UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 28, 2003
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-8402
IRVINE SENSORS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
| Delaware (State or Other Jurisdiction of Incorporation or Organization) |
33-0280334 (I.R.S. Employer Identification No.) |
3001 Redhill Avenue,
Costa Mesa, California 92626
(Address of Principal Executive Offices) (Zip Code)
(714) 549-8211
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2.) Yes ¨ No þ
As of January 30, 2004, there were 15,338,548 shares of common stock outstanding.
IRVINE SENSORS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL PERIOD ENDED DECEMBER 28, 2003
| PAGE | ||||
| PART I |
FINANCIAL INFORMATION | |||
| Item 1. |
Financial Statements | 3 | ||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 | ||
| Risk Factors | 24 | |||
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk. | 34 | ||
| Item 4. |
Controls and Procedures. | 34 | ||
| PART II |
OTHER INFORMATION | |||
| Item 1. |
Legal Proceedings | 35 | ||
| Item 2. |
Changes in Securities and Use of Proceeds | 35 | ||
| Item 6. |
Exhibits and Reports on Form 8-K | 36 | ||
| 37 | ||||
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
IRVINE SENSORS CORPORATION
CONSOLIDATED BALANCE SHEETS
| December 28, 2003 |
September 28, 2003 |
|||||||
| (Unaudited) | ||||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 1,627,000 | $ | 1,166,800 | ||||
| Restricted cash |
54,200 | 54,200 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $10,000 and $57,700, respectively |
802,100 | 443,500 | ||||||
| Unbilled revenues on uncompleted contracts |
759,100 | 598,100 | ||||||
| Inventory, net |
777,900 | 932,100 | ||||||
| Other current assets |
72,800 | 48,500 | ||||||
| Total current assets |
4,093,100 | 3,243,200 | ||||||
| Equipment, furniture and fixtures, net |
4,351,900 | 4,417,600 | ||||||
| Patents and trademarks, net |
701,100 | 707,400 | ||||||
| Deposits |
86,600 | 87,400 | ||||||
| Total assets |
$ | 9,232,700 | $ | 8,455,600 | ||||
| Liabilities and Stockholders’ Equity |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 1,634,500 | $ | 1,620,600 | ||||
| Accrued expenses |
883,600 | 806,100 | ||||||
| Accrued loss on contracts |
42,300 | 358,500 | ||||||
| Advance billings on uncompleted contracts |
20,300 | 437,000 | ||||||
| Deferred revenue |
25,000 | 251,700 | ||||||
| Capital lease obligations – current portion |
26,500 | 30,700 | ||||||
| Total current liabilities |
2,632,200 | 3,504,600 | ||||||
| Capital lease obligations, less current portion |
29,500 | 34,700 | ||||||
| Minority interest in consolidated subsidiaries |
427,600 | 431,500 | ||||||
| Total liabilities |
3,089,300 | 3,970,800 | ||||||
| Commitments and contingencies (Note 8) |
— | — | ||||||
| Stockholders’ Equity: |
||||||||
| Preferred stock, $0.01 par value, 500,000 shares authorized; |
||||||||
| Series E convertible preferred stock, 0 and 2,083 shares outstanding |
— | — | ||||||
| Common stock, $0.01 par value, 80,000,000 shares authorized; 15,008,400 and 12,947,700 shares issued and outstanding |
150,100 | 129,500 | ||||||
| Common stock warrants; 2,075,200 and 2,065,600 warrants outstanding |
— | — | ||||||
| Unamortized employee stock bonus plan contribution |
(469,100 | ) | — | |||||
| Common stock held by Rabbi Trust |
(250,000 | ) | (250,000 | ) | ||||
| Deferred compensation liability |
250,000 | 250,000 | ||||||
| Paid-in capital |
113,320,400 | 110,315,500 | ||||||
| Accumulated deficit |
(106,858,000 | ) | (105,960,200 | ) | ||||
| Total stockholders’ equity |
6,143,400 | 4,484,800 | ||||||
| $ | 9,232,700 | $ | 8,455,600 | |||||
See Accompanying Condensed Notes to Consolidated Financial Statements.
3
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| 13 Weeks Ended |
||||||||
| December 28, 2003 |
December 29, 2002 |
|||||||
| Revenues: |
||||||||
| Contract research and development revenue |
$ | 2,474,100 | $ | 4,580,600 | ||||
| Product sales |
939,700 | 599,300 | ||||||
| Other revenue |
26,500 | 17,100 | ||||||
| Total revenues |
3,440,300 | 5,197,000 | ||||||
| Cost and expenses: |
||||||||
| Cost of contract research and development revenue |
1,393,600 | 3,621,300 | ||||||
| Cost of product sales |
1,066,200 | 606,600 | ||||||
| General and administrative expense |
1,293,400 | 1,511,400 | ||||||
| Research and development expense |
549,800 | 95,100 | ||||||
| Total cost and expenses |
4,303,000 | 5,834,400 | ||||||
| Loss from operations |
(862,700 | ) | (637,400 | ) | ||||
| Interest expense |
(33,100 | ) | (51,500 | ) | ||||
| Other expense |
— | (5,800 | ) | |||||
| Interest and other income |
— | 4,700 | ||||||
| Loss before minority interest and provision for income taxes |
(895,800 | ) | (690,000 | ) | ||||
| Minority interest in loss of subsidiaries |
4,000 | 6,200 | ||||||
| Provision for income taxes |
(6,000 | ) | (9,900 | ) | ||||
| Net loss |
(897,800 | ) | (693,700 | ) | ||||
| Imputed dividend on Series E stock issued |
— | (842,900 | ) | |||||
| Net loss applicable to common stockholders |
$ | (897,800 | ) | $ | (1,536,600 | ) | ||
| Basic and diluted net loss per common share (Note 5) |
$ | (0.07 | ) | $ | (0.22 | ) | ||
| Weighted average number of shares outstanding |
13,592,700 | 7,144,940 | ||||||
See Accompanying Condensed Notes to Consolidated Financial Statements.
4
IRVINE SENSORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| 13 Weeks Ended |
||||||||
| December 28, 2003 |
December 29, 2002 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (897,800 | ) | $ | (693,700 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
376,600 | 346,300 | ||||||
| Provision for obsolete inventory |
40,700 | — | ||||||
| Accrued interest on marketable securities |
— | (100 | ) | |||||
| Loss on disposal of equipment |
— | 6,100 | ||||||
| Noncash employee retirement plan contribution |
180,900 | 176,800 | ||||||
| Minority interest in net loss of subsidiaries |
(4,000 | ) | (6,200 | ) | ||||
| Common stock issued to pay operating expenses |
— | 142,500 | ||||||
| (Increase) decrease in accounts receivable |
(358,600 | ) | 1,154,500 | |||||
| Increase in unbilled revenues on uncompleted contracts |
(161,000 | ) | (1,060,300 | ) | ||||
| (Increase) decrease in inventory |
113,500 | (116,000 | ) | |||||
| (Increase) decrease in other current assets |
(24,300 | ) | 30,300 | |||||
| (Increase) decrease in deposits |
800 | (3,100 | ) | |||||
| Increase (decrease) in accounts payable and accrued expenses |
91,400 | (129,300 | ) | |||||
| Decrease in accrued loss on contracts |
(316,200 | ) | (160,000 | ) | ||||
| Increase (decrease) in advance billings on uncompleted contracts |
(416,700 | ) | 3,900 | |||||
| Increase (decrease) in deferred revenue |
(226,700 | ) | 130,800 | |||||
| Total adjustments |
(703,600 | ) | 516,200 | |||||
| Net cash used in operating activities |
(1,601,400 | ) | (177,500 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Capital facilities and equipment expenditures |
(285,600 | ) | (142,400 | ) | ||||
| Acquisition of patents |
(19,000 | ) | (44,400 | ) | ||||
| Proceeds from liquidation of certificate of deposit |
— | 400,000 | ||||||
| Net cash provided by (used in) investing activities |
(304,600 | ) | 213,200 | |||||
| Cash flows from financing activities: |
||||||||
| Net proceeds from issuance of preferred stock and common stock warrants |
— | 1,013,100 | ||||||
| Net proceeds from issuance of common stock and common stock warrants |
1,733,100 | — | ||||||
| Proceeds from options and warrants exercised |
642,500 | — | ||||||
| Payments on line of credit |
— | (400,000 | ) | |||||
| Principal payments of notes payable |
— | (150,000 | ) | |||||
| Principal payments of capital leases |
(9,400 | ) | (31,600 | ) | ||||
| Net cash provided by financing activities |
2,366,200 | 431,500 | ||||||
| Net increase in cash and cash equivalents |
460,200 | 467,200 | ||||||
| Cash and cash equivalents at beginning of period |
1,166,800 | 696,300 | ||||||
| Cash and cash equivalents at end of period |
$ | 1,627,000 | $ | 1,163,500 | ||||
| Supplemental cash flow information: |
||||||||
| Cash paid for interest |
$ | 33,100 | $ | 53,200 | ||||
See Accompanying Condensed Notes to Consolidated Financial Statements.
5
IRVINE SENSORS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – General
The information contained in the following Condensed Notes to Consolidated Financial Statements is condensed from that which would appear in the annual consolidated financial statements for Irvine Sensors Corporation and its subsidiaries (the “Company”). The accompanying unaudited condensed consolidated financial statements do not include certain footnotes and other financial presentations normally required under generally accepted accounting principles. Accordingly, the consolidated financial statements included herein should be reviewed in conjunction with the consolidated financial statements and related notes thereto contained in the Annual Report on Form 10-K of the Company for the fiscal year ended September 28, 2003 (“fiscal 2003”). It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the interim periods presented are not necessarily indicative of the results expected for the entire year.
The consolidated financial information as of December 28, 2003 and December 29, 2002 included herein is unaudited but includes all normal recurring adjustments which, in the opinion of management of the Company, are necessary to present fairly the consolidated financial position of the Company at December 28, 2003, the results of its operations for the 13-week periods ended December 28, 2003 and December 29, 2002, and its cash flows for the 13-week periods ended December 28, 2003 and December 29, 2002.
Summary of Significant Accounting Policies
Company Operations. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of obligations in the normal course of business. The Company had working capital of $1,460,900 at December 28, 2003, an increase of $1,722,300 in working capital since September 28, 2003. Despite the Company’s history of net losses, this outcome was achieved largely due to the Company’s continued access to equity financing which has allowed the Company to fund deficits in its operations. Management believes, but cannot assure, that the Company will be able to raise additional working capital, if required to fund its operations for at least the next twelve months. The Company has been advised of new government contract awards for the fiscal year ending October 3, 2004 (“fiscal 2004”) that management expects will contribute to cash flow in subsequent periods of fiscal 2004.
Consolidation. The consolidated financial statements include the accounts of Irvine Sensors Corporation (“ISC”) and its subsidiaries, Novalog, Inc., MicroSensors, Inc. (“MSI”), RedHawk Vision, Inc., iNetWorks Corporation, 3D Microelectronics, Inc. and 3D Microsystems, Inc. 3D Microelectronics and 3D Microsystems are shell corporations and do not have material assets, liabilities or operations. All significant intercompany transactions and accounts have been eliminated in the consolidation.
Fiscal Periods. The Company’s fiscal year ends on the Sunday nearest September 30. Fiscal 2003 (52 weeks) ended on September 28, 2003. Fiscal 2004, since it includes February of a leap year, will end on October 3, 2004 and will include 53 weeks. The Company’s first fiscal quarter and first 13 weeks of fiscal 2004 ended on December 28, 2003, and in similar manner, the first fiscal quarter and first 13 weeks of fiscal 2003 ended on December 29, 2002.
Use of Estimates. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect
6
the amounts reported in the financial statements and accompanying notes. The Company believes its estimates of inventory reserves and estimated costs to complete contracts to be the most sensitive estimates impacting financial position and results of operations in the near term. Actual results could differ from those estimates.
Inventory reserves. Each quarter, the Company evaluates its inventories for excess quantities and obsolescence. Inventories that are considered obsolete are written off. Remaining inventory balances are adjusted to approximate the lower of cost or market value. The valuation of inventories at the lower of cost or market requires the use of estimates as to the amounts of current inventories that will be sold. These estimates are dependent on our assessment of current and expected orders from our customers.
From time-to-time, the Company capitalizes material, labor and overhead costs expected to be recovered from a probable new contract. Due to the uncertain timing of new or follow-on research and development contracts, the Company maintains significant reserves for this inventory to avoid overstating its value. The Company has adopted this practic