Use of Estimates in Financial Statements
In preparing financial
statements in conformity with generally accepted accounting principles,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Accounts Receivable
We carry our trade
receivables from direct customers less an allowance for doubtful accounts to
ensure that trade receivables are carried at net realizable value. On a
periodic basis, we evaluate the collectibility of our accounts receivable on a
variety of factors, including length of time receivables are past due,
indication of customers’ willingness to pay, significant one-time events and
historical experience. An additional reserve for individual accounts is
recorded when we become aware of a customer’s inability to meet its financial
obligations, such as in the case of bankruptcy filings or substantial
deterioration in the customer’s operating results or financial position. If the
financial condition of a customer were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. Accounts receivable are generally considered past due if any
portion of the receivable balance is outstanding for more than 90 days.
If circumstances related to our customers change, estimates of the
recoverability of receivables would be further adjusted.
Fair value of financial instruments
Carrying amounts of
certain of our financial instruments, including cash and cash equivalents,
accounts receivable and notes and accounts payable, approximate their fair
values due to their relative short maturities and based upon comparable market
information available at the respective balance sheet dates. We do not hold or
issue financial instruments for trading purposes.
Stock Based Compensation
Apogee had a stock-based
compensation plan, the 1997 Employee, Director and Consultant Stock Option Plan
(the “1997 Plan”), which is described below. This 1997 Plan expired as of May
14, 2007. At our Annual Meeting held on August 28, 2007, the shareholders
approved the adoption of a new stock-based compensation plan, the 2007
Employee, Director and Consultant Stock Plan (the “2007 Plan”). Prior to fiscal
2006, we accounted for the 1997 Plan under the recognition and measurement
provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting
for Stock Issued to Employees”, and related Interpretations, as permitted by
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” (SFAS
123). Compensation costs related to stock options granted at fair value under
the 1997 Plan were not recognized in the consolidated statements of income.
In December 2004,
FASB issued SFAS 123 (revised 2004), “Share-Based Payments” (SFAS 123(R)).
Under the new standard, companies are no longer able to account for stock-based
compensation transactions using the intrinsic value method in accordance with
APB Opinion No. 25. Instead companies are required to account for such
transactions using a fair-value method and recognize the expense in the
consolidated statement of income.
Prior to January 1,
2006, we adopted only the disclosure provisions of SFAS 123(R). It applied APB
Opinion No. 25, “Accounting For Stock Issued To Employees”, and related
interpretations in accounting for the 1997 Plan and did not recognize
compensation expense for the 1997 Plan.
Effective
January 1, 2006, we adopted SFAS 123(R) using the
modified-prospective-transition method. Under this transition method, stock
compensation costs recognized beginning January 1, 2006 include (a)
compensation cost for all stock-based compensation payments granted prior to,
but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123, and
(b) compensation cost for all stock-based payments granted on or
subsequent to January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). Results for prior
periods have not been restated.
Due to the adoption of
SFAS 123(R), included in our net loss for the three and nine months ended
September 30, 2007 were compensation charges of approximately $24,000 and
$78,000, respectively. This compares to approximately $251,000 and $349,000 for
same periods in 2006.
Accounting for Stock Compensation
Stock-based compensation
costs are generally based on the fair value calculated from the Black-Scholes
option-pricing model on the date of grant for stock options. The fair
values of stock grants are amortized as compensation expense over the options’
vesting period. Compensation expense recognized is shown in the operating
activities section of the consolidated statements of cash flow.
9
9.
Indemnification Arrangements with our Executives
Apogee has been assuming
and will continue to assume the legal costs and related expenses of Herbert M.
Stein, in connection with the civil case in the Circuit Court of the Fifteenth
Judicial Circuit in and for Palm Beach County, Florida entitled
Joseph Shamy
v. Herbert M. Stein, case No.: 50 2005 CA 007719 XXXXMB.
To
date we have incurred approximately $460,000 toward this indemnification.
10.
Notification from the American Stock Exchange
As reported on our report
on Form 8-K dated January 12, 2007, Apogee was notified on
January 12, 2007, by the American Stock Exchange (“AMEX”) that AMEX
accepted our plan to regain compliance with AMEX continued listing standards,
and that Apogee’s listing will be continued pursuant to an extension.
We submitted a plan of
compliance to AMEX on November 30, 2006, as amended on December
20, 2006, which outlined our operational plan and strategic objectives
towards regaining compliance with certain of the AMEX continued listing
standards (the “AMEX Plan”). The AMEX Plan was prepared in response to a letter
received from AMEX on November 1, 2006, indicating that we no longer met
certain continued listing standards. We continue to not meet the standards
as a result of having shareholders’ equity of less than $4 million and losses
from continuing operations and/or net losses in three out of its four most
recent fiscal years, as is required in Section 1003 (a) (ii) of
the Company Guide; because we are also not in compliance with Section 1003
(a) (iii) of the Company Guide, as we have shareholders’ equity of
less than $6 million and losses from continuing operations in our five most
recent fiscal years; and on September 26, 2007 we were notified that we did not
meet Section 1003(a)(i), of the AMEX Company Guide due to the fact that we had
shareholders’ equity of less than $2,000,000 and losses from continuing
operations and/or net losses in two of our three most recent fiscal years. Because
we were already subject to 1009 of the Company Guide, the AMEX did not impose
any new requirements, nor were we required to take any additional steps in
connection with our efforts to address non-compliance with the continued
listing standards related to stockholders’ equity.
As reported on our report on Form 8-K dated November
8, 2007, we were notified by a letter from the American Stock Exchange on
November 2, 2007 that the AMEX PLAN period had expired without our having
regained compliance with the relevant continued listing standards. As a result,
the staff of the AMEX notified us of their intent to remove our common stock
from the AMEX by filing a delisting application with the Securities and
Exchange Commission (the “SEC”) pursuant to Section 1009(d) of the AMEX Company
Guide (the “Company Guide”), and Rule 12d2-2 of the Securities Exchange Act of
1934, as amended.
We are actively exploring alternatives to accomplish
our funding goals to demonstrate to AMEX that we can regain and maintain
compliance with the relevant continued listing standards in the Company Guide. In
addition, we have appealed the determination by the staff of the AMEX and
requested an oral hearing in accordance with Sections 1203 and 1009(d) of the
Company Guide. At the discretion of the AMEX, our common stock will continue to
trade on the AMEX during the appeal period.
11.
Settlement of Complaint by Former Employee
On March 29, 2007 Apogee
received a complaint, which had been filed at the Superior Court in Norfolk
County, Massachusetts, entitled
Michael S.
Danielson v. Apogee Technology, Case No. 0700512
. A former
Apogee employee initiated the complaint alleging, among other things, that
Apogee failed to pay certain bonuses and retirement contributions in connection
with a compensatory arrangement concerning the development of certain digital
amplifier technology. The former employee had claimed unpaid compensation
of approximately $155,000 and the request for relief asked for the amount to be
trebled, and include costs and attorneys’ fees. On September 13, 2007 we
reached a settlement with the former employee for total compensation of $40,000
to the former employee, consisting of $25,000 unpaid compensation and $15,000
for attorney fees.
13
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
GENERAL
The following Management’s
Discussion and Analysis of the Company’s Financial Condition and Results of
Operations for the three-and nine-month periods ended September 30, 2007 and
September 30, 2006 should be read in conjunction with the Company’s Financial
Statements and related Notes included elsewhere in this Quarterly Report on
Form 10-QSB. This discussion contains, in addition to historical
statements, forward-looking statements that involve risks and uncertainties.
Our actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include the factors discussed in the section titled “Certain
Risk Factors That May Affect Future Results of Operations And Our Common
Stock Price” as well as other factors described in our Annual Report on
Form 10-KSB for the year ended December 31, 2006, as amended.
OVERVIEW
We design, develop and
commercialize advanced drug delivery and sensor systems based upon its
proprietary Micro Electromechanical Systems (“MEMS”), nano fabrication and drug
delivery technologies. Our Medical Products Group is developing PyraDerm™ an
advanced intradermal drug delivery system to meet the needs of patients, health
insurers, companies’ developing pharmaceuticals, as well as, governments and
international health organizations. We believe PyraDerm™ has advantages over
competitive approaches for the delivery of vaccines, high potency therapeutic
protein drugs and other pharmaceuticals. We have evaluated the feasibility of
PyraDerm by performing in vitro tests with model drugs and have started in vivo
testing to complement positive in vivo results already obtained with vaccines
by third party researchers using our delivery technology. We are working
to establish pharmaceutical industry compliant manufacturing methods and to
define regulatory strategies to support its commercialization. Our business
strategy includes: (i) the licensing or selling of our technologies to
pharmaceutical or medical device companies; (ii) establish partnerships with
pharmaceutical and device companies to commercialize our products; and (iii)
developing, producing and marketing our own medical products. Our Sensor
Products Group is developing and marketing proprietary Micro-Electromechanical
Systems (“MEMS”) and Nanotechnology based pressure sensors for the medical,
automotive, industrial and consumer markets under the Sensilica® brand
name. These devices are produced using a novel manufacturing technology
that we believe reduces size and cost while improving reliability as compared
to alternative MEMS sensor designs. In August 2007, we announced an expansion
of our sensor business to include the development of IntellaPAL™, an innovative
sensor based monitoring system designed to improve the security, independence
and quality of life for the elderly and their families. IntellaPAL™ will utilize
a wireless sensor module and advanced software processing to continuously
measure a range of health characteristics and automatically notify responders
when specified conditions are detected. In addition, the system will provide
monitored data online so that approved caregivers will be able to assist in the
early identification of certain health characteristics. The Company believes
its development strategy will support the introduction of IntellaPAL™ home
monitoring products and services during the second half of 2008.
During the three and nine
months ended September 30, 2007, virtually all of our revenue was derived from
the sale of our remaining audio IC inventory. We expect that future
revenue will initially be the result of potential licensing and development
revenues resulting from the grant of rights to our intellectual property.
In order to support
our operations and regain full compliance with all sections of the Amex Company
Guide in order to have our common stock relisted on the AMEX, we intend to
secure additional funding in by the end of 2007. We plan to add a network of
direct sales staff, independent sales representatives and distributors to
support our medical and sensor products. We currently outsource the
manufacturing, assembly and certain testing of our medical and sensor products.
At September 30, 2007, we
had an accumulated deficit of approximately $17.9 million, as compared to a
deficit of $15.7 million as of December 31, 2006. Our historical net
losses and accumulated deficit (since 1995) result primarily from the costs
associated with our efforts to design, develop and market our DDX technology as
well as costs associated with our efforts to develop new medical and sensor
product. Since October 5, 2005 our net losses result primarily from the
research and development in our two current business lines.
Due to enhanced research
and development efforts, as of September 30, 2007 we had 14 employees compared
to 11 as of September 30, 2006.
During the three- and
nine-month periods ended September 30, 2007, we derived approximately 81% and
61% our revenue as a result of sales to two customers and one customer,
respectively. As of September 30, 2006, Apogee recognized all of the
deferred revenue related to six of our former distributors. At
December 31, 2005, we had formally terminated these distributor contracts.
At September 30, 2006 it was determined that we would have no continuing
involvement, under the terms of a distributor agreement, with these
distributors as they related to the audio business. All of the revenue was
attributable to the former audio IC division.
14
SELECTED
CONSOLIDATED FINANCIAL DATA
The following selected
financial data for the three- and nine-month periods ended September 30, 2007
and 2006 have been derived from our unaudited financial statements. Any trends
reflected by the following table may not be indicative of future results.
|
|
|
For the Three-Month Period
Ended
September 30,
|
|
For the Nine-Month Period
Ended
September 30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
13,601
|
|
$
|
509,015
|
|
$
|
132,268
|
|
$
|
1,835,211
|
|
|
Costs and
expenses
|
|
(793,933
|
)
|
(1,591,857
|
)
|
(2,456,724
|
)
|
(4,747,851
|
)
|
|
Other Income
(expenses)
|
|
67,825
|
|
343,682
|
|
123,760
|
|
512,845
|
|
|
Net Loss
|
|
$
|
(712,507
|
)
|
$
|
(739,160
|
)
|
$
|
(2,200,696
|
)
|
$
|
(2,399,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
12,033,332
|
|
11,968,332
|
|
12,033,332
|
|
11,968,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,372,370
|
|
$
|
4,047,799
|
|
$
|
1,372,370
|
|
$
|
4,047,799
|
|
|
Stockholders’
equity (deficiency)
|
|
$
|
773,673
|
|
$
|
3,488,450
|
|
$
|
773,673
|
|
$
|
3,488,450
|
|
|
Loss per share
(basic and fully diluted)
|
|
$
|
(0.06
|
)
|
$
|
(0.06
|
)
|
$
|
(0.18
|
)
|
$
|
(0.20
|
)
|
RESULTS OF OPERATIONS OF THE COMPANY
Revenue
We have traditionally
derived our revenue from three sources: (1) product sales, which consist
of merchandise sales made either directly to original equipment manufacturers
or sell through point of sale (“POS”) by distributors. All such shipments are
fulfilled from our contracted warehouse in Hong Kong or from our Norwood,
Massachusetts office and are reported net of returns; (2) royalty revenue,
which formerly consisted of royalties paid by STMicroelectronics, which have
now been sold as part of the transaction with SigmaTel and
(3) consulting income related to contractual services or development
activities for third parties. We may, in the future, receive royalties
under its remaining audio licensing agreements and from new agreements
contemplated under its two new business groups. See Footnote 2 of the financial
statements. We anticipate that future revenue streams will come from both
our sensor and medical device businesses, generally in the form of strategic
alliances or arrangements with development or marketing partners, direct
product sales and distribution arrangements. We envision the future of
our medical devices as (i) licensing or selling our technologies to
pharmaceutical or medical device companies; (ii) establishing partnerships with
pharmaceutical and device companies to commercialize our products; and (iii)
developing, producing and marketing our own medical products. Whereas the
future of our sensor business will be to develop, produce and market our own
sensor products.
Total revenue declined by
approximately $495,000 or 97% to approximately $14,000 for the three months
ended September 30, 2007 from approximately $509,000 for the three months ended
September 30, 2006. Total revenue declined by approximately $1.703
million or 93% to approximately $132,000 for the nine months ended September
30, 2007, compared to approximately $1.835 million for the nine months ended
September 30, 2006. During the three and nine months ended September 30, 2007 and September 30, 2006
substantially all revenue recorded was from the sale of remaining inventory
related to our former audio IC business.
Nominal revenue from the
sale of products related to the former audio IC business is expected to
continue over the short term as the remaining inventory is sold. We
expect that the decline in our revenues will continue until such time as we are
able to generate revenues from the sale of our medical and sensor products.
Cost of
Revenue
Since substantially all
of the revenue recorded was from products related our former audio IC business
and had previously been fully reserved at 100%, virtually no cost of revenue
was recorded for the three months ended September 30, 2007. For the nine months
ended September 30, 2007 cost of revenue decreased as a result of reduced
product revenue by approximately $1.350 million or 100% to $1,427. This
compared to approximately $354,000 and $1.351 million for the three and nine
months ended September 30, 2006. Cost of revenue from our former audio IC
business primarily consists of purchased finished semiconductor chips and
storage fees associated with warehousing a large portion of our semiconductor
products in Asia. The nominal cost of goods for the nine months ended
September 30, 2007 is a result of our having previously reserved 100% of the
remaining from the audio IC business inventory.
15
Operating
Expenses
Research
and Development (“R&D”) Expenses
Our research and
development (“R&D”) expenses consist primarily of salaries, development
material costs, external consulting and service costs related to the design of
new products and the refinement of existing products. Research and development
expenses were reduced to approximately $305,000 and $924,000 for the three and
nine months ended September 30, 2007, respectively, compared to approximately
$421,000 and $1.4 million for the three and nine months ended September
30, 2006. This decrease of approximately $116,000 or 28% and approximately
$497,000 or 35%, respectively, was the result of reduced utilization of third
party consultants as well as a reduction in business development expenses and
the expensing of development wafers and development mask costs related to our
sensor business in 2006. These decreases were partially offset by
increases in human resource and depreciation and amortization expense associated
with the amortization of exclusive patent license fees and depreciation of our
new laboratory and related equipment. For the three and nine months ended
September 30, 2007, expenses incurred from utilization of third party
consultants decreased by approximately $130,000 or 74% and $273,000 or 67% to
approximately $45,000 and $135,000, compared to approximately $175,000 and
$408,000 for the same periods in 2006.
In addition to the
reduction in the use of third party consultants, expense reductions in
development costs related to the sensor group, less travel and entertainment
expense, fewer software expenditures, we also closed its facility in Long
Island and a laboratory located in Connecticut, which contributed to the
overall decrease in R&D expenses. For the three and nine months ended
September 30, 2006, we expensed approximately $17,000 and $146,000,
respectively, in wafers related to our sensor business as well as approximately
$64,000 in developmental mask costs for the three and nine months ended September
30, 2006. In addition, during the three and nine months ended September 30,
2007 we incurred minimal business development expenses. This compares to
approximately $6,000 and $90,000 for the same periods in 2006.
For the three and nine
month ended September 30, 2007, human resource costs increased by approximately
$37,000 or 20% and $77,000 or 14% to approximately $218,000 and $625,000,
respectively, compared to approximately $181,000 and $548,000 for the same
periods in 2006. Depreciation and amortization expense increased approximately
$15,000 and $45,000 to approximately $18,000 and $54,000 for the three and nine
months ended September 30, 2007, respectively, from approximately $3,000 and
$9,000 for the same periods in 2006. For the three and nine months ended
September 30, 2007, we incurred approximately $24,000 in expense to support in
vivo immunization studies performed by a prominent organization. We anticipate
that we will continue to commit resources to research and development
activities as our financial position allows, and as a result, R&D costs are
expected to increase substantially in the future.
Selling,
General and Administrative (“SG&A”) Expenses
Selling expenses consist
primarily of salaries and related expenses for personnel engaged in the
marketing and selling of our products, as well as costs related to trade shows,
product literature, travel and other promotional support costs. In addition,
selling expenses had included costs related to the operation of Apogee’s Hong
Kong and Japan sales offices. Subsequent to the SigmaTel transaction, the
Taiwan and China offices were closed. In February 2006 we closed our Hong
Kong office and in July 2006 we closed our Japanese office. General
and Administrative costs consist primarily of executive and administrative
salaries, professional fees and other associated corporate expenses. General
and administrative costs consist primarily of executive and administrative
salaries, professional fees and other associated corporate expenses. Selling,
General and Administrative (“SG&A”) expenses were approximately $489,000
and $1.5 million for the three and nine months ended September 30, 2007,
compared to approximately $817,000 and $2.0 million for the three and nine
months ended September 30, 2006. This represents a decrease of approximately
$327,000 or 40% and $444,000 or 22% for the respective periods. The decrease in
SG&A was attributable primarily to the closing of the Hong Kong and
Japanese offices as well as decreased human resource costs, business development
and travel and entertainment costs partially offset by increases in
professional fees and corporate insurance.
Human resource costs
decreased approximately $260,000 or 54% and $415,000 or 38% to approximately
$218,000 and $677,000 for the three and nine months ended September 30, 2007
compared to approximately $478,000 and $1.092 million for the same periods in
2006. This decrease reflects the reduction in staffing and subsequent closing
of the Hong Kong and Japanese offices as well as a reduction in the stock
compensation expense for the three and nine months ended September 30,
2007. For the three and nine months ended September 30, 2007, stock
compensation expense decreased approximately $231,000 or 96% and $247,000 or
88% to approximately $10,000 and $34,000, respectively, compared to
approximately $241,000 and $281,000 for the same periods in 2006. As of
September 30, 2007, we employed a total of 14 employees all located in Norwood,
Massachusetts. As of September 30, 2006, we employed a total of 11
employees, 1 located in New York and 10 located in Norwood, Massachusetts
.
Professional expenses
decreased by approximately $89,000 or 35% to approximately $168,000 for the three months ended September 30,
2007, compared to approximately $257,000 for the three months ended September
30, 2006. For the nine months ended September 30, 2007, professional expenses
increased approximately $26,000 or 5% to approximately
16
$525,000 for the nine
months ended September 30, 2007, compared to approximately $499,000 for the
same period in 2006. Legal and accounting expenses decreased for both the three
and nine months ended September 30, 2007 compared to the same periods in 2006. For
the three and nine months ended September 30, 2007, legal expenses decreased by
approximately $110,000 or 53% and $28,000 or 8%, to approximately $96,000 and
$346,000, respectively, compared to approximately $206,000 and $374,000 for the
same periods in 2006. For the three and nine months ended September 30, 2007
legal expenses incurred as a result of costs increased to approximately $60,000
and $181,000, respectively, compared to approximately $55,000 and $157,000,
respectively, for the same periods in 2006. See Footnote 9 of the financial
statements—Indemnification Arrangements with our Executives.
Despite the overall
decrease in legal costs during the quarter ended September 30, 2007, legal
costs may rise significantly in the future. We have been informed
that an investigation by the SEC, which began during the period of
our restatement, is ongoing. We continue to cooperate with the
investigation and comply with requests as they arise. However, there is no
assurance that the concerns of the SEC can be resolved in a fashion
acceptable to us. See Risk Factors—Risks Related to Our Business.
Decreases in our legal
and accounting expenses were partially offset by cost increases in investor
relations and Sarbanes Oxley consultants. Costs associated with investor
relations and Sarbanes Oxley consultants were approximately $30,000 and $9,000,
respectively, for the three months ended September 30, 2007. For the three
months ended September 30, 2006, costs associated with Sarbanes Oxley
Consultants were approximately $13,000 with no expense incurred in investor
relations. For the nine months ended September 30, 2007, investor relations and
Sarbanes Oxley consultants were approximately $59,000 and $47,000, respectively.
For the nine months ended September 30, 2006, costs associated with Sarbanes
Oxley Consultants were approximately $15,000 with no expense incurred in
investor relations.
In addition, nominal
reductions in corporate taxes, travel and entertainment media relations and
communications expense, partially offset by an increase in corporate insurance
as a result of our obtaining Directors’ and Officers’ insurance effective as of
November 27, 2006, contributed to the overall decrease in SG&A. For the
three and nine months ended September 30, 2007, Directors’ and Officers’
insurance expense was approximately $18,000 and $55,000, respectively.
Operating expenses are
expected to increase over the next few quarters to support our Medical Product
and Sensor groups.
Interest
Income (Expense)
Interest income includes
income from our cash and cash equivalents and from investments and expenses
related to its financing activities. During the three and nine months ended
September 30, 2007, we generated interest income of approximately $14,000
and $69, 000, respectively, compared to interest income of approximately
$46,000 and $154,000 during the same periods in 2006. This decrease in interest
income for the three and nine months ended September 30, 2007 was
primarily due to reduced interest on reduced cash balances as of September 30,
2007. In addition, during the three and nine months ended September 30, 2006 we
recorded approximately $299,000 and $383,000, respectively, of income as a
result of the earn-out in connection with the SigmaTel transaction.
Finally, during the three months and nine months ended September 30, 2007 we
recorded miscellaneous income of approximately $54,000 consisting of
approximately $47,000 as a result of our recognizing an unclaimed deposit
customer deposit held over two year. Attempts to refund the money to this Asian
company failed and subsequently the company was sold. In addition,
approximately $5,600 tax refunds received from Massachusetts and New York tax
agencies.
No interest expense was
incurred for the three and nine months ended September 30, 2007 and
2006. For the three and nine months ended September 30, 2006, we incurred
approximately $2,000 and $22,000, respectively, in other expense which resulted
from a loss on the disposal of fixed assets and additional expenses in
connection with the SigmaTel transaction.
Net Loss
Our net loss for the
three months ended September 30, 2007 was approximately $713,000 or $0.06 per
basic and diluted common share, compared to a net loss of approximately
$739,000 or $0.06 per basic and diluted common share for the three months ended
September 30, 2006. For the nine months ended September 30, 2007 we
reported a loss of approximately $2.2 million or $0.18 per basic and diluted
common share, compared to a net loss of approximately $2.4 million or $0.20 per
basic and diluted common share for the nine months ended September 30,
2006.
17
LIQUIDITY
AND CAPITAL RESOURCES
Our principal source of
liquidity at September 30, 2007, consisted of approximately $794,000 in cash
and cash equivalents. We consider all highly liquid investments with an
original maturity of three months or less to be cash equivalents. Substantially
all of our cash is held in high quality money market funds comprised of
short-term, fixed income securities earning interest at 4.97% at September
30, 2007. This compares to approximately $3.1 million in cash and
cash equivalents as of December 31, 2006. In addition, as of
September 30, 2007, we had working capital of approximately $259,000 compared to
working capital of approximately $2.8 million at September 30, 2006.
As of September 30, 2007 and September 30, 2006 we had no debt.
Net cash used in
operating activities for the nine-month period ended September 30, 2007
decreased to approximately $2.2 million compared to approximately $2.5 million
in the nine-month period ended September 30, 2006. The decrease was
primarily due to a decrease operating expenses as a result of decreased
spending following the closing of the Hong Kong and Japanese offices.
As of September 30, 2007
and September 30, 2006, reserves for slow moving, excess and obsolete inventory
was at 100% of the remaining inventory related to the former audio IC business.
Net accounts receivable was approximately $5,000 at September 30, 2007, down
from approximately $389,000 at September 30, 2006. As of September
30, 2007 we had reserves against bad debt of approximately $11,000
compared to a reserve of $13,000 as of September 30, 2006. Given the quality
and amount of current accounts receivable, we believe that the remaining
reserve is sufficient at this time.
Net cash used in
investing activities for the nine months ended September 30, 2007 was
approximately $133,000, compared to approximately $59,000 for the nine months
ended September 30, 2006. As previously reported, on
January 3, 2007 we announced the completion of our state-of-the-art
laboratory to be used to develop advanced drug delivery systems. Along
with the laboratory we completed renovations to the entire facility. In
addition, during the nine-month period ended September 30, 2007, we supported
the filing and prosecution of our existing patent applications, as well as, the filing of two new patent
applications in July 2007, all of which related to our medical device group.
No cash was provided by
financing activities for the nine months ended September 30, 2007 and
September 30, 2006. On July 26, 2007, we signed a consulting agreement pursuant
to which we issued 65,000 shares of our common stock in a private transaction,
exempt from registration under the Securities Act as an upfront non-refundable
retainer as partial compensation to a financial advisor and exclusive placement
agent in connection with a possible financing transaction.
We believe that cash flow
from operations as well as the funds from the audio division sale will be
sufficient to support operation and fund its capital requirements through
December 31, 2007. Apogee requires additional funding and we
are currently reviewing our capital needs and actively exploring alternatives
to accomplish our funding goals. We will require additional capital to
conduct the research and development activity needed to support our medical
device and sensor businesses. Also see Footnote 10 of the financial
statements—Notification from the American Stock Exchange.
Revenue
Recognition
Apogee recognizes revenue
in accordance with Securities and Exchange Commission Staff Accounting Bulletin
No. 104 (“SAB 104”), “Revenue Recognition in Financial Statements: Revenue
Recognition”, which states that revenue should be recognized when the following
revenue recognition criteria are met: (1) persuasive evidence of an
arrangement exists; (2) the product has been shipped and the customer
takes ownership and assumes the risk of loss; (3) the selling price is fixed
or determinable; and (4) collection of the resulting receivable is
reasonably assured. The following policies apply to Apogee’s two major product
sales categories for revenue recognition. Sales to end users (“OEM”):
Revenue is recognized under our standard terms and conditions of sale, title
and risk of loss transfer to the customer at the time products are shipped from
our warehouse or delivered to the customer’s representative/freight forwarder.
Sales to Distributors: From time to time we provide stock rotation
rights, price protection and other incentives to our Distributors. See Footnote
2 of the financial statements. As a result of these incentives, Apogee has
adopted a policy of deferring recognition of revenue until the distributor
sells products to its customers based upon receipt of point-of-sale reports
from the distributors. We accrue the estimated cost of post-sale obligations
including product warranty returns, based on historical experience. To date we
have experienced minimal warranty returns.
In addition, we record
royalty revenue when earned in accordance with the underlying agreements.
Consulting and licensing revenue is recognized as services are performed.
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Accounts
Receivable
Apogee performs credit
evaluations of customers and determines credit limits based upon payment
history, customers’ creditworthiness and other factors, as determined by our
review of their current credit information. For a majority of our larger sales,
we can require the issuance of a Letter of Credit. Smaller accounts must either
pay via credit card or in advance of shipment. We continuously monitor
collections and payments from our customers, and we maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While we have not had any
significant credit losses to date, we cannot guarantee that we will continue to
avoid credit losses in the future. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. Since our accounts
receivable are highly concentrated in a small number of customers, a
significant change in the liquidity or financial position of any one of these
customers could have a material adverse impact on the collectibility of our
accounts receivable, our liquidity or our future results of operations.
Inventory
Apogee states its
inventory at the lower of cost (first-in, first-out) or market. This policy
requires that we make certain estimates regarding the market value of the
inventory, including an assessment of excess or obsolete inventory. In the
recent past, Apogee had determined excess and obsolete inventory based on
estimated future demands and estimated selling prices for our products within a
specified time frame, which was generally 12 months. The estimates used for
expected demand were also used for short-term capacity planning and inventory purchasing
and were consistent with revenue forecasts. Our entire current inventory is
associated with our former audio business. We have chosen to expense our sensor
die and sensor packaged products until such time as we have material results
from this business. We are still in the research and developmental phase of our
medical products business and thus do not have any related inventory. As of
September 30, 2007 we have approximately $1.68 million of inventory related to
our former audio IC business that has been 100% reserved and has no carrying
value on our balance sheet. This compares to inventory at December 31,
2006, of approximately $1.8 million of audio IC inventory which had been 100%
reserved and carried no value on the balance sheet.
Valuation
of Long-Lived Assets
Property, plant and
equipment, patents, trademarks and other intangible assets are amortized over
their estimated useful lives. Useful lives are based on management’s estimates
over the period that such assets will generate revenue. Intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. Future adverse
changes in market conditions or poor operating results of underlying capital investments
or intangible assets could result in losses or an inability to recover the
carrying value of such assets, thereby possibly requiring an impairment charge
in the future.
Stock
Compensation
Prior to fiscal 2006, we
accounted for stock-based compensation plans under the recognition and
measurement provisions of APB Opinion No. 25. Effective January 1,
2006, we adopted the provisions of SFAS 123(R) using the
modified-prospective-transition method. SFAS 123(R) requires companies
to recognize the fair-value of stock-based compensation transactions in the
statement of income. The fair value of our stock-based awards is estimated at
the date of grant using the Black-Scholes option pricing model. The
Black-Scholes valuation calculation requires us to estimate key assumptions
such as future stock price volatility, expected terms, risk-free rates and
dividend yield.
Expected stock price
volatility is based on implied volatility from traded options on our stock in
the marketplace and historical volatility of our stock. We use historical data
to estimate option exercises and employee terminations within the valuation
model.
The expected term of
options granted is derived from an analysis of historical exercises and
remaining contractual life of stock options, and represents the period of time
that options granted are expected to be outstanding. The risk-free rate is
based on the U.S. Treasury yield curve in effect at the time of grant. We have
never paid cash dividends, and do not currently intend to pay cash dividends,
and thus have assumed a 0% dividend yield. If our actual experience differs
significantly from the assumptions used to compute our stock-based compensation
cost, or if different assumptions had been used, we may have recorded too
much or too little stock-based compensation cost. In addition, we are required
to estimate the expected forfeiture rate of our stock grants and only recognize
the expense for those shares expected to vest. If the actual forfeiture rate is
materially different from our estimate, our stock-based compensation expense
could be materially different.
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CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Apogee prepares its
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates, judgments and assumptions
that we believe are reasonable based upon the information currently available.
These estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods presented. Any future changes to these
estimates and assumptions could have a significant impact on the reported
amounts of revenue, expenses, assets and liabilities in our financial
statements. The significant accounting policies which we believe are the most
critical to aid in fully understanding and evaluating our reported financial
results include the following:
Off
Balance Sheet Arrangements
We have no off balance
sheet arrangements, nor do we have any special purpose entities.
Contractual
Arrangements
We have no contractual
arrangements as of September 30, 2007.
RISK FACTORS
There are a number of important factors that could
cause our actual results to differ materially from those indicated or implied
by forward-looking statements. We disclaim any intention or obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required by law.
Aside from those risks discussed below, there have
been no material changes to the risk factors included in our Annual Report on
Form 10-KSB, as amended, for the fiscal year December 31, 2006.
RISKS RELATED TO OUR BUSINESS
WE HAVE
A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE OR SUSTAIN
PROFITABILITY.
As of September 30, 2007, we had stockholders’ equity
of approximately $738,000, an accumulated deficit of approximately $17.9
million and working capital of approximately $259,000. We had a net loss of
approximately $712,000 and $2.2 million for the three and nine months ended
September 30, 2007. In the fiscal year ended December 31, 2006, we
recorded net loss of approximately $3.0 million. We need to generate revenue or
obtain financing to continue operations. Our ability to generate future revenue
and achieve profitability depends on a number of factors, many of which are
described throughout this risk factor section, including our ability to develop
and generate revenues from the sales of our sensor and medical device products,
which are at a very early stage of development. We cannot assure you when, if
ever, we will generate meaningful revenues from the sales of these products
under development. If we are unable to generate revenue or obtain financing,
our share price will likely decline.
WE NEED
TO RAISE ADDITIONAL CAPITAL IN ORDER TO CONTINUE OUR OPERATIONS AND TO PERFORM
RESEARCH AND DEVELOPMENT TO BUILD OUR BUSINESS - THE NECESSARY CAPITAL
MAY NOT BE AVAILABLE TO US ON FAVORABLE TERMS, IF AT ALL.
Because we have historically had losses and only a
limited amount of cash has been generated from operations, we have funded our
operating activities to date primarily from the sale of securities and the sale
of certain assets to SigmaTel. In order to continue to fund the operation and
development of our business, we will need additional capital, either through
the sale of securities or through the sale of assets. We cannot be certain that
any such financing or asset sales will be available on acceptable terms, or at
all. Moreover, additional financing, if available, would likely be dilutive to
the holders of our common stock, and debt financing, if available, would likely
involve restrictive covenants. If we sell assets that are currently used in the
conduct of our business, those assets would no longer be available to us as a
potential source of revenue generation, as was the case with our
October 5, 2005 sale of assets. We have reduced, in the short-term, our
operating expenses for payroll and related costs, rents and professional fees
amongst others, in order to conserve resources for the operation of our
business. We believe that our current working capital and amounts that may be
raised to support operations will be sufficient to fund our capital and
operational requirements at least through December 31, 2007. If we cannot
raise sufficient additional capital by December 31, 2007, through means
available to us, it would adversely affect our ability to achieve our business
objectives and we may be required to further curtail operations.
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AS A
RESULT OF OUR NEED TO RAISE ADDITIONAL CAPITAL AND DUE TO OUR SMALL SIZE ANY
REGULATORY INVESTIGATION, LITIGATION OR ADMINISTRATIVE ACTION IMPOSES RISK ON
US.
Many companies have legal
actions that arise in the ordinary course of business; we are no different in
this regard. However, given our limited number of personnel, current
capitalization and stage of development after the sale of our audio business to
SigmaTel, legal actions or regulatory investigations that occur in the ordinary
course of business, or otherwise, may be more challenging for us than for other
companies. Even if successfully defended, lawsuits, regulatory investigations
or administrative actions may be costly, may divert management
attention and resources from the operation of our business, and
may therefore adversely affect our financial condition and results of
operations. If not successfully defended, any regulatory investigation,
litigation or administrative action may adversely affect our financial
condition and results of operations. See Management’s Discussion and Analysis—Results
of Operation of the Company—Operating Expenses—Selling General and
Administrative Expenses.
NEITHER
OUR DISCLOSURE CONTROLS AND PROCEDURES NOR OUR INTERNAL CONTROL OVER FINANCIAL
REPORTING CAN PREVENT ALL ERRORS OR FRAUD.
Our management does not expect that our disclosure
controls and procedures or our internal control over financial reporting could
prevent all errors or fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives
of the control system will be attained. Furthermore, the design of a control
system must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in a cost-effective control system, no evaluation of
controls can provide absolute assurance that all misstatements due to error or
fraud, if any, may occur and not be detected on a timely basis. These
inherent limitations include the possibility that judgments in decision-making
can be faulty and that breakdowns can occur because of errors or mistakes. Our
controls and procedures can also be circumvented by the individual acts of some
persons, by collusion of two or more people or by management override of the
controls.
The design of any system of controls is based in
part on certain assumptions about the likelihood of future events and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Furthermore, controls
may become inadequate because of changes in conditions or deterioration in
the degree of compliance with policies or procedures.
While we seek to design our controls and procedures to
provide reasonable assurance that information required to be disclosed in our
periodic filings is timely disclosed, these inherent limitations expose us to
breakdowns in such controls and procedures.
As our business continues to evolve into a life
science company in the research and development phase, rather than a company
involved in the manufacture and distribution of loudspeaker and IC solutions,
the Audit Committee reviews our accounting and auditing procedures to satisfy
itself that the correct standards are being employed for our evolving business
and to address an ongoing investigation by the Securities and Exchange
Commission that began during the period of our restatement. We continue to
cooperate fully with the investigation and comply with requests as they arise. However,
there is no assurance that the concerns of the staff of the Commission can be
resolved in a fashion acceptable to us.
RISKS RELATED TO OUR COMMON STOCK
WE DO
NOT MEET THE LISTING REQUIREMENTS OF THE AMERICAN STOCK EXCHANGE, AND ARE
SUBJECT TO A DELISTING PROCEEDING THAT BEGAN ON NOVEMBER 2, 2007. IF WE ARE
UNABLE TO REGAIN FULL COMPLIANCE DURING THE APPEAL PROCESS, WE MAY BE
DELISTED FROM THE AMEX.
Our common stock is quoted on the AMEX. In order to
continue to be included in the AMEX, we must regain full compliance with the
AMEX maintenance criteria. As our shareholders’ equity was approximately
$738,000 as of September 30, 2007 as of this report, we are not in
compliance with Section 1003 (a) (i), of the Company Guide, Section 1003
(a) (ii) of the Company Guide or Section 1003
(a) (iii) of the Company Guide due to the low value of its
shareholders’ equity.
In accordance with the original AMEX notice, we
submitted a plan to AMEX prior to December 1, 2006 and a subsequent
revision on December 20, 2006, advising of the actions we have taken, or
would take, to bring Apogee into compliance certain sections of the
Company Guide within a maximum of 12 months. This actions set forth in the plan
did not come to fruition as intended and the plan period ended on November 1,
2007 without regaining compliance. Apogee is appealing the delisting
proceedings, however, there can be no assurance that Apogee will be able to
stay the delisting or regain full compliance with all of the sections of the
Company Guide set forth above. See Footnote 10 of the financial statements -
Notification from the American Stock Exchange.
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If our common stock were delisted, we would trade on
the Over the Counter Bulletin Board or the Pink Sheets, LLC, which may have
significantly less liquidity than the AMEX. In order to have our common stock
relisted on the AMEX, we would be required to meet the criteria for initial
listing, which are more stringent than the maintenance criteria. Accordingly,
we cannot assure that if we were delisted, we would be able to have our common
stock relisted on the AMEX, and most likely our common stock would be quoted on
the Over the Counter Bulletin Board. In addition, if our common stock were
delisted from the AMEX, it might become more difficult for us to raise
additional capital and accomplish our business objectives through the sale of
our common stock or securities convertible into our common stock, due to
increased costs and potential diminished liquidity in the market for our common
stock.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document and the
documents incorporated by reference herein contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Also, Apogee’s management may make forward-looking statements orally or in
writing to investors, analysts, the media and others. Forward-looking
statements express our expectations or predictions of future events or results.
They are not guarantees and are subject to many risks and uncertainties. There
are a number of factors that could cause actual events or results to be
significantly different from those described in the forward-looking statements.
Forward-looking statements might include one or more of the following:
· anticipated financing
activities;
· anticipated strategic
alliances or arrangements with development or marketing partners;
· anticipated research
and product development results;
· projected development
and commercialization timelines;
· descriptions of plans
or objectives of management for future operations, products or services;
· forecasts of future
economic performance; and
· descriptions or
assumptions underlying or relating to any of the above items.
Forward-looking
statements can be identified by the fact that they do not relate strictly to
historical or current facts or events. They use words such as “anticipate”, “estimate”,
“expect”, “project”, “intend”, “opportunity”, “plan”, “potential”, “believe” or
words of similar meaning. They may also use words such as “will”, “would”, “should”,
“could” or “may”.
Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or achievements.
Moreover, we do not assume responsibility for the accuracy and completeness of
such statements. We do not intend to update any of the forward-looking
statements after the date of this report to conform such statements to actual
results except as required by law. Given these uncertainties, you should not
place undue reliance on these forward-looking statements, which speak only as
of the date of this report. You should carefully consider that information
before you make an investment decision. You should review carefully the risks
and uncertainties identified in this report and in our most recent Annual
Report on Form 10-KSB, as amended.
ITEM
3 – CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure
Controls and Procedures. Our chief executive officer (principal executive
officer) and chief financial officer (principal financial officer) have
reviewed and evaluated the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
as of the end of the period covered by this quarterly report. Based on that
evaluation, our chief executive officer and chief financial officer have
concluded that our current disclosure controls and procedures are adequate and
effective to ensure that material information relating to Apogee was made known
to them by others, particularly during the period in which this Quarterly
Report on Form 10-QSB was being prepared.
(b)
Changes in Internal
Controls. There were no changes in our internal control over financial reporting,
identified in connection with the evaluation of such internal control that
occurred during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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