engineering staffing, we expect fiscal year 2008 research and development costs to increase over fiscal year 2007.
Loss From Operations
Loss from operations was $5,883,257 for the year ended September 30, 2007 compared to a loss from operations of $8,596,289 for the year ended September 30, 2006. The decrease in loss from operations resulted primarily from the increased revenue and associated gross profit and a decrease in selling, general and administrative expenses, partially offset by an increase in research and development expense.
Other Income (Expense)
During the year ended September 30, 2007, we earned $376,264 of interest income on our cash balances. Other expense for the year ended September 30, 2007 included a loss on asset disposition of $53,855. During the year ended September 30, 2006, we earned interest income on our cash balances of $264,256 and incurred $833 of interest expense. Other income in fiscal 2006 included $624,700 related to the decrease in the fair value of warrants issued in connection with our July 2005 sale of common stock and warrants and a net gain on asset disposition of $367.
We had no preferred stock outstanding during fiscal 2006 or 2007 and our net loss was the same as net loss available to common stockholders. The net loss available to common stockholders decreased 28% to $5,560,848, or $0.18 per share for the year ended September 30, 2007, compared to a net loss available to common stockholders of $7,707,799, or $0.31, per share for the year ended September 30, 2006.
Comparison of Results of Operations for Fiscal Years Ended September 30, 2006 and 2005
Revenues
Revenues decreased $1,227,164, or 12%, in the fiscal year ended September 30, 2006 to $9,001,505 compared to $10,228,669 for the fiscal year ended September 30, 2005. Fiscal year 2006 revenues included $8,606,840 of product sales and $394,665 of contract and license and other revenue. Fiscal year 2005, revenues included $10,013,215 of product sales and $215,454 of contract and license revenue. The decrease in fiscal year 2006 revenues reflected a decrease in LRAD revenue from $8,822,366 in fiscal 2005 to $5,620,500 in fiscal 2006, due . . .
|
|