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| IMSC > SEC Filings for IMSC > Form 10-Q on 14-Feb-2013 | All Recent SEC Filings |
14-Feb-2013
Quarterly Report
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain statements that are "forward-looking" within the meaning of the federal securities laws. These forward looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.
The words "anticipate," "believe," "estimate," "expect," "intend," "will," "should" and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events, are subject to certain risks, uncertainties and assumptions, and are not guaranties of future performance. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended or using other similar expressions.
We are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Report. Important factors that could cause actual results to differ from our predictions include those discussed under this "Management's Discussion and Analysis" and under "Risk Factors," as well as those discussed under "Risk Factors," "Management's Discussion and Analysis" and "Business" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor can there be any assurance that we have identified all possible issues which we might face. In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our marketing, capital expenditure or other budgets, which may in turn affect our financial position and results of operations. For all of these reasons, the reader is cautioned not to place undue reliance on forward-looking statements contained herein, which speak only as of the date hereof. We assume no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise except as required by law. We urge readers to review carefully the risk factors described in this Quarterly Report, in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012 and in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov.
When we say "we," "us," "our," "Company," or "Implant Sciences,", we mean Implant Sciences Corporation and its subsidiaries.
Overview
We develop, manufacture and sell sophisticated sensors and systems for the security, safety and defense industries. A variety of technologies are currently used worldwide in security and inspection applications. In broad terms, the technologies focus on detection in two major categories: (i) the detection of "bulk" contraband, which includes materials that would be visible to the eye, such as weapons, explosives, narcotics and chemical agents; and (ii) the detection of "trace" amounts of contraband, which includes trace particles or vapors of explosives, narcotics and chemical agents. Technologies used in the detection of "bulk" materials include computed tomography, transmission and backscatter x-ray, metal detection, trace detection and x-ray, gamma-ray, passive millimeter wave, and neutron analysis. Trace detection techniques used include mass spectrometry, gas chromatography, chemical luminescence, and ion mobility spectrometry.
We have developed proprietary technologies used in explosives and narcotics trace detection ("ETD" and "NTD", respectively) applications and market and sell handheld ETD and benchtop ETD and NTD systems that use our proprietary technologies. Our products are marketed and sold to a growing number of locations domestically and internationally. These systems are used by private companies and government agencies to screen baggage, cargo, other objects and people for the detection of trace amounts of explosives and narcotics.
On January 16, 2013, our QS-B220 Benchtop Explosives and Narcotics Detector was accepted into the "Approved" section of the Transportation Security Administration's Air Cargo Screening Technology List.
Please see our Annual report on Form 10-K for the fiscal year ended June 30, 2012 for a complete description of our business.
Critical Accounting Policies
Our significant accounting policies are summarized in Note 2 to our condensed consolidated financial statements included in Item 7 of our Annual Report on Form 10-K, for the fiscal year ended June 30, 2012. However, certain of our accounting policies require the application of significant judgment by our management, and such judgments are reflected in the amounts reported in our condensed consolidated financial statements. In applying these policies, our management uses judgment to determine the appropriate assumptions to be used in the determination of estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of market trends, information provided by our strategic partners and information available from other outside sources, as appropriate. Actual results may differ significantly from the estimates contained in our condensed consolidated financial statements.
Results of Operations
Revenues
Revenues for the three months ended December 31, 2012 were $6,938,000 as compared with $1,132,000 for the comparable prior year period, an increase of $5,806,000, or 512.9%. The increase in revenue is due primarily to the shipment of the India Ministry of Defence order, resulting in a 511% increase in the number of QS-H150 handheld units sold and increased sales of parts and supplies during the three months ended December 31, 2012, as compared to the comparable prior year period and, to a lesser extent, incremental sales of our QS-B220 benchtop units, which we began shipping commercially in the third quarter of fiscal 2012, partially offset by a 9.3% decrease in average unit sell prices on sales our QS-H150 handheld units.
Cost of Revenues
Cost of revenues for the three months ended December 31, 2012 were $4,470,000 as compared with $767,000 for the comparable prior year period, an increase of $3,703,000 or 482.8%. The increase in cost of revenues recorded in the three months ended December 31, 2012 is primarily due to increased unit sales of our security products, increased manufacturing overhead spending due to stock-based compensation recorded on the September 2012 officer and director option grants and increased manufacturing personnel costs, as compared to the comparable prior year period.
Gross Margin
Gross margin for the three months ended December 31, 2012 was $2,468,000 or 35.6% of revenues as compared with gross margin of $365,000 or 32.2% of revenues for the comparable prior year period. The gross margin increase is due primarily to higher unit volume of our explosives detection products sold, which resulted in decreased unabsorbed manufacturing overhead and higher margins realized on sales of parts and supplies, partially offset by stock-based compensation recorded on the September 2012 officer and director option grants and by the 9.3% decrease in the average unit sell prices on sales of our QS-H150 handheld units in the three months ended December 31, 2012, as compared to the comparable prior year period.
Research and Development Expense
Research and development expense for the three months ended December 31, 2012 was $1,068,000 as compared with $747,000 for the comparable prior year period, an increase of $321,000 or 43.0%. The increase in research and development expense is due primarily to increased payroll and related benefit costs, stock-based compensation recorded on the September 2012 officer and director option grants, partially offset by decreased contracted engineering. We continue to expend funds to further the development of new products in the areas of explosives and narcotics detection, as well as to prepare for certain government laboratory acceptance testing. Spending on research and development will increase in the next six to twelve months due to the ongoing development of the QS-B220 benchtop explosives and narcotics detector and the development of a hyphenated system employing conventional ion mobility, differential mobility and quadrupole mass spectrometry.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended December 31, 2012 were $3,793,000 as compared with $1,982,000 for the comparable prior year period, an increase of $1,811,000, or 91.4%. The increase in selling, general and administrative expenses is due primarily a $1,276,000 increase in stock-based compensation recorded on the September 2012 officer and director option grants, increased payroll, related benefit costs and travel expense resulting from the addition of sales personnel, the imposition of liquidated damages of $298,000 under our contact with the India Ministry of Defence, due to delayed shipment and increased bank fees, partially offset by lower consulting fees due to the issuance of our common stock to certain consultants in the comparable prior year period.
Other Income and Expense, Net
For the three months ended December 31, 2012, other expense, net was $1,330,000 as compared with other expense, net of $926,000, for the comparable prior year period, an increase of $404,000. The increase was primarily due to increased interest expense on higher borrowings under our credit facility with DMRJ. Interest expense increased $404,000 to $1,331,000 in the three months ended December 31, 2012 from $927,000 in the comparable prior year period.
Net Loss
Our net loss for the three months ended December 31, 2012 was $3,723,000 as compared with a net loss of $3,290,000 for the comparable prior year period, an increase of $433,000, or 13.2%. The increase in the net loss is primarily due to stock-based compensation recorded on the September 2012 officer and director option grants, increased operating expenses and increased interest expense.
Results of Operations
Six Months Ended December 31, 2012 vs. December 31, 2011
Revenues
Revenues for the six months ended December 31, 2012 were $8,353,000 as compared with $2,168,000 for the comparable prior year period, an increase of $6,185,000, or 285.3%. The increase in revenue is due primarily to the shipment of the India Ministry of Defence order, resulting in a 284% increase in the number of QS-H150 handheld units sold and increased sales of parts and supplies during the six months ended December 31, 2012, as compared to the comparable prior year period and, to a lesser extent, incremental sales of our QS-B220 benchtop units, which we began shipping commercially in the third quarter of fiscal 2012, partially offset by an 8.4% decrease in average unit sell prices on sales our QS-H150 handheld units.
Cost of Revenues
Cost of revenues for the six months ended December 31, 2012 were $5,924,000 as compared with $1,404,000 for the comparable prior year period, an increase of $4,520,000 or 321.9%. The increase in cost of revenues recorded in the six months ended December 31, 2012 is primarily due to increased unit sales of our security products, increased manufacturing overhead spending due to stock-based compensation recorded on the September 2012 officer and director option grants and increased manufacturing personnel costs, as compared to the comparable prior year period.
Gross Margin
Gross margin for the six months ended December 31, 2012 was $2,429,000 or 29.1% of revenues as compared with gross margin of $764,000 or 35.2% of revenues for the comparable prior year period. The decrease in gross margin is primarily the result of increased manufacturing overhead spending due to stock-based compensation recorded on the September 2012 officer and director option grants, increased manufacturing personnel costs and by the 8.4% decrease in the average unit sell prices on sales of our QS-H150 handheld units in the six months ended December 31, 2012, as compared to the comparable prior year period.
Research and Development Expense
Research and development expense for the six months ended December 31, 2012 was $2,405,000 as compared with $1,566,000 for the comparable prior year period, an increase of $839,000 or 53.6%. The increase in research and development expense is due primarily to stock-based compensation recorded on the September 2012 officer and director option grants and increased payroll and related benefit costs, partially offset by decreased contracted engineering. We continue to expend funds to further the development of new products in the areas of explosives and narcotics detection, as well as to prepare for certain government laboratory acceptance testing. Spending on research and development will increase in the next six to twelve months due to the ongoing development of the QS-B220 benchtop explosives and narcotics detector and the development of a hyphenated system employing conventional ion mobility, differential mobility and quadrupole mass spectrometry.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended December 31, 2012 were $13,924,000 as compared with $3,795,000 for the comparable prior year period, an increase of $10,129,000, or 266.9%. The increase in selling, general and administrative expenses is due primarily to a $9,603,000 increase in stock-based compensation recorded on the September 2012 officer and director option grants, increased payroll, related benefit costs and travel expense resulting from the addition of sales personnel, the imposition of liquidated damages of $298,000 under our contact with the India Ministry of Defence, due to delayed shipment, increased legal fees and increased bank fees, partially offset by lower consulting fees due to the issuance of our common stock to certain consultants in the comparable prior year period.
Other Income and Expense, Net
For the six months ended December 31, 2012, other expense, net was $2,571,000 as compared with other income, net of $1,765,000, for the comparable prior year period, an increase of $806,000. The increase was primarily due to increased interest expense on higher borrowings under our credit facility with DMRJ. Interest expense increased $805,000 to $2,572,000 in the six months ended December 31, 2012 from $1,767,000 in the comparable prior year period.
Net Loss
Our net loss for the six months ended December 31, 2012 was $16,471,000 as compared with a net loss of $6,362,000 for the comparable prior year period, an increase of $10,109,000, or 158.9%. The increase in the net loss is primarily due to stock-based compensation recorded on the September 2012 officer and director option grants, increased operating expenses and increased interest expense.
Liquidity and Capital Resources
As of December 31, 2012 and June 30, 2012, we had cash and cash equivalents of $34,000 and $84,000, respectively. On March 31, 2013, we must repay in full our obligations to DMRJ under the amended and restated senior secured promissory note issued to DMRJ in March 2009, under a second senior secured convertible promissory note issued in September 2012, under a secured promissory note issued in July 2009 and under a revolving credit facility established in September 2009. As of December 31, 2012, our obligation to DMRJ under a senior secured convertible promissory note, as amended, a second senior secured convertible promissory note, a senior secured promissory note and under a revolving line of credit approximated $3,184,000, $12,000,000, $1,000,000 and $17,635,000, respectively. Further, as of December 31, 2012, our obligation to DMRJ for accrued interest under these instruments approximated $3,059,000.
As of February 5, 2013, our obligations to DMRJ under the amended and restated senior secured convertible promissory note, the second senior secured convertible promissory note, the senior secured promissory note and under the credit facility approximated $3,184,000, $12,000,000, $1,000,000 and $19,077,000, respectively. Further, as of February 5, 2013, our obligation to DMRJ for accrued interest under these instruments approximated $3,576,000.
Each of these notes and the credit facility are described in Note 13 of the Notes to Condensed Consolidated Financial Statements, accompanying this Quarterly Report.
During the six months ended December 31, 2012, we had net cash outflows of
$3,185,000 from operating activities as compared to net cash outflows from
operating activities of $5,153,000 for the comparable prior year period. The
approximately $1,968,000 decrease in net cash outflows used in operating
activities during the three months ended December 31, 2012, as compared to the
comparable prior year period, was due to the shipment of our order with the
India Ministry of Defence, resulting in the following changes to working capital
(i) a $1,724,000 decrease in inventories due to the shipment of the India
Ministry of Defence order, compared to a $888,000 increase in inventories; (ii)
a $351,000 decrease in prepaid expenses, compared to a $39,000 decrease due to
primarily to a decrease in prepaid inventory, which inventory was shipped in the
period ended December 31, 2012; (iii) a decrease in accounts payable of
$206,000, compared to an increase in accounts payable of $132,000 in the prior
period due to increased operating expenses; (iv) a $1,295,000 increase in
accrued expenses, compared to a $607,000 increase in accrued expenses in the
prior year due primarily to increased accruals for unpaid interest on our
borrowings with DMRJ, the imposition of liquidated damages under our contact
with the India Ministry of Defence, due to delayed shipment and increased
warranty reserves. These increases were partially offset by (v) a $732,000
decrease in deferred revenue, compared to a $95,000 increase in the prior year,
due to the shipment of the India Ministry of Defence order; and, (vi) a $334,000
increase in accounts receivable, compared to a $53,000 decrease in accounts
receivable due to the timing of product shipments in the current fiscal year.
During the six months ended December 31, 2012, we had net cash outflows of $272,000 from investing activities as compared to net cash outflows of $316,000 from investing activities for the comparable prior year period. The $44,000 decrease in net cash used in investing activities during the six months ended December 31, 2012, as compared to the comparable prior year period, was primarily due to a $56,000 decrease in purchases of equipment, partially offset by a $12,000 increase in cash transferred to restricted funds.
During the six months ended December 31, 2012 we had net cash inflows of $3,407,000 from financing activities as compared to net cash inflows of $5,244,000 from financing activities for the comparable prior year period. The $1,837,000 decrease in net cash from financing activities during the six months ended December 31, 2012, as compared to the comparable prior year period, was primarily a result of receipt of $4,761,000 in proceeds from our shipment to the India Ministry of Defence, which resulted in deceased borrowings under our credit facility with DMRJ, compared to the prior fiscal year. During the six months ended December 31, 2012, we received proceeds of $26,000 due to the exercise of employee stock options.
Credit Facilities with DMRJ Group LLC
In December 2008, we entered into a note and warrant purchase agreement with DMRJ, pursuant to which we issued a senior secured convertible promissory note in the principal amount of $5,600,000 and a warrant to purchase 1,000,000 shares of our common stock. Thereafter, we entered into a series of amendments, waivers and modifications of this facility. On September 5, 2012, we amended our credit agreements with DMRJ (see Note 13) pursuant to which we extended the maturity date of all of our indebtedness from December 31, 2012 to March 31, 2013 and issued to DMRJ a second senior secured convertible promissory note in the principal amount of $12,000,000. This note is convertible in whole or in part, at DMRJ's option, into shares of Series H Convertible Preferred Stock at an initial conversion rate of $1,000 per share. There can be no assurance that we will be successful in refinancing or extending our obligations to DMRJ.
Our ability to comply with our debt covenants in the future depends on our
ability to generate sufficient sales and to control expenses, and will require
us to seek additional capital through private financing sources. In addition,
we will require substantial funds for further research and development,
regulatory approvals, and the marketing of our explosives detection products.
Our capital requirements depend on numerous factors, including but not limited
to the progress of our research and development programs; the cost of filing,
prosecuting, defending and enforcing any intellectual property rights; competing
technological and market developments; changes in our development of
commercialization activities and arrangements; and the hiring of additional
personnel, and acquiring capital equipment. There can be no assurances that we
will achieve our forecasted financial results or that we will be able to raise
additional capital to operate our business.
Any failure to comply with our debt covenants, to achieve our projections and/or obtain sufficient capital on acceptable terms would have a material adverse impact on our liquidity, financial condition and operations and could force us to curtail or discontinue operations entirely and/or file for protection under bankruptcy laws. Further, upon the occurrence of an event of default under certain provisions of our agreements with DMRJ, we could be required to pay default rate interest equal to the lesser of 3.0% per month and the maximum applicable legal rate per annum on the outstanding principal balance outstanding.
Based on current sales, operating expense and cash flow projections, and the cash available from our line of credit, management believes there are plans in place to sustain operations for the next several months. Because there can be no assurances that sales will materialize as forecasted, and/or that management will be successful in refinancing or extending our obligations with DMRJ, management will continue to closely monitor and attempt to control our costs and will continue to actively seek the needed capital through government grants and awards, strategic alliances, private financing sources, and through its lending institutions. Future expenditures for research and product development are discretionary and can be adjusted as can certain selling, general and administrative expenses, based on the availability of cash. The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Despite our current sales, expense and cash flow projections and the cash available from our line of credit with DMRJ, we will require additional capital in the third quarter of fiscal 2013 to fund operations and continue the development, commercialization and marketing of our products. Our failure to achieve our projections and/or obtain sufficient additional capital on acceptable terms would have a material adverse effect on our liquidity and operations and could require us to file for protection under bankruptcy laws. These conditions raise substantial doubt as to our ability to continue as a going concern.
Off-Balance Sheet Arrangements
As of December 31, 2012, we had three irrevocable standby letters of credit
outstanding in the approximate amount of $1,562,000. These letters of credit
(1) provide performance security equal to 5% of the amount of our contract with
the India Ministry of Defence; (2) provide warranty performance security equal
to 5% of the contract amount; and (3) provide security equal to 15% of the
contract amount against an advance deposit under the terms of the contract. We
have amended each of the letters of credit, extending the expiration dates. As
amended, the letters of credit expire between August 2, 2013 and May 4, 2015.
As of December 31, 2012, we did not have any other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.
New Accounting Pronouncements
In May 2011, the FASB issued Accounting Standards Update 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS" ("ASU 2011-04"). The adoption of ASU 2011-04 gives fair value the same meaning between U.S. generally accepted accounting principles ("U.S. GAAP") and International Financial Reporting Standards ("IFRS"), and improves consistency of disclosures relating to fair value. The provisions of ASU 2011-04 will be effective for fiscal years and interim periods beginning after December 15, 2011 and can be applied prospectively. However, changes in valuation techniques shall be treated as changes in accounting estimates. The adoption of this update did not have a material effect on our consolidated financial position and results of operations.
Item 3.
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